Sangoma Technologies Corp (SANG) 2017 Q3 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the Sangoma Technologies Third Quarter Fiscal 2017 Earnings Conference Call. (Operator Instructions) I would now like to turn the conference over to David Moore, Chief Financial Officer. Please go ahead, sir.

Thank you, operator. Hello, everyone, 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 third quarter results for fiscal 2017. As a reminder, Sangoma reports under International Financial Reporting Standards, IFRS. And during the call, we may also refer to a couple of terms, such as operating income and EBITDA, that are not IFRS measures, which are defined in our MD&A. Also, please note that unless otherwise stated, all references to dollars are to the Canadian dollar. This call will discuss the press release that was distributed over the wire services yesterday together with the interim financial statements and Q3 MD&A, which are filed on SEDAR and which are also available on our website at www.sangoma.com.

As some of you will know, there was an error in the filing of SEDAR for a few hours last night and I sincerely apologize to anybody who could not get the right file for that brief period of time. Everything is filed and correct on both SEDAR, and of course, was always correct on our website. Just to let you know this call is being recorded, and the prepared section of remarks will be available on our website within a few hours of the call concluding.

Before we start, I would like to remind you that 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.

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

Thank you, David. Welcome, everyone, and thank you for joining us. I'm very pleased to share our record results with you today in 4 sections: First, I will cover the Q3 results; second, I will share some comments on how we performed for the first 9 months of our fiscal year; thirdly, I will provide a brief strategic update; more of a refresher, actually. And finally, I will discuss the forward guidance issued by Sangoma at this time, last quarter. As always, we'll then open up the call to questions. I would like to share a quick thought before we begin, especially for those folks who may end up listening to this call as an archived recording on our website. I apologize that we are squeezing in this quarterly call so soon after the results were released yesterday. Ideally, we would have normally held this either tomorrow or Monday giving more time between the results release and the call itself. But due to some business travel and the statutory holiday in Canada on Monday, we decided to fit it in today, rather than wait until Tuesday, which felt too far out being almost a week from the release of results. I hope you will understand.

Okay. So let's now turn to our third quarter of fiscal 2017. Sales were a record $6.8 million, 29% higher than in the same quarter last year, making this the ninth quarter in a row that Sangoma has grown significantly over the same quarter in the prior year. The increase from the expanded product portfolio -- this increase results from the expanded product portfolio, the compounding recurring revenue, the completed unified communications solution crafted over the last few years and a full quarter of the acquisition of the telecom assets from Micro Advantage purchased on December 1.

Gross profit was $4.5 million for the third quarter, 23% above that of the same quarter last year with gross margin in the mid-60% of sales. Operating expenses were $4 million for the third quarter, 16% higher than in the same quarter of fiscal 2016 and growing at a slower rate than revenue as planned. EBITDA was $0.7 million for the third quarter, considerably higher than the $0.45 million earned in the same quarter last year and expanding at a faster rate than revenue.

Net income for the quarter ended March 31 was $0.3 million or $0.08 per share fully diluted, more than double the net income of $0.1 million for the same quarter last year.

With that overview of the quarter's P&L, I would like to now share a couple of quick remarks on our balance sheet and on cash flow. Sangoma continues to have a very healthy financial position having closed the quarter with $2.3 million of cash on hand. For this past quarter, our operating cash flow was very modest, as we mentioned it could be when answering a question on this call 3 months ago. Sangoma was investing in inventory last quarter, adding $500,000 to our stock, thereby bringing inventory levels to about $5 million. This was done to ensure we could fill most all year-end orders having had some backlog at the end of the third quarter, which is unusual for us. We also had some natural increase in receivables, but this is actually good news in this case as it resulted from orders, just orders that happened to arrive late in Q3. You can feel comfortable about AR knowing that our aged receivables that are over 90 days are actually down in Q3 versus Q2.

At Sangoma, [in spite of] it not being an IFRS measure, we tend to utilize and cite EBITDA as a measure of profitability mostly because this is the best proxy for cash in our case, but of course, it's not a perfect analogy and there will always be some quarters where cash flow is materially higher or lower than EBITDA as you have seen in prior years. For low cash flow in Q3 is mostly one of timing, and although, we will need to add a bit to inventory in Q4 as new models of phones and gateways are launched. We do expect the cash flow in our fourth quarter, i.e. the one we're partly through now, will bounce back again to more typical levels.

And finally, given the $2.3 million in cash cited earlier as well as our balance sheet and cash flow, that leaves Sangoma with solid working capital of $6.7 million as of March 31. Overall, it was another solid quarter in most all respects.

