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Edited Transcript of STC.V earnings conference call or presentation 29-May-19 12:00pm GMT

Q3 2019 Sangoma Technologies Corp Earnings Call

MARKHAM Jun 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Sangoma Technologies Corp earnings conference call or presentation Wednesday, May 29, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David S. Moore

Sangoma Technologies Corporation - CFO

* William J. Wignall

Sangoma Technologies Corporation - President, CEO & Director

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Conference Call Participants

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* David Kwan

PI Financial Corp., Research Division - Technology Analyst

* Gabriel Leung

Beacon Securities Limited, Research Division - Research Analyst of Technology

* Gavin Fairweather

Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research

* Nick Corcoran

Acumen Capital Finance Partners Limited, Research Division - Equity Research Analyst

* Stephen Boland

INFOR Financial Group - Principal

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Presentation

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Operator [1]

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Thank you for standing by. This is the conference operator. Welcome to the Sangoma Technologies' third quarter conference call. (Operator Instructions) I would now like to turn the conference over to David Moore, Chief Financial Officer. Please go ahead.

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David S. Moore, Sangoma Technologies Corporation - CFO [2]

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Thank you, operator. Hello, everyone, and welcome to the Sangoma's Investor Call. 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 Chief Executive Officer, to take you through the results of our third quarter of fiscal 2019, which ended on March 31, 2019. And we will discuss the press release that was distributed over the wire services on May 27, together with the company's interim unaudited financial statements and Q3 MD&A, which are available on 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 also refer to a couple of terms such as operating income, EBITDA and adjusted cash flow that are not IFRS measures, but which are defined in our MD&A. Please 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 statements made during the course of this call that are not purely historical are forward-looking statements regarding the company or management's intentions, hopes, beliefs, expectations and strategies for the future. Because such statements deal with future events, they're subject to various risks and uncertainties and actual results might differ materially from those projected in the forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements are discussed in the accompanying MD&A and in the company's annual audited financial statements also posted on SEDAR. With that, I'd like to turn the call over to Bill.

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William J. Wignall, Sangoma Technologies Corporation - President, CEO & Director [3]

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Thank you, David. Welcome, everyone, and thanks for joining us this morning. Today my prepared remarks will fall into four categories. I will start by covering our operating results for Q3 and year-to-date. Second, I will share a few comments under our balance sheet and cash flow. Thirdly, I will touch on corporate strategy and provide an update on the Digium integration. Fourth and finally, I will close with a comment on forward guidance.

As always I'll then offer a short summary before returning the call back to David for questions. Just before starting, I'd like to remind you about the impact on Q3 results from the timing of our last two acquisitions. The CCD Division of Dialogic was acquired in early January 2018. And thus factors into both this year's and last year's Q3. It therefore has minimal impact on the year-over-year comparison of quarterly results, but is relevant in year-to-date comparisons. Whereas our acquisition of Digium closed in September of 2018 and so is included in Q3 of this year, but not in fiscal '18 and thus does affect year-over-year comparisons for the quarter.

Okay. So let's now turn to Q3 results. Our third quarter of fiscal '19 ending on March 31st was a pivotal one for Sangoma as it was the first full quarter since the cost restructuring undertaken in December of last year. Sales were $28.9 million, up 78% over last year and this was the 17th quarter in a row that we've exceeded the prior year's quarterly revenue. The increase from last year came from the ongoing organic growth at Sangoma, the compounding of services revenue and the addition of the Digium business. Gross profit was $17.9 million in the third quarter at a gross margin of 62% of sales, which is a slight increase in percentage terms. As I explained in last quarter's call, Q3 results would reflect the full impact of the operating expense reductions undertaken in December of 2018. And indeed, total operating costs were $16.2 million for the third quarter down $0.8 million from the prior quarter or almost $1 million excluding foreign exchange.

For the third quarter, EBITDA at $3.26 million was 72% above that of the same period in fiscal '18. This moves the EBITDA to 11% of revenue, which is up 3 full points over Q2 and puts us on better track to achieve the 13% target we've set for the next fiscal year.

Net income at $1.1 million puts us over $1 million per quarter and just about $0.019 per share fully diluted, the strongest we've had since commencing the turnaround.

