Sangoma Technologies Corp (SANG) 2019 Q1 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the Sangoma Technologies Fiscal 2019 Q1 Investor 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 Sangoma's first investment call of fiscal 2019. We are recording the call, and we'll make it available on our website for anyone who is unable to join us live. I'm here today together with Bill Wignall, Sangoma's President and CEO, to take you through the first quarter of our fiscal year 2019, which started on July 1 of this year. We will discuss the press release that was distributed over the wire services on November 22, together with the company's interim unaudited financial statements and Q1 MD&A, which are available on both SEDAR and our website at www.sangoma.com.

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 that unless otherwise stated, all references to dollars are to the Canadian dollar.

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, on 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 those forward-looking statements. Important factors that could cause actual results to differ materially are discussed in the accompanying MD&A and in the company's annual audited financial statements.

With that, I would like to introduce our President and CEO, Bill Wignall.

Thanks, David. Welcome, everyone, and thank you for joining us today. My prepared remarks will fall into 4 categories. I will start by covering our first quarter results; next, I will share a few comments on balance sheet and cash flow; thirdly, I'll provide an update on how the Digium integration is proceeding; and finally, I'll wrap up with a comment on forward guidance.

You'll note that I did not mention an update on strategy for today's call. I covered this extensively only 4 weeks ago, so may I please suggest that any of you who are new to Sangoma might listen to that recording to get a detailed picture of our business since all of that material is still current.

As always, I'll then offer a short summary before turning the call back to David for questions. Before jumping in, just a reminder that this quarter's results include 1 month of the most recently completed acquisition of Digium, which closed in September, and a full quarter of CCD, which we acquired in January, both of which contributed to the increase in scale.

Okay. Let's now turn to Q1 results. Our first quarter of fiscal '19 ending on September 30 was another record and the 15th quarter in a row where we've delivered more revenue than from the same quarter in the preceding year. Sales were $21.4 million, 81% higher than the same quarter last year and a 22% jump from the immediately preceding fourth quarter of fiscal '18. This increase came from the ongoing intrinsic growth at Sangoma, the compounding of recurring services revenue, and the addition of CCD and Digium.

Gross profit was $12.4 million in the first quarter at a gross margin of 58%. Gross margin percentage is expected to increase slightly in future quarters when Digium higher margins will be included for the entire 3-month period. Operating expenses were $10.6 million in the first quarter of fiscal '19, about double those of the prior year, primarily as a result of the 2 acquisitions mentioned above.

For the first quarter, EBITDA of $2.5 million is more than double that of the same period in fiscal '18 and even a little stronger than we had anticipated.

And lastly, below the EBITDA line, you will observe onetime expenses we did incur related to the Digium acquisition, and this covered all of the standard types of costs you would anticipate such as legal fees, investment banking fees, quality of earnings report, reps and warranty insurance, rendered due diligence and other associated transaction costs. All of this was provided for in the quarter and totaled approximately $2.1 million. Because of the onetime $2.1 million cost just mentioned, there is a net loss in the first quarter of about $1 million compared to net income of $0.4 million in fiscal '18.

In summary, we're very pleased with what was a strong $2.5 million EBITDA for the quarter, and a little higher than we expected, all a very encouraging start to the year. But before moving to the balance sheet, I would like to share a short comment on net income, given we had a couple of questions on this during our last call. There are 2 specific items I'd like to discuss, tax rate and amortization, and I hope you'll bear with me through this accounting discussion.

Let's start with tax. At Sangoma, although we're still a micro cap company, tax is not simple because we're managing taxation across multiple legal entities and multiple tax jurisdictions in multiple currencies, what's read here in Canada, but not in others, et cetera, et cetera. Sangoma carefully considers how we structure our business to conserve resources, rather than minimize a tax line on the P&L statement. Also, to further complicate matters, as many of you know, tax laws and rates are being changed in multiple countries these days.

With that as a backdrop, and at this point in time, if you're trying to figure out what tax rate to assume for Sangoma, or if you're an analyst constructing and updating a detailed financial model, we recommend using a tax rate at about 25% of EBT. As you'll hear in a moment, there is tax planning work going on in realtime now, and we'll update you if we see that changing materially.

To help understand this recommendation a little bit better, we could look back on fiscal '18 for comparison and illustration purposes. For example, our P&L had about $4 million of pretax profit that year. We expensed $1.5 million in taxes, made up of $1 million in current taxes and $0.5 million in deferred taxes. This is a rate of around 35%. On the cash flow statement, you will see that theoretical calculation is replaced by the actual cash amounts paid. Last year, we paid $0.3 million in tax, and we refunded $0.2 million. So on a $57 million business earning $4 million in profit before tax, we actually paid $0.1 million out. And in some prior years, we were actually net recipients of tax. So you see that this 35% tax rate on the P&L differs materially from the tax actually paid out.