And now I will move on to the second section of today's call on year-to-date results. Essentially the story at the 9-month point of fiscal '17 is quite similar to that of the quarter I have just described. Year-to-date sales are up by 27% compared to the year prior such that revenue as of March 31 for the first 3 quarters is now sitting at $19.2 million. Our gross profit was $12.6 million year-to-date, which is up 18% with gross margin holding at good levels. Spending on OpEx grew more slowly at 13% above last year as planned. As I have shared on prior calls, we are seeking to keep the expense growth rate below the rate of revenue growth.

During fiscal '16, our operating expense spending was hovering in the mid-60% of sales. That has now declined to around 60% in fiscal '17. This resulted from our decisions to implement processes that offer efficiencies of scale as revenue grows. The result is that EBITDA has expanded from $1.4 million in the first 9 months of last year up to $1.9 million year-to-date for fiscal '17. We have already exceeded in the first 3 quarters of this year the EBITDA earned in the full year of last year. Our plan for the year had Sangoma eventually starting to hit EBITDA margins as a percentage of sales at about 10% by the third or fourth quarter of this year. In fact, we now sit at about 10% of sales for the full year-to-date, well up from the year prior, which is a very positive trend.

And I will now turn to a strategic update. As regular participants on these calls will know, we have spent several years rebuilding Sangoma from a single product line business into a full solution unified communications company. Customers can now get their connectivity products, be it cards, gateways, or SBC's, their PBX, their phones and even their network connection in the form of SIP trunks all from Sangoma. The full solution appealed to customers and partners and enabled us to compete for a larger share of wallet. Just as importantly, Sangoma began to focus more on software services and recurring revenue, including network-based services offered from the cloud. This was not only a strategic objective, 1 that appealed to selected customers and allowed us to compete in a faster-growing field, it was also a very conscious means of enhancing shareholder value, something that you now see is working. This enormous transition, which literally involved ripping the company apart and rebuilding it both organically and via acquisition, was undertaken without raising substantial outside capital, thereby avoiding any material dilution to shareholder, all while maintaining reasonable EBITDA margins and cash flow throughout. As you will now have seen, not only is the resulting business model delivering growth and sales, the operating expense to deliver this revenue is now growing more slowly, and hence the EBITDA margin is increasing as we had forecasted. And my last comment on strategy today is that I would like to reiterate that Sangoma continues to seek scale through a combination of organic growth, which includes the compounding of recurring revenue, and prudent acquisitions where available. We are constantly on the lookout for the right chances to complement our product offerings, provide opportunities to expand our customer base, or kickstart business lines in new territories, and of course, we will keep you posted on such initiatives if and when they materialize and it becomes appropriate to discuss publicly. That completes my comments on strategy. And I will now provide an update on forward guidance. On last quarter's call, I shared that Sangoma's business momentum was sufficiently well established that the company had started providing limited forward guidance for the first time. That guidance from 3 months ago forecasted revenues to be approximately $25 million for fiscal '17 with EBITDA of about $2.4 million for the same period. Given that third quarter results were stronger than expected, both sales and EBITDA for the full year of 2017 should exceed those estimates.

Sangoma will update guidance for fiscal '18 at the time it releases financial results for the fourth quarter and full year of fiscal 2017. And now, before we open the call to questions, I will just wrap up with a quick summary.

Fiscal 2017 continues with solid growth, increasing recurring revenue, good gross margin, expanding EBITDA, a strong balance sheet with minimal leverage and healthy working capital. It is very rewarding to see the strategy of transitioning away from PSTN reliance, shifting from hardware-only products to more software and services, moving from onetime sales into more recurring revenue and adding our full unified communications solution, all available on-premise and in the cloud, really starting to pay off. We have navigated this transition in spite of significant upheavals in our industry as numerous players have faltered and despite the inevitable gradual decline in our legacy PSTN business over multiple years. We needed your patience during this period, and I want to thank you for your support. That now concludes my prepared remarks, and I will turn the call back to David, so we can take your questions.

Thank you, Bill. And now to make sure everyone knows how to ask questions, I will ask the operator to go over the instructions. Operator, we are ready to take questions now, please.

(Operator Instructions) The first question comes from [Michael Dumont], who is a private investor.

So, great quarter. Could you provide some color as to why or maybe how you topped your expectations in the quarter and whether or not there was any pull forward in revenues?