In summary, this third quarter was pretty much what we expected for our most important objective in Q3, which was alignment of our costs with the revenue. You have now seen that Sangoma significantly strengthened EBITDA by materially restructuring our OpEx as planned and as we communicated previously.

So I'll now turn to our year-to-date performance. Sales for the 9 months ending March 2019 were $79.6 million, double the $39.8 million in the same period last year. Again, this was fueled by a mixture of intrinsic growth at Sangoma, compounding services revenue and the addition of the 2 acquisitions. Gross profit for the year so far was $48.2 million, more than double last year and the 61% gross margin is on track with our expectations.

Operating expense for the first 9 months of fiscal '19 was $43.8 million considerably higher than last year, but again this was mostly the result of the 2 acquisitions. As I covered in remarks about the third quarter specifically, our OpEx run rate has now dropped after the changes in December. EBITDA was $8.2 million for the first 9 months, almost double that of fiscal '18 and consistent with our expectations.

So now let's turn to a few comments on Sangoma's balance sheet. Please recall from our last quarterly call that there were significant changes to the balance sheet with the Digium acquisition. As at March 31, Sangoma finished with a healthy cash balance of $7.1 million and working capital of about $6 million for the quarter. And of course, we continue to pay down the loans and meet all covenants more than comfortably. During our third quarter you may have noticed that we had 2 balance sheet items increase, which suppressed operating cash flow in the period, inventory and receivables. I'll speak about both of those for a moment.

Inventory grew from about $11 million at December 31st to $12.6 million by March 31. This was caused by a couple of things. First, higher-than-typical inventory levels of some phone models with large deliveries taken from our CM in the quarter and slightly softer than normal shipments of those models in one territory. And secondly, the realignment our supply chain that I introduced on our last call, when I mentioned it would begin in Q3 and take through the next couple of quarters. I will describe that project more fully in my strategy section next as part of the update on the Digium integration.

As we undertake this realignment of our supply chain, we expect to see inventory levels increase somewhat over that period.

Accounts receivable also increased this quarter from under $10 million at the end of Q2 to over $12 million this quarter. This was partly a timing anomaly as some orders came in later than expected in the third quarter. And partly because we need to beef up some internal processes and systems that ensured timely payment by customers. We are addressing these issues and expect to have our receivables work down and DSL back to under 40 days in the next few months. It's not likely to fully correct by Q4 because we still tend to have some level of sales spiking up in June at our year-end when our sales teams and our channels are driving for targets to close out the year.

With that, I'll bring my remarks on financials to a close and turn to our strategic section including an update on the Digium integration. In this section, I will touch on M&A and then provide the update on Digium. As I've indicated previously, we remain focused on both organic and acquired growth and are almost always working actively on both fronts. Regarding M&A, as a company that's done 7 acquisitions in 7 years, we fully expect that there will be an eighth. I've been asked multiple times over the last few months, both on these calls and offline, one on one as well, what exactly we look for in an acquisition. Ideally, of course, we want growth, high recurring revenue, a solid strategic fit between the products to services, synergy with their customers or channel, profitability to be accretive, and we want it all at a fair price. As you can imagine, we do not normally get all of those things. We have to compromise on one or more in each case and evaluations are not based strictly nor solely on ILR or other such hurdles alone. At this stage, I really can't be more specific on any one opportunity, but when we spoke in February for last quarter's call, I mentioned that the Digium integration had progressed to the point that some of our executive team would be able to start allocating time to acquisition opportunities once again and bring them to the next stage of evaluation. That indeed has begun in Q3 and so we do have several irons in the fire. They are simply too early for me to comment on publicly yet.

