Sangoma Technologies Corp (SANG) 2018 Q1 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the Sangoma First Quarter's Fiscal 2018 Investor Conference Call. (Operator Instructions) And the conference is being recorded. I would now like to turn the conference over to Mr. David Moore, Chief Financial Officer. Please go ahead, Mr. Moore.

Thank you, operator. Hello, everyone, and welcome to the first Sangoma conference call for fiscal 2018 for the period July to September 2017. I'm here today together with Bill Wignall, Sangoma's President and Chief Executive Officer, to take you through the first quarter interim unaudited results.

As a reminder, Sangoma reports under International Financial Reporting Standards, IFRS, and during the call, we may refer to a couple of items such as operating income and EBITDA that are not IFRS measures, but which are defined in our MD&A.

Also please note that unless otherwise stated, all reference to dollars are to the Canadian dollar. This call will discuss the press release that was distributed over the wire services on November 16, together with the company's first quarter financial statements and Q1 MD&A, which are filed on SEDAR and which are also available on our website at www.sangoma.com.

This call is being recorded, and the prepared remarks will be available on our 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 www.sedar.com.

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

Thank you, David. Welcome, everyone, and thank you for joining us today. The first quarter delivered a very good start to the fiscal 2018 year. Since the last call we did was only 4 weeks ago, I'm going to keep my prepared remarks much shorter today. That prior call, just held in October, covered fiscal '17 of course and included a full review of Sangoma's strategy as well as the progress made by your company with respect to that strategy. So I'd like to suggest that anyone new to these calls, who would like more detail on the direction of the company, please listen to the Q4 call recording that is available on our website in the Investor Relations section.

Today I'm going to turn the call around a little bit and start with our guidance for the year. I will then address this past quarter's results. And finally, I'll share a few comments on key elements of Sangoma's balance sheet and cash flow. At the end, as always, we'll open up the call to questions.

And of course, this is the first quarter with shareholders and analysts that includes the operations of VoIP Supply, which Sangoma acquired at the very beginning of Q1, the quarter being discussed today.

Okay. Let's get started by revisiting the guidance issued for 2018. As many of you will have noticed from our press release, Sangoma has now reaffirmed the guidance for fiscal 2018 as was issued when we released fiscal '17 results just last month. That guidance forecasted revenue of about $46 million and EBITDA of around $4 million or so. Our Q1 results are consistent with our expectations and thus, we've not changed guidance for this fiscal year now that first quarter results are out.

The solid growth to $46 million this year in fiscal '18 from where we left off at the end of fiscal '17, will come from a mix of organic growth, the inclusion of VoIP Supply and the compounding of recurring revenue.

The other highly relevant factor to our fiscal '18 revenue and the guidance we've issued about it, is the very dramatic shift in the Canadian-U. S. dollar exchange rate, which has been significant for Sangoma and has happened very quickly after fiscal '17. The level of forecasted revenue at $46 million in Canadian dollars already factors in a U.S. dollar that is 5% to 10% lower than at various points in fiscal '17, an impact on Sangoma's top line of multiple millions of dollars, and an impact which the company has had to absorb, one which has been handled quite nicely and without missing a step.

And one final topic on guidance. Over the past few days, we've been asked by a couple of investors whether we will be breaking out separately each of the contributors to growth that I've just mentioned, such as revenue growth from organic sources versus acquisition versus compounding of recurring revenue, et cetera. One of you also asked if we'd share gross margin by product line, by VoIP Supply and by services. I'd simply like to reiterate for the whole group that as I've mentioned previously, we did not do this last month on the call for fiscal '17 results and it's still not our intention to do so going forward. Sangoma operates on 5 continents with an incredibly broad product portfolio with multiple services and products. In most cases, we compete against many companies, some of whom are private and do not disclose such data and still others of whom are many times our size with correspondingly more resources. So sharing exactly what is happening with revenue in fine granularity across each of our segments would be commercially risky for us. Your management team seeks to strike the right balance, admittedly in our estimation, between the wish by shareholders for more and more precision against the need to maintain our competitive advantage. We view it as our job to juggle the variety of factors impacting the business in order to deliver the overall results we've guided to and to find ways to further scale the company. I hope this perspective will make sense to those of you who have asked for more granularity and that our shareholder group will accept this point of view.

Okay. Let's move on to Q1 results. Sales for the first quarter of fiscal '18 were $11.8 million, double that of the same quarter last year and more than 50% above Q4 of fiscal '17.

