Sangoma Technologies (SANG) - 2025 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Revenue for Q2 FY 2025 was $59.1 million, a decline of $1 million from Q1, primarily due to a $1.2 million decrease in third-party product resales, while the remainder of the business showed sequential growth [41][44] - Adjusted EBITDA improved by 3% to $10.1 million, with the adjusted EBITDA margin increasing from 16% to 17% of revenue despite the decline in top line [42][44] - Net cash from operating activities reached $11.9 million, a 30% increase year-over-year, with fiscal year-to-date net cash at $24 million, representing a 41% increase [37][38] Business Line Data and Key Metrics Changes - The company has consolidated its 11 product lines into six main lines, focusing on high-margin MRR-driven communications platforms, including UCaaS, CCaaS, and CPaaS technologies [24][25] - The infrastructure platform, which includes services like SIP trunking, has seen revenue growth of more than 10% in the first half of fiscal 2025 compared to the prior year [28] - The churn rate improved to below 0.95%, reflecting stronger client relationships and validating the focus on securing long-term recurring revenue streams [17][27] Market Data and Key Metrics Changes - The third-party hardware resale segment declined by $1.2 million compared to Q1, indicating limited potential for this segment to contribute to FY 2025 growth objectives [14][19] - The company is experiencing increased interest from partners in the premise PBX business following NEC's exit from the market, with partners seeking specialization in industry verticals [66][70] Company Strategy and Development Direction - The company is shifting its focus away from low-margin hardware sales to prioritize high-margin recurring revenue opportunities, particularly in key verticals such as healthcare and education [19][20] - Strategic priorities include expanding the portfolio through acquisitions, driving organic growth within existing partner ecosystems, and optimizing operations for efficiency and client satisfaction [21][22] - The company aims to achieve a model with over 85% recurring revenue, gross margins near 80%, and adjusted EBITDA margins approaching 20% [45][132] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's financial strength and the ability to accelerate growth through strategic realignment and divestiture of non-core assets [18][19] - The uncertainty in government spending has impacted the third-party hardware resale segment, leading to a strategic decision to focus on core business areas [13][14] - Management believes that the ongoing transformation and focus on high-margin recurring revenue will position the company for long-term success and value creation [9][20] Other Important Information - The company has achieved its fiscal year-end debt target of $55 million to $60 million two quarters ahead of schedule, with net debt decreasing to $43.3 million [39][44] - The company is on track for an April go-live of its new ERP system, which is expected to enhance operational efficiencies [74] Q&A Session Summary Question: Can you discuss the new Pinnacle Partner Program and its impact on sales? - The program is designed to build intimacy and trust with key partners, focusing on high-margin product lines and driving customer events, showing good momentum [50][51][55] Question: Can you reconcile the drop in churn with the sequential decline in services? - Management noted that while churn has improved, the company is still two to three quarters behind in organic growth, which is expected to pick up [57][60] Question: What is the outlook for the premise PBX business following NEC's exit? - The company is seeing increased interest from partners looking for specialization in industry verticals, which is expected to lead to growth in this area [66][70] Question: What is the strategy regarding low-margin hardware resale? - The company is sustaining the business but not investing further in it, focusing instead on core high-margin areas due to uncertainty in government spending [84][86] Question: How is the company mitigating potential tariff impacts? - Management believes the impact of proposed tariffs will be minimal, with sufficient inventory and options to optimize manufacturing locations [93][95] Question: What is the company's approach to geographic expansion? - The company is seeing performance improvements in international markets and plans to continue focusing on geographic expansion as a growth strategy [99][102]