With those comments on M&A activity, I'll now turn to a short update on the Digium integration. Last quarter I shared a fairly comprehensive update, so this one's more brief. Basically, most of the many tasks involved in bringing the companies together are now complete. That would include product strategy decisions, people changes, both organization structure and reductions. All customers have been contacted and are comfortable and channel integration has been covered with our partners now. On that last item, we have explained to the channels that our plan is to have resellers, who traditionally sold Digium products, able to buy Sangoma products as well starting on July 1 to kick off our new fiscal year and vice versa of course. Accordingly, we're now going to the upper tier of our channel to inform the distributors about this, so that they can stock products to be ready to fill such orders in July. I'm sure there are other projects that still require work of course. For instance, our IT systems and back office integration still definitely has a way to go, but that's to be expected. And the one thing I promised earlier on this call was to describe to you in a bit more detail the realignment of our supply chain presently underway. This is a significant project and affects facilities and staff in multiple Sangoma locations. At a high level, this project aims to consolidate down the number of contract manufacturers at which we build our products and the number of warehouses where we hold inventory and pick, pack and ship from around the world. That's easy to say, but as you can imagine, it's a substantial logistical project and one our teams are working on diligently. The reason this affects the balance sheet is mostly the result of having to forward plan inventory levels during transitions from one CM or warehouse to another. For example, if we are to move manufacturing away from an existing CM relationship, one would typically pre-build some inventory to cover us for filling customer orders we receive while the other CM is coming up to speed. It's all quite normal, but it's also why we've shared with you that there will be some increases in inventory levels in the short term to get to those longer-term strategic benefits. I expect the slightly higher inventory levels to last for the next few months as this project is executed possibly towards the latter part of 2019. That brings my comments on strategy to a close for today and with it, I'd like to discuss forward guidance for just a moment.

As you may recall, back in September at the time we closed the Digium transaction, we released guidance of $100 million in revenue and $9 million to $10 million for EBITDA. Those figures were then increased twice when we revised guidance after Q1 and Q2 results. Now after Q3, we are at almost $18 million in sales year-to-date. And as you may have noticed from our press release, we expect Q4 to hold up well to Q3 levels. So we have added a little additional clarity to our guidance by stating that we now expect to exceed previously issued guidance of $100 million in revenue and $11 million in EBITDA excluding onetime cost associated with the Digium acquisition.

With that, I'll wrap up my prepared remarks using a quick summary. There is indeed a lot going on at Sangoma these days, but the most important message from our Q2 results is that we've delivered the first full quarter post restructuring and it was on target with what we had projected with EBITDA of $3.2 million and net income at record levels. Sangoma is now a $100 million company with growing services revenue, healthy margins and solid profitability. Further, we are well positioned heading into the close of our fiscal year next month and even beyond into fiscal 2020.

Given your company's performance and financial results, your Board of Directors continues to feel that Sangoma remains undervalued. At recent share prices, our market cap is hovering around $85 million to $90 million these days and with the Q3 run rate annualized that would imply an EBITDA multiple of 7 to 8x or a revenue multiple of around 0.8. Both seem very low. The 4 analysts who cover us have placed targets way above today's level and we continue to work harder to get to those places and indeed well beyond them.

With that, I'd like to close off my prepared remarks for today. I remain very proud of our progress and our track record at Sangoma and the team overall. We've come a very long way in just a few short years when many folks didn't believe it possible. But we've now developed a reputation as a company that does what it says it will do and has built a history of delivering on its promises to both customers and to shareholders. As such, I'm looking forward to providing you a full report on fiscal '19 during our next call and sharing initial expectations for fiscal '20.

David, I'll now turn the call back to you for questions.

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Questions and Answers

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David S. Moore, Sangoma Technologies Corporation - CFO [1]

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Thank you, Bill. To make sure everybody knows how to ask questions, I will ask the operator to please go over the instructions again.

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Operator [2]

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

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Nick Corcoran, Acumen Capital Finance Partners Limited, Research Division - Equity Research Analyst [3]

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Congratulations on the great quarter. I just have a couple questions. The first one is on the revenue and I'm just wondering if there's any large, maybe, onetime sales that occurred in the quarter that you would like to highlight?

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William J. Wignall, Sangoma Technologies Corporation - President, CEO & Director [4]

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No, there's nothing huge that would be worth talking about in Q3, Nick. The question got asked about Q2 last quarter and there was 1 or 2 slightly larger than we'd expected onetime orders in Q2 and that's partly why Q2 was stronger than we'd anticipated. But Q3 didn't have as much of that.

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Nick Corcoran, Acumen Capital Finance Partners Limited, Research Division - Equity Research Analyst [5]

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Great. And then maybe just into costs. Are there any Digium costs in the quarter that you would like to highlight?

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William J. Wignall, Sangoma Technologies Corporation - President, CEO & Director [6]

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No, I think the most important element of costs for shareholders to understand was the replication or duplication of spending between Sangoma and Digium, which we tried to address in December with the restructuring. The key comment I made during my remarks about having to realign supply chain will affect costs in several of those areas. But it's not being done as much to reduce costs overall on a net basis as it is to make things more efficient and manageable and more predictable, have fewer CMs to manage, having product in fewer warehouses, because the more warehouses you have it in, the more split up your inventory is and you might get a product from one region that's not stocked adequately in that region and then you can't sell it without shipping the stuff across an ocean. So that's the only other cost that I would comment on.

