Sangoma Technologies Corp (SANG) 2018 Q2 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the Sangoma Second Quarter 2018 Investor Conference Call.

(Operator Instructions) And the conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to David Moore, Chief Financial Officer. Please go ahead, Mr. Moore.

Thank you, operator. Hello, everyone, and welcome to the Sangoma Conference Call. And I'm here today together with Bill Wignall, Sangoma's President and Chief Executive Officer, to take you through the second quarter interim unaudited results.

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, EBITDA and adjusted cash flow that are not IFRS measures but which are defined in our MD&A. Please note that, unless otherwise stated, all references to dollars are to the Canadian dollar.

The call today will discuss the press release that was distributed over the wire services on February 13 together with the company's second quarter financial statements and 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 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 that are also posted on SEDAR.

Okay, with that, it's now my pleasure to introduce Bill Wignall, Sangoma's President and CEO.

Thanks, David. Welcome, everyone, and thank you for joining us today.

I'm pleased to be reporting another strong quarter. I will first take you through this quarter's results, then I'll cover year-to-date and add some color on our balance sheet. Next I'll briefly touch on forward guidance and finish with an update on Sangoma's strategy and M&A activity. After my prepared remarks, I will, as usual, open up the call to questions.

Okay, let's start with our second quarter financials.

Sales for the second quarter of fiscal '18 were $11.7 million, 79% more than in the same quarter last year. This is the 12th quarter in a row of higher revenue versus the same period in the prior year. The increases in sales came from the ongoing intrinsic growth at Sangoma, the compounding of services revenue and the addition of VoIP Supply, all of which were partly offset by the lower U.S. dollar exchange rate. If we compare Q2 revenue to sales in the immediately preceding Q1, you may recall that on the last call I explained Q1 had been positively impacted by a large onetime order, so I'm particularly pleased that we managed to deliver Q2 sales in line with Q1 in spite of not having that onetime order this quarter.

Gross profit of $6 million for the second quarter was 38% higher than for the same quarter of fiscal '17, and the gross margin percent at 51% of sales was in line with expectations. As I mentioned last time, Sangoma's margins for fiscal '18 will be lower than the 60% range in fiscal '17 due to general pricing pressures in the marketplace; Sangoma's expanded product mix that includes the successful introduction of products that have inherently lower margins; the addition of VoIP Supply, which comes with lower gross margin percentage but with lower operating expense percentage as well; and finally, regional economies around the globe requiring localized pricing.

Operating expenses were $5.1 million in the second quarter, up 32% from the same quarter in fiscal '17, reflecting the normal expenses in the operation of VoIP Supply and controlled spending increases to invest in Sangoma's growth.

EBITDA was $1.3 million for the quarter, the second in a row above $1 million and was up 68% from the $0.8 million in the same quarter of last year. This level of EBITDA was just over 10% of revenue, which is slightly above our target for fiscal '18.

So let's now turn to our year-to-date results.

Sales for the 6 months ended December 31, 2017, were $23.6 million, up 90% from the $12.3 million in the same period last year. Again, this was fueled by a mixture of intrinsic growth at Sangoma helped by that single onetime order in Q1, the compounding of our services and software revenue and the addition of VoIP Supply's sales. Gross profit for the year so far was $12.1 million, 41 -- 49% higher than the $8.1 million realized in the first 6 months of fiscal 2017. The year-to-date gross margin at 51% of revenue follows the same trend I described earlier for the quarter.

Operating expense for the first 6 months of fiscal '18 was $10.5 million, a 40% increase over the same period last year, reflecting continued investment to drive Sangoma's top line growth and the additional costs attributable to VoIP Supply. While absolute spending is higher for the 2 reasons just mentioned, as a percentage of revenue, OpEx is actually lower across all key departments, R&D, marketing and sales and G&A.

EBITDA was $2.4 million for the first half, double that of fiscal '17, when we delivered $1.2 million for the first 6 months of the year. Net income for our first 6 months was $1 million and is already higher than the full year of fiscal '17.

So now let's turn to a few comments on Sangoma's balance sheet.