Okay, the second item that I'd said that I would comment on in this accounting section is amortization, or more specifically, that of intangible assets amortization. Intangible assets are an important factor in tech company acquisitions. Valuation and purchase price allocation for such acquisitions is then determined by a specialized outside party. That data and an analysis of the useful life of those intangible assets helps calculate the amortization. Each business acquired has a different set of criteria, and so each is considered individually. As a theoretical example, if the life is estimated as 10 years in one sample case on $12 million of intangible assets acquired, it would lead to $1.2 million of amortization per year or $0.1 million per month.

For Q1 of fiscal '19, we've used an estimate for the Digium acquisition because we're doing that accounting and valuation work in Q2. This estimate will change once the valuation is complete. As part of that Q2 work, we'll be completing an audit of the transaction having the full purchase price allocation determined by an independent valuer and locking down the transaction values in the Q2 accounts. David is specifically doing this right away so that we do not have significant Q4 adjustments later, when the auditors review the valuation report. For the same reason we will have the tax structure analyzed, so the potential value of the Digium net operating losses can be considered, including the projected timing of their utilization.

Okay. So that many of you are thoroughly bored with that accounting discussion of tax and amortization, let's turn to the balance sheet as of the end of Q1. Before commenting on specific individual lines, I'd like to briefly recap the financing of the Digium acquisition, given its impact on the balance sheet.

You may recall that we raised $12 million of equity through a private placement in March, and $21 million of new debt through our existing banker in September. Further, we issued about 4 million shares to Digium shareholders as part of the consideration to buy the company. As a result, there would be these significant changes this quarter, all of which were totally foreseen.

As of September 30, Sangoma finished the quarter with a cash balance of $5 million and had total debt of approximately $25 million completely consistent with what was expected when the Digium deal was announced. Accounts receivable increased from $7.2 million last quarter to $10.8 million as of the end of Q1, and inventory grew from just under $7 million to just over $10 million. All of this is directly attributable to the Digium transaction entirely as expected, and some of it will be timing, since Digium tends to have stronger sales in the last month of each quarter, and we took over in early September.

At a $100 million run rate, there can be significantly larger swings between quarters on any such line item as I previously mentioned in prior calls. For example, we now move container-loads of phones rather than pallets, a perfectly normal operational event.

And next, I'd like to comment on cash flow just briefly. This quarter, adjusted cash flow from operations was about $1.7 million, excluding the one-time costs associated with the acquisition. Over time, we generally expect EBITDA to be the best proxy for adjusted cash flow.

And finally, just a quick point of reassurance. Sangoma was, of course, perfectly and comfortably on side with all the debt covenants of the new loan taken on to help finance the Digium transaction.

With that, I'll bring my remarks on our financials to a close and turn to an update on the Digium integration. Perhaps I'll start with a short reminder of the company we're merging into Sangoma. Digium is a true pioneer in the communications market, having launched the open source segment with Asterisk, and is a very well-respected player in our industry. They commenced with the transition to cloud and their recurring revenue model about 4 or 5 years ago in advance of Sangoma, and that has been very successful, with Digium now generating about 40% of their sales from recurring revenue.

Indeed, over 40% of their new UC customers choose Digium's cloud service as opposed to an on-premise option, and they're growing this very profitable segment nicely. Although we share some similarity in parts of our product portfolio, interestingly, there's not a lot of overlapping customers in our channels.

So let's start the update on this topic of integration with people, given our company is an intellectual capital business. Firstly, it feels really good as we've gotten to know the Digium team and seen the energy and contribution they have to make. We are well into the integration of teams, departments and organization structure. There remains more to do in this area, and I expect most of that to be completed by the end of Q2.

There is much work taking place to bring formerly disparate folks to gather into one company with one identity, but we're making really good progress. One modest example might be the amalgamation of what was 4 separate employee benefit programs now being brought together into one cohesive plan, something that's actually very complex in the U.S. minefield of employee health and medical care.

As of 2 weeks ago, we now have approximately 200 staff in the U.S. on a single benefits program. That generates savings for the company, offers better care to our valued staff, and helps provide commonality for managers who have global teams on a single plan.

Perhaps slightly less interesting, but equally essential for execution and efficiency, Sangoma is now working our way through key decisions on IT and operational systems. We have already harmonized communications tools such that all staff are on a connected phone system and we now have standardized desktop software, e-mail, et cetera, on G suites from what was a mixture of tools. Sangoma has made progress on selecting our preferred CRM and marketing automation tools, and is in the process of planning those transitions, too. I know that internal IT stuff is not sexy, but it is important to our ability to operate as one company so, while I might sound a little boring to investors, I wanted to touch on it just slightly.

Timing and implementing the cost synergies is also well underway. In Q1, we already negotiated and obtained better pricing to reduce our costs from several key suppliers by offering amalgamated volumes and integrated lines. A couple of examples might include, for instance, our cloud network infrastructure costs or our manufacturers of phones. This process is ongoing, and I would expect the majority of the decisions enabling these synergies to be completed in Q2. And by Q3, we will see a more cost-efficient level of OpEx, as I previously communicated.

