Sangoma Technologies Corp (SANG) 2020 Q4 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the Sangoma Technologies Year-End Fiscal 2020 Investor Conference Call. (Operator Instructions) 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 Fiscal 2020 Year-End Investor Call. We are recording the call, and we'll make it available on our website tomorrow for anyone who is unable to join us live.

I'm here today with Bill Wignall, Sangoma's President and Chief Executive Officer; as well as John Tobia, EVP, Corporate Development, to take you through the results of our fourth quarter and full fiscal year 2020. We will then discuss the press release that was distributed this afternoon, together with the company's annual audited financial statements and Q4 MD&A, which are available both on SEDAR and will be posted on our website shortly 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. For fiscal 2020 and thus starting on July 1, Sangoma adopted IFRS 16, a new accounting standard, and the fiscal 2020 results incorporate that new standard. Also, please note that unless otherwise stated, all references to dollars are to the Canadian dollar.

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 our forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements are discussed in our accompanying MD&A and our annual information form and in the company's annual audited financial statements posted on sedar.com.

With that, I'll hand the call over to Bill.

Thank you, David. Good afternoon, everyone, and thanks for joining us today. First, I would like to welcome some new shareholders to this call, investors who joined us at the time of our most recent capital raise. It has been quite a year at Sangoma, and so it's very good to have you with us for this conference call.

I have structured my prepared remarks into 5 sections today. I will start by taking you through our Q4 financials. Second, I will cover results for the full fiscal '20 year. Next, I'll offer a brief update regarding the impact from COVID-19 on Sangoma. Fourth, I will then offer my typical year-end commentary on the evolution of our company strategy. And finally, I will cover forward guidance for fiscal '21 as provided for the first time in this afternoon's press release. I'll then wrap up with a brief summary and then turn the call back to David for our typical Q&A session. With that, let's turn to our Q4 results.

Sales for the quarter ended June 30, 2020, were $34.8 million, up 16% from $30.1 million in the fourth quarter of fiscal '19. This 16% growth was driven by the continued growth and compounding of our services business, where our recurring revenue is generated, as well as the acquisition of VoIP Innovations, all partly offset by some slight softening in demand for our one-time revenue product sales due to COVID-19.

The slight softening in Q4 product sales, as mentioned, was mostly due to the COVID shutdowns. This modestly impacted demand for these products, which are CapEx-type decisions for customers. And it also made it more challenging for Sangoma or our channel partners to get physically on-site to do installations. More importantly, it was really gratifying to see that our services revenue, which we've worked so hard to build up the past few years, held up well in our fourth quarter, growing in absolute terms and once again exceeding half of our sales.

Gross profit for the fourth fiscal quarter of 2020 was $22.6 million, 21% higher than the $18.7 million realized in the fourth quarter of last year. Gross margin for the quarter was 65% of revenue, 3% higher than in the same quarter a year ago due to the steady increase in the percentage of revenue from higher-margin services and to the impact of the VoIP Innovations acquisition.

Operating expenses for the fourth quarter of fiscal '20 were $19.6 million versus $16 million in the same period last year. This was primarily driven by the additional operating expense that came with the acquisition of VI, additional investments in R&D and marketing and sales to generally drive growth, all partly offset by COVID-related cost controls during the fourth quarter. These cost controls involve several initiatives, which I will cover in more detail during my COVID update coming shortly.

For the fourth quarter of fiscal '20, EBITDA at $6.2 million was 50% higher than the same quarter last year, resulting from top line growth, slightly expanded gross margin percentage and cost controls introduced during COVID in Q4, as just mentioned. Interest expense for the fourth quarter was up year-over-year as expected due to the additional debt taken on partially funding the VI acquisition.

As we shared in a prior quarterly call, we have also reduced our borrowing costs, bringing our interest rate down to about 4.2% versus the previous rate of $6.5 million. Net income for the fourth quarter was a record $2.6 million compared to $1.7 million for the equivalent quarter last year. And for the final portion of my commentary on Q4 results, I'll briefly touch on a couple of highlights from our balance sheet and cash flow.

Let's start with the balance sheet. You will recall from our last call, shortly after COVID emerged, that Sangoma drew down its 2 operating lines to ensure that the company was ready for anything at a time when it wasn't clear what the impact of the pandemic might be and whether there would be a liquidity crunch. We were certainly not alone in taking this step, and we held this $9.3 million of cash through the rest of the fourth quarter in fiscal '20.

This action, together with the cash generated in Q4 less our quarterly $2 million debt repayment, raised our cash balance from $12.5 million on March 31 to $27 million on June 30. As the impact of COVID became somewhat more understood, I should mention that we repaid those operating lines after the end of fiscal '20. And of course, I'll just mention that Sangoma is in full compliance with all of our debt covenants.

Next, I would like to touch on inventory for a moment. As we mentioned in recent calls, earlier this year, we undertook a significant supply chain project to consolidate some contract manufacturers. In Q2, that caused an increase in inventory buffer stock. With the project completed, we began to draw down some of this buffer during Q3 and reduced our inventory by a further $1.3 million in Q4. We closed the year with inventory at $12.6 million and expect that it will remain in or around this level going forward.

