Sangoma Technologies Corp (SANG) 2012 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Sangoma Technologies 2012 fourth-quarter and full-year earnings conference call.

As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. (Operator Instructions). At this time, I would like to turn the conference over to David Moore, Chief Financial Officer. Please go ahead, Mr. Moore.

Thank you, operator. Hello, everybody, and welcome to the Sangoma conference call. I'm here today together with Bill Wignall, Sangoma's President and Chief Executive Officer, to take you through our fourth quarter and annual results of fiscal 2012.

As a reminder, this is Sangoma's first Annual Report under International Financial Reporting Standards, IFRS, and if you require more information on the impact of this, please look at our annual audited statements and MD&A, which describe the changes in detail.

Also, you should be aware that the fiscal year 2011 has been restated to conform with IFRS so that all data for 2011 and 2012 is comparable. Also, we will refer to a couple of terms such as operating income that are not IFRS measures, but which are defined in our MD&A.

This call will discuss the press release that was distributed over the wire services on October 10, the Company's audited financial statements, the Q4 MD&A, and the announcement of a shareholder rights plan, all of which are posted on SEDAR and all the financial documents are also available on our website at www.Sangoma.com.

This call is being recorded and will be available on our website shortly after the call concludes.

Before I hand over to Bill, 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 may 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 and in the Company's annual audited financial statements, also posted on SEDAR.

It is now my pleasure to introduce Bill Wignall, Sangoma's President and CEO.

Thanks, David. Welcome, everyone, and thank you for joining us today. As in prior calls, I will share some prepared comments and then open up the call to questions.

I've structured those prepared comments in four sections today. I will begin with a high level summary of the year in general. Secondly, I will review our fourth quarter and annual financial results. Third, I will provide a brief operational update of Sangoma's progress, which focuses less on financials and more on what is happening inside the Company and within our market.

And finally, the fourth topic will be corporate development. Just a heads-up that it's a bit longer this quarter since we're looking back over an entire year as well.

Okay, so let's begin with that first section, offering you a high-level overview of fiscal 2012, a really critical year in Sangoma's evolution. I am delighted that another all-time record quarter capped a very positive year for Sangoma, with revenue growth of 16% over fiscal 2011. It's especially gratifying when placed in context at a time when many of our competitors are struggling, shrinking, and losing money.

Sangoma has grown, is generating reasonable profitability during an investment phase, and has remained financially and operationally healthy. The contrast versus our competitors and with the overall economy is significant, and the whole team of people here at Sangoma has worked extremely hard during fiscal 2012 to deliver those results for you. I'm really proud of the job they've done under these challenging circumstances.

I mentioned in this forum about a year ago that the 2012 test of the operational rebuild that we took in the prior fiscal year would be, one, new products, perhaps 8 or 10 of them; two, a buildout of our sales and marketing capabilities; and ultimately, three, the resulting revenue growth that we hoped for in fiscal 2012. All three of those have been delivered.

In fact, we introduced more than 10 new products during fiscal 2012. These products contributed the bulk of the 2012 revenue growth and are still in the early stages of adoption.

Further, we then built out our sales and marketing capability as planned. As the new products began to hit the market, our marketing department repositioned Sangoma during fiscal 2012, using the new messaging of Everything Connects to ensure the world understood that we are not just a board Company anymore.

We added professional sales resources closer to both our widely dispersed historical customers, and to our potential new customer segments, particularly carriers that Sangoma is now targeting. And finally, Sangoma did reignite revenue growth during fiscal 2012 after several years of flat sales, and during a prolonged economic downturn that has made it most difficult to do so, something that we witnessed more specifically in our industry.

All in all, three for three -- new products, new sales and marketing capability, and new revenues. The trend definitely remains a work in process and, indeed, we are not out of the woods yet with continuing deep economic downturn that doesn't yet show signs of letting up. But whereas fiscal 2012 had a distinctly R&D type feel to it at Sangoma, as we needed to catch up our product portfolio so quickly, we are now communicating internally that fiscal 2013, which we've now started of course, can have a more customer facing focus to it.

