Sangoma Technologies Corp (SANG) 2013 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Sangoma Technologies 2013 first-quarter 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 William Wignall, Chief Executive Officer. Please go ahead, sir.

Thank you, operator. Hello, everyone. Welcome to the Sangoma conference call, and thank you for joining us. I'm here today with David Moore, Sangoma's CFO, to take you through our first quarter fiscal-2013 results. David has been quite ill the past couple of days, and has lost his voice. So, I will cover the typical introductory or prefaced remarks as well this time, though probably not as well as he does.

This call will discuss the press release that was distributed over the wire services on October 28. The Company's audited financial statements, the Q1 MD&A, and the announcement of a Shareholders' Rights Plan that are posted on SEDAR, and other financial documents are also available on our website. This call is being recorded, and will be available on that website shortly after the call concludes.

Before we start, I'd like to remind you that the statements made during the course of this call that are not purely historical are forward-looking statements regarding the Company or management's intentions, hopes, beliefs, expectations, and strategies for the future. Because such statements deal with future events, they are subject to various risks and uncertainties, and actual results might differ materially from those projected in the forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements are discussed in the accompanying MD&A and in the Company's annual audited financial statements posted on SEDAR.

So, let's get started. 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 three sections. I will begin with a high-level summary of the first quarter's financial results. Secondly, 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. Finally, the third topic will be corporate development.

So, on to the financial results. Sales for the first quarter of fiscal '13 came in at CAD3.02 million, just marginally higher than those of the same period last year. While we expect sales in the first quarter of each year to be the weakest in any given year, and typically to be lower than our stronger Q4's of the prior year just completed, we were a little disappointed that we did not get higher growth over the first quarter of last year. We believe this is primarily a timing issue, due to the lumpiness we have described over recent quarters, since Sangoma is now deriving revenues from some larger customers with longer sales cycles, making it more difficult to forecast when a particular order might be received. It is still early days for the many new products introduced over the last year or so, and for our more robust sales organization built out over the same period. I'll cover both of these in more detail during my operational update in a few minutes.

But we continue to expect these new products and the sales capabilities will allow us to win new business from new customers in new segments and new geographies. Nevertheless, we recognize that the ongoing weakness in global economies makes this challenging, and we are seeing the impact of some customers delaying the commencement of projects or rolling them out more slowly than had been expected. This can make it difficult to forecast when a particular order might be received.

To put this in a broader context, while we would have liked to see stronger revenue growth in Q1, even Sangoma's slight growth in our first quarter continues to outperform many of our key competitors, whose resources are much larger than Sangoma's but whose sales have been declining materially. We remain focused on top-line growth, and believe that our strategy of developing more products for sales to more customer segments in more geographies will still deliver growth in fiscal 2013.

Now moving down the income statement, gross profit was CAD2.16 million for the quarter, or 72% of revenue. Slightly below the 73% in the same period of last year. The gross margin this quarter was somewhat above the percentages experienced over recent quarters, and those quarters are more representative of Sangoma's expected gross margin going forward, as I've detailed in our prior calls and official filings.

Operating expense for the first quarter was down to CAD2.15 million. While this is higher than last year in absolute terms, it's driven primarily by the impact of a falling US dollar this quarter versus a rising one in the same quarter of last year, causing a CAD600,000 swing between the years. Without that impact, the increase in operating expenses was 7% over last year, reflecting the slowed rate of expense growth that we have communicated would happen in fiscal '13 as spending approaches equilibrium for the planned level of business.

Operating income was effectively at break-even levels for Q1, and about CAD800,000 below the same period last year, due to that same exchange rate swing I just covered. We continue to adhere to a focus on growing the top line by investing in R&D, and in marketing and sales, leading typically to positive cash flows and reasonable profitability levels. 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 called the statement of financial position under IFRS.

First, Sangoma continues to have both solid working capital and cash. Working capital was CAD11.33 million at the end of Q1, this fiscal year, on September 30. Almost exactly flat with the CAD11.39 million on June 30 one quarter ago. We retain a robust cash balance of CAD4.53 million.