On the October call last month, regarding last year's results, I shared that we would not likely see the historical Q1 dip in revenue this year from Q4. For those of you who have been following the company over the past few years, you'll recall that Q1 frequently showed signs of seasonality as sales dipped from the fourth quarter of the prior year, due to the slowdown in the European part of our business during the significant summer vacation periods there. The lack of a dip this quarter was due to a few factors, including the ongoing compound in our services business, which does not exhibit seasonality, the inclusion of VoIP Supply and the fact that Q1 sales included a large order, which was worked on over several quarters.

Since much of this information was known to management at the time we issued fiscal '18 guidance, Q1 is coming pretty much as expected and in line with the annual guidance provided.

The only other topic surrounding Q1 revenue that I'd like to touch on is the FX fluctuation I referred to earlier. The stronger Canadian dollar, which you will appreciate is good for those of you who might be joining this call from Canada and are planning to travel to the U.S. on vacation, is actually very painful for Sangoma.

Our Q1 revenue results, in which you see a doubling of sales from Q1 of the prior year, is thus all the more impressive in that we've absorbed a 5% to 10% hit to our top line when expressed in Canadian dollars. And this is truly an apples-to-apples comparison. It has always troubled me when observing some other companies that choose to selectively point out FX fluctuations only when it serves their interest.

You might be interested to note that the FX rate in fiscal '17 was almost unchanged from fiscal '16, so the growth delivered by Sangoma in our prior year truly was organic and not distorted in any way by FX swings. And thus the hit I described in this year's fiscal Q1 is, in our opinion, a factually accurate one, and why we point out that this makes the growth all the more impressive.

Before we go further down the income statement, I'd like to pause here for a moment to share a few thoughts on how the acquisition of VoIP Supply has gone in the first quarter since that transaction closed. The bottom line is that we've been very pleased with the contribution from VoIP Supply this quarter. I have absorbed reinvigorated growth, higher focus and energy, tweaks to the team to further strengthen it and improve margins and profitability. Further, we've maintained all the critical relationships with key suppliers, customers and our critical staff in Buffalo. So we are slightly ahead of our original plan when we decided to pursue the acquisition and are already realizing some of the benefits expected from it.

Continuing through the income statement for Q1, gross profit for the quarter was $6.1 million, more than 60% above last year for the same quarter. On a percentage of revenue basis, gross margin was 52% of sales in our first quarter, which is generally in line with our expectations for the year plus or minus a couple of points.

As some of you have noticed in recent press releases and MD&As over recent quarters, we have seen some pressure on our margins over the past while due to regional economies around the globe requiring localized pricing, general pricing pressures in the marketplace, Sangoma's expanded product mix, which includes the successful introduction of products that have inherently lower margin, and now the addition of VoIP Supply with comes -- which comes with lower gross margin percentage, but with lower operating expense percentage as well.

It is your management team's responsibility to manage all the different gross margins from the different parts of our business in order to deliver an attractive level of EBITDA, something that I feel we're doing a pretty good job of, as we've seen EBITDA gradually track upwards from $1.4 million in fiscal '16 to $2.6 million in fiscal '17 and now headed for $4 million in fiscal '18.

Operating expenses in Q1 were $5.4 million for the quarter, again, in line with our expectations and indicative of the kind of percent of revenue to expect in fiscal '18.

You might be interested to note the trend in OpEx as a percentage of revenue. Last year, Sangoma was between 55% and 60% of sales in OpEx, and this year in fiscal '18, we're likely between 45% and 50%.

And importantly, for the first quarter, EBITDA was $1.1 million for the first time your company has crossed the $1 million per quarter threshold. And let's now turn to a few comments on key elements of our balance sheet and cash flow.

Sangoma continues to have a very healthy balance sheet at the end of Q1. We have finished the quarter with working capital of $4.3 million, reflecting the net cash outlay for the purchase of VoIP Supply. Elsewhere on the balance sheet, you might notice that soft assets like intangible and goodwill have increased due to the acquisition; inventory grew about $1 million to $5.6 million due to the timing of purchases through our supply chain to meet demand and due to the inventory of VoIP Supply; AR is up by about $400,000 due to higher sales this quarter; and finally, AP and accrued liabilities increased to about $5 million due to the absorption of the VoIP Supply balance sheet, the earnout due 12 months from the date of the acquisition and other normal costs at Sangoma.

And finally, let's touch on cash flow as well. In the first quarter, we delivered $1.4 million of operating cash flow, up very materially from the $0.3 million in the same quarter last year. And so Sangoma paid down part of our debt facilities, taking the operating line in loan balance from $3.9 million down to $2.3 million.

And with that, I'll bring my prepared remarks in a shorter call today to a close. In summary, Q1 was a very solid kickoff to the year on the top line. I'm pleased with the start made by the VoIP Supply team in their first quarter as part of the family. It's gratifying to see EBITDA exceed $1 million for the first quarter and operating cash flow follow suit. Overall, Sangoma is on target for our annual guidance. We continue to seek further growth through a mix of organic and inorganic means and would be ready for additional deals in 2018, if the right ones become available.