As you would expect, we're right in the middle of reengineering our supply chain, the sourcing for manufacturers, the logistics, the warehousing, et cetera, and there is work being done to optimize our data centers and to remove duplication in marketing spend, and all of these things take a little longer to plan, but are well underway and will bring up the Digium operating margins for Q3.

The last topic on the Digium integration section I thought I'd cover today deals with customer-facing subjects. We are also in the process of beginning to integrate our sales teams and channel structure. This is being done first outside of North America where it is a bit more straightforward, given that Digium did not have staff nor offices around the world like Sangoma did. So managing customers, sales and channels in the rest of the world is being transitioned to the Sangoma folks and departments that already had operational capability in those regions.

This gives us better coverage of such channels and customers around the world, and I would say that the very initial feedback that I personally have heard from such organizations has been entirely positive as you might expect, when they find out that there are now Sangoma folks close to them, often in their own countries, who speak their own languages. Working out how to best integrate the North American sales and channel operations will come next.

So that's it for my Digium update today. I'd like to thank the many Digium folks across the U.S. who are celebrating Thanksgiving now, and working hard to figure out how best to integrate into and contribute to the growth of our business. I expect the benefits of this integration work to start showing once the decisions are made during Q2. You will see why the addition of Digium is one more significant step on the path to building a more valuable company for you, our shareholders, as we seek ways to add scale by augmenting our organic growth with selective acquisitions during a time of industry consolidation.

With that, I'd like to discuss forward guidance for just a moment. As many of you will no doubt have noticed from our press release, we've reaffirmed our commitment to delivering $100 million of revenue and $10 million of EBITDA during fiscal '19. Our Q1 results only serve to increase our confidence in our ability to do so. Further, as we've indicated before, we see a clear path to getting our EBITDA percentage up to 13% for fiscal 2020, and I would expect we'll be on track for that figure by the time we exit this fiscal year. It's really that simple, and our plans are, if anything, slightly more advanced now than we'd expected before Q1.

In summary, Sangoma is now a $100 million company with demonstrable growth, 10% EBITDA margins growing to 13%, positive cash flow, and with the management to continue winning new customers, building new products and acquiring new businesses. The turnaround from a few years ago has created a strong public company with a history of delivering on its promises to both customers and shareholders.

We did all this while not raising a lot of additional equity that would have diluted shareholders, and while building out an entirely new product portfolio, it required very significant R&D investments, completely repositioning the company, getting us on the recurring revenue path, buying multiple businesses and growing profitability throughout the entire sequence. We've come a long way and fully intend to stay on that path.

For these reasons, your Board of Directors feel strongly that Sangoma remains undervalued at today's share prices and we continue to work diligently on this every day. Interestingly, since our last call together, open-source software, one key part of our business, has been getting a lot of attention in the markets. I'm not sure how many of you would have noticed the news or realized the relevance to Sangoma, but IBM acquired Red Hat for about $34 billion recently. Red Hat is an open source software company who was doing about $3 billion in revenue with just under 10% profit margins and was growing about 20% per year. Those are some encouraging signs from our point of view.

We remain proud of our progress and our track record at Sangoma, and we look forward to still further appreciation in stock price. With that, I'd like to close off my prepared remarks for today, and turn it back to you, David, for questions.

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

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

So I just have a question about EBITDA margins. They were stronger than anticipated in the quarter. Can you just speak to what might have turned that? And if any of that was onetime items that may not be there for the remainder of the year?

Yes. Fair question. There was no single explanation, to be honest, Nick. I'll give you a little bit of color, but none of the color includes significant or material onetime large orders that would have caused it to spike and drive EBITDA up. There's a bunch of stuff going on, right? We had the first month of Digium consolidated in. The third month of any quarter at Digium has tended to be higher than month 1 and 2. So we just happened, by pure coincidence, to incorporate the strongest month of the quarter because of the date of the acquisition. So that's relevant. The product mix is highly relevant to EBITDA in any one quarter. So if we happen to have orders for slightly more, I don't know, higher margin, software-only products versus something like a gateway that might come with lower margin, that drives up gross margins and less EBITDA margins. And then, it really depends also on which regions the order flow is coming from. There are some regions in the world that come with slightly lower gross margins as we've talked about on prior calls. So for example, Southeast Asia, South Asia, Africa, parts of Latin America come with lower margins, and if they contribute a slightly higher fraction of the revenue for any one quarter, that pulls gross margin down a notch or 2 in EBITDA. That didn't happen this quarter as you saw. So there's no one thing, and for sure, it wasn't caused by some anomalous order that would not repeat.

So with EBITDA margins tracking ahead of your full year guidance, should we expect, maybe, in Q2, there'd be a little bit of margin impression before they start to expand through the remainder of the year?

Yes. That's a fair point. We're going through, as I mentioned in the Digium update, the process of planning the integration. It's just -- it's the big topic for the quarter, right, lots of discussions about, as I said, supply chain or integrating sales teams, or which IT systems to use, which data centers, et cetera. So as those decisions are being made, the cost synergies that we are working to get to by the end of the quarter are not all in place yet. And so I think it's right that the EBITDA margins in Q2 are likely to be slight lower than the EBITDA margins in Q1, before they pop up and expand for Q3. So I can't give you specific guidance or quantify that, Nick, but the question's a good one.

