Thank 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. I would now like to turn the conference over to Larry Stock, Chief Financial Officer. Please go ahead.
Thank you, operator. Hello, everyone, and welcome to Sangoma's 1st quarter fiscal 2023 investor call. We are recording this call, and we will make it available on our website for anyone who was unable to join us live. I'm here today with Bill Wignall, Sangoma's President and Chief Executive Officer, and Samantha Reburn, General Counsel, to take you through the results of the 1st quarter of fiscal year 2023, which ended on September 30, 2022. We will discuss the press release that was distributed yesterday, together with the company's unaudited interim financial statements and MD&A, which are available on SEDAR, 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 operating income, adjusted EBITDA, and adjusted cash flows that are non-IFRS measures, but which are defined in our MD&A.
Also, please note that unless otherwise stated, all references to dollars are to the U.S. dollar. As we have started reporting in U.S. dollars now for FY 2022 and beyond. This includes all prior period comparisons which have been converted to U.S.D as described in note two of our financial statement. 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 might differ materially from those projected in the forward-looking statement.
Important factors that could cause actual results to differ materially from those in the forward-looking statements are discussed in the accompanying MD&A, our annual information form, and in the company's annual audited financial statements posted on SEDAR and EDGAR. With that, I'll hand the call over to Bill.
Thank you, Larry. Good morning, everyone, and thanks for joining us today. I typically keep my prepared remarks a little shorter for our Q1 calls together, and this one is no exception. If there is anyone joining us on these calls for the 1st time today, I would invite you to listen to the recording of our Q4 fiscal 2022 results from September 30, just a few weeks ago, which is available on our website. On that year-end call, I provided a very extensive update on our business, and that call would also give you a more detailed explanation of adjustments made in Q4 that have some impact on certain year-over-year comparisons. Okay, I've structured my prepared remarks for this call into three sections. I will 1st discuss our 1st quarter operating results, and then I'll add some commentary on a few strategic topics.
Finally, I will review forward guidance for fiscal 2023. As always, I'll then wrap up with a brief summary and turn the call back over to Larry for our typical open Q&A session. Let's get started with Q1 results. In this 1st section on operating results, I'll cover highlights from our 1st quarter. I'll skip my normal year-to-date remarks, of course, given it's Q1, and I'll conclude with a few comments on the balance sheet and cash flow. Sales for the 1st quarter of fiscal 2023 were $64.1 million, which is up 24% when compared to the same period in fiscal 2022. This substantial year-over-year increase is driven primarily by the growth in compounding in our services business, where the recurring revenue is generated, which I'll discuss a bit more in a moment, and also, of course, by the acquisition of NetFortris.
The $64.1 million for Q1 is down 3% from the $66.3 million in the immediately preceding 4th quarter of fiscal 2022. It's not surprising for us to see our 1st quarter dip slightly from Q4 of the prior year, as Sangoma has indeed felt the impact of seasonality in most years. That doesn't always show up, because in some years it can be masked a bit depending upon the timing of certain acquisitions. In general, Q4 has been our strongest quarter and the summer months have always been a bit weaker, especially in the European markets where summer holidays impact order flow, causing that small dip from Q4 to Q1. Such trends naturally affect our capital product business more so than our services business, given the product revenue is lumpier and not recurring.
In addition to seasonality, we've also seen this quarter that sales of our product business were impacted by some of the macro effects we all see out there these days. General economic headwinds have a more noticeable effect on product sales than on services because such purchases are usually seen as CapEx purchases by our customers, whereas our service subscriptions are OpEx, of course. If those economic headwinds are a 2nd order effect, then outside of North America, we also see a smaller 3rd order effect from FX rates. I just want to be a little bit careful as I explain this one. In calls like these a few years ago, we'd often talk about the effects of FX on the top line and in the middle of our income statement because we reported in Canadian dollars.
The top line, due to the sale of a widget for $100 converting to CAD 130 or CAD 110, depending upon prevailing rates at the time, and in the middle of our P&L from the revaluation of balance sheet items like inventory or receivables as their value in Canadian dollars fluctuated with the U.S. dollar rate. All that is gone now, given we've been reporting in U.S. dollars, as Larry just mentioned. That is not what I'm referring to, and given several of our analysts wrote about this extensively in the past, I just wanted to clarify. What we're referring to today is the effect on a possible customer in Europe or Asia or Latin America from the strong U.S. dollar recently.
That is, given we sell almost exclusively in U.S. dollars around the globe, the perceived cost in most local currencies has gone up. For example, when we sell a Sangoma widget for $100 in the U.K., the product was seen by a local buyer as costing them about GBP 65 a few years ago, and it would cost them about GBP 85 today, purely due to the strong dollar and weaker pound. That's not unique to the U.K., of course. If the buyer were in India, that same $100 widget, which cost them INR 6,300 a few years ago, would cost them over INR 8,000 INR today. Such trends have an impact on purchases of our CapEx products abroad.
