Sangoma Technologies Q3 2025 Earnings Call Transcript

Quartr
Provided by Quartr
May 8, 2025

There are 2 speakers on the call.

Operator

you for standing by. This is the conference operator. Welcome to the Sangoma Investor Conference Call. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, there will be an opportunity for analysts to ask questions.

Operator

I would now like to turn the conference over to Samantha Wieburn, Chief Legal Officer. Please go ahead, Ms. Wieburn. Thank you, operator. Hello, everyone, and welcome to Sangoma's third quarter of fiscal year twenty twenty five investor call.

Operator

We are recording the call, and we will make it available on our website for anyone who's unable to join us live. I'm here today with Charles Falame, Tangela's Chief Executive Officer Jeremy Wuggs, Chief Operating and Marketing Officer and Larry Stock, Chief Financial Officer. Charles will provide a high level overview of the quarter. Jeremy and Larry will take you through the operating results for the third quarter of fiscal year twenty twenty five, which ended on 03/31/2025. Following their presentation, we will open the floor for Q and A with analysts.

Operator

We will discuss the press release that was distributed earlier today together with the company's financial statements and MD and A, which are available on SEDAR plus EDGAR and our website. As a reminder, Sangoma reports under International Financial Reporting Standards, IFRS. And during the call, we may refer to terms such as adjusted EBITDA and free cash flow, which are non IFRS measures but defined in our MD and A. Before we start, I'd like to remind you that the statements made during the course of this call that are not purely historical are forward looking statements regarding the company or management's intentions, estimates, plans, expectations, and strategies for the future. Because such statements deal with future events, they are subject to various risks and uncertainties, and actual results may differ materially from those projected in the forward looking statements.

Operator

Important factors that could cause actual results to differ materially from those in the forward looking statements are discussed in the accompanying MD and A, unaudited condensed consolidated interim financial statements, our annual information form and the company's annual audited financial statements posted on SEDAR plus EDGAR and our website. With that, I'll hand the call over to Charles.

Speaker 1

Good afternoon, everyone, and thanks for joining us today. I'd like to start with the quarter. Sangoma delivered really strong financial performance in Q3 with revenue of $58,100,000 adjusted EBITDA margins of 17% and operating cash flow conversion from adjusted EBITDA of over 100% once again. Generated strong free cash flow per share. And while Larry will walk you through the full numbers shortly, I'm proud to say that we're seeing some consistent meaningful improvements in our cash generation.

Speaker 1

It underpins both the value of and the strategic potential for our company. We're also continuing to pay down debt well ahead of schedule, further strengthening our balance sheet and creating greater flexibility for our capital allocation priorities. Now as I emphasized last quarter, financial strength creates optionality. And today, that optionality is real, supporting the execution of our growth strategies with confidence. After fifteen months of focused execution, I'm excited to say that the major transformation that we committed to to Project Diamond is now complete.

Speaker 1

Of course, continuous improvement is part of any great company, but the heavy lifting we set out to accomplish is finally behind us. Today, Sangoma has the financial foundation, the operational structures, processes, and competencies to fully move into our next phase, a multipronged growth strategy. Simply put, Sangoma has never been stronger or in a better position to tackle this growth. I wanna spend a few moments talking about the operational readiness for that growth. I'm thrilled to share that our new ERP system is on track and online, and we're finalizing the user acceptance testing in April as promised.

Speaker 1

This is a major milestone and critical component of our transformation that sets the stage for both organic and inorganic growth as well as providing enhanced visibility across the entire business. I've been speaking a lot about the ERP systems, and I'm very proud of what the team has done here. The efficiency gain we expect to realize from our modern ERP system will be a source of operating leverage with expected savings of approximately $5,000,000 over the next three years. We self funded the entire ERP system implementation since the beginning of this transformation. We've also streamlined our processes, upgraded team competencies, and sharpened our value propositions to better position Sangoma as a communications partner of choice for small, medium enterprises globally.

Speaker 1

Last quarter, I told you we start moving away from the lower margin hardware reselling to focus Sangoma as a pure play communications software company, delivering significantly higher margins and predictability. We've done exactly that. We have accelerated the divestiture of our noncore assets, improving profitability and sharpening our focus. These assets have been classified as held for sale on the balance sheet, and we've seen strong interest from potential buyers. As expected, this shift resulted in a slight revenue dip in Q3, but it also led to a sequential improvement in gross margin as we reduced our reliance on lower margin NRR retail offerings.

Speaker 1

At this time, we've been actively pursuing acquisitions that can expand our footprint in both North America and internationally. And importantly, with our lower debt with our debt lower than planned, we were able to launch and begin executing a normal course issuer bid, reinforcing our strong belief in Sangoma's intrinsic value. This deliberate shift is already delivering benefits, bringing up resources for strategic investments that are creating momentum for our core MRR business, where the measurable benefits are clear. Client satisfaction NPS scores have improved significantly year over year, with NPS scores up nearly 300% and client satisfaction scores up 23%. Customer churn remained industry leading at below 1%, point nine to be exact.