Sangoma continues to have a healthy balance sheet, and on December 31, we had $5.4 million of working capital and had already reduced our borrowing for the VoIP Supply acquisition and paid down part of the line of credit. Inventory at $5.8 million was up by almost $1.3 million from June, the last quarter prior to the VoIP Supply deal, but over $1 million of that $1.3 million was from inventory purchased with the VoIP Supply acquisition. The rest is due to the timing of purchases to fulfill future demand.

Receivables were up by about $400,000 over last quarter partly due to some orders coming in later in Q2 and partly because that one order -- that one large order in Q1 involved a significant deposit reducing its AR. To be conservative, we've increased our provision slightly.

I'd also like to add a bit of color regarding cash flow. For the second quarter of fiscal 2018, the company generated adjusted cash flow from operations of $0.4 million versus $0.89 million in the second quarter of fiscal '17. And for the first 6 months of fiscal '18, Sangoma has generated $1.8 million of adjusted cash flow from operations, up from $1.2 million the year before. At this stage in your company's evolution, we'd encourage you to look at cash flow over a wider term than in any 1 single quarter due to typical ups and downs in purchases of inventory, receivables and other elements in working capital. For example, in Q1, cash flow was greater than EBITDA, and in this most recent quarter, it was below EBITDA. This type of fluctuation is not unexpected at this stage.

I'd now like to make a comment or 2 on forward guidance.

As you have seen, our results are tracking in line with our 2018 expectations. Earlier this year, we had issued guidance for fiscal 2018 of $46 million in revenue and $4 million in EBITDA. Subsequent to the end of Q2, [we entered to our current next] acquisition. On January 9, we purchased the CCD division of Dialogic, which I'll comment more on in a few minutes. On that day, we issued new guidance to reflect the impact of half a year's results of that business being consolidated into Sangoma during Q3 and Q4. The positive Q2 results we've just discussed and the first few weeks of operation with CCD have given our board comfort that the previously released guidance from the last few months -- last month remains achievable. Just to remind you, we have forecasted revenue of about $53 million and EBITDA of around $5.5 million.

And now I'd like to turn to my final section [for the day], on strategy and M&A. As you know, Sangoma is building its revenue and earnings through a mixture of organic growth and selective acquisitions during a time of industry consolidation. These changes in the industry open up opportunities for strong companies like ours to benefit from. In this section, I'll first review our strategy and then comment on the most recent acquisition activity.

As those of you who've joined us for these calls previously will know, I'd describe Sangoma's strategy to you as investing to drive renewed growth. We continue to seek that growth on both the top and bottom lines in spite of challenging market conditions and through a mix of organic and inorganic means. This is a conscious decision from the Board of Directors, one that most of you also support. And based on my discussions with many of the folks on this call, we continue on that same path. That strategy of investing to drive growth manifested as 3 principal planks: growth through penetrating new customer segments, going from SMB to SMB plus enterprise, plus service providers, plus OEMs; growth from selling into new geographies, going from a North American company to a global business with operations around the world; and finally, growth from broadening the product portfolio. This third plank had Sangoma evolve from a single-product-line company a few years ago to one with a full unified communications portfolio.

While each product addition along the way was important, it was all with the intent of getting Sangoma to the point where we had a full UC solution. We now have the ability to offer not only the PBX as the central part of that full solution but also the other connectivity products that purchasers need along with their phone system such as cards, gateways or [SBCs], along with the IP phones themselves. And once we had that full solution, this made it possible to deploy not only on premises but also in the cloud, thus kickstarting our recurring revenue streams.

With that strategic context, I'll now offer a few comments on our M&A activity. First, with respect to VoIP Supply, which we acquired in early July, I will give just a brief update since we went through this one in some detail on our last call. VoIP Supply results have been incorporated into Sangoma's financials for the last 2 quarters now. The business is performing well. It's pretty much on track as we hoped overall, and it's generating revenue and earnings for us at the rate we anticipated. In addition, the market feedback we have garnered from the customer-facing team there is helping us to further refine our cloud offerings.