The second balance sheet item I'd like to comment on is receivables. AR at CAD4.1 million was down from the CAD4.5 million at the end of Q4, as we suggested it would be during our last call together. We expect continued swings as we penetrate new larger customers who often will not accept standard 30-day terms offered to most of our credit-worthy customers.

As has been the case in the past, we used the Canadian EDC, or Export Development Corporation, to insure, wherever possible, and we carefully manage receivables risk. As most of you who have been following Sangoma the past few years will know, we have had extremely low bad debt for an organization of our size, and we continue being very vigilant on this line item.

A third quick comment is on inventory levels. With our much broader portfolio, ensuring we have inventory in stock for most products is a more complex task than ever before. And so far, we're doing quite well in that respect. Just like we have tried to use our strong balance sheet to our advantage in sales opportunities by being willing to accept extended payment terms, we've also used it to our advantage by building stock of most products to allow same-day or next-day delivery. This indeed assists our sales organization in competitive situations. And in our view, the somewhat increased inventory levels are a good trade off for this advantage.

Inventory was up from CAD3.0 million to CAD3.6 million this quarter, and we're building units for expected growth in sales over Q2 and Q3. Such manufacturing cycle times can now easily run to three months, much longer than with the traditional board business. Although there will naturally always be some fluctuation, inventory levels have now mostly stabilized since we have the new products nearly fully stocked.

Overall, this whole picture means that Sangoma remains very financially healthy in spite of our investment phase, the weak global economy, and the industry that is struggling right now. We have a strong cash position, essentially no debt, are generating operating profit, and expect to be cash flow positive in most quarters. We can revisit the financials during the question period, but now I'd like to switch to the operational update part of the call.

On prior calls, I have discussed the process that we followed to reinvent Sangoma. First, an operational rebuild of the entire Company in fiscal 2011 to allow us to scale. Secondly, a new corporate strategy, launched during fiscal '12, to focus on the top line in order to start growing revenue through new products, new customers, and new geographies. This includes some reinvestment in the business to get that top line moving, which we've demonstrated some success with during the past fiscal year, while generating reasonable levels of profitability. There's an implied trade-off between driving some growth and accepting modest profitability, which we've clearly communicated and explained over several quarters. This is the strategy we continue to execute on today. And thirdly, some corporate development initiatives including M&A opportunities, investor relations, and share price, which I'll cover in the next section.

If any of this is new to shareholders that may be joining their first call of this type today, I'd recommend you listen to recordings of earlier calls, especially the year-end call for fiscal 2012. These are available for download from our website in the Investor Relations section.

For fiscal 2013, our operational focus is to continue delivering revenue growth. This relies upon the investment in new products, and in sales and marketing, which you have seen over the past year or so, and which is now leveling off. We have focused much of our effort this year on customer-facing roles and activity to ensure that we're doing everything possible to deliver on that revenue objective.

In the R&D area, I have two updates to share with you. First, as I mentioned very briefly a few quarters ago and will expand on now, as part of our product planning, Sangoma has tried to identify some novel new areas for product development. So, in addition to the launch of products such as gateways, SS7, session border controllers, et cetera, we have also sought out some entirely new product areas, and we are developing initial products in those areas intended to help us explore such opportunities. In Q1, we released our STM1 Multiplexer, the first fiber-based product ever from Sangoma, and that follows the launch of our first wireless product last year. During fiscal 2013, I expect that we will release other such innovative products in areas as diverse as the cloud, video, and maybe even social networking. More on those in future calls.

The second R&D comment I'll make is more of an internal-type update intended to demonstrate to you that we're working on ways to still further enhance new product introductions. One of the key development strategies at Sangoma has been to bring all of the products onto a single platform, software platform where possible, so that we can replicate functionality introduced in one product across the entire product line much more quickly.

And now for a couple of quick comments on sales and marketing. In Q1, we finished the build-out of our global sales organization after a year of solid work in that area. We now have experienced sales professionals in every global region, and focused exclusively on all three of our key customer segments -- enterprise clients sold to primarily through our distribution network, OEM customers, and carriers or telcos or service providers. This is a considerable improvement from 1.5 or 2 years ago when we had a sales force of one for the entire world. In addition, we've started constructing a professional services capability to help penetrate these new accounts with more demand in presales and implementation needs.