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Nick Corcoran, Acumen Capital Finance Partners Limited, Research Division - Equity Research Analyst [7]

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Great. And then just some on EBITDA margin. I believe you have previously indicated that margins would improve around 13% by the end of fiscal year '19. Do you still expect this to occur?

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William J. Wignall, Sangoma Technologies Corporation - President, CEO & Director [8]

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Yes, I think so. I hope so. Plus or minus, point is very hard for us to manage to with any 100% reassurance. My hope is that by the time June ends we're running at that level and we are entering fiscal '20 close to or at 13% already. I'm not too worried about, like I said, plus or minus a percent. It would be fine by me if we entered slightly below 13% because I think the whole point here is that for fiscal '20, we expect it to be at 13% overall and we might be a touch under-entering and a touch over-exiting, that's just beyond the accuracy of the forecasting exercise at this stage.

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Operator [9]

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Our next question comes from Gavin Fairweather of Cormark Securities.

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Gavin Fairweather, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [10]

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In your prepared remarks you noted some softness of that phone product in one region. I recognize it as one product in one region. I was hoping you could give us a bit more of a broader update on the demand picture based on what you're hearing from the channel. Maybe, you have noted any changes of note in kind of regional demand?

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William J. Wignall, Sangoma Technologies Corporation - President, CEO & Director [11]

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The only real thing that I believe would be worth touching on that one, Gavin, would be there was a fair bit of feedback from the channel mostly in North America about product strategy and channel integration, which some of the frontline sales team was hearing for part of the explanation for slightly softer demand over the space of a month or 2. And to put some color on that what we were hearing was when are we going to be able to sell Sangoma products as a Digium reseller and when are we going to be able to sell Digium products as a Sangoma reseller and how is it going to work? And as I explained during the call, the plan as we've conveyed to the channel now, is that both sets of resellers will be able to sell "the other" set of products by July 1 to kick off our new year and so we think that has answered the key question from the channel. That's what they've told us, we put a lot of effort into making sure that message was clear and reassuring and that's definitely now it is going to the distribution tier, the level of the chain above the resellers from whom they buy and making sure the distributors know what products to buy and stock such that if a distributor came from the Digium side, they know which Sangoma products to have on the shelf and if they came from the Sangoma side, they know which Digium products to have on the shelf. But that's the only comment on demand I think would be material enough to comment on here, Gavin.

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Gavin Fairweather, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [12]

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Okay. That's fair. Maybe you could put that in the context in terms of the revenue synergy opportunity that you see in terms of opening up those product lines to the channel of -- the other 2 channels?

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William J. Wignall, Sangoma Technologies Corporation - President, CEO & Director [13]

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Yes. And that's, of course, super difficult to predict, right? It's all subjective opinion and qualitatively evaluated rather than quantitatively. There is good solid interest. I can tell you that. I personally worked hard on some of the presentation materials to make sure the message was crystal clear. I kicked off those calls with the channel before our customer-facing teams took over most of the message. I can tell you that the feedback was positive. They are excited. The Digium channel is interested in selling the broader Sangoma portfolio and we heard that clearly, but I think it would be premature for me to try and quantify it until we have a couple of months under our belt, Gavin.

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Gavin Fairweather, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [14]

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Okay. That's fair. And then on the COO departure, it sounds like you are done with the reorganization of the executive team and even after the Digium acquisition. Maybe you could speak to how you feel about the current management capacity given all the things that are going on in the business and the increased scale of the business today?

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William J. Wignall, Sangoma Technologies Corporation - President, CEO & Director [15]

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Yes, sure. I feel super good about the current team. Some, I can't remember exactly, but some point after the last quarterly call we did for Q2, which would have been in mid-February and this one we agreed with Tony Lewis, the former COO that he was going to leave the company to pursue other interests. And we put in place an orderly transition where he would finish up at Sangoma on the 30th, as you noted. That all feels perfectly normal as companies grow and evolve. Some people enjoy larger, more mature businesses and some enjoy smaller start-up environments. And there's nothing strange or unusual about that. As I said in our note, in the press release, we thanked Tony for his service and contributions to Sangoma and wished him good luck. We're not going to replace the COO role, and that's because we have capacity in the management team and adding a person in for customer-facing role that we think is perfectly suited to handling the business going forward. And that doesn't mean it has to stay that way forever, but that seems like the right structure now. And we have a team that continues to evolve and get stronger every year.

