Sangoma Technologies Corp (SANG) 2018 Q3 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the Sangoma Technologies Third 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.

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 the third 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 terms, such as operating income, EBITDA and adjusted cash flow that are not IFRS measures, but which are defined in our MD&A. Please also note, 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 May 15, together with the company's third quarter financial statements and Q3 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 would like to remind you that the statements made during this course of the business that are not purely historical are forward-looking statements regarding the company or management's intentions, hopes, beliefs, expectations and strategies for the future. Because such statements deal with future events, they are subject to various risks and uncertainties, and actual results may differ materially from those projected in the forward-looking statements. Important factors that could cause actual results to differ 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.

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

I'm pleased to be reporting another strong quarter, one that incorporates our sixth acquisition in 6 years as well as our recent equity raise. As a result, I'll start my comments today with a short explanation of those 2 important events. Then I'll take you through this quarter's results, following which I'll cover year-to-date financials, updated guidance and some color on our balance sheet.

Finally, I'll wrap up with a refresher on Sangoma's strategy, given we have several new shareholders in this quarter's call. After my prepared remarks, I will, as usual, open up the call to any questions.

Okay, so let's return to those key 2 events. As just mentioned, Q3 saw Sangoma's acquisition of CCD or the Converged Communications division. This latest acquisition has contributed positively to sales, recurring revenue, gross margin and EBITDA, pretty much as we'd anticipated. It has also nicely elevated some of our product portfolio and customer base. As you know, this transaction was structured as a carve-out of assets and as such, involved a fairly complex transition out of Dialogic and into Sangoma. That complexity is ours to manage, and I hope that after 6 acquisitions, our investors trust that your management team here has the capacity to not only source, finance and close such deals, but also the expertise to work through those integrations. I'm pleased with the way the 2 teams have handled this intricate transition of people, computing assets, business systems, customers, supply chain, and office leases over to Sangoma.

And I'd like to especially thank those folks here who spent countless evenings, overnights and weekends making that work. We are already operating entirely on our own systems. The staff and customers seem comfortable, and several CCD departments have already been combined with Sangoma's. The integration will be completed by the end of June, when we amalgamate sales teams and commence selling the full range of Sangoma's products into this new client base with a single phase to the customer for fiscal '19.

The other key strategic event in Q3, was the capital raise undertaken in March. We raised about $13 million, netting the company about $12 million to enhance our operational and strategic strength. I'd like to thank our bankers for their efforts and we want to welcome those new institutional investors to these calls as well as any other new shareholders who may be joining for the first time. We appreciate your support and plan to continue delivering growing revenue and profitability.

Okay. With that as context, let's come back to our Q3 financials. Sales for the third quarter of fiscal '18 were $16.2 million, 138% more than in the same quarter last year. This is the 13th quarter in a row of higher revenue versus the same period in the prior year. The increase in sales came from the ongoing organic growth at Sangoma, including the compounding of services revenue and from the addition of VoIP Supply in CCD. Sangoma is now generating revenue well in excess of $60 million per year on a run-rate basis. Sequentially, we saw significant growth over Q2 driven heavily by the addition of the CCD business, of course. Gross profit of $8.9 million for the third quarter was 99% higher than for the third quarter of fiscal '17 and 49% above our immediately preceding second quarter.

On a percentage basis, margin was about 55% of revenue, up from Q2, mostly as a result of our most recent acquisition. This percentage for fiscal '18 is somewhat 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 margin, the addition of VoIP Supply, which comes with lower gross margin, but lower operating expense percentage as well; and finally, regional economies around the globe requiring localized pricing. OpEx was $7.6 million for the third quarter, up 88% from the same quarter in fiscal '17, mostly reflecting irregular expenses in VoIP Supply and CCD, together with some controlled spending increases to invest in Sangoma's growth. EBITDA was $1.9 million for the quarter, way above the $0.7 million of last year and about 11% of revenue. This continues the company's drive to move EBITDA through the 10% threshold from where we expect to gradually increase operating leverage over the next few years.