That's helpful. And then, just on Digium, you've highlighted that the third month in the quarter tends to be stronger. Can you just quantify how much stronger it is than the first 2 months of the quarter?

It varies. So I'd hate to do that and have you use any one quarter as the way to build out a model that looks at multiple years. What could I share to be helpful here?

So I guess the -- like the point I'm looking at is, I think when you acquired Digium, you said the run rate was about $3 million a month. So can we expect that, say the fourth quarter is a $4 million quarter, and then, the other 2 -- or $4 million a month, and then, the other 2 months are, say, $2.5 million? Or is it not that strong a number?

It's not that, that profile is going to be wrong. It may indeed be right, Nick. It's -- but it's not consistently predictable from one quarter to the next. My point here was making sure that you guys understood that it is a bit higher in the last month of the quarter, but it really shouldn't matter once we're looking at steady-state quarter-to-quarter comparisons. It's only unusually impacting because of the fact that Q1 had 1 month of Digium and that it happens by coincidence to be the final month of the quarter. But once you look at Q2 versus Q3, or Q3 versus Q4, that profile between month 1 and month 3 should not be causing quarter-to-quarter comparisons to be explained.

Okay. And then, just the last question for me. The business integration costs in the quarter were about $2.1 million. Can you just comment on how much the acquisition costs or integration costs for the remainder of the year will be?

Yes. Sure, we can talk about that. Yes. Maybe I'll -- if you allow me, generalize your question to include what is inside that $2.1 million. We had 3 e-mail questions about this prior to today's call, and I said to those folks, if you let me answer at once on the call rather than by e-mail, and then, I'll talk about what's left to come. So I don't think there's anything really surprising in the $2.1 million. It's all the stuff that you would expect when you guys look in at or analyze companies that have acquisitions as part of their strategy. There's the investment banking fees. And for some of our deals, we've had such fees and others we haven't because we've been able to source some transactions without using bankers. All right. So for example, that's a big part of it. The deal played out over a longer period of time, which always stretches out the fees that you're incurring during that period. The transaction from Digium's end was fairly complicated because of multiple classes of shareholders and the give-and-take between them. It was rep and warranty insurance, which can be expensive. It also required due diligence from the insurance companies because of the debt financing, the lender needed a quality-of-earnings reports, like in many audits. So there's no one thing and none of the elements that make up that $2 million are strange, or weird, or anything like that. The only stuff that's left, Nick, it's not the cost of closing the transaction. It's the costs of getting through the cost synergies. I would expect most of that to be covered by, I don't know, $0.5 million, $0.6 million, maybe $0.7 million. I don't know exactly. And I think most of that will be in Q2, with maybe a little bit trickling into Q3.

The next question comes from Gavin Fairweather with Cormark Securities.

Just for the record, I really enjoyed the tax and amortization discussion.

More than me.

Just to start out here, on operating expenses, a bit of a transition quarter for you there with Digium coming into the mix. But they were a little bit higher than I expected. Was that mostly just the Digium being layered in there? Or was there other additions kind of north of the border? Or...

The only other one that might be worth talking about, because it is mostly, of course, the addition of Digium, is you can imagine that in the quarter where we're closing the transaction and giving the integration process, there was a lot of travel, way more than normal, right. A lot of people flying back and forth all the time, many different departments. We must have been down there a dozen times. So the other substantive variation from normal run rate will be the travel expenses.

Okay. And then, just secondly, I'm thinking about your mix of foreign exchange now that you have Digium in the mix. Obviously, more weighted towards U.S. dollar revenue. Any thoughts on whether it makes sense to either to change your reporting currency or hedge a little bit? What are your thoughts on that, given how that part of the business has changed?

Yes. I think the answer to those 2 subparts to your question are quite different, Gavin. On the part about reporting in U.S. currency, we talk about it pretty regularly, including at the board. We're not about to change any immediate time in the near future. But at some point down the road, it could make sense. There's lots of variables there, but don't look for anything in the short term. And then, secondly, about hedging. The need for hedging, I would say, has gone down, not up, and that might surprise you, but that's mostly because of the size of the natural hedge, which really not a whole lot we can do to hedge the top line impact from FX movement. Most of our efforts in the past, when employing hedging strategies, have been related to hedging balance sheet items that get revalued at the end of each quarter. So the cash on the balance sheet, the receivables, the inventory, things like that. And we now have a much larger fraction of our operating expenses in U.S. dollars, mostly because of the number of people that are down there. So we haven't been hedging for the last -- David, could you help me? 1.5, 2 quarters? Yes. And for right now, Gavin, we're not planning to unless the set of conditions that we look at change. So I understand the question but I think hedging is probably less necessary and inappropriate now than it was a year or 2 ago.

Okay. That's helpful. And this question might be a little bit premature, but we've seen some volatility in the stock markets, especially with some of your really cloud-focused years. I know you're focused very much on integration of Digium at this point, but do you think that, at some point, maybe that factors turned into private evaluations of the things that you're looking at?