The cumulative effects of seasonality, general economic headwinds, and FX on the sales of our products caused the product revenue to dip by about 9% this quarter from Q4. That's what drove the overall drop in total sales sequentially. While our product sales dropped a bit, given all that's going on in the world, our services business held up pretty well, and that's good. It makes sense, and it's what we expect, given it's the services business which is the driver of Sangoma's growth, not our product side. Let's look a little deeper too at our services revenue. The long-term trend, as Sangoma has successfully evolved their business to a SaaS model, continues to produce success.
Not only was our total revenue up 24% year-over-year in the quarter, but our services revenue, more specifically, was up 35% as compared to the same period in fiscal 2022. Just as importantly, our services revenue as a fraction of total sales crossed 75% for the 1st time. This is a big accomplishment and an indicator that our long-term strategy is working just as intended. More on that in the strategy section coming up. Our cost of goods sold came in at 32.3% of revenue, which is down slightly from the 32.9% in the most recently completed Q4 of fiscal 2022. Supply chain disruptions remain an impact on cost of goods, as I've discussed at length on recent calls, so I won't go into it again on this one.
Suffice to say that Sangoma does a really good job in this area, producing some of the highest gross margins in the industry, while we continue to be able to fill most orders without the other stock issues that many of our competitors have been contending with. Gross profit for the 1st quarter was $43.3 million, up 18% from the $36.9 million in Q4 of last year. Gross margin for the quarter was approximately 68% of revenue, which is up slightly from the 67% last quarter. As we previously indicated, this is generally in line with our expectations for fiscal 2023. Operating expenses for the 1st quarter were $44.4 million versus $45.7 million in the most recent 4th quarter.
The deduction from the prior quarter by another $1 million per quarter is the result of the 2nd and final stage of the NetFortris integration and restructuring. Adjusted EBITDA in the 1st quarter of fiscal 2023 came in at $10.7 million, an increase of 6% from the 1st quarter of the previous fiscal year, and a decrease of 3% from the immediately preceding Q4, consistent with the 3% sequential revenue dip already covered. This EBITDA result translates to 17% of sales for the 1st quarter of fiscal 2023. With the NetFortris integration and restructuring now in place, we expect EBITDA margins to continue in that range. As mentioned in our press release from last night, we've built a resilient business with the inherent flexibility that enables us to adjust OpEx if it were necessary in order to protect profitability.
Net loss for the 1st quarter of fiscal 2023 was $1.98 million, versus a net loss of $2.3 million in the same period last year. That completes my remarks on our P&L results, and I'd now like to turn to a few comments on our balance sheet and cash flow. Our cash balance at the end of the 1st quarter was $8.3 million, down from the prior quarter as we continue to pay down debt each quarter. In fact, I'd like to pause here for a moment just to definitively reassure Sangoma shareholders regarding our debt levels and debt service. I hear a lot of questions these days from investors and other companies, questions that make perfect sense and the debt levels in some other companies' businesses.
Please know that Sangoma has always taken a prudent approach to managing our business, our P&L, and our balance sheet. We have believed in a balanced growth approach, not growth at any cost, and have done so from the very beginning since I took over, not in a reactive response to some recently changed market sentiment by those who have now somehow seen the light. That means we prioritize profitable growth above maximum possible growth. That means we prioritize prudent use of debt to help manage dilution, but not exposing your company to undue leverage. That means we now have a company in which we repay almost $4.5 million of principal each quarter, an approach we feel makes more sense now than ever, delevering assertively during increasing uncertain economic times.
Our gross debt level is now sitting at about $100 million, and with EBITDA guidance of about $50 million at the midpoint of the range, you can do the math. As a result, our balance sheet continues to remain strong. Our debt load is reasonably modest, given EBITDA levels. We have the resilient business model I touched on earlier that enables us to adjust OpEx, if required, to protect profitability during these unpredictable economic times, and we are delevering, as I just mentioned. Finally, of course, we are also comfortably within all of our debt covenants, and I hope those comments are sufficiently reassuring to you so that you do not need to worry about Sangoma's debt servicing. Moving on with other items on the balance sheet.
Trade receivables ended the 1st quarter at $17.2 million, as compared to $14.1 million for the same period last year, and $16.1 million for the end of the prior quarter. The growth in receivables year-over-year at 22% aligns appropriately with our revenue growth of 24%. Inventory balances at the end of the 1st quarter were $19.1 million, compared to $12.7 million in the same period last year, and up slightly from the $17.4 million in the immediately preceding 4th quarter of fiscal 2022. As we have discussed previously, the increase in inventory is driven in part by strategic purchases to combat supply chain challenges, and specifically in Q1, we had some larger purchases to get the new line of P-Series desk phones in stock, a product line we're all very excited about.
Finally, I'd like to offer a short comment on adjusted cash flow. This quarter, we generated adjusted cash flow of $3.2 million. Historically, during the 1st part of the year, net cash from operating activities has run a bit lower than in the latter parts of the year. During this 1st quarter, that number came in at $3.6 million, as compared to an average of $3.3 million for the 1st two quarters of fiscal 2022. It has been common that the timing of some payments has occurred early in the year. For instance, in this quarter, we saw a bump in audit-related fees as we transitioned to a larger audit firm, slightly higher professional fees, and a significant income tax payment, all having an impact on adjusted cash flow in Q1.