And with that, I'd like to turn the call back to David so that we can take your questions.

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

(Operator Instructions) The first question comes from Gabriel Young of Beacon Securities.

Couple of things. So first on the revenue side. Bill, are you in a position to provide a little bit of color on the large deal you talked about in your preamble? Can you quantify that contract?

Gabe, I had this question from someone by e-mail too. We thought about it, and David and I discussed it this morning. I think what we're going to do is I can provide you a bit of color, but we're not going to give you the dollar figure, which is, I really think, what you're asking if I understand the question currently. And that's because it kind of would set a precedent, right, and what size of deal would we then disclose or feel like we need to disclose in any one given quarter. We get significant deals quite regularly, not every quarter, but periodically. We've never really talked about them in any quantified way before, and I'd prefer to avoid that and not have to debate is a $400,000 order worthy of disclosure versus a $900,000 order versus a $600,000 order. So what I can say is this. This was an order in the U.S. versus our international business. It came with good margins, not weak margins. It was a onetime order that was fulfilled a little bit, a minority of the order in Q4 of the year before and the majority of it fulfilled this quarter in Q1. It was to a retail customer, end-user sold direct. So that's the information we've decided that we'd share with the investor base and I know, Gabe, it's not exactly what you're asking, but I hope you'll understand why.

That's fine, I appreciate the color. And it sounds like you don't want to go drill down each of the segments of your business. But maybe I can ask, were there any areas where you felt you did outperform nicely in the quarter?

No. It was actually quite consistent across most of the customer categories. Most of the product categories, I would say North America was stronger compared to expectations and rest of world was a bit weaker this year -- this quarter compared to expectations. Our legacy business held up a little bit better than we expected going into fiscal '18, helped by the large order. But the overall strength, Gabe, is not because of a particular spike in any one product line or customer segment.

Got you. And then on the OpEx side, let's see, I think you reported about $5.4 million in the quarter. Is that a nice baseline operating cost -- quarterly cost base for us to be modeling? Or should we think about it as maybe more on the percentage sides there?

Yes. You should think about it on the percentage side, but we don't expect hugely dramatic changes in quarterly revenue over the course of the year. And so, using the percentage is not going to deviate hugely from the dollar amounts. We do expect to add people over the course of the year gradually. But as you saw, our guidance is at $46 million. We knew we had this onetime order, and we're almost at $12 million, and we didn't change guidance. So that tells you that we expect the quarters to kind of unfold in a nonbackend-loaded way. And therefore, the difference between using a percentage of revenue versus an absolute dollar figure wouldn't be huge.

Got you. And then on the M&A side, I know it's only been a couple of weeks since we've spoken since your last call. But any update on -- any progress made on some of the targets you might have in your potential M&A pipeline?

Yes. Good questions, Gabe. Thank you. Yes, there is some progress. And as I mentioned, not the last call, but the call before that, for a company like Sangoma to do 5 acquisitions in 5 years, you can probably imagine that we've spoken to, I don't know what the number would be, 50 companies, right? Trying to find the right one. So we're always prospecting for the right next acquisition. We would typically have multiple conversations underway at any one time. And one never really knows which will progress to closure and at what rate. If I knew one was kind of locked in with a very specific closing date, of course, we would say something. We're not at that stage, but for sure, we're further ahead than when we spoke at this time a few weeks or a month back.

(Operator Instructions) There are no more questions in the question queue. I would like to turn the conference back over to Mr. David Moore for any closing remarks.

So thank you, operator. But just before we close, I just want to make sure there's nobody out there with a question. Whether you are a longtime listener to these calls or a first-time listener, we are always happy to take your calls. So if you have something on your mind, please take this opportunity to share that with us. It will be 3 months before the next opportunity. So please take the opportunity if you can. We'll give you another minute. And if we have no further questions in that minute, then we will thank you for your time and move on. So anybody else with a question?

Operator, just so you know, we've had this pattern in the past. And if we just pause for a minute and give folks a chance to consider, we sometimes get 2 or 3 more. So we're just going to wait here patiently for a bit.

(Operator Instructions)

No, David. Nothing?

Okay, well, in that case, let me wrap up the call. Firstly, thank you very much for those of you that joined us. We do appreciate it. We thank you for your support. It's up coming to the holiday season. So we wish you and your families well for the American Thanksgiving and for the Canadian and rest of the world Christmas times. Please, thank you for your support during the year. And I'll turn the call back to the operator. Thank you.

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