And for the third and final point on our balance sheet, a few words on receivables. During the summer, there was a lot of media coverage about how companies might stop paying their bills or perhaps significantly delay payment due to COVID-19. I'm pleased to say that we really have not seen too much of that from our customer base, at least not to any material extent. Sure, there are some customers here or there that are having some financial challenges from this pandemic, of course. But Sangoma has no customer concentration, and we've managed through that phase without seeing material impacts on AR.

In fact, our receivables were down $0.4 million in the fourth quarter and -- and are about at the same level as they were at the end of fiscal '19 despite our larger base of business. Nevertheless, to be prudent, we increased our AR provision over the course of fiscal '20 from about [$300,000] a year ago to almost 8,000 -- [$6,000] now just in case.

And for a few remarks on cash flow. In Q4, we generated a very solid adjusted cash flow from operations of $7.4 million. This measure of adjusted cash flow excludes the impact of acquisitions, financing and any unusual nonoperating anomalies. For the fourth quarter, the adjusted cash flow even exceeded our EBITDA of $6.2 million, mostly because of the reduction of inventory and receivables that I just covered. That brings my comments on Q4 financial results to a close, and I'll now turn to our full year fiscal '20 results.

Sales for the year-ended June 30 were $131.4 million, 20% higher than the $109.7 million in fiscal '19. The increase in sales was driven by the ongoing growth and compounding of our services business by the acquisition of VI partway through fiscal '20, the fact that Digium was not included in the first couple of months of fiscal '19, all offsetting a slight decline in one-time product sales during the COVID-impacted fourth quarter.

For the year, services revenue increased 81%. And the percentage of sales from services has grown from 33% in fiscal '19 to about 50% for fiscal '20, reflecting the company's focus on cloud and recurring revenue streams. And our services revenue exceeded product revenue for the first time in Q3 this year, a key milestone in our transition to becoming more and more a recurring revenue company. I'd just like to reiterate how significant that transition has been. In fiscal '18, we averaged about $5 million per quarter in services. By last year in fiscal '19, that was $10 million per quarter. And this past year in fiscal '20 were over $15 million per quarter.

The cost of sales for the year-ended June 30 was $46.5 million compared to $42.8 million for fiscal '19. Gross profit for fiscal '20 was $84.9 million, 27% higher than the $66.8 million realized in fiscal '19. Gross margin for fiscal '20 was 65% of revenue, up 4% from the 61% last year, reflecting slightly higher margins in the newly acquired businesses and a greater percentage of revenue coming from higher-margin services.

Operating expenses for fiscal '20 were $74.5 million compared to $59.8 million for the same period last year, reflecting the additional OpEx in the acquired VI and e4 businesses, the investment in growth, all partly offset by constrained spending in the fourth quarter due to COVID. For fiscal '20, EBITDA at $21.6 million was 75% higher than last year, resulting from higher revenue, the gradually increasing fraction of sales from services, a few extra points of gross margin, the inclusion of VI, the adoption of IFRS 16 at the beginning of the fiscal year and operational efficiencies introduced during fiscal '19 being in place for all of fiscal '20.

Interest expense is up substantially year-over-year as a result of the debt taken on for the acquisitions just as it was for the quarter. And the comments I made for Q4 apply to the year as well. Net income for the fiscal year-ended June 30 was $3.9 million compared to a net income of $1.5 million in fiscal '19. Earlier in fiscal '20, you may remember, Sangoma recorded $2.6 million of costs directly associated with the legal, financing and closing of the VI acquisition in October of '19. In fiscal '19, the year before, we coincidentally incurred a similar amount of $2.7 million for the purchase and integration of Digium. And the year-over-year growth in net income is thus really quite an apples-to-apples comparison.

This brings my comments on our fiscal results for fiscal '20 to a close, and I'll now provide a COVID update before I move on to strategy. We have shared information about the impact of COVID-19 in earlier calls and in press releases. But since it arguably remains the most critical near-term variable for many businesses. I'm going to provide a full update today on this fiscal '20 year-end call. I recognize that we've held investor calls specifically dedicated to this topic in the past. So if you're one of the folks that did join us for those calls, please bear with me.

Before jumping into the details of the COVID update, I'd just like to say how very pleased I am with the way Sangoma performed this year, especially given how very challenging it's been for everyone during the COVID-19 crisis. It's been truly gratifying to see the resilience of our business during times like these with Sangoma ending up with 20% revenue growth and EBITDA expanding 75% to over $20 million for the first time.

Okay. So now for your COVID update, I will cover this from 2 perspectives today. First, I will discuss the distinct phases of impact on Sangoma. And second, I'll then describe why we feel your company is well positioned to withstand that impact. Let's start with what we describe as the 3 distinct stages in which COVID affected Sangoma. They were the impact on our supply chain, followed by the impact on business continuity and finally, the impact on demand.