That brings my commentary on our 1st quarter financial results to a close, and I'll move to my 2nd section, the strategic topics for today. In this part of today's call, I will touch on Sangoma's competitive differentiation strategy in the industry. Our positioning to the public equity markets. A quick update on the integration of NetFortris. I'll offer a comment on our share price. Finally, a word or two about M&A in this climate. Okay, let's start with a reminder of our competitive differentiation. As Sangoma has rounded out its product portfolio over the past few years, via good, solid in-house engineering augmented by strategic M&A, the breadth of the product suite has grown. This was entirely conscious, of course, as we sought to build out our cloud services to deliver on our stated strategy.
That strategy involved getting Sangoma to the point where we had all the pieces of a cloud communication solution that would enable a customer to buy everything from us in a one-stop shopping experience. As we hear time and time again, businesses of all sizes are looking for a single vendor to provide most of their communications needs instead of needing to buy five different products from five different vendors with five different take-offs, five different contracts, five different invoices each month, five different tech support lines to call, and five different products that they then need to integrate. We now have that capability, and we leverage it every day when describing our three key points of competitive differentiation to a customer. One, Sangoma has the widest suite of cloud communication services in the industry.
UCaaS, trunking as a service, contact center as a service, video meetings as a service, collaboration as a service, CPaaS, managed SD-WAN, et cetera. Sangoma has solutions for cloud, on-prem, and hybrid. We find the path to yes, no matter which deployment option the customer prefers, something that no cloud or on-prem competitor can match. Third, Sangoma makes all of its own products right down to the desk phones. Better functionality, better network uptime, better engineering velocity, better supply chain, better integration, one throat to choke. Second, I'd like to touch on our positioning to the public equity markets.
That positioning includes our total growth model in which organic growth is augmented with strategic M&A, a commitment to growth with profitability, not growth at any cost, which so many of our competitors tried, tapping into the enormous TAM that remains very under-penetrated, all backed by the clear, competitively differentiated strategy in our industry that I just covered. Sangoma is now large enough to be disruptive with about 750 staff, and nimble enough to pivot quickly, and is becoming a destination employer as our growth provides career opportunities for our valued staff, and underpinning all of this, a company that customers and channel partners want to do business with. Third, I'd like to offer a quick update on the integration of NetFortris. On our last call together, I explained in some detail the integration plan and that much of it was completed during Q4.
There were two primary pieces remaining that I mentioned, the integration of the sales organization, as well as the 2nd and final stages of restructuring. I'm pleased to report that both are now complete. Full stop. Further, that sales team has recently landed a couple of really interesting orders from enterprise customers with many locations each. Each of these orders deliver us over $100,000 in MRR, which is a large order for any company in the industry, including our new MSP offerings. Further evidence of the strategic rationale behind our NetFortris acquisition. This comment today on the integration of NetFortris will be my last, as it is now fully integrated, so no more NetFortris. One team, one Sangoma.
Next, at the risk of stating the obvious, I'd just like to confirm that Sangoma's share price is absolutely front and center in the minds of your board of directors and every single member of the senior executive team here. We know it's upsetting for you to see Sangoma trading at these prices, and please know it's equally disturbing to us seeing Sangoma dramatically undervalued like this on almost any metric. For instance, one of the trends we monitor closely is the progress we seek to derive more and more of our revenue from recurring services. It's actually a really impressive story. Growing from zero historically to reach 25% of sales in fiscal 2018, to 33% in fiscal 2019, to 49% in 2020, to 62% in 2021, to 71% last year, and now crossing the 75% threshold this quarter for the 1st time.
My point is not that the figure in any one quarter is apt to fluctuate a bit or even the precise figure in a particular year, but that long-term trend is exactly where we want to see it, and that's but one way to see our share price is so obviously undervalued in today's market conditions. We are doing everything we can, though, as I realize, many of the people on this call know even better than me, many institutional investors have pulled back from small cap these days. My last comment in the strategic topics section today is on M&A. We've had a few calls from shareholders about this, asking whether acquisitions are still on the table in this situation. I just wanted to answer it officially for everyone to hear. That answer is yes, Sangoma is still interested in and working on possible acquisition opportunities.
However, I think it goes without saying that we need to be highly selective right now, even more than ever before, as we consider any possible deals. We are very cognizant of share price, keenly aware of everyone's sensitivity to dilution at these prices. We realize that our use of debt should factor in the uncertainties in the macro environment and will thus only consider opportunities that are accretive. In the meantime, we are fully committed to running your company prudently, as we always have, with a heightened sense of caution these days. Now let's move to my 3rd and final section today on fiscal 2023 guidance.
As you recall, the last time we were all together in late September, we provided fiscal 2023 guidance for the 1st time in keeping with our traditional policy of issuing guidance for the new year as we release results for the year that has just closed. As a reminder, that guidance forecasted revenue to be between $275 million and $285 million and adjusted EBITDA in the $48 million-$52 million range. Based upon Q1 results and what we see out there so far today, we are maintaining those ranges for revenue and adjusted EBITDA in fiscal 2023.