Well, first of all, I think your kind of caveat at the beginning of your question is right. We are really focused. On the last call, someone asked, when does the next acquisition come? And all I was able to say is, we don't have a lot of spare cycles right now to be looking at that. It's not in the next couple of quarters, I would guess, whether the volatility affects valuations of private companies, I think, depends on so many factors, Gavin, right? Like, of course, those companies who might be trying to be acquired or approached will be paying attention to such things and when it serves their interest, they'll be pointing out, look at how the price of businesses like ours have gone up. And when it doesn't serve their interests, they surprisingly choose not to cite that, but there's so many other factors, like what's going on in the cap table of that company and what are the dynamics between the shareholders, how much some of those shareholders care about cash now versus cash later? Or how much they care about cash versus rolling over equity that I think other factors are likely to dominate more than the volatility of the public comparables.

The next question comes from David Kwan with PI Financial.

I want to talk on the revenue side. Looking at it from a year-over-year basis, and even excluding the acquisitions. It looks like you guys did a pretty good job. I think there was a large deal a year ago, but also on a sequential basis, it looks like there was a pretty good performance there, especially on the services side. And I was wondering, to what extent that might have been driven by the Digium acquisition given your comments, I guess, on the last month of the quarter being one of their strongest, but also, I guess, their higher recurring revenues from their cloud platform?

Yes. I mean, of course, you're right. It's significantly impacted by Digium, and that would be one of the key drivers of the growth, both the absolute growth and the fact that it was slightly stronger even than we expected. I would tell you it's not only on the Digium side. Our cloud business at Sangoma is growing quite nicely right now. We had a very good fiscal '18 and that's continuing on into fiscal '19. It's actually quite astute. No one asked any questions about this by e-mail, but you're right. The quarter one over quarter one performance is even nicer when you realize last year's Q1 had a significant order in it. I think it was the second half of a large order, if I remember back that far now. And then, I would say that, definitely, that compounding of recurring revenue at Digium, just like it is at Sangoma, is the primary driver of growth, right? It's desirable not just because of the higher multiples that recurring revenues get, but because of the underlying reason that that's true. This compounding effect we're seeing at Digium, we see it at Sangoma. You add the same number of gross adds, and if churn's not increasing, the same number of net adds and that's on top of the install base that you had a month or a quarter or a year before. So there's nothing magic in that formula, and the growth in the quarter was partly Sangoma, partly Digium. And if you remember, I mentioned that also related to the fact that CCD came in partway through last fiscal year. So it was not included in the fiscal Q1 of 2018.

That's right. David, wondering on the balance sheet, as it relates to the payable, that was up notably quarter-over-quarter. I was wondering to what extent that might have been all Digium or versus maybe some timing issues?

Almost 100% Digium.

Okay. Can you comment, I guess, guys, just on pipeline since the closing of the Digium acquisitions, any changes that you guys have seen in terms of average size of deals or composition? Are you seeing larger deals given the greater scale that you guys have?

So let me just ask a clarifying question. When you refer to pipeline in deals, are we talking customers or acquisitions here?

Customers.

Okay. Thank you. So no, nothing super noticeable yet, David, to be honest. It's just too early. The sales organizations are getting to know each other and looking at the different types of customers and the archetype and how typical customers in one business are slightly different from typical customers on the other portion of the business. But both Sangoma and Digium play in the small, medium, smaller enterprise size. We're not typically the vendor that a government with 250,000 seats is coming to. And the difference between a typical customer that might have, I don't know, 20 employees versus a customer that might have 200 employees, is not that big. The sales cycle looks similar. And so although we see slightly differing ranges of customer size, it doesn't change the kind of marketing you use or the types of channel structure you employ to get to that market. So although I would say that the UCaaS business and the installed base on the Digium side of the company has slightly larger seats per customer than the installed base of UCaaS on the Sangoma side, it's not hugely different, and the difference doesn't cause us to need to behave or interact with those companies in a different way.

The next question comes from [Peter Fritza], with -- a private investor.

I just want to start off by saying that I've been a shareholder a long time. I just really want to compliment you, Bill, and David, and your team, on a really remarkable turnaround for the company, very exciting stuff. I had 2 questions aimed at share value. The first is, you obviously focus investors in your forecast on revenue and EBITDA, which is fantastic. There's still a core of investors that look to that income almost in a simplistic way when they're doing a basic P/E evaluation or something like that. I seem to recall, in the past, though, you said you obviously are very aware of net income, but you don't manage to it to artificially make it look better. So just wondering if you could provide some color on the approach of the board and you to the net income line. And the second question around shareholder value. Are you monitoring whether the listing could move to the TSX at some point?