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Gavin Fairweather, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [16]

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And then just lastly for me, I mean, EBITDA margins -- you're -- as you noted, you're pretty close to your 13% target for fiscal '20 by the end of this fiscal year. So when you think about your priorities going into next year, I mean, is it really to show the margin expansion or are you leaning more towards investing more in sales and R&D to support the growth and hold margins relatively flat or maybe slow that pace of expansion?

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William J. Wignall, Sangoma Technologies Corporation - President, CEO & Director [17]

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Yes. It's hard to answer that one without it touching into guidance for next year, which I don't want to do until we finish Q4. But I can make a comment or two for you, because it's a slightly different question, although as I said it can overlap. The way -- I don't know if we've actually talked about this on a call like this before. The way we think at the management level and the way we talked about it at our board meetings, is -- you know, Sangoma really does have quite a metaphorical lever that we can choose to move over towards invest more, accelerate growth or the other way, squeeze more EBITDA out the bottom. And there are lots of companies in our industry that are at one extreme end or the other of those two. Companies that are mature, zero growth and it's all about how much cash flow can we strip out of the business and others that are growing more quickly not worrying about EBITDA at all, high valuation multiples in many cases. And Sangoma quite consciously thus far has chosen to be somewhere in the middle. In general, I would say our Board and most of our investors tend to like and support that strategy. So I don't think we're likely to move to lever in a huge way, Gavin, away from generate EBITDA, to suppress the EBITDA and try to accelerate growth even further. I'm happy with the rate of growth. The company's gone from $10 million to $100 million over the last 2 years. It's twice as big as it was the year before. Looking down EBITDA to make that grow even faster doesn't seem necessary to me. But for sure this is a very strategic decision that the Board makes every year as we go through planning and budgeting. I think 13% EBITDA seems like the right number. It is our plan that we will build a budget that delivers that. We've met all of our guidance. So I have full expectation we'll meet it again next year. And I don't think you should expect a big change from that 13% number.

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Operator [18]

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Our next question comes from David Kwan of PI Financial.

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David Kwan, PI Financial Corp., Research Division - Technology Analyst [19]

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Bill, can you comment on the services revenue? We saw a bit of a more modest increase sequentially this quarter. Was there anything going on there? And maybe how should we look at that revenue line going forward?

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William J. Wignall, Sangoma Technologies Corporation - President, CEO & Director [20]

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Yes, nothing particularly special of note. David, it's driven by two larger buckets and then a couple of smaller ones. I think you personally understand this well, but just as I generalize the answer for the group. That bucket is dominated by Cloud Services and Maintenance. There are some other small things in there like, I don't know, professional services to help customers get launched or something. And those grow at different rates, the Cloud Services are growing more quickly than the Maintenance streams, as you would expect. That's continuing. I don't think that will change. Either of those growth rates can fluctuate a few points up or down in any one quarter. And that's mostly because on the maintenance side, new maintenance subscriptions are typically tied to new premise-based sales or the analogy to churn in Cloud on the maintenance line is a customer who may not renew their maintenance subscription. So those are the two drivers of growth and maintenance. On the cloud side, it's growth adds and churn meeting to net adds. Our Cloud business in North America continues to tick along just as we expect in most cases. The area that I would like to see us do better on is we'd like to have that Cloud business begin to expand outside of North America and grow internationally, which is an opportunity for us. But there's nothing about that, that influenced these services growth rate during Q3.

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David Kwan, PI Financial Corp., Research Division - Technology Analyst [21]

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All right, Bill, and that kind of touches on my next question. Can you maybe talk about your plans on the UCaaS side if you wanted to grow that business, I think, particularly in Europe and the U.K., more so in the near term?