Overall, I hope you can see that Sangoma is a much stronger Company in every respect with a stronger team, a clear plan, a broader product portfolio, leading to a more visible market presence, strengthening customer relationships, consistent execution, and resulting topline growth.

Okay. Having set the stage, let's now dive into the financial details, the second major section of today's call. Sales were another Sangoma record during Q4 at CAD3.7 million, up about 14% on the same quarter last year. And this rounds out a very good revenue year in which sales were CAD13.8 million, compared to CAD11.9 million in fiscal 2011, an increase of 16%, especially gratifying given what we see in the market as a whole.

The cost of sales for the year ended June 30, 2012, was CAD4.3 million, or 31% of sales, compared to 25% of sales for the year prior. This delivered gross margin of 69% for the year, more typical of our business recently, and an important trend that we are monitoring and managing very carefully.

For Q4 our gross margin was 64%, somewhat below our typical levels these days, simply due to product mix sold during the fourth quarter. As we have indicated in the past, the gross margin percentage for some new products is lower than the historical board business, which has been in an uncharacteristically profitable niche for hardware products. Our margin on sales of those historical products, indeed, remains above 70%. And the margin on some newer product will continue to be less, though I expect some improvement as we run higher production volumes.

[Photo] operating expense for this year was CAD2.4 million -- for this quarter was CAD2.4 million, barely above Q3 at all, and 15% higher than the same quarter last year. As we've indicated, quarterly OPEX spending has nearly stabilized at this point.

And now for the fiscal year, I'll cover annual OPEX trends across our three major cost centers, marketing and sales, R&D, and G&A.

Sales and marketing expenses were CAD2.6 million in fiscal 2012, up about 43% from last year, reflecting the focus on and incremental investment in generating new revenue and acquiring new customers.

R&D expense was up 33% to CAD2.8 million in fiscal 2012. As you may recall, Sangoma capitalizes qualifying R&D expense and so this CAD2.8 million is a mix of actual engineering spending and the amortization of development cost incurred over the last three years. This year, the increase was driven primarily by the larger engineering team necessary to deliver all the new products, the absorption of the Vega Stream engineers, and some leftover amortization of spending increases, especially late in fiscal 2010.

G&A expenses were CAD3.4 million for the year, an increase of 13%, which was less than the rate of revenue growth year over year. The result is that for all of fiscal 2012, our OPEX spending increased by about 11% over the prior year of fiscal 2011.

Operating income for the year ended June 30 was just over CAD1 million, down slightly from fiscal 2011, and was about breakeven in Q4, both due to higher revenue being offset by the increases in spending to drive growth and reduced gross margin percentages. Internally, we use operating income to measure our progress year over year, as it can provide a clearer picture of what's actually happening in the business. All in all, a decent level of profitability at between 7% and 8% of revenue, especially during an investment year.

Net income for the year 2012, after all items, was CAD400,000, or approximately CAD0.014 per share fully diluted, compared to the net loss of CAD3.8 million last year which was due to the one-time non-cash write-downs. For Q4, net income shows as negative this year and last, but this is not very illustrative since it's entirely non-cash related.

For fiscal 2011, it was due to those write-downs and for fiscal 2012 it's due to tax balances. Sangoma's tax position this year is also a little confusing, as it shows at more than 40%. But in fact we have not and will not pay tax for fiscal 2012.

We, of course, benefit from the Canadian SR&ED credits as part of our development spending, so our typical rates would be expected to be below 40%. And that's indeed where we expect it to be again in fiscal 2013. For fiscal 2012, it's higher, partly because of the switch to IFRS and some of the changes in accounting treatment that this implies, and partly because of a one-time tax impact of the Vega Stream acquisition.

That covers all the key P&L points on our statement of comprehensive income, so I'd now like to address a couple of items on the balance sheet, which is now called the Statement of Financial Position under IFRS. The first is inventory. As discussed last quarter, we continue to utilize some of our cash to build new product inventory so that we can deliver on sales opportunities, and we expect inventory levels to remain in the CAD3 million range for the next while.