Speaker 1

I'm most proud of this that we were able to maintain churn levels at this low level during a very significant transformation. Our large deal pipeline is up considerably compared to last quarter. We are seeing accelerated signs of growth across our entire pipeline, new partner engagement and in deal closings. Free cash flow per share is $0.25 in Q3 and $0.84 in the first three quarters, a double digit increase over the past two years. These results are the direct outcome of the strategy we outlined in the previous quarters.

Speaker 1

We committed to enhancing customer success, focusing our investments on core communication platforms and driving disciplined operational execution. We are seeing progress on all those fronts. This gives me great confidence that Sangoma is poised for the opportunities that lie ahead. I just wanna step back for a moment to speak on the industry's terms. First, on tariffs and geopolitical risk, I get asked that question all the time.

Speaker 1

We have not seen a material impact to our business today. For areas in our supply chain that were concerned, we got ahead of it and derisked the company. Because we own the IP in our own hardware, we have flexibility now to adjust our processes and supply chain to mitigate any impact. And like all of you, we're just simply hoping for peace and common sense to prevail on the global stage. Closer to home, we're witnessing a major shift in our industry landscape, one that plays directly to Sangoma's strength.

Speaker 1

Mitel's recent chapter 11 filing highlights the struggles of legacy on premises providers. And you see in Avaya pulling back from the premise based business, reinforcing the industry shift to cloud and hybrid models. And and single solution vendors continue to face commoditization pressure and margin erosion. Against this backdrop, Sangoma is now positioned to win. With our integrated platforms, integrating both security and AI components, spanning premises, hybrid, and cloud solutions, modernized systems in both back and front offices, and an energized general ecosystem coupled with financial flexibility, we are uniquely positioned to build a void left by legacy plans.

Speaker 1

And we are already seeing the pipeline and market demand growth in this particular sector. We offer voice, data, video security, proprietary hardware, the essential communication element, and we're now bundling them into industry tailored solutions, delivering exactly what MidPart Enterprises need as they modernize their communication infrastructure. We are now a full one stop shop for our customers, and a single product competitor cannot match that. The last six quarters have been challenging and accelerating. The men and women of Sangoma have risen to the occasion, embracing change, strengthening our culture, and pushing the company to new heights.

Speaker 1

We are a very different company than we were one year ago. That transformation is now complete. Engelman now has the financial operational and cultural readiness to execute our three pronged growth strategy, organic expansion, strategic acquisitions, geographic growth. The changes we're seeing in the market validate the strategy we pursued, offering integrated essential communication services to a single trusted partner is working. We anticipated this shift, and now we are ahead of the curve.

Speaker 1

We are confident Sangoma will continue to deliver increased value to customers and shareholders alike. Finally, I want to sincerely thank the entire Sangoma team for achieving this remarkable transformation. And I want to thank our investors for the trust you placed in us throughout this journey. I am more energized than ever to see what can be achieved with the transforming things over that we've created. I'll now hand it over to Jeremy and Larry to walk you through the detailed financial and operational results.

Speaker 1

Jeremy, over to you. Thank you, Charles. I'm very pleased and excited to share a meaningful update on both our company wide transformation and the progress on our go to market programs this quarter. Since Charles and I joined Genoa in late twenty twenty three, we have been deeply focused on transforming the company into a simpler and more unified organization for our customers, partners, and employees. As I shared last quarter, fiscal twenty twenty five has been about reinforcing this transformation, and I am pleased to report that this work is now largely complete and firmly embedded across the organization, giving us a solid foundation from which to accelerate our growth strategy.

Speaker 1

To achieve this, we have implemented cost savings programs, streamlined processes, and made substantial systems improvements. We've also instituted this philosophy of ongoing financial discipline and process improvement within the company. Some of the notable highlights of our transformation efforts year over year include the following. Company wide Net Promoter Score has improved dramatically by more than 300. Both onboarding and support customer satisfaction have risen by more than 20% to the 90% level.

Speaker 1

Support average time to answer has been reduced by 33%. In our IT business system, our new ERP system is online, as Charles noted earlier, supporting streamlining and consolidating our finance systems and billers. As part of our broader IT programs, we have also introduced standardized tools and processes across sales, invoicing, and commissions, laying the groundwork for a more scalable, unified, and efficient organization. Our CTO office, in collaboration with the product team, has taken major steps to enhance and unify the customer experience across our platforms. We introduced TeamHub, our unified desktop application, and alongside, we enhanced our contact center offerings by bringing together a more inter integrated contact center as a service experience with our unified communications offerings.

Speaker 1

In addition, we launched a new control panel with more releases to come that simplifies administration and offers a unified monitoring dashboard that deliver delivers greater visibility and control. Together, these innovations are strengthening our platform differentiation, improving customer satisfaction, and positioning us to drive greater adoption and expand our share of wallet in key markets. In marketing, we have taken important steps to sharpen our brand and improve market engagement. This includes unifying our messaging and branding, refreshing our collateral and content, launching consistent social and email campaigns, and updating key digital touch points, such as our website, help center, and social apps. These efforts ensure that Sangoma presents a clear, consistent, and compelling story to our customers and partners across every channel.