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William J. Wignall, Sangoma Technologies Corporation - President, CEO & Director [22]

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Yes, sure we can. The launching of a Cloud business is a very significant project. There's a lot of aspects to it that are not visible to a typical investor perhaps. There's not just the infrastructure, but the people to sell it, the channel that's needed, the support of the Cloud service, the billing system. There is a lot of work to get going there. I think that you know that we've started to dip our toe in the water in the U.K. about 2 quarters ago. We're beginning to get some traction there, but when we started selling Cloud Services in North America, that early ramp rate takes a while. And so it's not material revenue there yet. There's no way to know for sure, but one of the possible buckets of acquisitions that I've spoken about to a few of the analysts could include if we were able to find a Cloud business outside of North America that would accelerate the growth in our international Cloud. For sure that's something we would consider to make it go even faster. But I don't think we'll be launching in Latin America or Asia in the next few quarters, David, until we get the acceleration in Europe that we're looking for, if that helps.

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David Kwan, PI Financial Corp., Research Division - Technology Analyst [23]

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No, that does. So it sounds like hopefully maybe towards the end of this calendar year or early calendar '20 that we could see some sort of material contribution from the cloud business outside North America?

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William J. Wignall, Sangoma Technologies Corporation - President, CEO & Director [24]

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Super hard to know. I think that would be a reasonable assumption, but I would not want to commit to that. We've had the service life for a while now. We've got the first few resellers. We've got customers on it. But if you think about one of the beautiful benefits of cloud is the recurring nature of it, but one of the disadvantages of it is because you know the customers are paying monthly, the rate of ramp in those early first few quarters is very slow, right. You've got a customer paying $20-odd a month per seat and where they might have bought a $5,000 on Premise PBX once. Now we're getting, I don't know, a $1,000 a year or $100 a month. And it just takes a while for that to become material. So I'd love to think that 3 quarters, 4 quarters from now, it looks more material. But we need to see how that unfolds in Q1, Q2 before I could make a commitment to that, David. And that's the way it was in North America too by the way.

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David Kwan, PI Financial Corp., Research Division - Technology Analyst [25]

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No. That's fair. Okay. Just last question here. Just want to know what you're doing to consolidate the supply chain. Can you comment, I guess, on how many CMOs and warehouses you'll have at the end of the market you doing right now and where they are going to be able to get it?

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William J. Wignall, Sangoma Technologies Corporation - President, CEO & Director [26]

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Yes, I can comment, although that answer is not 100% definitive. Right now, we've had over the last several years between 4 and 6 CMs, a couple in China, 1 in India, a couple in the U.S. and 1 in Canada and we're trying to get back down by at least 2. We're making progress on that. On warehouses, we had warehouses in Toronto, Buffalo, Neenah, Huntsville and the U.K., with an outsourced 3PL in Holland. We want that down. There was also some not pick, pack and ship, but inventory in at least one other place. We also want back down by one or two. And I don't know whether that will get it down to 3 or 2 or 4. That's the work the team is doing and assessing the trade-off between one more warehouse putting product closer to 1 more region, but then splitting inventory levels across one extra facility, which can lead to stock out versus having one fewer facility, shipping products slightly further around the globe but having stock in fewer places to reduce stock out. So we have a very solid team that's working on that. As I said, this is going to take us a couple more quarters. And I think by the time we're on the next call, I'll know definitively how many CMs and how many warehouses we can get out of that.

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Operator [27]

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(Operator Instructions) Our next question comes from Gabriel Leung of Beacon Securities.

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Gabriel Leung, Beacon Securities Limited, Research Division - Research Analyst of Technology [28]

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I think most of the operational questions have been addressed. But maybe, Bill, maybe a bigger picture question for you around M&A. I'm just curious whether in your discussions with the Board, with your team, whether M&A discussions have evolved around expanding beyond your current product set within inside communication, i.e. do you think about complementary technologies with hardware/software might be possible, might be a good fit for your current product set whether it be in the -- let's call it the MDM space or whatever? Have you guys thought about that at all in terms of expanding your current product offering?