The second item I'd like to comment on is receivables. AR rose to CAD4.5 million at the end of Q4, up significantly over last year, and is expected to have crested as new, sometimes larger customer sales with extended terms begin to work through. It is often a condition of sale in such orders from governments, military, or large telcos that they will not accept our standard 30-day terms offered to most creditworthy customers.

As has been the case in the past, we used the Canadian Export Development Corporation, or EDC, to insure receivables where possible. We carefully manage receivables risk and we have extremely low bad debt for an organization of our size.

For the year, the increase in inventory and AR explains the entire reduction in our cash balance. That is to say our operating profit from day to day operations was sufficient to consider it as having paid for the CAD1.5 million purchase of Vega Stream, and for the normal course issuer bid repurchase of shares. As such, we expect that going forward we will continue to be cash positive in most quarters.

Overall, this means that Sangoma remains very financially healthy in spite of our investment phase and during the economic recession, with a strong cash position of CAD5 million and essentially no debt. Especially vis-a-vis our competitors, we are very pleased with that progress made this year.

We can revisit the financials during the question period if you like, but now I'll switch to the operational update part of the call.

On prior calls, we discussed the three-step process we were going to follow to reinvent Sangoma. First, an operational rebuild of the entire Company to allow us to scale. Second, a complete look at strategy to uncover new ways to grow revenue. And third, some time on corporate development, including M&A opportunities, investor relation, share price, et cetera.

I've covered the operational rebuild during earlier calls in some detail, so I don't plan to do so again here. Suffice to say that we entirely changed the way the Company operated in fiscal 2011 to construct a new executive team, ensure clear accountability, focus on new products, and build out our marketing and sales capability. That task, completed in fiscal 2011, was intended to create the ability to scale and to dramatically improve our general corporate competence.

The benefits were seen in 2012, with the sales team in place, marketing programs getting traction, the first of the new products on our roadmap shipping, all contributing to the 16% growth.

Having gotten the Company working in the way we had planned, step two was the complete look at strategy to identify a new way to stimulate growth. You will recall that we landed on a multifaceted approach in which we would drive growth, first by expanding product portfolio to address new product categories; second, via targeting new customer segments, not just Sangoma's traditional segment at enterprise clients, but now also OEM and carrier solutions. And, finally, third, by an aggressive thrust into new geographies as we globalize into all four of our key markets, North America, Europe, Asia, and Latin America.

This is the strategy that Sangoma is pursuing these days. And so now I'll cover a couple of the key accomplishments in each major area of our business -- marketing and sales, R&D, and G&A -- to provide you some deeper insight into how we are executing that strategy at an operational level. Let's begin with marketing and sales.

Revenue growth is obviously tough to come by during periods of economic recession. And when it lasts this long, the added uncertainty definitely impacts capital spending, which is where Sangoma products often fit into our customers and budgets. So our marketing and sales teams had their work cut out for them this year.

Our sales growth in fiscal 2012 came primarily from new products this year. But equally importantly, those sales were to both new and existing customers. I am particularly pleased that more than half of the revenue growth was from customers Sangoma had not even known during fiscal 2011.

Building these relationships takes time and investment. The focus on new customers and markets shows in the sales and marketing spending, which is up 43% from last year, as mentioned. And with some of our new larger customers, it also requires new capabilities.

In fact, it has definitely stretched our resources in fiscal 2012 so that in fiscal 2013 we are constructing the Company's first professional services department to help us manage these kinds of deployments.

You may recall that Sangoma sells through a combination of direct and indirect sales methodologies. As you heard, we have been building out our sales organization during fiscal 2012, such that by year-end we had sales professionals in every major geographic region that we target.

And in fiscal 2013, we have been further expanding that team to provide additional vertical market attention on top of geographic focus, by hiring sales professionals to specifically target carriers and large OEMs, focusing on these kinds of longer-term opportunities to get our products standardized at bigger customers.