This guidance reflects our best assessment of many challenging factors in an increasingly uncertain world, including but not limited to the macroeconomic considerations such as historic inflation and hawkish monetary policy in many countries around the world, as well as trends in FX rates, the potential impacts thereof on demand, the continuing supply chain challenges, our ability to retain and attract talent, international conflict, lingering effects of the pandemic, and the growing risk of global recession. As such, visibility and forecasting has become more difficult for everyone, and Sangoma is not immune. We will therefore be monitoring such trends very carefully over the next few months. With that, I'd like to bring my prepared remarks for today to a close with a quick summary. Overall, I'm very pleased with another quarter of solid financial results for Sangoma and what we've accomplished.
To continue, we continue to see our well-defined, competitively differentiated strategy yield success and are pursuing attractive organic growth by investing in sales and marketing, R&D and customer expansion. We also remain uniquely positioned to augment that organic growth with deliberate, prudent, highly selective M&A using a very disciplined approach. That reflects a heightened awareness of share price, ensuring Sangoma would only consider acquisitions in this climate if they are accretive. We have built our company with the core belief in growth with profitability, even when it was out of fashion, and we of course hold that belief even more strongly today. Further, we have a resilient business and financial model, one that allows us to protect our profitability even if faced with the kind of uncertainty we all see these days.
We've utilized debt conservatively, maintaining modest debt to EBITDA ratios and avoiding over-leveraging even when others encouraged us to take on more debt. That commitment to using debt cautiously has served us well, and we will maintain that approach as we continue to delever and pay down debt. Finally, I will close off my prepared remarks today by saying that you have a team here at Sangoma that works extremely hard for you every day and that is determined to continue that work to improve share price and create shareholder value. With that, Larry, I think we're ready to take questions now.
Thank you, Bill. Before we pause and accumulate questions, one question that has come up that we should answer now is why is services revenue down from last quarter?
Oh, okay. Well, I guess it's important to remember from my commentary in the prepared remarks that the sequential decline from $66 million- $64 million is really driven not by the services piece, but by the product category. That's a non-recurring revenue. As you heard, that was due to a few overlapping factors, seasonality, FX impacts, the macro environment affecting CapEx purchases, et cetera. In our services category, the recurring revenue part of our business, our revenue was up 35% year-over-year in Q1, which is the segment we're focused on. That's why I walked through on the call that long-term trend that showed this figure consistently ticking up year-over-year nicely. It's the trend that got services to over 75% of total sales this quarter.
There's truly not a structural problem in services revenue for us to be concerned about. Yeah, sure, there can be minor fluctuations from quarter to quarter sequentially. That's right. That's what we saw this quarter when Q1 took a small dip from Q4. I think it was about 2%. We're not worried about that at all. I expect that we'll bounce back next quarter. This can happen in the services business for a number of possible reasons. The most of those don't normally coincide in one quarter, but that's indeed what happened this quarter. It just happened to occur at the same time. You know, things like in the product side, but to a much smaller degree, of course, given our services are recurring.
There can be seasonality impacts and our services category is mostly all cloud revenue, as you know. There's still a very small part that is indeed recurring, but left over from the more traditional parts of our business when we sell products in the capital P sense. You know, the customers are sometimes purchasing maintenance or have in the past. It's very small now and declining over time, as you would expect. It is recurring, so it needs to get captured inside the services bucket. You know, during times of economic pressure, there's increased scrutiny on those kinds of maintenance purchases by customers, which is what we saw. What else? Those same macro factors can have an impact on usage.
In one of our cloud services, like our TaaS offering, there's a small usage component to the pricing model, like for all of our competitors. That usage was down a touch with the macro factors. What else, Larry? You know, we lost one mid-sized customer this quarter when they were acquired and the new parent company parachuted in, you know, their existing IT systems to the newly acquired company. That's normal, that happens. You know, I hope you can see that this minor, I don't know, blip is not some systemic issue in our cloud business, and we fully expect it to be back up next quarter. You know, perhaps surprisingly, given the question you got, you know, Q1 was our best cloud bookings quarter in a really long time.
We had one of the highest levels of gross add MRR bookings ever this quarter. We had the strongest quarter of net add MRR in a long time too. As most of you recall, when we use terms like net add MRR, it's just the difference between the gross add bookings that we bring in and the churned MRR. It's the way our competitors describe it too. It's the standard SaaS model. You even heard me reference two enterprise orders we won recently. Each over $100,000 in MRR, which, you know, by any standard is a big cloud order, being over $1 million a year. You know, of course, all bookings or orders in the cloud business, you know, they then need to go through the onboarding or activation stage I realize. There's a natural time lag in the book-to-bill step before it turns into revenue. Yeah, I guess that's my thought on that one, Larry.
Excellent. Okay. Thanks, Bill. Operator, we are ready to take questions. Would you please go over the instructions again and accumulate that for us?