Stage 1 for Sangoma was all about our supply chain. As you may recall, coronavirus first started to get attention in early January as it emerges in the city of Wuhan, China, and initial fears are all about China as the world's factory. Although our services business now represents more than half our revenue, the other part involving the sale of products does still involve some suppliers in China, especially for phones. And thus, Sangoma's focus during stage 1 of the COVID-19 crisis was to ensure that we were able to get our products from suppliers in a timely manner and in sufficient quantities in a way that did not negatively impact our customers.

During this period, our operations team was working very diligently with all links in our supply chain to make sure that raw materials were available at factories when needed, that our contract manufacturers could still build, especially given this was happening during Chinese New Year, that our suppliers could deliver to us across international borders and that we could subsequently ship to all of our customers around the world.

This is perhaps not glamorous work, not the type of in the trenches effort that we'd stand up and tell investors about while we were handling it. In the end, the first stage of dealing with COVID lasted about 4 to 6 weeks for us. And most importantly, significant work by our teams ensured that virtually all customers will able to get their orders filled on time. And thus, our revenue was not impacted in any material way as we wrestled the supply chain challenges during stage 1.

Stage 2 in the COVID impact on Sangoma relates to business continuity. Stage 2 begins in or around February. At this point, it had become clear that coronavirus was no longer a China-only problem and was turning into the global pandemic we know it to be today. Sangoma's top priority during this stage had to be the safety and well-being of our employees while ensuring business continuity for partners and clients, much like many of your organizations, I'd suspect.

Like most companies, we gradually began to reduce business travel ahead of public policy, eventually eliminating all business travel. We instituted new policies, such as no visitors to Sangoma offices, social distancing, hand sanitizers, stay at home if you're feeling ill, et cetera. And by early March, we required all of our staff who could do so to work from home. We seamlessly migrated to this model with no material impact on operations. This was especially complex for a highly globalized company with staff in over 20 countries around the world and in about 25 states across the U.S., all needing access to the right systems all at about the same time in March and April.

While there has been some voluntary return to the offices, where local regulations permit, Sangoma still has more of our staff working from home. As complex as that was, we benefited from the fact that we make many of the products and services that work-from-home staff need, so we know these tools very well. We have been able to continue serving our customers who count upon us every day, perhaps now more than ever, for mission-critical communications. Stage 2 continues to this day, of course, but is also now fully under control. And concern about the impact on our business from stage 2 is now also behind us, and we have contingency plans for local COVID-19-related issues that might arise.

Sangoma describes stage 3 of the COVID crisis for us as the impact on the demand side of our business. We saw this third phase starting to surface in March and more fully in April as the shutdowns began. We saw this most dramatically during our fiscal '20 fourth quarter. And of course, some of this still persists or is being restarted during the second wave. You've already heard that the impact on demand has had a fairly minor effect on Sangoma during Q4, mostly in product revenue, while our services business has demonstrated many of the reasons that the trend out there towards cloud is a real permanent thing, including moving a CapEx decision to an OpEx decision for customers, especially important when cash is king for them; better support for remote workers; less distraction from the core business because they spend less time managing communications and expense savings as they don't need to pay IT personnel to manage it.

Further, our management team and Board have many, many years of experience managing through disruptive change. As a result, Sangoma took action during this third phase to mitigate such possible impacts, including we have taken prompt, prudent expense mitigation steps to appropriately control discretionary spending, such as a temporary hire increase, scaled back on nonessential marketing investments, eliminated business travel, et cetera. We've adjusted our product road map in a very nimble way to reprioritize the launch of planned products earlier than scheduled, where they fit with the increased needs of employees working remotely.

We've launched numerous customer-focused initiatives to win new clients in need of improved communications during this crisis and to secure our existing customer base. And we've begun to get some staff back at work and continue to be flexible to work within local guidelines in our many offices around the globe. This planning accommodates enhanced social distancing, frequent cleaning, hand sanitizer, rules regarding employees with any symptoms remaining at home and regular reinforcement of such rules. The net result is that we feel Sangoma has understood the impacts of COVID-19 on our business, even as they changed over 3 phases and have controlled well the things that are within our control, managing prudently through those 3 phases.

In the second part of my COVID update, I promised to share why we believe strongly that Sangoma is well positioned to weather the impacts just described. I'd like to review some of those reasons now. First, Sangoma continues to operate in as close to a business-as-normal manner as is possible under these conditions as an essential service. We have repeatedly demonstrated an ability to adapt as part of our team's core competency, whether it was turning ourselves into a software company from a hardware business or building out an entire portfolio from a single product or creating a fast-growing services business based upon recurring revenue in just a few years. This track record makes me confident that Sangoma will emerge from the COVID-19 crisis ready to step on the accelerator.

We have a very large customer base, diversified on multiple dimensions, no customer concentration within our largest customer -- with our largest customer, representing less than 10% of sales, a geographically distributed client base in over 125 countries around the globe, many varied customer segments, including SMB, enterprise, service providers and content centers. Services revenue now accounts for more than half of sales and is more insulated from this business cycle, customers across many verticals, including manufacturing, mil-aero, government, retail, education, transportation, technology, et cetera.