And let's now turn to our year-to-date results. Sales for the first 9 months ended March 31, were $39.8 million, up 107% from the $19.2 million in the same period last year. Again, this was fueled by a mixture of organic growth at Sangoma driven by the intrinsic compounding of services and software revenue as well as by the addition of VoIP Supply and CCD. Gross profit for the year so far was $21.1 million, 67% higher than the $12.6 million realized in the first 9 months of fiscal '17. Year-to-date gross margin at 53% is up slightly from last quarter, for the same reasons I described earlier for Q3. Operating expense for the first 9 months of fiscal '18 was $18 million, a 56% 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 and CCD.

While absolute spending is higher for the reasons just mentioned, as a percentage of revenue, OpEx is lower year-over-year across our 3 key departments of R&D, marketing and sales and G&A. EBITDA of $4.3 million for the 9 months was more than double that of fiscal '17, over 3 quarters. And net income for the first 9 months was $1.7 million, already double that of the entire fiscal '17 year.

Given the strong results this quarter, I'd like to share a few comments on our updated guidance. The positive Q3 results we just discussed have given the board comfort that the previously issued guidance for fiscal '18 could be increased from $53 million to $55 million for revenue, and from $5.5 million to $6 million for EBITDA. Ending with EBITDA comfortably above 10% of revenue will solidified Sangoma's progress in improving bottom line earnings at a faster rate than top line growth and round out a big year for Sangoma.

And now I'd like to comment on a few selected balance sheet items and cash flow. Sangoma finished the quarter with $14 million of cash on hand and $4.8 million of debt, providing us a very strong position from which to continue the forward momentum of the company. We generated adjusted cash flow from operations of $1.9 million for the quarter, consistent with our EBITDA. Please note that this obviously excludes the impact of the equity raised in the acquisition payment. This cash flow was used to pay off the entire amount of the operating line, leaving Sangoma with just the term-loan debt taken on the fund of VoIP Supply and CCD acquisitions.

On a year-to-date basis, adjusted operating cash flow was $3.7 million, more than double that of last year. On the balance sheet, many items were materially affected by the CCD acquisition and -- or the capital raise, so I'll keep my comments on this brief for today. For example, the swings in inventory, payables, provisions, deferred revenue, et cetera, were primarily the absorption of the CCD assets. The only line item where Sangoma reduced the balance materially between quarters was receivables, with $8.8 million reduction in the outstanding balance excluding the impact of CCD receivables.

And finally, we have quite a few new shareholders on this call, as I mentioned. So I'm now going to review Sangoma's corporate strategy a little. I know some of you have heard this multiple times, so if that's you, please bear with me for a moment. But if this is your first call, I hope this will provide you with a clear picture of your company's strategy and how it has unfolded over the past few years. As those of you who have joined us for these calls previously will know, I've described Sangoma's strategy as investing to drive renewed growth. We continue to see growth, in spite of the challenging market conditions, through a mix of organic and inorganic means, all while demanding healthy profitability. This is a conscious decision from the Board of Directors, one that most all of you support based upon their discussions with many of the folks on this call and we continue on that same path today. A few years ago, when new management came in to take over the reins at Sangoma, we recognized quite quickly that sales of telephony cards were unavoidably going to gradually decline, as networks gravitated away from the PSTN and towards the Internet.

So the first stage of strategy was to begin the turnaround and it manifested as 3 principal planks: Growth through broadening the product portfolio, penetrating new customer segments and selling into new geographies. Over the next couple of years, we evolved from a single-product-line company to one with a much broader portfolio made up of multiple product lines. All parts of plank #1. In order to extend our market presence, Sangoma began targeting not just our traditional customers in the SMB segment, but also enterprise, OEMs and carriers fulfilling the second plank in that turnaround strategy. And plank #3 was to globalize the company and increase revenue outside of North America, especially in regions with higher growth rates. This has the ancillary benefit of also extending the life cycle of our PSTN-based cards since these regions are moving away from the PSTN more gradually than in the more developed economies. This strategy is important to us, but we've also had to accept that these types of markets are much more volatile than the West.

As the turnaround phase was unfolding, the next step in strategy was to go from a portfolio of individual products to a complete solution. Sangoma now offers a full unified communications suite that includes not just the software PBX as the central part of this full solution, but also the other connectivity products that purchasers need with such a phone system, including telephony cards, gateways, SPCs, et cetera, along with the IP phones themselves. As we had hoped, I think you can see that the whole has proven greater than the sum of the individual parts and has allowed us to compete for a larger share of wallet. 5 years ago, if a customer was buying a new business communication system, Sangoma could compete for perhaps 10% of their spend. We can now fight for the whole thing.