Speaker 1

As Charles highlighted, we have a financial foundation, operational structure and competencies to drive a multipronged growth strategy with strength and with focus. Last quarter, I highlighted the progression in our large deal pipeline and the revitalization of our infrastructure business, an Area one segment. I'm very encouraged to report that this positive trajectory has continued. Our large deal pipeline, defined as opportunities with 10 ks or more MRR, has seen a 90% quarter over In addition, our infrastructure business continues to show strength and is up 15% from the same quarter last year. Moreover, our forward looking indicators remain very strong with a 24% increase in our ninety day forward looking pipeline and a 2x increase in our prem UCaaS pipeline, driven by competitive displacement efforts targeting providers like Mitel and Avaya, as Charles had mentioned earlier.

Speaker 1

These results reinforce our confidence that our go to market model is gaining traction. I've said before that these large MRR sales cycles are longer at six to twelve months and, therefore, take time to flow through to our p and l. However, the increasing size and sophistication of the opportunities in our pipeline are clear indicators that our strategy is working. We are seeing tangible momentum from our market share takeout program and competitive initiatives, which are creating new paths for growth and positioning Sangoma for long term success. I hope this gives you a sense of just how much we've accomplished in our transformation journey and that the foundation is firmly in place to scale the business and accelerate profitable growth.

Speaker 1

With that, I'll now turn it over to Larry to provide an update on the financial results for the quarter. Over to you, Larry. Thank you, Jeremy, and welcome, everyone. We appreciate you joining us for today's call. In q three, we built on the momentum of prior quarters, delivering strong performance across the key metrics that drive the company's strategic and financial health.

Speaker 1

A key highlight continues to be the efficiency with which we converted adjusted EBITDA into net cash from operating activities and ultimately free cash flow. This strong cash generation supports our ability to reduce debt, execute share repurchases, and reinvest in our core business offerings to drive long term growth. In the third quarter, we generated 10,600,000.0 in net cash from operating activities, achieving a cash conversion rate of 109% from adjusted EBITDA, our fifth consecutive quarter surpassing a %. Fiscal year to date net cash from operating activities reached 34,700,000.0, representing a 7% increase over the prior year. In Q3, we also generated an additional $1,100,000 net positive changes to working capital, building on the $1,100,000 generated in the second quarter.

Speaker 1

This was driven by positive $2,300,000 from collected trade and other receivables, plus a million dollars from inventory. This quarter, we added free cash flow as a key financial performance indicator for investors. While it can be historically derived by subtracting capital expenditures and development costs from net cash from operating activities, highlighting and emphasizes the power of Sangamo's value creation engine. Free cash flow for the third quarter was $8,400,000 or $0.25 per diluted share and 28,200,000.0 or 84¢ per diluted share for the first three quarters ended 03/31/2025. On an annualized basis, we are tracking above $1 in free cash flow per share, underscoring the value we see in Sangoma.

Speaker 1

This strong cash flow performance reported our decision to launch a normal course issuer bid or NCIB at the March. Similar to prior quarters, we have continued on our accelerated debt reduction schedule, retiring another 7,300,000.0 in total debt during the third quarter. This enabled us to not only achieve but exceed our target timeline and debt position of 55,000,000 to 60,000,000 as we ended q three at 53,000,000 of gross debt. By the end of the third quarter, our net debt decreased to $35,800,000 from $43,300,000 at the end of the second quarter, resulting in a trailing twelve month net debt to adjusted EBITDA ratio of about point eight eight times from 1.03 times in the second quarter. With our FY twenty five debt reduction targets achieved well ahead of schedule and our term loan loans fully repaid, we'll still allocate a portion of our cash flow towards further debt reduction.

Speaker 1

That said, given the meaningful value of our long term return potential we see in our share price, we introduced the NCIB at the March as an additional way to return value to our shareholders. We put in place an automatic share purchase plan, which allows us to continue repurchasing shares even during blackout periods. And since launching the NCIB, we've instructed our broker to purchase the maximum amount available subject to our daily limit, and we've already retired more than 155,000 shares. Overall, these actions reflect our disciplined approach to capital allocation and underscore the confidence our management and board have in Sangoma's long term growth and value creation potential. Now on to the p and l.

Speaker 1

Revenue for the third quarter of fiscal year twenty twenty five is 58,100,000.0, representing a decline of $1,000,000 from the second quarter. The sequential decline was primarily due to decrease in our noncore products, including third party resale, while in total, core platform products and services revenue increased sequentially for the second consecutive quarter. We are now in the process of formally divesting our third party resale assets as shown by the classification of assets held for sale and liabilities directly associated with assets held for sale in the financial statements. Revenue from core on premises solution and phone product lines increased quarter over quarter, reflecting the effectiveness of targeted go to market campaigns and strategic share gains following competitor exits from on premise market, which Charles and Jeremy spoke to earlier. Gross profit reached 40,000,000 in the third quarter.