And now I'll offer a bit more detail on CCD, our more recent acquisition. Just last month, as we acquired the assets of the CCD division from Dialogic, and thus the deal closed just after the end of our fiscal Q2. As a result, there was no impact from this acquisition on our second quarter. And nothing related to CCD was consolidated into the results just released on Tuesday. However, I'm pleased to share some first impressions just 1 month in. On our call shortly after the deal was announced, we reviewed in some detail the strategic advantages of the acquisition. And generally I'd say that the equity markets have also responded well to the news as one more step along the way in building a more valuable company for you, our shareholders. To recap those just briefly: The strategic advantages we covered included accelerated sales growth, adding $15 million of revenue over the next 12 months; expanded recurring revenue, with about 25% of CCD sales recurring; strong gross margins because CCD comes with margin in the 60% range; increased profitability, as the deal will be accretive immediately. And as you saw, we increased our EBITDA guidance by $1.5 million for just the remaining 6 months of fiscal '18. We've added over 40 excellent team members when competition for talent is high and this was one of the constraints on our growth. These products, we also understand well. They are complementary to our existing portfolio, generally sitting just higher up the price curve with higher capacities or additional functionality. We've now added hundreds of new customers that are generally larger than the average Sangoma user today and are typically bigger enterprises or service providers or application developers. And we've got dozens of new leading channel partners around the world.

Although it's just a month since the transaction closed, I can give you an initial update on progress so far. We've already begun to integrate the CCD products into Sangoma's portfolio, and we're now in the process of joint road map planning. We've just begun the migration of customers from Dialogic to Sangoma, and staff from both CCD and Sangoma have already engaged with many of those clients. The new CCD team has begun to settle in to the Sangoma family. And almost the -- all CCD staff, independent of where they might be around the globe, have now met some of the new Sangoma colleagues. I personally was in Asia last week meeting the CCD team, channels and customers there. Integration is underway and will take place gradually, department by department, over the next few months, with completion expected by the beginning of our new fiscal year. Economies of scale now matter at Sangoma. And we are leveraging other CCD resources such as a warehouse operation in Ireland, which would enable improved logistics for us to customers inside the EU, which is a growing territory for us.

And finally, while not in the quarter's results, coincident with the acquisition in January, we extended our borrowing capability with our current Canadian bank from $4.5 million to $8.5 million. This still allows plenty of room for us to operate the enlarged business, and we've already commenced paying down some of this debt.

The last comment I'd like to make on the M&A front is not about CCD specifically but about the capability Sangoma has now developed for acquisitions in general. We've done 6 in 6 years. We absolutely are planning on making a seventh and as we seek to become a $100 million company and beyond now that we have established the platform for doing so.

With that, I'll wrap up with a short summary for today.

Sangoma remained strong with demonstrated growth, nearing 10% EBITDA margins; positive cash flow; and the management to continue seeking new customers, building new products and acquiring new businesses. Overall, the second quarter was strong and on target for our annual guidance. We continue to seek further growth through a mix of organic and inorganic means. This will include, where available, the right acquisitions. And by here, the word "right," I mean it must fit our strategy, complement the organic growth, be on terms that we see as adding shareholder value and one that we have the expertise and resources to execute on. I am pleased with the growth, EBITDA and cash flow for the year so far, and look forward to reporting Q3 results that will incorporate the new CCD business.

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

Thanks, Bill.

To make sure everybody knows how to ask questions, operator, could you please explain how to do so, please?

(Operator Instructions)

Don't be shy, guys. It's okay. Operator, we often have this pattern, so just give it a minute or 2 for questions to surface, if there are any, okay?

Certainly. (Operator Instructions)

David, what about the emailed question we got? Should I tackle that one if we're not getting questions building up? Or do we have someone? Okay...

We do have a questioner in the queue. Our first question comes from Gabriel Leung of Beacon Securities.

Sorry, I was on mute there. A couple of things, if I could. So first off, as it relates to the CCD acquisition, it sounds like an integration, initial integration phase going well. And clearly you've got a nice road map there. Maybe you can talk to us about how you see potential cross-selling between the Sangoma product portfolio with the CCD customer base. And what [indeed is the] opportunities in there?