And finally, the most recent phase in our strategy was to take that full solution that could be sold on-premise and [see were it meaning] that the software and hardware is installed at the customer site and introduce the cloud-based service in which we host our own software and hardware in data centers and use it to provide a monthly subscription service for customers who prefer a hosted cloud-based service to be on-premise model. This enabled the recurring revenue model to begin its growth phase at Sangoma.

And as my final comment on corporate strategy, Sangoma's expansion involves not just organic growth, but also carefully selected acquisitions that complement it. As you've heard, we've done 6 acquisitions in 6 years. We continue to seek out the right acquisitions where available. And here, by 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.

At the very beginning of fiscal '18, we acquired VoIP Supply, and I'm pleased that this business is performing well and meeting our expectations.

The Q3 acquisition of CCD has given us a boost on both the top and bottom lines as I described in some detail in my first section today. In March, we bulked up with an equity raise, which positions us well going into our fiscal '19 year. And as mentioned, we continued to seek the next acquisition opportunity as well, one that we hope might contribute to our wish to become a $100 million revenue company.

With that, I'll wrap up with a short summary for today. Sangoma remained strong. We have delivered proven top line growth. EBITDA margins now exceeding 10% of sales, expanding recurring revenue, demonstrative consistent cash flow and the management to win new customers, build new products and acquire new businesses. I look forward to seeing the public equity markets continue to recognize this performance with expanding multiples and share price because your board fundamentally believes the company remains undervalued.

And on that note, I'd like to share one very quick comment about our tap table. Some of you will know that Sangoma has had one individual investor, who up until quite recently owned in or around 4 million shares. Mr. Galea, who I communicate with regularly also happens to be a fellow who owns a private company that competes with one of our product lines. Over the past several weeks, he has exited his position in Sangoma and this volume of selling naturally put some short-term pressure on the stock price. It has been a somewhat unusual situation for us, so I'm pleased that some new investors used this opportunity to build a position and some existing shareholders to increase their stake. We very much appreciate your support.

With that, I'd like to turn the call back to David, so we can take your questions. I hope you'd agree that our third quarter was strong, that our latest acquisition has borne fruit right off the bat and that your company is well positioned to continue our momentum. Back to you, David.

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

(Operator Instructions) Our first question comes from Nick Corcoran of Acumen Capital.

So I just like to ask a couple of questions. So the first is in terms of revenue, how much of the year-over-year revenue growth was from CCD and VoIP Supply?

Yes, we cannot really -- broken that out historically, Nick, and that's because, so quickly, and for sure, this supply is even as recently as Q3, it integrates almost right away. So we have Sangoma channels now selling CCD products and we've introduced Sangoma to the CCD distribution channel. I think I've been asked this at least on a couple of prior calls, and I've tried to give examples here and there, so people understand as much as us trying to be evasive of it, it really does get blurred almost immediately. Products can end up getting redesigned. We've already started modifying some of the CCD products. So I guess, I would just encourage this group and our research analysts more specifically, we need to look at the business overall on a complete basis. We can't really separate an individual piece of an organic growth from an acquired piece that ends up being integrated immediately in that first quarter. And it's not our plan to kind of tease those apart over time for either CCD or the other 5 acquisitions or even something in the future.

Okay, that's fair. And then, just moving to the EBITDA margin, it was quite strong -- it grew at 11.7% in the quarter. Do you see that being at sustainable level? Or were there any one-time items on the quarter that might have pushed the EBITDA margin up?

No, there was not anything, what did you call one-time -- there was nothing kind of strange or anomalous or something that would really cause it to be a spike. Our guidance has been bumped from $5.5 million to $6 million, so you can read a little bit into that with a revenue guidance of $55 million and EBITDA of $6 million, you can see we think we are through that 10% threshold. But, whether it's 11.7% or 10.9% or 12% or 11.3%, that's beyond our ability to predict in any one quarter. The variables are typically the gross margin that comes -- Nick, you know our spending is pretty tightly controlled. There is not a lot of variability on the OpEx side. The biggest discretionary bucket is marketing and that's tightly managed. So if we have a quarter where there is a lot of sales of a product with 80% gross margins, EBITDA bumps up a bit. If we have a quarter, where more sales are 47% gross margins, it's down a couple of points. It's just the best like thing we can do, as it's in that range. We feel like we're comfortably above 10% but whether it's 11.7% or a couple of points lower or higher, I think it's just -- it's beyond the accuracy we exercise here.