Certainly. We will now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We'll pause for a moment as callers join the queue. The 1st question is from Michael Latimore from Northland Capital Markets. Please go ahead.
Great. Thanks a lot. Good morning, everybody. I guess just picking up on that last comment, you said you had your best cloud bookings quarter in a long time. Can you kind of sync that up with, you know, just comments around macro uncertainty? I would think you wouldn't have a record bookings quarter if the macro was having that big of an impact, but maybe just sync those two sort of different comments up there.
Yeah, sure. Totally get why one would make that assumption, Mike, and you know, we've had this debate internally many times. Like, I think there's a couple of things going on there. One is the types of macro pressures that you're asking about and that I referred to are also the same kinds of things that push customers to OpEx decisions versus CapEx decisions. Right? I think that's the 1st one. Secondly, you know, when you ask about and I refer to what large orders of enterprise customers, I realize you know this well, but for the group, you know, those are the kinds of sales opportunities that have really long sales cycles, right?
If a normal customer with 100 seats, you know, is gonna spend $1,000 or $2,000 bucks a month with us, it's, I don't know, a 30 day or a 60 day sales cycle. Big ones like that with hundreds of locations and $1 million a year of MRR are six months or a year, right? The fact that the macro trends might be working against that, of course, come into play, but the decision process by the customer was started like whatever, you know what I'm saying, a year ago or something, right? I think that's the explanation, Mike.
Okay. Bill . Can you tackle it? It sounds like you've had some good wins with the MSP offering from NetFortris. Can you talk just a little bit about what you're seeing in the pipeline there, interest among kind of new logos or into the Sangoma base, and then also just kind of the latest on your go-to-market efforts to really push that out, kind of more broadly?
Yeah. Maybe I'll tackle the 2nd part because that's the more general case and then tell you how it's working. You know, the go-to-market approach is, I think it's like exactly the one that you would intuit it to be, right? The go-to-market is put the MSP offerings together with the rest of the over-the-top cloud services and, you know, position it as a single suite. That's it. We talk about it every quarter together. You and I have had the discussion one-on-one. That's the same positioning, whether it's to a new logo or an existing customer.
If it's the part of the sales organization that's hunting, then when they're going out and talking to a customer about, you know, cloud service X, hey, we really need, I don't know, CCaaS or UCaaS, you know, they've been taught that the job is to explain that we have all these other things, including managed security or managed SD-WAN or managed access and vice versa. If the sales process begins by somebody calling and saying, you know, "I need managed security," or, "I need managed access," they've been taught, then we have to ask, "What are you doing for UCaaS? What are you doing for CCaaS? Do you have some already? Do you not have it? If you have it, when's the contract expire?" So all of those play together.
In terms of the pipeline and how that's working, I would say that from the hunting point of view, and then I'll come back to the farming of the existing customer base. From the hunting side, you know, we're starting to see signs of that working. I've mentioned a couple of big orders. In orders above a certain size, Sangoma has the same kind of a process that most all normal firms like us have in which, you know, the opportunity gets reviewed and approved and pricing gets looked at and are there any particular pieces of functionality the customer needs that are not part of the normal suite, et cetera, et cetera, et cetera. Every one of those leads to a conversation about, oh, great, you're selling, you know, cloud service one, two, and four. What about MSP services?
You're selling, you know, Managed Access and Managed SD-WAN, what about CCaaS and UCaaS? It's a normal part of the process now, Mike. It's a new part of that normal process, so it's still the exception, not the norm, but it's becoming less and less an exception and more and more normal. I just sat through one of those meetings two weeks ago about a significant opportunity with a large chain of auto dealerships that started in the cloud communications way and is evolving to be cloud plus MSP. We have lots of deals that started as MSP and adding cloud. That's how it's working. With the installed base, it's a little bit different, right? With the installed base, they already have one or the other.
They're, for instance, already a cloud communications customer, and then the exercise is as part of the normal touch base, stay in contact with your customers, ask them, "Are we meeting your needs?" We introduce this other new thing. That's true whether they start as a cloud communications customer or start as an MSP customer. That's starting to get traction too, although they often have something else already. A normal reaction in that situation is, "Okay, happy to talk about it. We are interested. But by the way, if we're, I don't know, a managed access customer, our UCaaS contract doesn't expire until February of 2023. Let's start talking about it now, but please know we can't make the switch till then." I don't know, Mike, maybe that was too much. Yeah, that's what's on my-
No, perfect. Thanks. One final real quick question. On, you mentioned there's still maintenance left in the service line. It's very small, you said. Can you quantify that a little bit more?
No, I wouldn't have that number off the top of my head, Mike. Like, the cloud stuff is almost all of it. Way, well over 90%, whatever that would be. Yeah.
Okay. Thanks very much.
Okay.
The next question is from Eric Martinuzzi from Lake Street. Please go ahead.
Yeah, I was just curious to know, given the you cited the economic headwinds, you know, I would think that by the end of September, you were, you know, you had a pretty good feel for those economic headwinds. Did you see any change in customer buying behavior just in the month of October or sort of, month to date, November?