Speaker 1

Our focus on higher margin for services contributed to improvement in gross margin to 69% of revenue, up from 68% in the second quarter. Adjusted EBITDA for the third quarter was 9,800,000.0 or 17% of revenue and included 400,000.0 in expense related to our ERP implementation. Excluding these costs, adjusted EBITDA would have been 10,200,000.0 or 18% of revenue, consistent with 18% in the second quarter. Overall, we're pleased that despite the broader macroeconomic uncertainties, our third quarter results came in largely as expected. Now on to our guidance.

Speaker 1

For fiscal twenty twenty five, we are reaffirming and narrowing our revenue guidance range to 235 to 238,000,000 from 235 to 240,000,000 and reaffirming our adjusted EBITDA of 40 to 42,000,000 at approximately 17% of revenue given the results for the first three quarters of fiscal twenty twenty five. As you can see from these numbers, the net effect of lower revenue for the second half of the fiscal year has had a relatively small impact on adjusted EBITDA, and adjusted EBITDA margin is expected to improve as we remain focused on our higher margin core offerings and advance our core platform strategy by accelerating strategic alternatives with respect to lower margin noncore product lines, including our third party hardware resale operations. As always, we extend our sincere thanks to the talented team at Sangoma whose dedication and daily contributions continue to drive our success. That concludes our prepared remarks. Operator, let's open the call up for some Q and A.

Operator

First question comes from Gavin Fairweather with Cormark. Please go ahead.

Speaker 1

Hey, guys. Congrats on the quarter. Good afternoon. Thank you, Gavin. How are you, Val?

Speaker 1

Good. Good. Good. I wanted to start out with kind of the output of of project time and maybe from a high level. I mean, there's certainly been a lot of kind of sales and and partner transformation that's been underway here and also kind of refocused on on the core platforms as well.

Speaker 1

So really encouraging to hear the sales KPIs that that Jeremy was bringing out here in the prepared remarks. So I guess I'm curious. Do think that Sangoma has kind of fully hit its dry here under the new program, or or do you suspect that there's kind of further improvement in sales momentum that you can see the kind of the team and and the new structure itself? Yeah. So great great question.

Speaker 1

You know, one thing about these transformations, and I've been trying to educate as much as I can on the complexity of, you know, companies like Saint Gomma that have 11 acquisitions trying to solidify process systems, tools. There's a lot there's a lot that goes into that. In fact, in our board meeting today, we had a great chat about it. We we we are building the stride up. It's almost like a a 1,500 meter race.

Speaker 1

Right? We're in the probably the third lap now on the 400 meter track, and we're beginning to accelerate because everything is much more efficient now. We have efficient systems. We have efficient tools. We have the right competency structure and processes by which to execute.

Speaker 1

And the momentum will continue to build over f y twenty six. The the real hard part is the first two laps. Right? What pace do you wanna go at? And all of the effort that has gone on to the transformation over the last fifteen months since we started this back in January of twenty twenty four, you know, it got us to the point now where we can begin to accelerate.

Speaker 1

The balance sheet is in the right place. Cash flow is in the right place. Structured processes and tools are in the right place. The company went from, you know, 20 different legal entities down to 13. We went from 6,000 regulatory filings down to only 1,500.

Speaker 1

The amount of efficiency that we are now able to leverage to quarter over quarter begin to increase momentum is really just begun over the last quarter. Getting making the decision to move away from the noncore products and focus all of our attention on the core business just accelerates that even further. So we're we're kind of in the seventh or eighth inning of acceleration. I think there's more to come because we've got much more efficient capabilities by which to speed up the process. Yes.

Speaker 1

That's that's great to hear. And then maybe just specifically on the partner program, know, obviously, redesign your partner program as as part of the transformation, and there's also being, you know, some disruption in in kind of the on prem panel as well of of late stuff. Here's for your perspective on how many partners you're adding, what kind of level of partner engagement that you're seeing from kind of the existing profit? Any color there would be helpful. Yeah.

Speaker 1

So we we've added about 56 new partners just in the last since the January. We're we're actually much more specific about our partners because our focus for the company, as you know, and I've been hearing from you over the last four or five quarters in particular, is to put these components of the company together so that we can begin to be much more bundled. And those bundles are only really valuable when you can make them contextual to the discontinuities in a particular industry. Health care, hospitality, you know, government business, retail, these are areas where we're focusing our our our efforts. And therefore, we're being particular about partners who have very strong niches in those areas.

Speaker 1

So we're not just adding partners for the sake of trying to sell voice data video security or commodity. We certainly we revitalize all of those through our traditional partner routes, and we built all of those, TSC, VARs, and selling partners. We've also onboarded several new partners, the number I just gave you, who have got much more industry focused, much more specific knowledge and awareness of these various industry verticals we wanna we wanna capitalize on. Health care right now has become a a real niche area for us. We've gotten great partners in that area, hospitality and other ones, where our offerings really go well with partners who really understand those verticals much better.