Yes, that's a good question actually, Gabe. So naturally this was one of the key reasons behind the acquisition. Those products, as I mentioned in my prepared remarks, fit very well with 2 of the product lines at Sangoma and typically reside just higher than our current products, so the way the cross-selling opportunities will work is going into either CCD customers who have bought higher capacity or more complex -- (inaudible) higher-capacity gateways or more complex telephony cards and offering to meet their needs at a lower capacity or more cost-effective solutions; and in the other way, going into existing Sangoma customers who have needs for higher-capacity gateways and more sophisticated capability in the software specs on top of the cards and adding to the higher end of their use case. So that's how we imagine it working, Gabe. I will tell you that, that has not started yet. We have the first meetings with one of the sales team here in Toronto headquarters next week. And it's going to take us a few months to work through that and get the teams ready to do that in a well understood, [trained our] way, but that's where we're going.

Got you. And just on the subject of M&A, you obviously alluded to the fact that there is a [selling point] in your future, but in listening to your preamble, though, it sounds like you're pretty happy with where the tech stack currently stands. You do have a pretty fulsome indirect channel base of partners now, so I'm just curious where, as you look for your next opportunity, what areas are you sort of focused on? Is it still filling in gaps in the tech stack? Or is it to acquire additional scale?

Well, we've got a few ideas in front of us, nothing anywhere near progressed to the point where I could talk about an individual one. And the answer would be yes to both of those, and I could even add a third. So there are some ideas we have for other ways to complement our existing product portfolio. There is definitely benefit from adding scale, as we're starting to see. And thirdly, I think there's lots of interest at Sangoma in accelerating the rate of penetration of our cloud business. So that's the third one I would add to the two you asked about, Gabe.

Got you. And from a valuation standpoint, I mean the CCD assets. I mean it looked like a very good transaction for Sangoma's, especially from a valuation standpoint, amongst other things, but what are you generally seeing in terms of what the seller is looking for? Were we seeing a bit more reasonable valuations? Or is it still burning pretty hot out there?

Well, that, of course, depends almost entirely on the kind of company we're talking about, the stage that it's at in its evolution, the product portfolio, how much of it is onetime versus how much of it's recurring. Is it growing? Is it profitable? Those are all things that I know I'm preaching to the choir here, Gabe. So we see a very, very wide range, everything from less than 1x revenue up to very high multiples of 3 to 4x revenue. If you look at the Cisco-BroadSoft announcement, that was at the very, very, very upper end, right? And Sangoma, I think you would have to acknowledge, has been very careful in the acquisitions we've made. I don't see us paying 4x revenue for anything, but as businesses of different kinds become available to us and, I will say, as we've done more acquisitions and added scale, the opportunities which are coming to us rather than us having to go out and source are increasing. We are absolutely comfortable paying slightly higher up in the multiples range for the right kind of business.

Got you. And maybe one last thing: Clearly the growth, the revenue growth, has been quite strong, whether it's on a reported basis or even organically. Maybe talk to us about where are you seeing the most strength, whether it's geographic or from a product perspective. And maybe just if you could, talk a little bit about what you're seeing on the overall macro demand picture for your product portfolio. And that's it for me.

Okay, thank you, Gabe. The first part of the question, on where is the growth coming from, the answer to that might surprise you. It varies from quarter to quarter. Some quarters, we see growth in one product category and something more modest [or found in a] different product category. And the next quarter, it looks quite different. And that's one of the reasons when we plotted out business strategy 3 or 4 years ago, and it's not -- we just talked about this at the board meeting on Tuesday, there was an option all those years back to do a single swing for the fences, place a bet on a single product. And if it takes off, you grow more quickly. And if it doesn't take off, it's crash and burn. We decided to spread the risk across multiple product lines, and this was one of the reasons. We knew that it would be hard to predict which ones would grow at 20% or 30% and which ones would grow at 5% or 10% and which ones might eventually decline. And so we saw a decline in our card business in fiscal '16. Then in fiscal '17, it started to pick up. Earlier this year, it was quite strong because of that one large order. This quarter, it was a little bit softer again. Gateways were a bit soft last year. Gateways are stronger again this year. PBX has continued strong. We had our strongest PBX quarter... ever, David? In Q2?

Yes.