We have a broad portfolio of products that appeal to many different users and needs, from cloud communications to premise-based UC to connectivity, in-demand products that are critical in today's work-from-home world, including soft phones, headsets, audio conferencing and the ability to take an employee's desk phone home and use it there in a way that matches exactly what it does on their desk network. An ever-present focus on the customer, enabling Sangoma to respond quickly with empathy towards our clients. Our staff have been asked to be patient and supportive towards our customers and each other during these times of high stress. We will be flexible with them, helping customers beyond strict contract entitlements because we have the financial resources to do so and how we handle them in difficult times will be remembered in the good ones. Investment in innovation continues unabated by this crisis, resulting in our ability to reprioritize road maps and quickly launch new products.

And last but certainly not least, our proven financial strength, consistently growing our top line for over 22 straight quarters, now generating over half of our sales in services revenue, which is more insulated from these economic shocks. We produce very healthy EBITDA at over $6 million this past quarter. We're cash flow positive with over $7 million in operating cash flow during Q4, precisely during the tremendous disruption of COVID exactly on that quarter. In addition, we have, of course, always paid full interest in principal payments due under our loan agreements, have never failed to meet our debt covenants and we're well capitalized and have over $90 million in cash reserves to take advantage of opportunities that may arise as well as being fully prepared for any uncertainties in the future during the COVID-19 pandemic. For all of these reasons, both financial and strategic, we strongly believe Sangoma is unusually well positioned to weather the COVID-19 pandemic.

So now I'll turn to Sangoma's corporate strategy. I typically provide a comprehensive update on strategy once per year, usually on the Q4 calls, with shorter updates to specific strategic information on a quarterly basis. Since we have some new significant shareholders this year, I'm going to first review where we've come from. Then I'll get into where are we going and how will we get there. So let's jump in.

I've consistently characterized Sangoma's turnaround and then subsequent expansion using the phrase, investing to drive strategic growth through this combination of organic growth augmented with prudent M&A activity, all while demanding healthy profitability. This is a conscious decision from the Board of Directors, one that most of you also support based upon my discussions with many of the folks on this call. And we are continuing on that path today.

Several years ago, when new management came in to take over the reins at Sangoma, we recognized that sales of telephony cards were unavoidably going to gradually decline as networks gravitated away from the PSTN and towards the Internet. So the first stage of strategy was to begin a complete turnaround and rebuild of the company. It manifested in 3 principal planks: broadening the product portfolio, penetrating new customer segments and selling into new geographies. Over the next few years, we evolved from a single-product company to one with a much broader portfolio made up of multiple product lines, all part of plank number one, which has taken us on the path to becoming a full UC provider, first, on-premise and now in the cloud.

In order to expand our market presence, Sangoma began targeting not just our traditional customers in the SMB segment but also enterprise customers, along with OEMs and carriers, fulfilling the second plank in that turnaround strategy. During this time, we have also expanded our global reach by adding staff and channel partners to serve over 100 countries around the world.

As the turnaround phase was unfolding, the next step in strategy was to go from a portfolio of individual products to a complete solution. So Sangoma now has the ability to offer a full UC suite that includes not only the core UC software as the central brains of this full solution but also the other products that purchasers need with such a communication system, including phones, appliances to install that software brain upon and all the different ways of connecting your UC system out into the network, be it a session border controller, cards or gateways. I think you can see that the whole has proven greater than the sum of the individual parts and has allowed us to compete for a larger share of wallet in each sales cycle.

Having garnered the full suite of products, the next phase in our strategy was to take that full solution, which could be sold on-premise, just industry jargon, meaning that the software is installed at the customer site, and introduce cloud-based services built on our own products and software. We now host and manage these cloud services in data centers. And this allows us to provide monthly subscription service for customers who prefer a cloud-based service rather than the on-premise model. This commenced a rapidly growing services business, which you are now so very familiar with and where our recurring revenue is generated. Sangoma uses our own software and equipment to provide these services.

Along the way, we built some of these components ourselves and added others via acquisition. That's why we say that Sangoma employs 2 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 to get it faster than we'd be able to do it ourselves in-house or to get new customer segments or to secure paths to market to win such customers. Sometimes an acquisition gives us 2 or all 3 of those strategic attributes.

In fiscal '20, this strategy led us to make 2 acquisitions. The first was VoIP Innovations, a cloud communications company offering what we refer to as Trunking as a Service, or TaaS, using the same naming convention as SaaS or UCaaS. This wholesale SIP trunking service is sold to partners, not typically to end users, and is sold with a usage-based pricing model. We've been hard at work on integrating the parts of that business. And of course, VI revenue has held up well during the pandemic, given it is almost all recurring.

The second deal this fiscal year was a company called e4, which had been a partner of Sangoma for many years. So we knew them well, their leadership, their culture and their unique skills in the open source ecosystem. That community is somewhat different from other markets we serve with their own set of needs and expectations. So this deal was done to strengthen our sales capabilities, specifically in open source. Accordingly, the e4 team focuses on that portion of the market, and we've seen the benefit of that focus already in our fourth quarter. But those acquisitions this past year are not to say we've slowed down our internal development.