Speaker 1

And that Pinnacle Partner Program that we launched about three quarters ago is really starting to get a lot of traction with partners of not only the traditional style, but also ones that are much more aligned to our, I think, unique value proposition of integrated solution bundle that represents industry vertical solution. That's that's great to hear. And then lastly for me, maybe you can just help us with thinking and framing the opportunity for the on prem business. Obviously, there's been a lot of news there recently. Curious how you kind of size up that opportunity and and who you're bumping into now in terms of the competition for the prem business in in the mid market.

Speaker 1

Well, it's a it's an interesting question. I don't have all the exact data for you because all of this has happened so quickly over the last, I would say, two quarters. But what I can tell you is a couple of things. One, we've had a significant increase in the number of resellers. Who traditionally sold some of these other legacy competitors asking us for support because they don't have that opportunity.

Speaker 1

The market size here is 3.3, roughly, billion dollars. While the overall prem markets are somewhat declining, for a company of our size, even if we were to grab one, two, three percent market share of that 3,300,000,000 is a very significant contribution to our revenue. So we are both seeing receptiveness from our major distributors who have resellers who sell these types of products with traditional legacy players coming to us at an increasing rate. Our pipeline is growing at a very exponential rate. And in my prediction, I think this will be a shining light portfolio for us going into f y twenty six because we haven't we have a product and a portfolio and a set of competencies in the company that can really capitalize on what's happened to some of the legacy traditional players, and we're gonna absolutely do that, including putting money into those areas in terms of investment.

Speaker 1

So it's it's it's an area that we it's a opportunity that we think we can really capitalize on, and we're actually gonna be putting quite a bit of effort to take advantage of the situation that the market has given us. Thanks a lot for the past one. I'm sorry?

Operator

The next question comes from Mike Latimore with Northland Securities. Please go ahead.

Speaker 1

Hey, Mike. Hey, Mike. Hi. This is Keaton this is Keaton on for Mike. But Oh.

Speaker 1

Thank you for taking the question. And I was just wondering if you're seeing any longer sales cycles recently given macro considerations such as tariff tensions. On the MRR part of our business, the sales cycles are normal. Six to twelve months, they're bigger deals where Jeremy said in his comments, I'm starting to see deal sizes getting bigger as we put bundles together. And they fit and really haven't changed much of the normal sales cycles.

Speaker 1

On the hardware side, absolutely, we saw some slowdown. Customers were weary, particularly in March. And some of the excuse my throat. And some of the tariff announcements first came on board, there was so much confusion in the market about what would be terrible. We'd be not we had vendors who, you know, hardware resell side, which is why that business we're looking to put into asset health for sale.

Speaker 1

They said in q two, it became very volatile. And sales cycles got longer. We had no idea if they were it wasn't a short term thing or the long term thing. That whole business became a little too volatile for us given the dynamics, and we did see sales cycles changing dramatically week on week depending on what the new cycle was. But on the core business, no.

Speaker 1

We have not really seen much of a change there. Okay. Thank you for that additional color color. And then another question here is how how important are acquisitions as part of your strategy over the next twelve months? And what are you Well, Mike Mike would yeah.

Speaker 1

Mike Mike would have told you Mike would have told you that over the last three quarters, probably since about the beginning of q one, we announced that we had three major vectors for growth. As we paid down the debt, the option of growing inorganically became very viable. Organic growth was also quite viable, which is obviously the integration of the company and the transformational activity and then geographic expansion. So inorganic growth is literally one third of our entire growth strategy. We needed to get the company integrated, which is now done, so the transformation is now over.

Speaker 1

We needed to get the balance sheet and debt cut in half, which it is. We are, you know, the lowest level we've had in quite some time and well ahead of schedule. So now inorganic becomes an option, and inorganic activities will actually be part a major part of our 2026 plan and our growth plan for beginning in July. So it it is an important element that we needed to get the integration done, when you get the transformation done, when you get the balance sheet done, leaving the cap position up. And the market is in our favor.

Speaker 1

Right? Cost of capital has come down. Valuations have come down. A lot of companies don't have the balance sheets we have, and I think we're in a very favorable position to begin. And we actually already have begun the inorganic acquisition activity.

Speaker 1

Do you have an estimate on the valuation expectations of those acquisition candidates? Well, look, we don't wanna be I said this before publicly. We I don't wanna be dilutive. You know? In January, we were $11.55 a share, which got us to, like, valuations of seven, eight times EBITDA.

Speaker 1

Most of the market is in that, you know, six to eight times EBITDA area, which is why I think they go with such an incredible offer right now or opportunity. That's why we put the NCIB in. I had to put money into an acquisition versus Sangoma, given where Sangoma is trading and our balance sheet and our cash position, the best thing for the shareholders is me to put my money into the NCIB and buy a stock because we got in February, when when I took out all that that lower lower margin revenue and said I was gonna focus on the company, had to change guidance. The market reacted by about 11 or 12% on the stock, and then the rest of it was a lot of this noise from tariffs and geopolitical issues that are going on. And now, look, since April the low of April, we came back almost 40% in terms of its value.