Yeah, it's a fair question, Eric. I think it's less, was there a sudden change or a step function and more a matter of degree is how I would answer it. For sure, you're right. Of course, we saw some of that, you know, as I guess most people did. We, you know, we saw more of it in September than we did in August, and more in August than we did July, and for sure more in October than we did September, and it's continuing in November. I don't—I wouldn't wanna pretend something that was. It isn't this shocking thing to us. It's just more pronounced there.
You did talk regarding the Q4 results. You said you had, you know, there were a couple of deals, couple of projects that fell out of Q4 and into Q1. A, did those close in Q1? And then B, did you have a similar situation where something you thought was gonna close in Q1 pushing now into Q2?
Yeah. One of the large orders that I referenced that closed in Q1 was one of those orders that you just asked about from Q4. The answer is yes. In general, I would say, you know, as the company gets into more and more mid-market, especially the higher end of the mid-market, and starts to see more enterprise customers, I think we'll just get better at more fully appreciating the elongated sales cycles. You know, what I said about Q4 was completely true, but as we see more of it, maybe it'll catch us less by surprise, you know?
Mm-hmm.
If in that case, we thought it would close in Q4, and if I'm being brutally honest, Eric, looking back, we probably should have realized it might not. You know, it was a big deal. It was a complicated negotiation. We were right down to the eleventh hour. It looked like it was gonna finish. But that last little bit, you know, it's still a lot, right? Like most companies in the SaaS business that start in the S of SMB, you know, we're still getting better and better at looking at the sales funnel, understanding which pieces or tiers of the sales funnel behave which way. I'm hoping we're getting more confident that I won't have to say that as much. Not because things get done faster, that's not my point. Just that we get more used to it and accustomed to it, and the slightly longer sales cycle doesn't catch us as much by surprise.
Gotcha. Regarding the Q2 outlook, I know you're just commenting on the full year, but historically, we would see a 6%-8% sequential increase Q1 versus Q2. Any reason to not assume that same historical behavior for those of us modeling?
No, I don't think there's any reason to not. I wouldn't wanna be too precise in my answer here 'cause we've not, as you just said, given quarterly guidance. That is right. We would fully expect Q2 to be up from Q1, and there's nothing special about the quarter by quarter trends that should affect fiscal 2023 that are hugely different than fiscal 2022 or fiscal 2021. I don't wanna, you know, get into. I can never use 6% or whatever it was. Generally, I think you're on track.
Okay. Well, just, I'll close with a comment. It's good to see that 75% recurring revs number. I know that's been a long-term goal, and good to see it finally achieved. Onwards and upwards from here, right?
Yeah. Thank you. Exactly, Eric. Appreciate that very much.
The next question is from Jim Breen from William Blair. Please go ahead.
Thanks for taking the question. Just a couple. Could you talk about the growth you're seeing and, you know, how it sort of mixes between sort of larger enterprise, you know, mid, small? Also within that, you know, is the growth coming from new customers or existing taking more product? Just, you know, talk a little bit about the cross-sell opportunity, you know, given the recent M&A. Thanks.
Yeah. Yeah, good question. Thank you, Jim. I guess it's not one or the other, right? You won't be surprised to hear me say it's both. We're getting more and more what I would call deliberate about how we handle that. As an example, and then I'll come to the, you know, the breakdown. We had traditionally had one team that serviced existing customers, and the role of that team was both taking care of the customer, checking in, making sure they were happy with the service, answering any questions, understanding how their business was evolving and selling more to them. What we found was that wasn't working so great.
The part of the conversation that falls into the 1st of those two buckets feels different, is received by the customer differently, involves different skills by our employees than the 2nd part. Going into fiscal 2023, we teased those apart into two entirely different sales teams, one that does the servicing and one that does the upselling. We're getting better and better visibility to this. The part of the new MRR, the growth side, which comes from new logos, and the part which comes from existing customers, are equally important. In any one month, you know, bookings might be a little bit higher than the existing customer expansion, and the next month it might reverse the other way. But it's not the case that one of those is 80% and the other one's 20%.
You know, they're you know, both pretty similar in the middle. Typically, the new logos are a little bit more new booking MRR than the expansion, but not always. And then the other portion of your question, if I got it right, is, you know, just the market segmentation. How much of the business in S, how much in M, and how much in enterprise?
Yes.
The portion of the installed base, I realize you know this, Jim, I'm just answering it for the group, that falls into those buckets is different than the portion of the new bookings, right? The installed base, like most SaaS companies, started S and then finally started to get some M and has more recently been into the enterprise. On a headcount basis, you know, the number of customers, the vast majority of customers are more S and then less M and of course, fewer enterprise. On the new MRR, you know, we had very few orders in the past like we're starting to see now in that enterprise bucket. Like, you know, we just didn't get $100,000 MRR orders before. You know, now we do. Not like once.