Okay. Good questions. First of all, thank you for the kind words at the beginning. That's much appreciated, and it's nice to talk to you. I don't know if we've interacted very much in the past. If you've been a shareholder for the long time, it's nice to have you on the call. So the second of your 2 questions is simpler and easier. Yes, a potential up-listing to the TSX is stuff we're actively talking about now. There's no definitive decision made yet, Peter. David and I, and our General Counsel, and the Board have discussed this. There are advantages and disadvantages of doing that. I think, in general, our view is that the advantages outweigh the disadvantages. But going further than that would be inappropriate at this point other than just to say, it's a logical question and a logical decision we're working through. It's not imminent in the next quarter or 2, but once we're through the Digium acquisition and integration, it would make perfectly good sense for us to look at that quite seriously. Now the second part -- yes. Yes. And the second part of your -- or maybe the first part of your question, about net income and EPS, I hope you won't take my prior comments as in any way dismissive about net income or EPS. Really what we were trying to say is, there's a bunch of metrics that shareholders and investors could use to try and evaluate the performance of a business, and it seems like it's our job to try and direct investors to the ones that we think are most telling. So it's not that net income is lacking utility or EPS is unwise to look at. It just doesn't seem to us as useful compared to something like EBITDA. And that's partly related to the stage the company is at. You referred to the massive turnaround. We feel much better about where the business is now than where it was 5 years ago. But we're still a small company, and we want that to change as we get bigger, and bigger, and bigger. And then, some of the volatility comes out of the EPS. And right now, things like depreciation and amortization, especially amortization as you heard me talk about, have this very big effect on both EBT and then, my other comment, tax rates on net income, that it seems like there's a risk, if you look at that too singularly, you get a distorted picture. Right? And so that's why we encourage people to look at EBITDA. It's not because we don't care about net income, or we don't talk about it, we absolutely talk about it in internal discussions and at the board level. It just doesn't seem like as useful a barometer of company performance for us at this point compared to EBITDA. That's all.

The next question comes from Gabriel Leung with Beacon Securities.

A couple of things. Bill, just as it relates to Digium and its contribution to your financials, you sort of alluded to it being back-end loaded. So you saw a pretty strong September month. I'm kind of curious, with the -- you've got sort of 2 additional months of data now, I guess. Just curious to hear your thoughts around how Digium is performing in the first 2 months of calendar Q4. You earlier discussed whether it's sort of in line-ish or perhaps a little bit over and above what you had been hoping to see?

Yes. I don't think I'm really at liberty to talk about that. So we do have results from October. It's definitely not possible to comment on November. And until I have, I don't know, like 2, maybe even 3 quarters, Gabe, to understand a little bit about that month-to-month profile, for me to drive too positively or too negatively about a first month when it's the first, first month under our ownership seems, it just seems unwise. I hope you won't feel like I'm being evasive, but it's like one single data point out of a million, and drawing any conclusion from it, I think, just is not good. We'll be able to tell you more about how that first month looks once we get through January or April, and I have a couple of them under my belt.

I got you, and I appreciate that. I guess my last question would be, well, looking at Sangoma, I mean, you guys have clearly scaled up pretty meaningfully over the last couple of years. I'm just curious to hear whether there's been a change in terms of how your market, whether it's your competitors or your customers have viewed the company or whether the narrative of the company is changed? Any feedback around that I think will be pretty interesting. And I guess, specifically, I'm looking for evidence of whether or not your bigger scale might increase the breadth of customers that you're dealing with and perhaps also the size of deal flow that you might see come through?

Yes. Good questions. I'll just think about that a little bit. Maybe I'll offer 2 separate points as I think through my answer in realtime. One is, yes, and then, I'll add some color on that, and I'll come to the second point. So I try my very best as constrained by how many hours there are in a day and how many days in a month, to get face time with customers, to read, just how are they feeling about our company, and our people, and our products. I travel widely to do that. That includes both end-user customers, OEM customers and channels, and that hasn't changed either right before or right after the acquisition. So I continue to be in front of our biggest customers. I've visited Digium's largest customer in the world, in the U.S. I visited the top 2 European distributors. I'm planning, in 2 weeks, to be in front of the top 2 or 3 OEM customers in the world for Digium. So I think I can tell you both from feedback I hear from staff about what they're getting from the market, and as well from just personal face time, that the reaction to the scaling up of Sangoma, including Digium as another step along that process, but not the only step, as you said, is everybody notices. Right? If we're talking to a potential channel partner, or an existing customer, it's the very first thing that comes up, that there are very few companies in this industry that have gone through the size of metamorphosis that we have. We were a $10 million company a few years ago. Right? So it's very reassuring to them. In the specific case of the Digium step along the way, as the most recent component of that growth, one of the things that I'm hearing from those customers is, it's very beneficial to us to have people nearer to us. And the fact that there is an office in the U.K., or people in Germany, or people in France or -- that is noticed right away as a benefit of the acquisition. So I feel really good about that. And then, you asked about, is it affecting the type of customer, including by size? And I would say, it's a little bit noticeable, but not as much as I think it will be over the next couple of years, Gabe. It's not like we've started getting calls every single day from companies that are 10x the size of the traditional customer base. But we absolutely are winning more larger customers. It's just very gradual. It's true both in more traditional on-premise type customers, and also in the cloud. I would say the size, the number of employees, or seats, or extensions, of a cloud customer is gradually going up over time, and that's a good sign, as well as the size of companies that choose to buy product from us. We've got, I don't know, last year we had $1 million or $2 million-plus deals, which is not the norm for us. We've got one in the works now and a sales funnel that may go somewhere. So that feels new, but it feels like it's on the very beginning of that trend, Gabe.