And our existing distribution partners have remained critical to our business and a significant part of our revenue. We have sales in virtually every country, thanks to these partners. And, as I mentioned on the last call, we would host our second annual Global Partner Conference during Q4.

That event took place in May, where we spent two days sharing our fiscal 2012 results, thanking them for their effort and loyalty, and sharing plans for fiscal 2013. It naturally includes a lot of training on the recently introduced new products, together with us getting their feedback on planned new products before we introduce them to the market. Again, it was extremely well received this year and we got about 50 people from 30 countries.

Last year, we were able to share only what we had planned at that stage. And, frankly, some of the audience was very skeptical about whether the old Sangoma could really change as much as we were telling them we would. This year, they admitted that they had not expected us to have delivered on everything we promised last year, particularly on the new product side.

As you might expect, this year they paid even closer attention to what is coming and we have newfound respect from our channel for the new Sangoma.

In addition, we have expanded our marketing programs considerably and have launched our Everything Connects vision to the market, as we evolved from a board Company to a facilitator of any-to-any IP conductivity connectivity. Getting the message out to the industry and to our prospective customers that we're not just a board Company anymore, and should be considered in many new product categories that we were not known of historically, was the key marketing job in fiscal 2012.

We also realigned our product launch process to shorten the time between product launch and first orders, by introducing a two-stage process in which we pre-launched the product to our channel so they have all of their staff trained and marketing materials ready for the real launch. Essentially, this now attempts to enable Sangoma to expect initial orders at launch and be able to ship quickly after the product is released.

Our marketing programs continue to run smoothly each month, with some activity now starting in the new global regions as well. Our presence at trade shows, through regular newsletters, PR activity, including several articles in many trade journals focused on the new Sangoma, outbound lead generation programs, are all up and are helping raise Sangoma's profile in the marketplace.

Finally, we've introduced the more sophisticated lead nurturing program to help move potential customers through the early phases of the sales cycle.

Now let's shift from marketing and sales to a quick overview of what was happening in R&D during fiscal 2012 at Sangoma. I think you probably need slightly less information in this area since I have been getting regular calls from many shareholders through the year, pointing out you've clearly noticed the huge step up in new product releases during fiscal 2012. The simplified summary is that we released over 10 new products this year, proving the naysayers wrong and demonstrating our much improved engineering capabilities.

Of course, this means our R&D spending also had to be somewhat higher and was up 33% from 2011, as mentioned. This reflects a full year of the slightly larger team and the integration of the Vega engineering group. There were many R&D highlights this past year that lay the foundation not just for fiscal 2012 -- for fiscal 2013, but for the Company's ongoing future.

A few key ones include a full Gateway product line, providing systems from 4 to 1000 lines. This portfolio includes our NetBorder Express Soft Gateway, an SS7 Gateway, a transcoding gateway, and the TDM [FSIT] family. External gateways have expanded our addressable market and can be easily integrated into virtualized and cloud-based solutions in order to capture additional opportunities in this space, as well as in Sangoma's traditional segment.

The rapid addition of major new functionality to our SS7 line, to meet a tight deadline with a large international telco that we expect to generate significant follow-through sales. This opportunity was actually identified by a new distributor to Sangoma, and we are working well together on this significant opportunity. The integration of the Vega business and rapid launch of the product portfolio; our attention to the Microsoft Lync opportunity and the accompanying products to go with it.

We are using a three-pronged approach, a software certified Gateway with boards, the Vega portfolio, and our newest Lync addition, the Lync Express product, which is our all-in-one solution for Lync that seems to be getting good early response from the market. Significant application, accomplishments not just in new products, but some platform development to redesign our software into a common stream so that we can rapidly share new functionality across our multiple hardware products and families.

We also leveraged our development team skills to introduce our first wireless and first optical products and, of course, we continued our lead in the board business by introducing the world's first 16-span board, doubling the highest capacity available after a competitor finally matched our 8-span product after three years. In the last quarter, we capped the year with the introduction of our first-ever Session Border Controller.