In marketing, we are using our Everything Connects messaging in fiscal 2013 to communicate to the market Sangoma's new ability of any-to-any IP connectivity across multiple devices, networks, and applications. The ramp up of investment in R&D, and marketing and sales, is mostly done now, with the final slight increase in sales and marketing to come in Q2 and Q3 as the new hires are onboarded. Well, that's your update on operations, and I'll now turn my attention briefly to a few quick comments on corporate development.

We remain on the lookout for acquisition opportunities that could add material revenue, increase geographic presence in key markets, or broaden our product portfolio. While we are very active in this area right now, we are also highly selective, and there is nothing I can specifically report on at this time. We will, of course, keep you updated.

The Company, management, and your Board of Directors continues to believe that our shares are materially undervalued right now, and share the concern that some of you have expressed as well. We don't understand why the public markets are not valuing the very significant progress made over the past year or two, as we've dramatically strengthened the Company and its competitive position. There is no information that we're aware of that could be putting selling pressure on our stock. As a result, we are looking at various ways to improve the share price, including our NCIB, additional investor relations work, and our Shareholders' Right Plan to protect shareholders from opportunistic bids.

In summary, as we've said on each quarterly call, I hope these sessions convey a clear picture of a changed Sangoma with a renewed sense of purpose. We recognize that the acceptance of Sangoma's new products in new markets remains a multi-year objective, and that the macro environment out there continues to make this a challenging goal. For the balance of fiscal '13, the focus will be on further enhancing our product portfolio, adding additional new customers, as well as channels, and on bringing some bigger wins from new customers to solidify the progress made in fiscal 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. I'm going to turn the call back to the operator to take any questions, which I hope you will do, since we've struggled to get questions very much the last few quarters.

Operator, back to you.

Thank you. We will now begin the question and answer session.

(Operator Instructions)

Pardeep Sangha, PI Financial.

Just with regards to the growth side of the story, I think I can see where you guys are making improvements in terms of operating results and things like that, but what about just on the growth side and what is your pipeline look like? If you can characterize some of that and where is the really strong points in your pipeline? Where is the strong point in your area that you're seeing growth in your pipeline?

Good question. Thank you, Pardeep. Good to hear from you. This is the first one you've been on. It's a balance for me between giving clear visibility when answering such a question and sticking to our policy of not offering forward guidance. So let me see what I can say without violating that policy.

I would say our sales funnel continues to improve. It improves both in the kinds of customers that are coming into that funnel, especially new carriers and new OEM customers and it improves in the size of the opportunities that some of those new customers in the funnel are bringing. In the past, it was quite unusual for Sangoma to get large orders. Large has to be taken in context here, Pardeep, it's still a CAD14 million business. But it's now not unusual for us to have opportunities measured in the CAD100,000 or CAD300,000 or CAD400,000. That's quite a new thing for Sangoma. It's also part of the contribution to what can make the revenue a bit more lumpy. So, I feel good about the funnel.

I would say that in spite of those improvements, Sangoma is impacted by the same macro effects that the rest of the world is, and so it is those larger orders that can be more easily impacted by the economy. If someone's placing an order for CAD5,000 of one product, it's probably unlikely they get very nervous about the order, just because the financial conditions out there are a bit hairy. If it's a CAD400,000 order, there's a much higher probability that stuff causes them to think about it or delay it a little bit. I would say on a regional basis, if that's interesting to you about the funnel, like most Western companies I would say we see more growth in developing economies. Asia and Latin America, generally, for example, India or Russia have some good opportunities for us more specifically.

Then maybe on a product basis a couple of comments. It's clearly true that all of the growth in the business is coming from the new products we've released over the past little while. Some of those products are starting to sell well. Others have been launched much more recently so we're getting some decent traction in our SS7 product, as an example, that makes us quite happy. Our offering from Microsoft Lync seems to be getting received with lots of excitement. We've got high hopes for our Session Border Controller, which has just been released and is getting noticed by some of the industry analysts, not financial analyst community. So, I hope that is worthwhile. It's a long-winded answer to a quick question.