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

Yes. So I was wondering -- I mean, you mentioned a little bit about it in the prepared remarks, I was wondering if you can add a bit more color to, I guess, on a broader level, what kind of steps you're prioritizing for the integration now versus what steps you're focusing -- going to focus on more later? Or like what divisions, or areas, or what the integration plan really is?

Well, that's still -- we could be here for 3 days on that topic. It as wide as the company operates. Right? So you could imagine there is activity in almost all function of disciplines. So I touched on, I don't even know now 2, or 3, or 4 of them, 3 or 4 of them, in my prepared remarks. But I just had to select some highlights, otherwise, like I said, it would go on forever. There's a very detailed integration plan document. We meet as a management team once a week. There are ongoing discussions about the organization of the company and our people, and how to structure them into which departments, and which people will lead which groups. There are discussions, as I said, about supply chain, and that includes the very beginning of the supply chain, the middle, and the end, so what I mean by that is, from which companies we source product that typically means contract manufacturers. Sangoma had a series of contract manufacturers, as did Digium. We're already starting to align those. We've begin to reduce the number of CMs that we need and put more volume into fewer manufacturers, the logistics middle part of that is how do we get product from a source of manufacturer to us, and stuff in that area happens like every single day or -- there was a humorous one, if you're just looking for a bit of color in to get an instinctive feel for it. We're trying to get some large shipments of Digium phones in our warehouses in time for shipping at the end of this quarter, and Digium typically shipped only full containers of phones, and Sangoma's more traditionally been able to ship less than full containers, including pallets, and you can't put full containers on planes, but you can put pallets on -- it's very operational at some levels as well. And then, the latter stages of the supply chain include, where do we house product in our inventory, and then, pick, pack, and ship from. How many of those places do you need and how do you staff it? So all of that across supply chain is taking place. I mentioned sales. The sales teams are beginning to talk. We've had multiple -- multiple-day planning meetings amongst the management teams, talking about channel partners and the structure of the sales departments. I mentioned to you that we're integrating the Rest of World stuff before North America. That was actually a bit of a switch. We thought we might start in North America, but once we get into the planning, you realize there's a lot more work there because there's 2 different separate teams, and 2 different sets of systems. In marketing, there's 2 different sets of CRM tools and marketing automation tools. We have to figure out which ones you're going to use and standardize on, and how do you get all the contact data for customers and prospects out of one and into another to allow regular contacts. It's just -- it's everywhere. The engineering team's thinking about how do we structure teams that built 2 different PBXs into one team, so that you only have to do development of the feature once, not twice. I feel like I'm kind of rambling because that's what you wanted just to get an instinctive or gut feel. I'll stop and pause, and ask if you want more or something more specific?

No. That's some great color. I guess -- I mean, you spoke to it, I think, on the last call anyways, but any -- and it's been a month, I guess, since then, but any unexpected, I guess, unexpected benefits or issues to kind of speak to on the integration side?

Well, I mean, sure, right? If you hear a CEO say, there's tons of stuff going on in that area across all areas of the company, both high-level strategic stuff and down in the weeds operational stuff, you would realize right away, that there's definitely surprises that come up here and there. Last call, I said, there were some positive and some negative, but none -- nothing really of the magnitude that would justify me pointing it out on a call like this. If you wanted an example, even though they're not big, huge examples, the description I just gave you of the very initial first reaction, we've had from international customers of Digium to being told, oh, that's so great. You have sales and service people in India, or someone who can come and visit me in Munich or in Paris. And maybe there's more business we could do with you if we know there's local people who understand us and can visit us more frequently. That's been a pleasant surprise. I mean, of course, instinctively, it makes sense and you hope that will happen. But hearing them say it, without being prompted, is really encouraging. So that's just one random example.

Our next question comes from [Igor Savelson], a private investor.

If I may, just one question about the competitive dynamics. Would you please just talk a little bit about that, and how they might -- how you see those flying out over the next several years?