Naturally, we are actively developing further new product for release over the next year or two. Such products will lead Sangoma into new markets as the Company continues to diversify its portfolio and include additional software applications, more full solution appliances, and, of course, additional board-based products.

All in all, the key message I'd like you to hear regarding our R&D success is that we've launched more than 10 new products this year, surpassing our target and up considerably from the 1 per year of the past. We've proven it can be done, and with relatively modest incremental spending, by being very rigorous with our priorities and our process.

And now, finally, for our finance and operations group, just briefly. This group has led the integration of the Vega Stream business, amalgamated our Paraxip subsidiary to simplify operations and for tax efficiency, switched over smoothly to IFRS, and coordinated the new factories which, I've explained previously, had added significant complexity to our manufacturing operations. The growth in spending within this area was almost entirely the result of our Vega Stream acquisition and we continue to watch this spending closely so it becomes a smaller portion of revenue over time.

Well, that's your update on operations and I'll now turn my attention briefly to a few quick comments on corporate development.

First, we remain on the lookout for acquisition opportunities that could add material revenue, increase geographic presence in key markets, and/or broaden our product portfolio. This remains a key objective and we are quite active in this area, but very selective. In our review, this selectivity is what has made the Vega Stream deal look so good in hindsight.

During the year, we closed the Vega Stream acquisition, as you know, integrated the key staff, built initial inventory volumes from a standing start, and shipped Vega gateways around the world, and giving us a 4 to 1000 line portfolio.

Precisely because we are so selective, there were not new acquisitions that I can specifically report to you at this time, but we continue to invest time in the area and do expect further acquisitions. When something progresses to the stage where it's appropriate to discuss, we will, of course, include it in future updates.

Secondly, as you know, we changed auditors this year and Deloitte completed their review with an unmodified report on our first year under IFRS. Next, this week, the Sangoma Board of Directors approved the adoption of a shareholder rights plan. And they've already received a couple of comments and questions on this, so I'd like to take a few minutes to explain just briefly.

Of course, we can explore it in more detail during the question period if you wish. The shareholders right plan is intended to ensure, to the extent possible, that all shareholders of the Company are treated equally and fairly in connection with any takeover bid for the Company, and to maximize shareholder value. The plan discourages discriminatory, coercive or unfair takeovers of the Company.

In the event an unsolicited takeover bid is made for all or a portion of the outstanding common shares, it gives your elected board Time, if in the circumstances that Board determines is appropriate to take such time, in order to pursue alternatives to maximize shareholder value. The Board did not adopt the plan to prevent a takeover of the Company, to secure continuance of directors or management and their respective offices, nor to deter fair offers for the common shares. The adoption of this kind of plan is very common and, as of today's date, the Company has not been approached by, nor is it away or aware of, any intent for someone to launch a bid for the Company.

The plan has been approved by the TSX Venture Exchange, subject to confirmation by the Company's shareholders, excluding officers and directors, at a special meeting to be held coincident with our Annual General Meeting being held on December 10. If the plan is not confined confirmed by shareholders, the plan and all the outstanding rights would terminate and be void and of no further force and effect.

The more specific mechanics of how these rights at work, how they are triggered, when a shareholder receives the physical right, et cetera, are a little involved. But we are perfectly prepared to explain that to you, if you wish, during the Q&A period.

And finally, the last item under corporate development is the NCIB. There is not very much new to report on this topic, to be honest. We continue to buy back shares as permitted and during periods outside of blackout. The number of shares we can obtain using this vehicle is somewhat limited by both the generally low trading volume in the Sangoma shares and by the blackout periods.

Okay, and then just to wrap up, in summary, I would just say that fiscal 2012 was a pivotal year for Sangoma to demonstrate that the operational rebuild would deliver both new products and revenue growth. I'm pleased to report that we succeeded in both respects with more than 10 new products launched and sales growth of 16% to a record CAD13.8 million. The expanded product line, new customer segments, revenue growth, continuing profitability, cash generation capability, and a strong balance sheet all serve as the foundation for ongoing success.