In fiscal '20, we've launched both our newest cloud service called Sangoma Meet as well as our new line of headsets. Sangoma Meet is our brand-new cloud service for video meetings, collaboration and screen-sharing. It was launched by reprioritizing our product road map, demonstrating agility to bring it forward, given the adoption of video meeting services during the current work-from-home trend. For the period of the COVID-19 pandemic, we offered this service for free and we'll gravitate to a commercial model in the next short while. Headsets were important to round out our portfolio endpoints, which included desk phones, soft phone client software for your computer or mobile device and now these new headsets. This was also an important addition to have during the COVID crisis as remote workers wanted this capability at home.

So where do we go from here strategically? And how will Sangoma get there? Well, your company continues along its current strategic path, one that has served us well and one that we are executing on. We want to grow much further via our mix of organic growth and M&A. But we also seek to do so prudently, balancing growth and the investments that drive it with the desire for reasonable profitability that provides financial stability. And in our market, we seek competitive strategies that provide a unique advantage or positioning so that we are very consciously not simply fighting head-to-head on the same basis against larger players. This approach has worked as part of our organic growth strategy, and we've continued refining it such that in fiscal '20, we've become even more precise about our value proposition in our cloud business.

Here is what I mean. In our opinion, cloud communications does not equal UCaaS. I know that some industry players and some analysts see them as synonymous. That is not my view. At Sangoma, we started using the term Communications as a Service, C-A-A-S or CaaS. To us, CaaS is an overarching umbrella of cloud communication services with a number of cloud applications under it. Those applications, of course, include UCaaS for voice. But CaaS also incorporates Trunking as a Service, or TaaS, as well as CPaaS and video meetings as a service and collaboration as a service, et cetera.

Sangoma's differentiated strategy includes the idea of offering all of these capabilities from a single provider, integrated elegantly with one user interface, single sign-on and a consistent UX or user experience. We don't believe that most normal companies want 5 different tools from 5 different vendors, such as video meetings from Zoom or voice from Ring or CPaaS from Twilio or collaboration from Slack. Sure, if you are a Fortune 100 company with a huge IT department, capable of integrating 5 different tools on your own, maybe that's realistic. But it's not practical for most companies. And this is the direction Sangoma is headed. We have UCaaS, TaaS, video meetings as a service, CPaaS, fax as a service. We're well on our way, and we're feeling like this strategy is a winner.

Secondly, on the inorganic side, Sangoma's future will continue to involve prudent acquisitions to accelerate that organic growth. Just after the end of fiscal '20, we undertook a significant financing in July, raising gross proceeds of over $80 million. This issuance of about 35 million shares at a price of $2.30 netted us almost $76 million, substantially hardening our balance sheet. This raise was a big deal for Sangoma. Five banks participated in a syndicate to make this happen, and it was upsized as it progressed with the 15% over-allotment being filled. This was done for general corporate purposes and undertaken at a time during which the equity markets looked like they could become challenging as COVID and its impacts unfolded.

So we are now well positioned for a variety of conceivable scenarios, including possible future acquisitions. Sangoma typically has a number of such conversations taking place at any one time. And today's M&A climate looks really interesting to us. While I'm, of course, not in a position to share any further details with you today, I just want you to know that we're confident Sangoma will put the money that many of you entrusted us with to good use indeed.

And finally, before I leave our section on strategy, I'd just like to draw your attention to the company's 2020 AIF or annual information form. Companies on the venture exchange are not required to provide an AIF each year, but Sangoma has decided to add it to the series of documents describing the business that we share with you. You will find it posted on SEDAR. The AIF describes the business, including customers, competition, corporate structure, risk factors, a 3-year history of events, et cetera, so it can be a useful source of information on strategy for those of you who may be so inclined.

That concludes my comments on general strategy, and I'd like to move on to forward guidance for fiscal '21. Let me start by reminding us how Sangoma fared against fiscal '20 guidance. We guided towards $128 million to $132 million in revenue and towards $19 million to $21 million in EBITDA. You now know that we came in at the very upper end of the revenue range and surpassed our EBITDA targets, pretty decent for a year rocked with COVID, perhaps the biggest shock to the economy in most of our lifetimes.

And a quick refresher on how Sangoma's cadence for issuing guidance works. When we release results for a fiscal year, we then provide guidance for the year that follows. Today, we're releasing audited results for fiscal '20 and thus it's time to provide guidance for fiscal '21 as some of you have no doubt seen in today's press release. In it, we shared that our guidance for fiscal '21 is for revenue of between $143 million and $147 million as well as for EBITDA between $24 million and $26 million.

In determining this range of growth projections, we tried to consider a number of factors, such as the expected growth in our services business; the FX rate outlook; likely GDP growth; trends in Europe, Asia, North America and CALA; the ongoing COVID-19 pandemic; and the gradual decline of PSTN networks for our product sales. To be honest, I'm guessing we had all hoped things would have been clearer this late in calendar 2020. But instead, we have to acknowledge that the outlook for the global economy remains somewhat unclear. Many of you in this call are still in work-from-home mode or know people whose businesses are closed or see that reopening or closing again of companies around the globe is still kind of inconsistent.