So it's not something that I can point to a single trend about, Gabe. It does fluctuate by product category. In terms of regions, as you guys all know, the North American market is our most advanced and most mature, so can grow more slowly because of that. Europe, I would say, was the strongest-growth performer this past quarter. We had a very strong quarter in Q2 in Europe. And Latin America and APAC are smaller but can grow more quickly in any 1 quarter. It kind of depends upon whether we get a large order in one of those territories or not. And now if I recall, the second part of your question is what's the demand like for our product portfolio in general. I would say that it really depends upon which territory we're talking about, right? The U.S. market has moved away from the PSTN more quickly than the Eastern Europe, APAC or Latin America market. I guess Western Europe would fall into that category too. So the demand for cards and gateways has slowed in those developed economies more quickly. And so cards and PSTN gateways are less growth in those developed economies, whereas we're still seeing decent strengths for cards and gateways in less advanced economies. So there's no single way that I can answer that question, Gabe, but the key thing I'd want you guys to hear is at Sangoma you're buying into a company that has this mix of product portfolios and this mix of geographies and this mix of organic growth and acquisition. And it is with that strategy of blending these strings -- things together that we're able to generate the growth you're seeing.

Our next question comes from [Derek Siramba], private investor.

So in the past, in past acquisitions, the company typically relied more on debt and internal kind of cash financing. And I think that was reflective, you mentioned, of your view of where the equity price was at the time or the share price at the time wasn't potentially the best source of financing for the company. Has that view kind of changed since CCD was acquired and the stock price rallied? Or what's your view going forward in terms of equity financing for acquisitions?

Yes, good question. So first, before I address the literal part of your question, let me respond to one of the comments in the middle of your question, which is the share price moving and when has it moved and how much of that was tied to the most recent acquisition, et cetera. When I have heard questions or comments like that from our investors or analysts, one of the comments I've offered respectfully in return is our view is the price appreciation over the last 12 or 18 months is a long time coming based upon this long-term strategy and tied to all of those new products, the organic growth, a multiple set of acquisitions, and it's not tied to purely Q2 results or a VoIP Supply acquisition or a CCD acquisition or the launch of UC or beginning the cloud. It's the amalgamation of all these things, and that is a message I'd like this group to hear from me. And now to explicitly answer your question: Yes. We think it does make more sense now to consider raising equity at prices like we're seeing. I continue to feel the share price is undervalued. We are trading well below 1x revenue. That's not the market price comp multiples for companies like us. We think there's still good, good upside in that share price, but at least it's at a level where the board is willing to consider such a capital raise. And so we're looking at that, talking to our bankers. There's nothing to announce right now, but the resistance that you cited a year or 2 ago has indeed much reduced.

Okay, perfect. And then I guess, just smaller question, but I think either in the previous call or in the call before you mentioned kind of FX headwinds somewhere in the roughly 10% range. I guess CCD is going to be subject to similar headwinds going forward. Or has that view changed?

Yes, there's 2 really important parts about FX to think about. One is the impact on revenues since almost all of our sales are denominated in U.S. dollars, and that part has not changed. Typically, through most of fiscal '17, we were hitting an FX -- David, could you remind me? Was it around CAD 1.33 that you tell me?

CAD 1.32, CAD 1.33, yes.

So last year, we were seeing every U.S. dollar converting to CAD 1.32 or CAD 1.33. This year, we're hitting...

CAD 1.26.

CAD 1.26, so there is the difference. And that affects our top line. The other part on the hedging question you asked is much more about revaluation of balance sheet entries. And we've now got U.S. dollar-denominated debt which was used for part of the CCD acquisition, and so we have a much more natural hedge at least for the next while. And David recommended to the board on Tuesday that we would not add in any incremental hedging because of that.

(Operator Instructions)

Okay, operator, I guess we've done our very best to pull questions out of the audience. If there are no more questions -- David, nothing in the queue?

No, nothing at the moment, so...

Okay, so operator, maybe you will bring the call to a close for us then.

Certainly. I'd like to turn the conference back over to Mr. Moore for any closing remarks.

Okay, well, thank you, everybody, for joining us. We very much appreciate it. We don't always say it, but thank you for your support over the last while. We really do appreciate it.

That concludes the conference call for today. We will have a recording available of the prepared remarks up on our website shortly. And again, have a very pleasant day.

Thank (inaudible). Bye for now.

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