In these calls, I have attempted to paint for you a picture of a changed Sangoma, one based upon a reinvented Company with a renewed sense of purpose and one that does what it says what it will do. Our strategy and execution are working cleanly, and we hope that you, our shareholders, will be rewarded with improvements in our share price over time, something we are all working very hard for.

We recognize that the acceptance of Sangoma's new products in new markets remains a multiyear objective, and that the macro environment out there makes things challenging for everyone. In fiscal 2012, I think we can justifiably claim that Sangoma has outperformed.

And for fiscal 2013, the focus will be on further enhancing our product portfolio, attracting additional new customers as well as channels, and on bringing in some bigger wins from new clients to solidify the progress made in 2012. As always, we put a fair bit of work into preparing these calls for your benefit. So I hope you found this quarter's update helpful in understanding where your Company stands.

With that, thank you for your time and I turn the call back over to David.

Thank you, Bill. On the Q3 call, we had an increased number of questions, and I hope we will continue that trend this time. Just to make sure everybody knows how to ask a question, I'm going to ask the operator to go over the instructions. Operator, we are ready to take questions now, please.

We will now begin the question and answer session. (Operator Instructions). Nitsan Hargil, Torrey Hills Capital.

Hi. Congratulations, David and Bill, on record quarterly and annual revenues. Wanted to ask you, you mentioned in detail how you have increased the product portfolio, and obviously we've seen the press releases throughout the year showing that. Are there any considerations or thoughts on your part of looking at the product portfolio and eliminating some parts of it that are less profitable to the Company?

That's actually a good question. Well, the simple answer is yes. And it was a conscious decision well over a year, of maybe even almost two years ago, that when we decided to broaden the portfolio so quickly, it was with the acceptance of that some of those new products may not succeed as well as others. And if that happened, we would either cull the portfolio to remove those products or, perhaps, just stop the extra R&D into ones that don't sell well.

So there is nothing at this stage that I can tell you, simply because those products haven't been on the market very long. And any of the old products which are not selling well, we had already discontinued investment in them some time ago. So, while in general the answer to your question is yes, there's no short-term action about to take place.

Okay. That's great. I will leave time for others to ask more questions. Thank you very much. And again, congratulations on a record quarter.

Thanks.

(Operator Instructions) There are no further questions at this time. I will now turn the call back over to David Moore for closing remarks.

Let's see if we can solicit some more.

Yes. Let's -- either we've got better at conveying everything that we wanted to, but this is an opportunity for anybody who's joining the call to please address anything which they would like to learn more about. And so, please, let's take a couple more minutes and make sure there's no other questions out there.

Nitsan Hargil, Torrey Hills Capital.

Maybe you can say a few words regarding the shareholder protection program, or the program that you are adopting in the December 10 shareholder meeting. If you can tell us a little bit -- you mentioned there were no bids for the Company, so what is the rationale behind taking this and what is the necessity of the plan?

So there is for sure no necessity, as I mentioned in my prepared remarks. It's just us trying to do the right thing as a Board of Directors, not even so much Management, to protect the interest of our shareholders. It's our personal view that our shares may be undervalued. And if someone else feels that way as well and makes an offer for the Company, this simply provides the Board, if it deems it wise, the opportunity to have a bit more time to push for a higher price and solicit other offers.

So it's not intended to dissuade a bid, and there are no bids that we are aware of that we are trying to push away or push out. That's why we are doing it. And if you are looking for information about how it works, that's kind of a different question. I'm happy to answer that. Just tell me.

I actually looked over the filing, so I did get some information on that and how it works.

Okay. Good. Thank you. Good question.

(Operator Instructions)

Are there no other questions, operator?

There are no further questions at this time.

Okay.

Well, I guess in that case we will bring this to a close. Thank you very much for joining us today. We now close the call and a recording of this will be available on our website shortly. Thank you for participating and have a very pleasant day.

Thank you, everyone.

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