Yes, sure, happy to do that. So the second question is a, maybe a simple just factual one. There was no pull forward in revenue. So that's not part of the answer. Now there's a number of things going on as we've tried to describe in the strategy section, and I realize sometimes it's hard to tie that directly to the financial results, but it's a combination of this full solution suite that I've referred to the past 2 or 3 calls in which we compete for a larger share of wallet and how much a share of that wallet and in what percentage of customer wins we might get everything we sell so the PBX and the connectivity products and the phones and the SIP trunks versus which portion of our customer wins, we might only get some of those products is extremely hard to predict with any accuracy. And so we do our best when putting together budgets and plans, but sometimes it might be because more of the customers who bought, bought everything from us, including the newer products like phones. Sometimes it might be because a particular distributor has been signed on in a particular region, and so we've got revenue in a new country that was not so much the case with you 3, by the way. Sometimes it's because there is the compounding effect of the recurring revenue and we expect that to happen each and every quarter from now on. So we have some ability to predict that and that stuff tends to be less the cause of the over-attainment and more a driver of the expected growth. You think what else contribute to these?

Individual larger deals that crop up on occasion.

Yes. So we didn't have a lot of that in this quarter. But we do sometimes win lumpy business. I would say, the business is typically a bit less lumpy now than it was a couple of years ago, Michael. But when we win a large deal, say something in excess of, I don't know, $0.25 million, that would be less common for us. And so orders like that would cause an over-attainment. How is that? Do you -- you got a general feeling.

No, I do, I do, it certainly sounds like execution was part of it, too. It's just some color in, I guess, is helpful in terms of providing, I guess, a sense of how. You talked expectations and how they could potentially do the same in forward quarters as well. Maybe the longer-term question is, could you help us frame how far you are in your transformation with more products and in the increased share of wallet at this point?

We are very far through that. We are coming up towards completion. The reality is that Sangoma is a traditional technology company. So we are -- you're never sitting still in terms of R&D and innovation. We have to keep doing that. But in terms of delivering a full UC solution, we are basically there. There is a lot of incremental functionality inside the existing products that we need to add, but the core backbones are there now. So working on things like softphone clients on the desktop is a key initiative for us that's underway and getting some early traction. But the key components as we have described on the last call to make up a UC solution are the brains of the system, the PBX itself, the ability to connect that PBX out into the network so that the company who is buying the PBX can make calls not just internally through their company, but to everybody else in the world. The phones that subtend from the PBX, and then the network facility itself in our case is SIP trunk. So those pieces are now in place, and a larger percentage of our R&D effort over the next little while will be adding functionality into that product suite rather than entirely new products.

Okay. That's helpful. And maybe just moving on to the second question. In Q2, you provided guidance for 2018, with growth expectations for the top line of between 15 and 20 and margins to exceed 10% directionally. I know you didn't reiterate that specifically, not that you didn't either, but directionally is that still your expectation?

We have chosen not to comment on 2018 right now. Because we have just started using guidance 3 months ago. This is the second quarter we have ever spoken about it. We've tried to give some indication of the impact on this year's financial results as a result of this first quarter under guidance. I think if you don't mind, I don't want to be evasive, but we've said we'd like to do that after the next quarter and get 2 quarters under our belt before we update something about next year.

Sure. I hear you. I appreciate that. I'm just trying to get a sense if this is -- if this higher than expected growth is something that's sustainable? Or if it's just a little bit of a bump this year and a pull forward instead, but I mean, if you can provide comments that would be helpful; if not, I completely understand.

Yes, I mean, I can provide some comments, although it won't be the literal answer to the precise question admittedly. So the guidance that we put in place for 2018 holds. So if you're worried about, is there any indication that we might be off-track on that, the answer is no. We won't comment about whether we are going to bump up that guidance because we would like to do that once we finish Q4. It's about 6 weeks away from being finished. And I would reiterate the comment I made at the beginning of my answer to your first question, when I said that there is no pull forward of revenue. So please don't worry that the strengthened results are in any way caused by doing something consciously which would detrimentally impact next quarter or next year because that's really not the case, Michael.

Okay. That's very clear. And I know I'm monopolizing the call here. So just one more question. And I will keep it short, but what is your appetite for M&A? And what types of deals particularly would you be looking at?

We have been pretty acquisitive for a small company that's not raised a ton of capital, and that's mostly been because we didn't want it to cause dilution. So I think we have done 4 acquisitions in 4 years or 5 years or something. We continue to look at acquisitions as I mentioned in my prepared remarks. The kinds of companies that would be most interesting to us are companies that would provide us new products or services that include hosted businesses, which has been the driver of many of our prior acquisitions, or opportunities to add closer access to or an expanded customer base or channels to market would be interesting, or opportunities to take a business which is working in one part of the world and expand it geographically. So all of those are things we pay attention to regularly. We are constantly scanning the ecosystem looking for the right types of fit. I think you would notice, if you look back on any of the 4 acquisitions. We tried to be very careful not to be a super high priced premium buyer because Sangoma share price had been suppressed in our opinion for too long, but starting to correct now. It's not where we think it needs or deserves to be. But we would remain prudent in the kinds of deals and the prices and valuations. And the, I guess, most important spot allowed at the end is, for sure, a mix level of organic and inorganic growth is part of the strategy to add scale to Sangoma.