Okay. And then, the last question I have is just in terms of the M&A pipeline. And if there is any specific areas you see yourself targeting to build out your portfolio, going forward?

Yes. So for sure there are. I think you and I, specifically have talked about this idea that for a company that's done 6 acquisitions in 6 years, I know you understand that, that means you're probably spoken to, I don't know -- 60 or 40 or 80 companies to find the right fits. So we're almost always in some form of conversation that means we have to have opinions about what types of businesses would be interesting, and fit that right definition that I described earlier. Some examples might be -- we're very interested in businesses that have material cloud revenue, especially if it's accelerating. We're interested in businesses that move us more and more into software or services. Recurring revenue might include maintenance. I'd be interested in acquisitions that would expand our global business, to give us geographic footprint that are accelerating faster in some of the tertiary markets. We would even consider acquisitions that grow the customer base in current product categories. So we're pretty open, there is a good set of options out there that are interesting to us. And as Sangoma scales, our ability to target larger and larger acquisitions from that sect improves.

Our next question comes from Gavin Fairweather of Cormark Securities.

So in the press release and in your comments, you referenced how you are pleased with the CCD contribution and the integration is progressing well. Just curious, if there have been any surprises either positive or negative? Asking about, say, close of the acquisition and gotten under the hood?

Good question. Well, there is -- I have to confess like with most acquisitions, you do your very best during due diligence to try and understand everything and make it predictable, and I've done an awful lot of acquisitions in my career, the management team has as well. I don't know that I have ever seen one that comes without surprises, up or down. In this particular case sure, sure, there were some, which I'll describe for you in 10 seconds. I just like to say that -- I'd like to preface that by being reassuring that the company has developed the expertise to plan for that stuff now. So, while I'm going to tell you about a couple up and down, the way we think about those acquisitions, the way we value them, the structure of the deals, the mix of consideration is all meant to make sure we try and insulate ourselves from those surprises.

So that I just don't want this to be troubling. On the upside, there is a couple of good customer opportunities that I don't think we knew about or enough about or the size of or the probability of. So let's see where that goes. It's very early in some of those sales cycles, but there's a couple there that look pretty interesting. I think the ability of the CCD staff to take on responsibilities in other parts of Sangoma, pay attention to other Sangoma products, work in R&D on things that are not just CCD products or sell products that are not just CCD is maybe a little bit stronger than we anticipated. But the technical expertise is very deep. And that means the ability to come up to speed on new technology is really good.

On the downside, I would say because this is the carve-out, as I alluded to, we certainly knew that there would be a lot of work to get that business off of the former Dialogic systems and onto Sangoma systems. Gavin, I'll tell you that since you asked explicitly, it was worse than we thought. It was harder to do. There were more things that we didn't know everything about. Both companies are super busy. So sometimes hard to find the resources to do this and that's one of the reasons I said in my prepared remarks, but I just wanted to thank the teams because although we don't expose you guys to the gory details, that's our job to manage. As I said, there were a lot of very, very long sleepless nights for lots of people.

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Okay. That's some great color there. Just secondly, a minor question on the balance sheet. Looks like a $1 million contract manufacturing provision came alongside that CCD acquisition. Just wasn't quite sure what exactly that referred to or related to?

David, would you mind doing this one, just so we're sharing questions.

Yes, absolutely. So, that is the reflection of the potential obligation that Sangoma now has for product that is held by the contract manufacturer. It's just the way the contract is set up. There is some product there that I think is -- it's partially built and some of it may not sell in the next period. So at the time of the acquisition, it doesn't impact our earnings whatsoever. It will be properly digested during the course of the independent valuation that we always have after the acquisition before our auditors come in. So it's not a -- it's really a write down-- it's really like a write down of inventory, that's probably the best way of describing it. And as we get into year-end, we may -- that may move back into inventory, but that's all it is. So there is no risk to Sangoma. It's just an accounting entry to make sure that we've got all our liabilities that we took on at the time of the acquisition fully provided for.