Okay. Yes. So the competitive nature of our business is such that when we've discussed this on prior calls, I've explained that who we compete against can differ widely based upon the product line we're talking about. And so the competitors in something like, I don't know, gateways, is a totally different set of competitors from on-premise PBXs, from a UCaaS service. And so when we're thinking about that competitive landscape and understanding who we're fighting against, then benchmarking products against or making sure our sales team is equipped with competitive intelligence, the stuff they get varies depending upon which product line the particular prospect is they're speaking to in any one sales engagement. Right? So -- but you don't think I'm being too ethereal, if it's -- I'll pick each of those examples I gave. In the gateway lines, I would say we would bump into companies like AudioCodes, which is a public company from Israel that you could look up. And then, there's a couple of private companies that would be small and difficult for you to know anything about. There's one in the U.S. called Patton, for example, that we occasionally see. There's some Chinese manufacturers of gateways, company called Grandstream, for example. On the on-premise PBX side, I would say that the majority of the installed base is still controlled by the traditional PBX companies from the '80s, '90s and 2000s. Firms like Avaya, if you come from the voice side of the world; or Cisco, if you come from the data side of the world. They will be at the higher end of the market down to what would have been traditional key systems and PBX manufacturers. Panasonic has a key system vendor of Toshiba in the PBX world, and that changes over time. Companies like Toshiba have come in and out of the business. Toshiba, for reasons that were quite unrelated to communications, exited the PBX world because of problems with an acquisition of a nuclear business. And then, in the UCaaS space, it's newer companies that are not the same incumbents that control the on-premise PBX world 20 years ago. Companies like RingCentral, or 8x8, firms that you may not know the name of, some of which are publicly traded, so you can go and see some data on those. And then, from that large type of customers and that product category down to a whole bunch, dozens or hundreds of little tiny $1 million hosted PBX businesses, one guy and his brother in a garage building a small platform and signing up customers in their city. So it's quite diverse, and the industry has been fragmented too widely in most people's view. And thus, the consolidation that you're seeing over recent periods.

I see. So about pricing pressure, do you think they'll start being more of a factor with time? Or are you not seeing?

Yes. Again, I mean, all of these things related to the conservative nature of the business vary from product line to product line. So we have product categories, where pricing is not going down at all. And in some cases, can go up as products near the end of their life cycle and there are fewer competitors left. We have product categories that are kind of in the middle, flat, not changing very much, plus or minus a little bit. And then, there are product categories that are more competitive. The cloud business is viewed as the thing that attracts the most capital and the highest valuations. So there are more players entering that. It's a little bit more price competitive. It's probably coming down a little bit at the price level each year. And at the same time as there's a little bit of price pressure, there's also pressure from those vendors to offer higher incentives to be -- to the channel partners and agents by way of commissions. So although that's not pricing, it's cost pressures squeezing in the middle. So we just have to pay attention to that. We're very good at it. We don't just compete head to head and blow our brains out. We have selective markets that allow us to generally do something that's a bit unique and maintain healthier margins than most of the competitors out there are able to get that one, as you see.

The next question comes from [Dean Proje], a private investor.

I just have one quick question or maybe, hopefully, it's a quick question. Can you give me some context on your shareholder base, kind of retail versus institutional, and anything to note from a geographical standpoint?

Okay. Sure. What we're able to. We have an annual general meeting on -- David, could you please make sure I -- Thursday, the 20th? Is that right?

Correct.

Thursday, the 20th of December. Anyone who is on the call and would like to join us, you'd be most welcome. That event gives us a little bit of information about the shareholder base. And I guess as you would note, not everybody chooses to be known, so it can be a little tricky for public companies to answer this question in a completely definitive way. Here's what I can share. So it's very widely held. The insiders made up of management and directors is around, I don't know, David, 14%, 15% or something like that?

Yes.

The majority of the vote outside of that is obviously a mix of retail and institutional. The company had not very many institutional shareholders 5 years ago. That has been changing quite rapidly over the last few years as more institutions become aware of the company as the company has grown and the market cap has increased, then, it's more applicable in their eyes. So we've now got a number of significant institutional investors, fund managers. Some of those are visible to you from public filings like PenderFund in Vancouver, which I can cite, because the information is in the public domain. We have relationships with many others who we know and speak to regularly and visit on-site, but who often choose not to be known and are below the threshold where they need to declare. So I hope you would appreciate that it's not in anyone's best interest for me to say that stuff if they don't want it to be disclosed. And then, we still have a large set of retail shareholders, some of which are in Canada, which is I guess what you're asking. And many of which are in the U.S. I was in Silicon Valley for some meetings about 2 months ago and went to visit a significant individual shareholder down there. So where we can, and where it's possible, we talk to both institutional and retail. And we're starting to spend a little bit more time talking to the retail base through organizations and events than we have in the past. We've done presentations at a couple of retail conferences in the last year, gone and met with folks who manage retail books at a brokerage, or write advice columns and have a base of subscribers following them. So with that, I would say, it's newer in the last 2, or maybe, 3 years.

This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Moore for any closing remarks.

Thank you, operator. We really appreciate everybody joining us today for the first call for this year. We will be having more information with regard to the acquisition and other things in our next call. Just a reminder, we will have a recording of the call available on our website shortly. We really appreciate your support. As Bill indicated, you'd be welcome to the AGM. Other than that, please enjoy the rest of your day.

David, is there information about address and stuff for the AGM somewhere? The shareholders have that, obviously, in the mailing post. It's at our offices here in Markham. You'd be welcome to join us. 10:00 a.m.? Do you know?

It's 10:00 a.m, yes.

10:00 a.m. on Thursday, the 20th of December, if you'd like to come. Okay, everyone, thank you for joining. Bye for now.

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