So in terms of the pipeline still, how would you characterize the pipeline compared to let's say a year ago? Today, like a year ago today compared to today, are your pipeline substantially bigger? Marginally bigger? How would you compare the two?

I guess there's a couple of comments, Pardeep. You have to think about the stage of the Company was that two years ago. So, Sangoma was not in the habit of measuring pipeline or capturing it in any formal way. The first step was teaching the organization how to do that and how one tracks funnels and how to use them for sales forecasting. So, just the fact that we have one and it's used regularly as part of a normal sales process, I would say is the most important first step. Over the space of the last year or so that funnel has grown. It's grown -- I don't really have the ability to give you a number, because there wasn't a funnel before that for me to compare it to. What I can tell you is what I said, that there are more companies on that list now than there was a year ago. And, the opportunities that are there are bigger. They are in developing geographies, and they are with our new products. And that's about the best resolution I can offer at this stage.

Okay. Can you give some commentary with regards to your sales channel and direct sales versus channel sales? And on the channel side, the VARs and other partners you're working with and how that's ramping up? And give us a sense on how things are going on the sales and marketing side of things?

Absolutely. Okay. So as for channels, there's a couple of comments I'd offer you. One is, as I mentioned to you the last time I was out in Vancouver, maybe the time before since we briefly passed each other in the hall this time. The sales model that Sangoma uses is reasonably sophisticated for a company of our size. We sell through both direct and indirect means. For the enterprise type customer segment, it's almost all indirect using a network of channel partners. Those channel partners typically fall into a two-tier structure where there is often a distributor for each major piece of geography.

In most places in the world that means one per country. So you would have a distributor for example in Peru or Argentina or Germany, France or Vietnam, et cetera. In some countries where the opportunity is larger, there might be a few distributors, but a few means two or three or four, not 20. Then underneath that level of distributor, in the channel structure, is a network of resellers. Those resellers might be systems integrators or value-added resellers or application developers, firms like that who by from the distributor in each region and then put together solutions for enterprise type customers.

For OEMs and carriers, it's more often direct sales. Although there certainly are some places in the world where well-established distributors service carriers and telcos and we're happy to work with them where that's the case. So there's your kind of comment --

So can you -- digging a bit deeper there. Over the past year, what sort of changes have you done and where are you seeing some growth in either this direct or indirect side of things in terms of your sales? How are you making things better and driving sales through either of those the direct or indirect channels?

So, let's talk a little bit about both. On the direct side, Sangoma has gone from a company with one salesperson to a company with 9 or 10 salespeople now distributed across the world. As I said in my prepared remarks, we now have people in each piece of geography and focused on each customer segment for the first time. Two years ago, there was one person, full stop. So that's how we've built out our internal sales infrastructure over the last year or so. On the indirect side, I would say most of the work has gone into either A, optimizing the distribution relationships we have, by focusing the distributors on certain objectives, putting sales targets in front of them, incenting them to make those targets with typical channel programs that didn't exist at Sangoma before. And as well, looking at places in the world where we were either underrepresented or did not have any distribution coverage at all. So, for example, we did not have distributors in Spain as an example or France or -- so going around the world then picking those countries that have large enough economies that they could make a difference and going and finding the right kind of distribution partner in those places.

Okay. Thanks. That's it for me.

Steve Red, US IP.

Two quick questions. Then I should add, I think the first caller's questions were superb, so I'm happy you went through them. The new products that we have, we're really quite enthusiastic about them. There's no question you've done enormous work on getting an infrastructure that really wasn't there and it's in place. The major thing I want to get to is have these products been beta tested by our customers? And are we simply waiting for them to put through the order? What's really the stage where we're at on them?

Okay. So a couple of thoughts. That's also a good question, Steve. The new products now represent very material parts of our revenue. It can vary from month to month or quarter to quarter, but for this year, I would expect that the new products certainly contribute maybe one-third of the revenue. So this is not a company going from 100% revenue in the traditional board segment to 95% last year to 90% this year to 85% next year. The new stuff is ramping up and is the source of the growth, for sure.