As a bit of context today, only 28% of S&P 500 companies are providing forward forecasts, which is less than half of the 57% who were providing guidance right before COVID hit. This gives you some idea of the ambiguity that even the biggest companies are still seeing. So while there still indeed remains significant uncertainty, we feel confident enough to share with you today what we see at this point for the year ahead. With that, I'd like to bring my prepared remarks to a close with a quick summary.

Sangoma has grown from a very small nano cap company with about $10 million in sales to a strong, growing business with over $130 million in revenue, a level we fully expect to continue adding on to, and a market cap of over $0.25 billion. We have demonstrated proven top line growth over an extended period; solid and expanding EBITDA; increases in our services business, where the recurring revenue is generated; and positive cash flow. And sure, we see some of the temporary COVID headwinds that so many other companies are experiencing, too. But we're very well positioned to withstand them.

Our recent acquisitions are bearing fruit as expected. We have excellent M&A opportunities in front of us. Share price has been strengthening, albeit more slowly than I'd like. We are cashed up on our balance sheet, and we're comfortable enough to provide guidance in spite of one of the worst economic shocks in our lives. As I just mentioned, all in all, a pretty darn good year in fiscal '20, all things considered. Indeed, we've come a long way, and we fully intend to continue on that path.

With that, I'll turn the call back over to David for questions. And finally, a simple reminder that we'll be back together again in just a few weeks, given the somewhat strained sequencing of results at this time of year for Sangoma: full year results from fiscal '20 in October and first quarter results from fiscal '21 in November. Okay. David, over to you.

Thank you, Bill. To make sure everybody knows how to ask questions, I'll ask the operator to go over the instructions. Operator, we're ready to take questions now, please.

(Operator Instructions) And our first question is from Nick Corcoran with Acumen Capital.

Congratulations on the great full year results.

Nick, thank you.

So my first question is just to do with the product sales that were potentially lost in Q4. In the MD&A, your comments said that Q4 revenue was like we saw kind of Q3. Can you give any indication of what that magnitude of that impact was?

I don't have that off the top of my head. Maybe David could help me with that. David, there will be segment disclosure in the financial statements that show product for Q4 versus product for Q3?

Yes. So Nick, the answer is the product part of our business was more impacted because of the COVID shutdowns in various parts of the world. In some cases, even where we had made a sale, it was difficult to deliver the product and have it installed. We also have more lumpiness in our products as a matter of course. And I think you'll recall in Q4 of '19, there was a substantial single transaction that has repeated in fiscal '20.

Great. That's helpful. And can you maybe give an indication whether or not product sales in Q1 will be higher than Q4?

No, we're not going to comment on that yet, Nick. We've just finished Q1. We're just closing books and pulling all that information together. So I don't think we want to get into Q1 numbers on the Q4 call. We're only, I don't know, 2, 3 weeks away from that. So please bear with us.

Yes, that's fair. And then just a last question for me. Can you give any more color on the M&A pipeline, what you're seeing and whether there's been any changes in multiples that potential buyers are asking for or sellers are asking for, sorry?

Yes, sure we can. I don't see a big change in the landscape, to be honest, Nick. Some of the research analysts and industry analysts have asked whether COVID made a big difference to the M&A landscape. I don't see that. I said on an earlier call, and I think it still holds true after the end of Q4 and into the beginning of fiscal '21, that good companies are still good companies. If you have a good, healthy business, it's still healthy and doing well. Those are the kind of firms we're interested in. We're not bottom feeders looking to pay the lowest possible multiple.

For sure, there are examples of companies, which might be what you're hinting at, that fall into a bucket like, I don't know, it's a small $10 million or $15 million cloud company and they generate $10 million a year in revenue and spend $15 million and lose $5 million a year. And there was lots of money available very cheaply over many years to fund those ongoing operating losses. Those guys have changed. And more of them have come out of the woodwork to be bought. We certainly get lots of those calls. But we didn't go and raise $80 million to spend $10 million, right?

So while that segment of the industry might have found themselves struggling more in COVID, the kind of businesses that we would be looking at haven't seen big changes. I wouldn't say multiples have come down because of COVID. Yes, that's about the best I could do without being too specific right now, Nick.

And then is there any specific part of the product offering or service offering that you'd look to target with potential acquisition?

Yes. When I've been asked this question in the past, instead of answering in a singularly pointed way, which kind of can get you in trouble because now people are saying, "What about this company? What about that one," the best way I can describe what we're looking for, because that's kind of where your question hints at, is we're looking for 1 of 3 things. As I said, in some subtle way during my prepared remarks, we're looking for companies that have certain product or service categories, where we feel we might have a hole or are a bit weaker than others, or we're looking for companies that have a certain kind of customer base or we're looking for companies that have a go-to-market strategy or a path or a channel to certain customers.

And so that's the kind of firm that we're looking for in acquisition discussions. We have more than one of those sets of conversations going on. And if you're fortunate, you can find businesses that satisfy more than one of those conditions, as I said in my comments, sometimes 2 or once in a while, all 3.

The next question is from Gavin Fairweather with Cormark Securities.

Appreciate the difficulty of providing guidance at this time. So I guess just a question on that. For the last couple of quarters, we've seen very strong growth in services and then some softness in products as you mentioned in your prepared remarks. Is that kind of your base case assumption as you kind of build up your guidance for fiscal '21 that, that will continue?