Okay, that's great. And then, just lastly for me. Given the equity in the door and the building EBITDA profile, maybe you can share how or whether your thought process has changed in terms of willingness to use more debt to fund future acquisitions?

Yes. So I would say the answer is yes. I think the folks -- we get a list here who is on the call, so we can kind of judge how many of the people dialing in have been -- being sure with us for long time versus more recently. How many have followed these calls the long period of time versus joined only in the last couple. That group I think would acknowledge that the management team here has been physically pretty conservative. We have aggressive targets and ambitious goals, but we try to manage the business very carefully. The company basically had no debt for the first many years. We went from no debt to 1x debt-to-EBITDA, hovered between 1 and 2 a little bit here and there depending upon the quarter. As you said, the business is scaling, EBITDA is expanding faster than revenue. If you couple that with the comments you heard from me that the board continues to feel share price is materially undervalued, I think it's correct to assume that we would be comfortable with a little bit more debt as a target consideration mix for future acquisitions.

Our next question comes from Gabriel Leung of Beacon Securities.

Couple things. First in terms of the CCD transaction, obviously you guys have acquired a nice little customer list that, I guess, you would share with Dialogic as well. I'm just curious. Is there anything that's preventing you from up-selling or cross-selling some of your non-card products, specifically some of your cloud services into that customer base?

There's nothing preventing it whatsoever. That's clearly part of the strategy behind the acquisition. And it's also the primary driver of the wish to integrate the sales teams, right. The way to get the rest of the Sangoma portfolio positioned into that user base. And the CCD products positioned into the traditional Sangoma base is to have a single face to the customer, so for sure that's going to happen.

Any thoughts around when we should start thinking about more accelerated cross-selling? And maybe go-to-market strategy or is it still too early to discuss right now?

It's not too early to discuss. It's probably too early for me to comment quantitatively. So let me see what I can do and feel comfortable that we're sharing stuff that's safe while not, you know, exposing us before we have enough data on how this is going to roll out. If you think about the fact that we've integrated 2 of the 4 major departments thus far. Engineering and support are integrated. Operations will integrate this month or next. And then sales will integrate at the end of June to prepare for the beginning of the fiscal year. So the reason it's tough to quantify is the thing -- the operational step that will make it possible to start gathering data about how that cross-selling is working hasn't even happened yet, right. So it's tough for me to give you numbers. But I will tell you that the Sangoma executive team generally, the CCD management team, and including myself personally, have been around the entire globe to meet the CCD customers and distribution partners. I've met the biggest distributors in the U.S., the U.K., Germany, Spain, Korea, Japan, Hong Kong -- we really have done the legwork to understand this opportunity. It's real. I'm quite enthused about the opportunity to cross-sell the Sangoma portfolio to those companies. And then, the only other thing I think I could add, Gabe, is part of your question, although I realize this wasn't the whole thing, ask not only about products, but also cloud services. And I would just remind the group that Sangoma's cloud services right now are launched first in the North American market. We don't have those cloud services in Europe or Asia yet. Europe and Asia are material portions of the CCD customer base, so while we cross-sell the rest of the Sangoma portfolio, you would not yet be in a position to cross-sell the cloud services to the EU or Asia CCD base.

Got you. That's perfect. And just moving on to -- over to your other recent acquisition, VoIP Supply. I'm just curious, you've had the company for a couple of quarters under your belt now. I'm just curious to see whether or not you've seen any of the other -- any of the OEMs that VoIP Supply might have been dealing with. Have they sort of made plans to sort of leave the company just given your ownership of it? If there is any discussions around that? Or it's sort of steady as she goes. I know you guys are operating in the separate subsidiary, So I'm just curious how that dynamic is going on with some of the other OEMs on the platform?