We get them pretty regularly. It's still not the norm. You know, if we close 100 orders in a quarter, you can still count the big ones on one hand like that. It's not one, and it's not one quarter out of four. We get them regularly. One of those is probably gonna be more than $200,000 a quarter. You know, you never exactly know until it's finished implementing. You know, enterprise is important. It's growing. All of our competitors say the same thing. There's no reason we would be any different. I would say the amount of time and attention we spend on the very small S has gone down, and the fraction of revenue that comes from the very small S has gone down as well.
You know, if four or five years ago it was normal to get a customer, a cloud customer with 10 seats, that's not the norm anymore. Size for us is bigger. There's much more in the medium bucket, and we're starting to get, you know, consistent enterprise traction.
That's great. Thank you.
Okay, sure.
The next question is from Deepak Kaushal from BMO Capital Markets. Please go ahead.
Well, hi, guys. Good morning. I've got a couple questions. First, you know, Bill, you mentioned earlier the macro is causing a pause on CapEx spending and that could, you know, bolster the case for a shift to kinda SaaS and OpEx spending. Are you seeing that transition now or is this just still a theoretical and we're just still in the pause phase on CapEx? 'Cause there's already a general shift to cloud from and OpEx spending versus CapEx. Are you seeing an acceleration of some of that?
Yeah, you know, it's a perfectly fair question, and I can give you an answer that I guess is at risk of sounding like I'm obfuscating, which is not my objective, Deepak. You know, when you're in the middle of something like that, it's very hard to know in the middle of a trend if it's a trend or not, right? We do see a bit more of it right now. As you said, it was already in place. It's one of the primary drivers of on-prem to cloud transition that's been happening for years. There's just a bit more. When I see more, I see up in one and down in the other. The more means a little bit more OpEx traction and a little bit less CapEx traction, and that's the transition I referred to.
It's very hard to know whether that's, you know, a one-quarter thing or it's gonna be in place for a while. It's hard to know if it accelerates based upon what happens with the economy and what's the Fed gonna do with interest rates, and are we almost through that? There's some encouraging signs that maybe inflation's peaked and is starting to come down a little bit. You know, honestly, Deepak, like I think everybody's having trouble forecasting right now. Our crystal ball is no better than the next guy's, and no bloody idea what the Bank of Canada or the Fed's gonna do. We all hold our own opinions. You know, certainly what we call the hawkish policy has been more hawkish than we at Sangoma probably thought it would be.
You know, it is, and I just don't wanna pretend that we know that answer more definitively than we really do.
Okay, got it. The 2nd question here, on the services side of the business, are you able to give us kind of a baseline of how that breaks down between managed services and you know non-managed services? Just so we can kind of have a baseline and monitor the growth rate going forward. Obviously, they have a different gross margin profile as well. I don't know if you're willing to give that as well. Just to help us kind of see how the trend might impact gross margin going forward.
Yeah, I don't think so, Deepak. It's the same kind of question we've had once or twice over the last, I don't know, six of these meetings. Sometimes about MSP versus cloud or UCaaS versus CCaaS, or, you know, managed SD-WAN versus managed security. For us, you know, we're trying whenever possible to sell in bundles, right? So the customer's getting a quote for UCaaS plus CCaaS plus video meetings plus collaboration plus managed access plus managed security, and it's, you know, whatever the number works out to be, right, $57.49 per seat. We don't break it out by product line. We can't track it by product line that way. We don't take the per seat price and allocate it into products.
You know, when you and I were 1st meeting each other, I remember sharing with you that, you know, one of the things Sangoma had to do when plotting its SaaS strategy was figure out what the competitive differentiation was going to be. No, we weren't gonna beat Zoom at video meetings, right? We weren't gonna beat, I don't know, Twilio at CCaaS. And so the strategy became, we have to be the company that's really good at having the full suite and meeting the customer's full needs in that one-stop shopping. If that's gonna be our strategy, then we have to sell that way. You know, we sell that suite of services as a suite, as a bundle, not as how much of it was MSP versus how much of it is UCaaS versus how much of it is CCaaS.
That's how we do it. It's competitively differentiated. It's the thing that makes us unique. But it means we can't say, you know, for a customer that's paying us $20,000 a month, how much of that is for UCaaS or how much is for CCaaS or how much is for MSP or how much is for CPaaS. It's all just this blended price.
Got it. I totally respect that. I guess what I was just trying to gather, I mean, how much of your services are you managing on behalf of your customers versus how much are they managing themselves? If that's not something you can give today, then I'll, you know, probably ask the question again in the future. That's kind of what I was getting at at a high level.
Yeah. Well, I think, you know, it's a bit hard to know exactly what you mean by that. But in general, we manage the service for the customer, right? Everywhere. Now, customers of course have the ability to go in and do things for themselves, as you would expect any IT administrator to do. Some of them choose to do that and some don't. Some of them choose to delegate that to the channel partner. But you know, they're not the UCaaS expert. We are. They're not the CCaaS expert. We are. If we're talking to, you know, a school for the deaf and blind who needs us to do something to make a 911 call using our CCaaS app connect into strobe lights, you know, they can't do that stuff, right? That's us.