(Operator Instructions) The next question comes from [Steve Rudd] of Blackwall.

Just a couple, Bill. What's the backlog, maybe it was in the release item, I didn't see it, and I didn't read in SEDAR, but what's the backlog at right now?

Yes, we almost never have backlog, Steve. That's (inaudible) -- yes, that's why you're asking. I know, of course, so there is almost no backlog right now because the backlog that existed at the end of Q3 has been cleared. But David, help me, would it have been, I don't know, $300,000 to $500,000?

No, not as much as that.

No, $200,000 to $300,000 maybe.

And the orders that are coming in now, the Q4 orders, are they for larger sizes than we have seen in the past? I know that we've got less spottiness, which is terrific, but are you seeing these larger orders coming now?

Yes, typically, I would say, there is 2 parts of that answer. Steve. One is a smaller fraction of our overall revenue comes from large orders than it did 2 or 3 years ago. And that's a very conscious decision as we try to diversify away from reliance on any 1 individual customer. We used to have situations where in any 1 year a single customer could be close to 10% of revenue. Now there is no one even close to 5%. Secondly, I would say, we do, of course, continue to work on larger orders and we get them regularly. We look for large orders to contribute as much as $1 million a quarter, and if we get $1 million of large orders in the quarter, that typically leads to a really good quarter. I think in this quarter, for example, David, help me 800K? 800K, Steve, in larger orders.

So that's pretty good, not the highest ever, but pretty good, stronger than the couple of quarters before that. There are some encouraging signs this quarter, which I will not comment on yet because we need to get through the quarter and close them and ship them and announce, but while I'm very happy that the percentage of orders of overall revenue that come from large orders declines, I'm even more happy that it's declining not because the large orders are going down, but because overall revenue is going up. So the numerator is holding okay and the denominator is growing.

And Bill, as the quarter -- the Q4 winds down, there is always a long lag between the end of fourth quarter and reporting. Are you thinking that you might update us at the end of the quarter as opposed to waiting for the normal release time?

Good question. We just came out of a Board meeting yesterday and didn't talk about that. There was one year, Steve, you might remember, when we did a preliminary press release of revenue only. I think sometime in July, prior to the release of the full results in October, but let me look at it, if we can do that and doesn't create a lot of churn. There is a lot of stuff going on right now. I would be happy to do so. So let us take it under advisement and it's a fair question.

(Operator Instructions) Gentlemen, there are no more questions at this time.

This is David. Maybe I'll just jump in. We are just going to ask 1 more time. This is an opportunity to ask anything that you might be interested in. Operator, let's just give another 30 seconds and then I will wrap up.

Maybe while we're waiting, David, I will just say to the group that while we are on the call, I just had an e-mail from a shareholder asking a question, sometimes not everybody is as comfortable asking verbally during the conference call, asking, if I'd comment further on the importance of new product and product launches to revenue growth.

Now I think as you probably appreciate, gentlemen, indeed the entire basis of Sangoma's turnaround and growth depends upon innovation and new products. We are a perfectly typical technology and networking type company. So the transition, as I said earlier in my remarks, from a single product line company to multiple product lines and several of those developed internally and several of those through acquisition, and then building those products into a full solution of suite that delivers a UC solution and then taking that suite and being able to offer it on-premise and in the cloud. I mean, that set of activities, the R&D that's needed to do it, the financing activities to support the acquisitions, the marketing and sales to launch the product and get it to customers, the building up of a distribution channel, the ability to sell those same products online, like everything depends on the set of new products and it will continue to depend upon the R&D investment and innovation. So if there was anything, I don't know, unclear and confusing about my early answer as I talked about the role of expanding geographies or winning new customers or signing up the new channel, I wouldn't want you to lose sight of the fact, the fundamental driver of all that stuff is innovation and R&D spend leading to new products. So I hope that answers the question I just got by e-mail. David, are there any other questions coming in the queue?

No, that's it. So unless there is somebody who can jump in literally right now, we will bring this to a close.

There is no more questions at this time.

Okay. Well, in that case, thank you very much for joining us today. This concludes the conference call, and a recording of the prepared remarks will be available on our website shortly. Thank you very much for participating, and thanks again for your support to Sangoma over the past year or so. Have a very pleasant day.

Thank you, everyone. Bye.

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