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William J. Wignall, Sangoma Technologies Corporation - President, CEO & Director [29]

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Yes. I think, Gabe, you and I have spoken about this once. The topic comes up all the time. It's less frequent with the Board, because those are quarterly meetings and one portion of the meeting is operational and one portion is financial and one portion is strategy. But for sure, we think about that. And the way I've described the current position the company is in is this feels a little bit like it felt several years ago when Sangoma was a one product line company that made cards to go in servers. It was pure hardware and just connecting to the PSTN. We know UC and UCaaS looks very good for the next few years. It is rolling for us organically. There are acquisition opportunities there. And so almost all of the company is focused on UC and the products that we have now. But there is efforts, and it's not only on the M&A side but since that's what you asked about, to begin thinking through what other products beyond UC could make sense. It's definitely premature for me to give you visibility into which one or more of those could end up getting selected, because we're just not there yet. But we talk about this as a management team, the last complete team meeting we had in Toronto about 2-plus months ago with the whole team, in our Board room here we spent the whole day on this brain storming, filtering, which ones could make sense, which ones need lots of investment, which ones need less investment. We're bringing a person into the company on a 3-month contract to help us think through some of that since the management team is pretty darn busy dealing with stuff related to current products. So I think that will help us get a little bit more time and energy on it. The Board is fully aware of the M&A opportunities that we're working on. And we've spoken to them about the possibility of acquisitions in the non-UC space. So they are entirely aware and fully supportive and ultimately it comes down to whether that list of attributes that I described when trying to characterize what an acquisition target looks like for us, we can find best in a UC type play or a different product category, and I don't know the answer to that yet, Gabe. But for sure there is time and attention on it, absolutely.

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Gabriel Leung, Beacon Securities Limited, Research Division - Research Analyst of Technology [30]

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And then, I know you guys like to keep things close to the chest, but are you able to talk at a higher level what sort of areas might make sense for Sangoma? Think about expansion beyond the current UC set.

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William J. Wignall, Sangoma Technologies Corporation - President, CEO & Director [31]

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I am able to, yes, but I will consciously choose not to. And I hope you would not think I'm being difficult. There is a list that we're looking at. I don't feel like we've progressed far enough down that list to speak in any definitive way about which one or two or whatever percolate to the top and I don't want to say something publicly, Gabe, until we feel internally that we know what our preference is. There's no worry or panic or urgency about this. There's lots of flywheels still turning on the UC business. It's just time now, as you rightly asked, for us to think about what might come next down the road. And although it's time to think about, it's premature for me to comment publicly to the market.

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Gabriel Leung, Beacon Securities Limited, Research Division - Research Analyst of Technology [32]

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Got it. I appreciate the feedback. Congrats on the quarter.

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William J. Wignall, Sangoma Technologies Corporation - President, CEO & Director [33]

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Thanks, Gabe.

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Operator [34]

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Our next question comes from Stephen Boland of INFOR Financial.

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Stephen Boland, INFOR Financial Group - Principal [35]

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Just one quick question. I guess as you -- I guess integrate Digium and the impact on your balance sheet and the debt levels which you are paying down, how do you see the balance between looking at a further acquisition and your leverage ratios? I guess the question really is what's the maximum you want to take up that leverage to get another deal done?

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William J. Wignall, Sangoma Technologies Corporation - President, CEO & Director [36]

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Yes. Fair question, Steve. The best way to answer it I think is to refer to how leverage has looked at Sangoma historically as a way to tell you something other than just being [weightless] fluffy words. We had very good leverage for most of the years during the turnaround. Only in the last short while have we added to that significantly as the business has grown and become a bit more predictable. We've been up between 2.5 and 3 when we closed the Digium acquisition. It's down to around 2 now. It comes down quite naturally on its own. For sure, we're comfortable where we were 6 or 9 months ago, 2.5, 2.8, 2.4. I don't think anyone here is that interested in going above 3. And so in our preparedness to lay on some extra debt for the purposes of an acquisition would depend upon the profitability, EBITDA and cash flow profile of that target either at the time of the acquisition or after we did the integration. So I know that's a little bit fluffy, it gives you kind of a range, but adding debt will depend heavily on what the target company's profile looks like.

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Operator [37]

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I would like to turn the conference back over to Mr. Moore for any closing remarks.

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David S. Moore, Sangoma Technologies Corporation - CFO [38]

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Thank you, ladies and gentleman. We really appreciate you joining us today. This concludes today's conference call, a recording of which will be available on our website shortly in the Investor Relations sections. Again, thank you for participating and for your support to Sangoma over the past year or so. Have a very pleasant rest of your day.

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William J. Wignall, Sangoma Technologies Corporation - President, CEO & Director [39]

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Thank you, everyone. Bye for now.

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Operator [40]

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