Now maybe a couple of comments about your question on what stage are they at with customers. Steve, the way products get adopted by new customers depends hugely on the specific product and the customer segment it's targeted at. If we pick something like, I don't know, the wireless board that we introduced last year, it is a new technology for us and was hard work, like the STM1 Mux that I mentioned in my remarks. But, it's a board that sells for a few thousand dollars to enterprise customers and would not go through a very long beta cycle.

Of course, we do have beta customers and it gets used that way for the purpose of us validating that the product works well, but less for the purpose of them assessing it and building it into their network. If you pick larger products that are often targeted at carriers with higher sales prices, then you get into the more traditional scenario you just described, where they go through fairly extensive testing, wanting to assess the compatibility of that product and their network. Does it work technically? How would they operate and maintain it and do they have the skills to that? How do we get them trained? We do go through that process for those kinds of products. I don't know, the SS7 product that I mentioned earlier would fall into that category.

For sales opportunities like that, we are precisely in those situations where a large customer would buy a few, where a few might be 3 or 12, but not 50 or 100 units. And then deploy them into their network, often at distributed locations and just let them sit and play with the product for a while. We might even have to put engineers on site from the professional services organization I mentioned to hold their hand during that process, make sure they understand how to use them, maybe do some formal training. Does that -- it that the kind of information --?

Yes, it's very helpful. So the biggest part I have -- are these, the larger customers to the larger products, are they typically telcos? I mean telco carriers?

They are either telcos, carrier service providers or in some cases OEMs who are buying the product to put inside their product. Or, in some cases, a large organization that while not a telco or service provider would run their own network like a telco or service provider would, but for their own internal use. So, it might be a government or a network of universities or a military organization, something like that. In those cases, the sales cycle looks like a telco sales cycle. It's long, it's complex, it's quite formal. There's often tenders or RP's. There's lots of soak time after they buy the first few products before the orders start to grow. So, although they're not telcos at all, the way they use the product is a bit like a telco and the level of sophistication of the sale is very much like the telco.

Segmenting this a bit, the telcos -- I'm invested in a lot of companies that supply to telcos. Every one of them tells me the same thing that they're just not buying and they're delaying all purchases and that's about it. They're all losing their minds. This third grouping, the larger organization, government, university, military, that sounds new to us. And, I take it that that's where our most -- our nearest opportunity is for a big sale?

Yes, that's right. But also some telcos. Let me talk about both of those for you. So yes, correct. They perhaps are a bit less impacted by the telco -- than the telcos because telcos often cut back their CapEx budgets when their revenues declined. And their revenues declined because people are just doing less business, so they're communicating less. They might have done some restructuring so there are few employees making long-distance calls or using the Internet at work every day.

On the telco side, our positioning to the market has been clearly mapped out as a leading company with very top-notch quality but at price points below the big boys. So, although it's clearly true that telcos find themselves under pressure and they're spending less, if there was a telco in need of something, a supplier like Sangoma being able to offer high-quality products at a price below the biggest providers can open a door for us that might not be open to a larger company. So, we are seeing some telco interest from telcos who might be tier two or tier three telcos and care a lot about value. They are not willing to buy crappy products just to save a few dollars and jeopardize the integrity of their network. But, if they can spend CAD300,000 instead of CAD600,000 or CAD800,000, that for certain is getting us in the door in a few places.

Okay. If you were to say to yourself, where you see your nearest customer coming in with a big order, I take it that would more likely be this government, university, military grouping? Or you think it's the telco grouping?

That's -- it's so hard to guess, Steve. It's a little bit like the comment I made in my prepared remarks that once you get into some of these larger orders, where large doesn't mean CAD6 million like it does for larger companies, large for us. It's very hard to know whether any one opportunity will close this month or next month or this quarter or next quarter because there's just such a big decision-making process at their side. We have opportunities in both of those categories, live right now, that could close this month or next month or next quarter. This is one of the reasons we've tended to avoid forward guidance, because it's just so hard to know. But I would not be surprised if we got an order from either or both of those categories.