Speaker 1

So I think the company's stock is gonna continue to do its thing. And I think valuate when valuations are along the line, which I think they are now, stock is up a little bit, you know, give us more opportunity to buy companies that are sitting in the kind of valuations that we are. What I won't do, and I've committed to this, is I won't dilute the company. And so we have to be patient and invest in our own company and invest in SG and A and invest in growing our company organically. We'll continue to do that.

Speaker 1

And when the time is right and the opportunities are available to us, we will make acquisitions because now I can bring them in, integrate them, take out the integration savings because I have an integrated company that allows me to do that efficiently. So we're we're and we started that process because these acquisitions take some time. We're we're not in a rush to acquire. We're in a position where we can take our time and be very thoughtful, very measured, and very strategic about the acquisitions that we make. And we can make them because we have the leverage in our balance sheet to be able to do so.

Speaker 1

Okay. Thank you for taking my questions, and I can return it to you. No problem.

Operator

The next question comes from David Kwan with TD Cohen. Please go ahead.

Speaker 1

Hey, Good afternoon. I guess maybe tagging on to the last question, talking about capital allocation. Just given how optimistic you guys are in terms of the outlook and and where the stock is trading, you talked about the NCIB. Would you consider an SID? Larry, you wanna address that?

Speaker 1

I may have got my opinions on it too, but You know, I I think at this time, we're we're good with where we are. We wanna see how the NCIB goes and where else we might wanna place that capital. I I'd like to give that a little more a little more time before really launching into something something different, David. Thanks, Larry. I don't Charles Charles, you said you had an opinion?

Speaker 1

Yeah. The NCIB, look, it it you know, we launched that thing, I don't know, about a month ago, I think. And we've been buying the maximum allocation that we can possibly buy every single day since that happens. We can also put in the automatic program in place to be able to buy right to the blackout. We are very comfortable right now that the best value for our capital at this point beyond the consistent debt repayment that we're making is to put it into Saint Globe.

Speaker 1

We see the value in the company, and we're doing it with our wallets by investing in share buyback. At this point, going doing anything more, I wanna see how this plays out because as we're going into the fourth quarter now, you know, one of the things I brought to my enterprise, like, disciplined planning is what we're in right now. So we're planning for fiscal twenty six, which is July. During the course of after this call, the management team will get together and talk about it. Okay.

Speaker 1

The allocate capital allocation for last year was accelerated debt repayment. Check mark. That is done. That is two quarters ahead of plan because of the work that Larry and his team have done. And now what do we do with capital?

Speaker 1

Well, let's look at NCIB. How does that go over the next three months? As we go into July, we can make another decision about what to do with capital. One of the options, obviously, that I've already stated is acquisition. So you've got acquisitions, you've got NCIB, you've got a little bit of debt left, and then we've got r and d investors to think about and consider.

Speaker 1

And and your commentary and your question and other elements put on the list, we'll consider how those will affect improving shareholder value and advancing the position of the company relative to everything we just went through in the last fifteen months putting this company together and transform. And we are we've got much more intelligence and data and and a retrospective view on what the company has done to be much more prospective on how to allocate that capital going forward. And, David, your commentary is a fair one. The FID is something we will put on the list, and we'll consider it for our fiscal twenty six investment plan. And we'll share that with you guys because I've been dealing with you all along the journey of the transformation of.

Speaker 1

Now we move to the next phase of growth. Obviously, allocation of capital is an important part of expressing to our investors how we're gonna use capital to do what we did in the first phase of this company. Now do it in the second phase, which is focused on organic, inorganic, and geographic expansion. That's very helpful, Charles. That insight definitely helps us better understand how you guys are looking at capital allocation.

Speaker 1

I guess on the margin front, so guidance is for roughly about 17% margins on the year. So I think that's roughly in line with where consensus is. Like how should we be looking at it? I know you're not gonna be giving guidance for kind of 2026, but just trying to understand how how to kind of juggle some of various aspects of, you know, you're focusing on investing in organic growth. Obviously, you wanna try to get the services revenue in particular starting to to grow again.

Speaker 1

But then you've also got the cost savings coming out of the ERP, which, you know, should obviously help help boost margins. So, like, how should we be looking at the margins, kinda looking out over the next year? Yeah. So I I think, David, I I would look at it in a couple of ways. We'll certainly see savings as we get into '26 for ERP as that starts to take hold.

Speaker 1

No doubt there. But really, as we look to move away from the noncore, particularly that third party retail kind of stuff, we do expect, as we said before, that we'll start to see our gross margins get closer to the 75, 80 percent range and and adjusted EBITDA, you know, 19 to 20% range. And we would expect to see that as we move away from that moving into, you know, the the latter part of '26 as those things take hold. That's the way I would think about it for sure if we move more towards the services sort of part of our business and the higher margins that they that they bring us. One thing I would ask you that, David, one thing I would ask you that, David, just for the for for you and others to understand, one thing that that Larry and Sam and Jeremy and I committed to when we first started Project Diamond back in January of twenty twenty four is that we were gonna self fund the transformation.