Yes. Generally, I think that's fair. There's lots of nuance to that at the next level down, Gavin, but not stuff that I talk about on this call. That's quite right. We see services continuing to grow quickly. We see product sales flat, a little bit of growth, a little bit of shrinkage. It really depends on the individual quarter, what's happening in certain geographies, if one part of the world shut down. Year-over-year compares depend upon, as David said, whether there was a lumpy order in that quarter from the prior fiscal year, et cetera. But I think you got the right picture.

And maybe we can jump into the nuance a little bit. I mean you mentioned the shift towards UCaaS in the market. Do you see that trend accelerating? Have you guys been feeling that? And then on the product side, are you still finding that some of the sales cycles are delayed and purchasing decisions are deferred?

Yes. So 2 totally separate questions, right? On the cloud side, the first part of my answer is, as I suggest that I would start to do when I introduced part of my strategy comment, we don't equate cloud communications with UCaaS. And I'm assuming you don't specifically mean UCaaS in your question, just do I see the trend to more cloud communications accelerating? And the answer to that is yes, right?

If you look back over many years and, of course, different industry analysts, not so much research analysts, but Forrester, Dataquest, Gartner, et cetera, I don't know, 4 years ago, people were talking about 10% to new adoptions were cloud and 90% were prem. And then it was 15% and then it was 20% and then it was 25%. And now most seem to be saying 30%-plus. I even saw one that went as high as 40% for the first time I saw that number. And those are the numbers in North America, as you and I have discussed before, right, Gavin?

So while in North America, the vast majority of the runway is still in front of us, the runway is even longer in Europe and Asia and Latin America, where cloud is not nearly as penetrated. But for sure, we expect the fraction of new adoptions that use cloud to be getting bigger and bigger every year. And we see it in our business. There's no stopping it. There's lots of good reasons that end users choose cloud and more and more of the channel is becoming focused on cloud as well.

Your other question about whether product sales or product orders are continuing to get delayed. It's a little bit early to tell. And the impacts of COVID are kind of oscillating a little bit right now, which is suboptimal for sure, right? It looked like the impact in Q4 was kind of obvious, what was happening our fiscal Q4. And then in the summer, it seemed like it was starting to get a little bit better. And I would say, any delay in product orders or hesitation of capital spending might have been looking a little bit more promising.

And then it looks like the second wave has come and more countries are beginning to ratchet things down again. Certainly, in Europe, there's lots of that. We're seeing it in different regions in Canada. The U.S. is continuing to see more cases, although maybe less willingness to shut down the economy. So it's very unpredictable, right, Gavin? I don't think we should quantify what we think is going to be up and down and for this quarter or next. We've tried to give guidance when almost nobody else is doing it. And I think that's about as far as we want to stick our necks out for now until we see the next couple of months.

And with that backdrop, I mean, you talked about being ready to step on the accelerator kind of when the environment calls for it. So I guess what would you like to see in order to get more aggressive in terms of your investments in [sales markets]?

Yes. I think there's some stuff which is economic and financial and some which is more general social trends. So I mean the biggest one and the reason I spent so long today talking about COVID is that pandemic really needs to feel like it's getting more under control, right? And different people have different definitions of what that means, whether all you look at is the number of cases or the number of hospitalizations or the percentages of tests that are proving positive or whether you look at other factors, including what's the improvement in treatments or where are we on vaccine development.

We're not a bunch of epidemiologists here. We're a bunch of geeky engineers running tech companies. From our perspective, COVID has to look like it's heading in the right direction, not oscillating up and down. It is better, it's a bit worse, it's better, it's a bit worse. So we're optimistic. I would say that Sangoma is run by people who kind of have a positive outlook. But the second wave doesn't look great right now for multiple places in the world.

The second thing, I guess, Gavin, is we can measure more directly customer behaviors. And so whether that's quantified or assessed in a more qualitative way by listening to salespeople on the frontline who are talking to customers and channel partners, what you hear right now is people getting a bit nervous again. And that's okay. We managed through the nervousness in Q4. It doesn't feel like it's at that level. It seems like it's going in the right direction, not the wrong direction. But for sure, this was a bit of a pause during the second wave. Let's see customer sentiment.

And then thirdly, I guess, what I would say is we'd like to see some of the problem areas geographically that are the most worrying begin to improve, right? So cases in the Southern U.S., some of the most problematic European countries that were bad and then got better and then worse again. They tend to be the big European economies. So the U.K. is in trouble right now. France looks like it's struggling, Germany a bit more again.

It will -- so those are the 3 things I would point out. Nothing magical, not like our crystal ball is better than anyone else. But that's the stuff we care about. It won't end up paralyzing us. I don't want you guys to hear this and say, "Therefore, Sangoma is not going to take action." We are acting, both in terms of R&D, marketing and sales and M&A. But as you said, I would say we haven't entirely stepped on the accelerator yet, and that's true.

(Operator Instructions) Our next question is from David Kwan with PI Financial.