Yes, that's an insightful question. So for sure, we pay a lot of attention to this, as you would surmise. Both amongst the management team at VoIP Supply, the lady that runs that business for us, and the executive team at Sangoma. So lots of outreach, proactive conversations, reassuring about the right level of autonomy. And so far, I've been pleased that it's unfolded almost exactly as we expected. We've lost almost no manufacturers to VoIP Supply. Those initial conversations almost every single time when something like this, Gabe. "Yes, yes, yes, sure. " But of course, you're going to say that Sangoma. The proof will be in the pudding. If you do what you say you're going to do and don't screw up the business by artificially colluding and steering and things like that, then okay. But if you just say a bunch of warm fuzzy words and then turn it into a channel that only sells Sangoma, then we're going to have a problem. And I think you're right that it's much easier for me to judge how that has played out now after a couple of quarters, then it was for me to answer the question in that very first call after the acquisition closed. And I can tell you that we've lost almost none, I think. David, am I right? One manufacturer that was like a sliver of the revenue, almost nothing. So at this pace -- at this point, Gabe, I think we're through the danger zone.

Got you. That sounds great. One last question from me. Just in terms of CCD and that's impact on your financials. You mentioned that it also had a very positive impact both top and bottom line. I'm just curious, is there still more juice to be squeezed from the integration efforts? Or have we sort of seen everything there is to see in terms of margin accretion from this particular acquisition already in the most recent quarter?

I think we're basically there. We've done what we think makes prudent sense. One of the comments I made in my prepared remarks was, Sangoma has chosen consciously to tread this, I don't know what to call it, delicate balance between growth and profitability. And maybe 3 or 4 quarterly calls ago, someone asked a similar question about like what are the options for changing that? And I said, the executive team here and the board looks at it like a lever, like in many businesses, right. There is a lever and we can choose to invest more to accelerate growth at the expense of EBITDA or we could choose to, what was your term -- "Squeeze more juice out of the bottom" by sacrificing some of the top line. We've been pretty consistent about where we think that lever is optimally placed at Sangoma. We are growing well both organically and through complementary acquisitions. I think if you mean theoretically or hypothetically, could we be sure? I mean, of course. But that answer wouldn't really be different for CCD, then for the rest of the business, Gabe. We could choose to strip out OpEx, right. Do less travel to be in front of customers or employ fewer engineers and marketers and sales reps and sales engineers, or we could do less marketing. And for sure that would goose the bottom line. But, of course, as you know, in tech businesses, you pay the in the long-term, right. So I don't see us trying to squeeze that juice even though hypothetically, I guess, we could.

Our next question comes from Derek Zaremba, a private investor.

So I guess, kind of following up on what you were just talking about, looking at kind of -- I was looking at the expenses relative to revenues and R&D is up, and I think it's up in the 14% of revenues or so, which on an absolute dollar, of course, is higher because revenues are higher, but even as a percentage. So do you have any, I guess, additional color to add to that or what you're expectations are? And I guess, it follows through with what you're saying in terms of investing in growth and how that kind of looks?

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Yes. Maybe I'll start and, I don't know David, if you would like to add some color or not. Sangoma is an absolutely stereotypical tech company, right. R&D is the originator of innovation and new products, that's the lifeblood of future revenue streams. The more R&D you do, the more potential products you have that can be winners. And every year we sit down and think about the product roadmap and how much money to spend on R&D, and there's this balancing act that you just referred to from my prior answer, in which we think about -- in R&D just like we do across OpEx, what's the trade-off or the payoff of spending more on R&D versus less and how much should we add to it? So our R&D budget has continued to grow every year in absolute dollars and I see that not changing. The percentage can go up and down a little bit, because the percentage really is tied to specific development projects, right. It's not a matter of us saying we will choose to employ 83 R&D engineers versus 79 because 83 is the right number. No, it works much more on a bottom-up basis. Of course, we have opinions about how much can we afford. But the number of people that's needed is equally tied to what we think the product portfolio needs to look like the next year. So instead of me saying 14% is the right number or 12% is the right number or 15% is the right number, I hope you'll trust that the team here is good at that. We think about it. We don't think about it in isolation for that bucket, Derek. So there might be a year where we say, we really need to spend 15% on R&D or we can afford to spend 13% on R&D. But we'll spend a little bit more there and a little bit less somewhere else. Or we'll spend a little bit less in R&D because we need to invest a bit more in marketing and sales to open up a new market. And we're conscious about it. I don't know that we have the singularly right answer, but I think you've seen over many, many quarters now in a row, we try to find that right balance and I just encourage you not to get too hung up, as I said about my answer to the 11.7% for EBITDA, whether it's 11.7% or 10.9%, or whether it's 12.1% or 11.2%, I kind of feel the same way about R&D. I wouldn't want to jump on one of these calls in a couple of quarters and someone say, oh you told us it was always going to go down as a percentage of revenue and it was 14% in Q3 and now it's 14.7%, and someone feels like we misled them. We need the flexibility to do the things in R&D that lead to the products that we believe will drive revenue. As constrained by what we think is a reasonable amount to spend. And I think trying to be more precise than that would just set us up for a trap later on.