Speaker 1

And for the most part, we have self funded the entire transformation. All those investments, all those changes, either cost came out and then we put them back in to things like ERP, all self funded. Margins didn't really move all that much. In fact, I think they improved despite the fact that, you know, we started to have we had to change the revenue mix from 78 to 22 services and products and now eighty four sixteen. And that has an impact on things.

Speaker 1

I think when you think when you think about going forward and growth, the philosophy of self funding your own growth is the ideal scenario. And that's sort of the mission that we're on. And that if we have to invest in s p and a or r and d, increase people to capitalize on growth opportunities, it may fluctuate the EBITDA margins up and down a point or two. But for the most part, we will try and find a way to self fund that. And I I think you can kind of feel you should feel comfortable that operating leverage will increase in the EBITDA range slightly and increasingly over the course of the coming years.

Speaker 1

But there'll be moments in time where market opportunities will be right for us to go see growth, and we'll go ahead and do that and explain to you what we're doing, when we're doing it, and how we're doing it. And we'll generally try and pull it out of the company because we have a much more efficient way of understanding how the company operates now that the transformation is over. And the the main message for all of you is this this period of transformation that we've gone through for fifteen months and the ability now for us to be much more aware of how levers that we can pull. Think of it like an applicant. We we now when you have a new credit company, you can move the applicant around to be able to capitalize our market opportunity and move at the speed of the market rather than the speed of the company.

Speaker 1

And EBITDA will ebb and flow within a very finite range to allow us to capitalize on opportunities that exist in the marketplace. A little bit more color on what Larry said to me, and I hope that that kinda gives you a little context of the dynamic and adaptive dynamic and adaptable nature of what we have now with the company. No. It's great. Thanks, Charles.

Speaker 1

And one just one last question for me. So you guys, I guess, put VoIP VoIP VoIP VoIP for sale. Are there other, you know, parts of your business that you're you're looking at looking at selling? No. Not at this point.

Speaker 1

I mean, we we had some vigorous debates as we went through our our thought process around divestitures, what's core, what's non core. There are not any other at this point, we've narrowed it down to this particular area, the sort of hardware resell environment that we just couldn't figure out how to integrate that into the core of the company. And, you know, it was just too volatile, and especially with the macro issues that were going on on the political arena. But other than that, no. The answer is we're we're pretty comfortable with the assets we have.

Speaker 1

We know how they go together like a jigsaw puzzle, which makes our acquisition strategy much clearer now in terms of adding to that that puzzle new pieces that enhances value or expands our strategies. Okay. Thanks. Thanks, guys. You're welcome.

Speaker 1

Thank you, David. Thanks, Kevin.

Operator

The next question comes from Robert Young with Canaccord Genuity. Please go ahead.

Speaker 1

Hi, Ivy. Maybe just a couple of channel related questions. Just given all of this legacy player disengagement, I think you're suggesting that there's a lot of channel players looking for a place to to go. So is that changing any of the dynamic the power dynamic in the channel? I know this is a very large fragmented channel, but is it changing in any way to your benefit?

Speaker 1

Yeah. It is. In particularly with I don't wanna name them again because I I think I've I've talked about them a lot. Two particular major legacy players had a very significant set of resellers that were attached to a significant set of distributors. We kinda think about the channel the way the channel works, the distributors have resellers, resellers then buy products from the resell products from those particular legacy vendors.

Speaker 1

There are hundreds and hundreds of those resellers, if not thousands of them, who are now stuck. It made their whole lifestyle selling this particular platform. And with those some of those companies completely exiting, NAC is a complete exit in chapter 11 in and out of sorry, Mitel, in and out of chapter 11, the confidence level and the of these lifestyle partners that are in the tens of thousands are desperately looking for an alternative, and there's not many left in the marketplace. We are one of them. We were known Sangoma before I joined three, four years ago was a well respected prem based provider through a platform called Switchvox.

Speaker 1

And for some reason, over the coming years, again, before I joined, there was a lot of confusion that single was out of that business with our parents. So as we revitalize and let people know, no. No. No. No.

Speaker 1

No. We're not out of that business. In fact, we're we're still in it. We're in it. They started coming back in droves, like, in droves.

Speaker 1

And so what we can do with all these partners, and I would say what they actually sell, that's gonna be found out over the course of the next three or four quarters. But it's one of those little things that sometimes the market, like, screw you and, you know, why is this happening now? We're just gonna transformation, and then other things happen in the market that can actually help you. This is one of those help you opportunities. And because we're so adaptable and flexible and we got the ability to put money into areas of optimizing discontinuities in the marketplace, we're we're able to go after it really quickly.