I'm just curious, just on the SIP trunking side of your business, how much of an impact you saw maybe in Q4. It seems like more people were shifting to kind of using video conferencing platforms instead of using kind of traditional phone calls. And if you did, was there much difference between your wholesale channel versus kind of your direct sales to end customers?

Yes. So a couple of parts to the answer. One is, for sure, there was a shift towards more video meetings as people were working from home. But I would say there was a shift to more video and to more voice. That doesn't mean that in Q4, we saw usage go up. So we'll talk about that next in the second part of my answer. But I remember reading an article partway through our fiscal quarter or the calendar Q2 that voice was the new killer app, right? And people weren't talking on the phone as much anymore. It was becoming one of the ways of communicating, along with Slack and collaboration or whatever.

And from our point of view, we've always believed in voice. I don't see that going away. Cloud voice makes that even easier to access, including in hybrid-type deployments. So it's true that video got lots of extra attention and certainly lots of users for all the obvious reasons. But I wouldn't equate that to less importance placed upon voice. What I would say is any dip we saw in wholesale usage, less so in retail, was mostly -- maybe not mostly, probably entirely related to the impact of the way customers and their companies were operating, right?

So they -- as a company with 100 employees and 10 people got laid off or it was a company that was in the restaurant business and had to shut down temporarily or it was a company that didn't survive the COVID phase. Now you heard that none of that ended up all summed together having a material impact on us. But for sure, we saw examples of that. And so while the retail trunking business did not dip, continued to grow, we saw a little tiny bit of a dip in Q4 in wholesale trunking revenue not because we were losing more customers or anything like that, but the traffic they were generating dipped a little bit.

No, that's helpful. I guess maybe also with people not meeting face-to-face, you might have seen a bit of a buffer from that standpoint in terms of whether people use video or voice.

Yes, completely agree.

Okay. And I guess on a related note, just on the Sangoma Meet, you answered one of my questions as it relates to kind of the revenue model for that going forward. I know when you were prioritizing getting it out, there were still some kind of features and functionality that you wanted to get it up to some of the other platforms out there. Can you maybe talk about some of the additions that you might have made over the last few months and what might still be in works?

Yes, sure. So there are a few that were at the top of the list, David. And it depended upon which kind of user, but -- so for example, the ones that we were most paying attention to were things like scheduling a video-based meeting from inside calendars and sending invites, whether you use G Suite or Outlook and being able to put the meeting link into a calendar entry or sending that to someone else. We were in the process of adding the ability to dial into a video bridge from a phone if that appealed to an end user. I've needed that several times when joining a video meeting from the car while driving somewhere.

We were adding the ability to control a call by a moderator. So there's still a few things we'd like to add. But that's very close to being a normal [GA] product. And from our point of view, we had a pretty tolerant user base at the time, given we weren't charging for the product. But we're now going through the exercise internally about how to monetize and what the economics of that kind of a service will look like.

Well, that's helpful. Just 2 more questions. As it relates to the inventory, you guys talked about, obviously, the supply chain, things that you're handling in terms of consolidation. But also given what's going on with COVID here and cases picking up, is the decision to kind of keeping inventories where they are as opposed to maybe stocking up the bit, particularly on the component side, more a reflection of maybe what's going on in China, where they've seemingly done a better job of controlling a second wave?

So I didn't quite follow. Were you asking whether the buffer stock that we built up was in any way related? Is that what you were getting at?

Well, I guess you guys have talked about keeping inventory flattish from current levels. But given what's gone on with COVID around the world and potential supply chain issues, is the decision to at least to kind of hold it flat where it is right now more a factor of China better handling a second surge of COVID?

Yes. Not really, I would say, David. No, if I felt like we were exposed with the level of inventory we have, it's not like I'm hesitant to buy an extra $500,000 of raw material. We could easily do that. The balance sheet has tons of capacity on it. I just think we're okay right now. There's not a sign that we have any issues with an inability to ship. The fraction of revenue that's coming from product is going down every quarter and lots of that product is software, not all hardware. So I think we're good. If there was ever a sign where our operations group felt like there could be some issue, for sure, we would act. But we're not seeing it today.

Okay. Perfect. Just a last question, you talked about the AIF. Any plans on upgrading to the TSX, given, obviously, that would be one step that you'd probably want to do?

Yes. So we have lots of plans. Not something that I think I want to commit to on the call, David, we're not quite there yet. But I would agree if what you're hypothesizing is that a $140-something million company that plans to become $250 million, that becomes $500 million is eventually going to move off the venture exchange, and that's completely right. It's a matter of less about if and more about when and which exchange, not whether we would plan to be on the venture exchange a few years from now.

Thank you, David. Let me ask again, is there anybody else who would like to ask us a question? Operator, perhaps you could just remind people how to do that?

(Operator Instructions)

Okay. That looks like that's it for everybody. So let's bring the call to a close. Thank you very much for joining us today. Just a reminder, there will be a replay available on our website later tonight or tomorrow. We do have our Annual General Meeting coming up in December. And we will be back to you in November with the Q1 results for our fiscal '21. Again, thanks very much for your support during the course of fiscal 2020, and have a very good evening.

Bye, everyone. Thank you.

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