David, did you want to add to that?

No.

Anything else, Derek?

No, that's it.

Our next question comes from David Kwan of PI Financial.

I'm wondering on staying back on the cross-selling opportunities. Can you comment maybe on past acquisitions, how long it took to kind of realize some of those opportunities and whether you see any changes -- or any differences possibly as it relates to CCD and maybe, in particular, given it was a carve-out?

I don't think there is anything that's particularly noteworthy beyond the observation that I shared earlier about the up and downside surprises. If you wanted me to kind of emphasize one thing, I would point to the complexity of those systems was higher than we thought, mostly because there were so many different systems. The people who understood them were not necessarily the same folks who we were taking as part of the carve-out. So you were sucking information out of the brains of people who are not coming with the company and trying to get that information into the brains of the Sangoma and CCD staff. That was different, right. But it was different primarily because it was a carve-out, more so than because it was CCD. And there were folks here who've done carve-outs before and knew that would be different from the prior 6 acquisitions. But in all transparency, I think it's quite -- excuse me, I've got a bit of a cold -- in spite of knowing that it was going to be a bit tougher, it was even more work than we anticipated. That's all.

Okay. And just in terms of getting reps up, in terms of knowledge for cross-selling, do you think it's going to take longer and probably just because the company is a lot bigger, especially for the CCD reps?

Longer than what? Longer than entire acquisition cases, did you mean?

Yes, yes, exactly. And how long do you think it will take?

Yes, I don't think so. So I was just kind of -- I haven't been asked that before, so I just wanted to think carefully before answering. I don't think so. So here's why. Some prior acquisitions have been of products and technology that were entirely new to the company because they were chosen as an acquisition target in a build versus buy decision. The company was growing out its product portfolio. It was thinking about as we expand towards fulfilling the subject of a complete UC suite, we need a product that does X. Will we build this from scratch or is this one that could lend itself to an acquisition? And some of those ended up lending themselves to an acquisition. And if it's entirely new technology, that will typically take longer to cross train the sales teams about. In this case, the product portfolio that was acquired was a portfolio that included products inside 2 of our existing product lines. And so the Sangoma sales organization knows how to sell products like that. And so I think that will be digested fairly easily. The CCD sales team will need to learn some stuff, which is more new. How does a PBX work? How does this particular cloud service work? So cross-training the CCD people is a little bit more complicated. But because it's more complicated, we've put more effort into that earlier. So the sales executive teams here and our COO have held meetings of the CCD sales forces regionally in both North America and Europe, and have brought some of the people from Asia into the European line early in our fiscal Q3 to begin that education process, 4 or in some cases 5 months before the cross-selling will begin.

So although it will take a little bit of time, we've tried to begin it with enough lead time that we're overlapping the education with the time during which the sales forces are beginning to integrate. My hope is once they start cross-selling July 1, that will make the time it takes to get the teams up to speed a little bit shorter. If you don't mind, declining to answer the question about how long will it take. Because frankly, I just feel like we don't fully know. I would like to think in one quarter, maybe 2, they're smooth and running. But whether it takes 3 months or 6 months or 4 or 7, I just don't think we can predict at this point.

(Operator Instructions) Our next question comes from [Igor Saddleton], a private investor.

So I've been a quiet shareholder for quite some time and I just want to start out by just saying thank you for the fine work you've done and continue to do. It's really been amazing to watch the transformation of this company over the years. Yes, and with that said, I just have a quick question about the intangibles. So there is a rather large acquired intangibles position on the balance sheet, and I'm just interested in maybe knowing what those are? If you could comment and -- about the amortization of those assets, how much of that is the real economic cost to the company as opposed to just an accounting formality or necessity?