Speaker 1

And we lit it up in, you know, literally three months. And I think it's gonna be a very exciting area for us. And I don't see many players wanting to rush back in because, ultimately, over the next five years, all of these midsized customers who have prem, a vast majority of them will begin to migrate to the cloud. So for us, it's a double edged opportunity. One, increase the base of my customers that want prem now.

Speaker 1

And then because I have a cloud and hybrid solution, I can migrate them over time, which provides a phenomenal going concern in terms of increasing my base. That's it. Maybe not and just to dig deeper on that last point, it it seems to me I may be wrong. You can me if I am. But it seems to me that these disengagements are faster than you would normally see.

Speaker 1

I think the the glide path to disengagement or end of life, you know, you get support for years. Sometimes these things seem to be happening in months. And so because you've got a lot of hybrid environments out there and you're supporting, you know, a lot of different sort of scenarios, I mean, they maybe just digging deeper on that. That puts you in a in a pretty good position, I imagine, to to pull the on prem and then grow with them. Maybe just dig a little deeper there.

Speaker 1

Am I pulling on a good thread there, or is that misguided? No. I think I think that's sort of what I was saying. The idea of capitalizing on the prem markets now while there's less and less major players to compete with creates the foundation for us to grow with customers as they grow with their transformational digital transformational road map. So as customers decide they wanna take advantage of the capabilities that cloud has to offer, and they're with us with prem, assuming that we can maintain high SLAs and great customer satisfaction, which is why we put so much effort.

Speaker 1

I mean, Jeremy spent so much time focused on improving the back office operations to improve customer stats and to improve NPS. You you won't be able to migrate and grow those customers who are gonna go from prem to hybrid or prem to cloud directly if you don't have good customer SaaS scores, great customer service. And I think that's what that's that's the effort of the last little while. And now that we have this opportunity with these players exiting the market, grabbing a hold of those customers who still wanna be on prem, offering them prem solutions, and then growing with them as they migrate themselves to the cloud over time at their own pace. And when you get to the cloud, you have a whole new opportunity to upsell them all kinds of new service offerings, including security, including networking, and, you know, more than just plain old voice, time based communication.

Speaker 1

The cloud offers all kinds of value added features, particularly as they align to industry verticals, health care, education, retail, etcetera. So you've you've got a you you you're you're pulling on exactly the right trend. It's exactly the strategy that we're aligned to. And it's it's kind of why we're a little excited that the market gave us a little bit of a bone here with this prem business and Saint Gomma happened to have one that will be available ready to go. Okay.

Speaker 1

And last just a last question. It was nice to hear the the margin ranges minutes ago. And so this sounds like an opportunity to potentially, you know, maybe get better margins out of some of these customers and channel partners that or potential customers and potential channel partners that don't have other places to go. Is there potentially upside in margins from that? And and then I'll just pass one.

Speaker 1

I I don't know yet. It's too early to know. I think that's a great question. One that I'd like to challenge the team on, especially given we're a little bit more efficient now with our, you know, way we operate the company. You know, the the the cost the cost adjustments have been made relative to to the number of people that we had versus what we needed.

Speaker 1

All of those things are gonna improve our margin position. And do we have an opportunity to, you know, leverage price here? Because there's fewer players. I think that's way too early to decide right now, but it's something obviously that we would consider. Right now, I wanna woo these partners back to us in droves and pick up that customer base.

Speaker 1

To me, it's more important to build the customer base because of the potential migration in the future to create a going concern for the company than it is to try and get a short term hit to increase profit by driving up price because of the the supply demand inequality in the marketplace. And so I I'd be I'd be a bit more careful in terms of using price as a lever or mechanism to drive short term profit. Okay. Thank you very much. Bye bye.

Speaker 1

Bye. Thank you. Thank you, Robert. Talk to you soon, Ron.

Operator

This concludes the question and answer session and today's conference call. You may disconnect your lines. Thank you for participating, and have a

Speaker 1

Have

Operator

a pleasant day.

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Key Takeaways

  • Robust financial performance: Q3 revenue of $58.1 M, 17% adjusted EBITDA margin, over 100% cash conversion, $8.4 M free cash flow, and reduced gross debt to $53 M.
  • Transformation complete: Project Diamond is finished with a new ERP system live on schedule, self-funded to deliver approximately $5 M in savings over three years and streamline operations for growth.
  • Focus on core software: Accelerated divestiture of lower-margin hardware resale assets improved gross margin to 69% and shifted emphasis to predictable, high-margin MRR services.
  • Market opportunity from legacy exits: Mitel’s Chapter 11 and Avaya’s pullback have increased partner interest, enabling Sangoma to capture on-premise and UCaaS deals with integrated cloud/hybrid solutions.
  • Strong customer and pipeline metrics: NPS up nearly 300%, churn below 1%, a 90% QoQ rise in large-deal pipeline and a 2× UCaaS prem pipeline boost signal momentum for multi-pronged growth.
AI Generated. May Contain Errors.
Earnings Conference Call
Sangoma Technologies Q3 2025
00:00 / 00:00