Okay. I got you. We're talking about the new products contributing as much as one-third of the revenue in this year. And I take it that a significant piece of that is incremental not simply replacement?

It's both. Right? For sure, the traditional product line as we've talked about on earlier calls will gradually decline over time. Our job is to hold that off as long as possible and keep the revenue stream from that product line as robust as we can. We're doing a lot of work there. Most of those boards end up getting sold to enterprise. Some to OEMs add a couple to telco. But it's mostly an enterprise business.

That involves a lot of work on the distribution side that Pardeep was asking about as we look to add distributors in certain countries from where we generated zero revenue in the past. So, if there's a small decline of a couple of points from the existing network, maybe we can offset it with some new business from a certain country. Or us doing a better job of managing our channel relationships by putting people in the regions and talking to them regularly in their language rather than a once or twice per year visit from some guy getting on a plane in Toronto, putting incentive programs in place that improve the financials for them if they meet sales growth targets rather than just saying, we'd really like you to buy X. Please buy X, please buy X, please buy X. So, we have a much more sophisticated capability of doing that.

We bring them all into a very large event hosted once per year, which we call our Annual Partner Conference. Where we hold them captive for three days and teach them all about what sales methodologies have worked in the past year, some competitive analysis, teach them about the new products that are coming. Just generally trying to keep that traditional product line and the revenue that comes from it as strong as it can be.

So you're at a stage now where everything you promised to build, you've built. And now we're at -- whether they'll come. And I don't mean to put us in a field of dreams analogy, but do you think that now they're going to really come?

I think so. That ultimately is the CAD64,000 question. We've been clear about that from the very beginning. Instead of me just prognosticating and you say, okay Bill says yes so I guess it's yes. Let's look at a little bit of evidence. Sangoma hadn't grown for several years in a row for many, many quarters, 12 or 16 quarters. We've had pretty consistent growth for 1.5 years now, quarter over quarter. Each quarter being above the same quarter the year before and decent growth sequentially quarter over quarter, with the exception of the seasonality. We delivered 16% last year.

If you look at how the competitors are performing, they are down materially. So, I'd like 16% to be 26% or 36% or 46% in a perfect world, but when everybody else is down a lot, 16% looks pretty decent right now. I think signs are encouraging. The stuff that we worry most about right now, Steve, that could impede that is not so much the stuff within our control. I think we're doing pretty well there. We're not perfect. There's lots of things that could be better, but the team is a good team and they're working very hard. It's stuff like foreign exchange movement and the macroeconomic effects. The movement in the Canadian dollar versus US dollar is really significant.

You and I have talked about this and we have attached -- but although people see the FX gain or loss in the middle of the income statement as an expense entry, there's this other thing that no one ever sees, which is the impact on revenue. And as the US dollar weakens and the Canadian dollar strengthens, every dollar of revenue we get in US dollars converts to fewer Canadian. That has a pretty big effect on us. That coupled with what's going on in the economy I think are the biggest two things we have to really pay attention to. The third one, a little bit more specific to our industry and still maybe a little bit more within our control but not very much, is just movement away from TDM to IP. We're very good right now at bridging that. The peak in that trend, we think, is still a year or two away, maybe in 2015.

We see the opportunity to connect those kinds of networks still growing over the next year or two. Although the reason we're building all these new product is that we do accept that TDM will start to decline over the next few years at a faster rate and it has so far.

Okay. I got you. Last question, when are you permitted to resume your buyback of shares?

We can start now. Right, David? Yes. So we were in blackout until these results are out. And we can start again now, Steve.

Okay. Terrific. All right. Listen, thanks for the hard work and keep sticking around and we'll see what happens.

(Operator Instructions)

There are no further questions at this time. I'll now turn the call back over to Bill Wignall to end the call with closing remarks.

Okay, guys. Last chance. Any more questions? I know sometimes what happens is everyone's a bit shy and then we try and draw it out of you and we get one or two more. Before we close off does anyone else have a final question? Okay. All right. With that, thank you very much for your time today. I hope you found it useful. We're always available and happy to talk to shareholders and investors. So never hesitate to reach out to David or I, and thank you for your attention. Goodbye.

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