David, do you like me to do this one? [Igor,] I think you really want David to answer this one for you.

So [Igo,] firstly, thank you for your comments, I appreciate that. And secondly, with regard to the accounting, this is one that books are written on. And each time we do a deal, we have it independently valued through a set of variables that come up with an answer. And that divides what is identified as an intangible asset versus goodwill. The intangible assets, we are always looking to maximize that as we are working with that team and those get amortized over the expected life of the business. So if we're buying hardware -- or a software design, if we think it's going to last 10 years, then it will be amortized over 10 years. And the remaining balance is goodwill. So how it is characterized is in a very complicated valuation document. It is somewhat arbitrary because it uses a whole bunch of variables, which may or may not be accurate. It uses a variety of models to do that. So it is the best effort to try and value each of the components of the businesses that we acquire. But the bottom line is, I look at it this way, we pay money on the day 1 to acquire the asset. We use those assets, whether they are physical assets or people assets or IT assets or goodwill. We use those to generate as much revenue and as profit as we can. The EBITDA line that we talked about is not impacted by those. Our bottom line net income, though, is because the amortization of those intangible assets is added to the depreciation of other capital assets. So they are accounted for in accordance with IFRS. But I look at it from a cash flow perspective as running EBITDA. But we assess that at the time that we do each acquisition. So that's not a very tidy answer to your question. It is a bit messy and it's a bit arbitrary, not by us, but by independent valuers who do this for a living. So we use the best efforts we can to do that. We also think very carefully about how we structure the business, and we have been able to locate intangible assets in countries where we're able to write it off for tax purposes. In fact, that's probably more valuable to us than anything else. So we're very careful how we structure the deals and where the profit flows and things like that in order to minimize our tax. So it has more value for me in tax planning than it actually does on the balance sheet. So it's an accounting set of constructs. We are constrained by those. We operate with our independent auditors and an independent valuer. But our plan is just to realize the maximum amount of revenue and cash flow from each deal that we do.

And David -- price allocation is eventually disclosed somewhere, right? So Igor can see the amount of that price which is allocated to fixed assets versus intangibles in a note or something to the financial statement.

Correct. Each deal has the result of that valuation put forward. For CCD, right now it's an estimate and will be finalized at the time of the audit because some of that work is still going on, but I've got a first view of how it might look. So the mix between intangible assets, the individual items and also between that and goodwill will alter between now and the financial results at the end of the year. But it doesn't change how we run the business. It really is an accounting convention for trying to recognize their instant value on assets that are not just physical. And many of our deals, we are buying people and processes and intellectual property and customers and trademarks and brands, and all these things, which don't appear on a -- in the working capital, and therefore, have to be accounted for somehow.

So if I may just follow up. So is it safe to suppose that some part of those intangible assets, the acquired ones, maybe a large part even, will yield more, let's say, in economic value than what's stated?

So I'm -- the answer is, it's a calculated value that is locked in at a point in time. And for sure, our opinion might change or I might not agree with the independent valuers characterization of where the true value of the deal is. But it is not something that is in any way indicative of what is going to be done with that asset.

Or its contribution towards the [top] of the company.

Or it's contribution, it's the recognition of the difference in price between the price paid and the assets.

The hard assets.

The hard assets at the time. So if we paid an extra million dollars for the company, it wouldn't change the value of the intangible assets. It would change the amount of goodwill. But it wouldn't change whether we are successful at managing those assets or not, because those assets are in the people and processes and technology that we're selling. So I like to have it on the balance sheet and write it down over time. But it's an accounting convention that we can't do anything about.

Igor, I'll also echo David's first point too. Thank you for the kind words at the beginning of your question.

Operator, perhaps we can just ask, are there any further questions? If so, please, the operator will explain again how to access. Please take this opportunity to speak with us if you can.

(Operator Instructions) We currently have no questioners in the queue.

Okay. Well in that case, thank you very much for joining us, in particular those new shareholders that have listened to this call for the first time, and welcome aboard. For the shareholders that have been with us a long time, we really do appreciate the support. And with that, I would like to bring the call to conclusion.

Okay. Thank you, everyone. Good day.

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