Yet, if a normal IT administrator is running the system and they're doing typical routine things. I don't know, Deepak, that's probably too abstract. They're hiring three new employees. They don't need to come to us to add three new employees to their system, right? That's what I wanted you to get a feel for.
Okay, that's very helpful color . I do appreciate it and respect that, you know, you guys sell everything together, so appreciate it. Thanks.
The next question is from Gavin Fairweather from Cormark. Please go ahead.
Good morning. I wanted to start out on new logo ARPU. In the past you've talked about how that's been, you know, kind of rising as you've been attaching things like contact center and some of your other services. Curious how that's kind of working in conjunction with kind of the move to larger customers and then maybe given the macro some smaller initial deal sizes. Like where is that all kinda netting out on that metric for you right now?
Yeah. It's all over the place, right, Gavin? You're completely right. There's all these competing factors that are pushing ARPU up and down in their own independent ways. I think the starting point before the specific causation you asked about, like bundling or whatever is, what's just the general trend in price in the industry? Like any technology industry and product, the trend over time is price goes down, not up, right? It's not unique to us. It's not unique to our industry. It's the way everything works in tech. For a product which has been around a longer time, like UCaaS, that's a bit more mature, the general trends in price for exactly the same thing delivered now versus four years ago would be a little bit lower.
What the companies who are best at managing this are doing is not pretending that the price trends are not down. They're combating a downward price trend by adding more things into the product solution. You know, it's the arithmetic sum of those which is so important. So we have customers where when they renew, the price goes down a little bit, and they were paying whatever it was, right, $28 a seat, and now it's $26 a seat. We have some that were paying $20 a seat, and it goes to, you know, $45 a seat. It's a little bit harder to figure that all out right now, just one or two quarters after the NetFortris acquisition, 'cause now there's a bunch of new services going in there as well.
As you just said, now we have these other macro effects, which is there was a general downward trend in price that everybody expects in every technology industry. Now, you know, customers are under price pressure. For us, that should be a positive, competitively differentiated opportunity. If the customer's worried about spending because of the macro environment, being able to get more things from the same vendor should lead to a lower total price than having to go buy UCaaS from one place and CCaaS from another place and CPaaS from another place and, you know, broadband internet access from another place and manage that. You know, in general, that has been working in our favor. It's absolutely the strategy and one of our competitively differentiated strengths.
You know, how that is all playing out and adding together, Gavin, is, you know, it's just such an uncertain time and whether that price pressure from the macro environment is gonna last one quarter or three, and what we all feel about whether the world will tip into a recession and, you know, how that is affected by foreign exchange rates and, oh, in the U.K. everybody was fine paying, you know, whatever it was, $18 a seat, but now the pound has moved and, you know, in pounds that changes and now $18 a seat seems like too much in pounds.
you know, there's just a lot going on in the world, and as I said earlier in answer to a different question, I just don't think we wanna get to the position where we're saying it's, you know, it's gone up by $2 or down by $1.50, and then those trends, you know, accelerate or subside. I told you $2, and it turned out to be $1 or something, right?
I appreciate the color. It was something I was thinking about and starting to come to an answer on too, so.
Well, it's hard. Like, it's really hard.
Maybe just on operating expenses, you know, we obviously saw those come down, given the NetFortris integration is now complete. How are you thinking about that, you know, investment lever, and kind of the decisions between, you know, kind of growth and supporting that versus driving kind of further cash flow, given some of the uncertainty?
Yeah. That's obviously an easier question to answer, right? 'Cause it's asking about stuff that's within our control as opposed to guessing about the impacts from things that are outside our control. I could do a much more definitive job of that one. Thank you for giving me an easy one. You know, right now I think we're content where our OpEx spending is. We don't expect to change it materially, this quarter versus next quarter. However, I did refer in my prepared remarks to this idea of having built in, you know, this inherent flexibility in the business model. It's one of the advantages of having high gross margin and high EBITDA margins.
If things start to happen that would make the level of OpEx spending we're at look a little bit off, we have lots of flexibility to move that, right? Those are the conditions under which we would consider adjusting it, Gavin. I don't see it going up for the next quarter or two given what's going on in the world out there. If demand were to soften a little bit, then, you know, we have lots of places to adjust, whether it's, you know, traveling to see customers or how much marketing you do or how many trade shows you go to or, you know. I feel really good about that.
The thing I'm feeling good about is the control over it that we have because of the financial model at Sangoma, more so than knowing whether we will or won't have to adjust it, you know, a quarter or three from now.
Got it. Very clear. Thanks so much for your answers.
Sure.
The next question is from David Kwan from TD Securities. Please go ahead.
Morning, guys. Bill, I appreciate the color you provided on the services revenue and the sequential decline there. It's just, I think, something we haven't seen, I think, since the start of the pandemic, which would be probably quite understandable, I think, at the time in particular. You had some concerns about where the SIP trunking revenues would have gone. I guess related to that though is maybe just trying to get a better understanding of that services revenue line. You know, kinda how much is really coming from more traditional kind of seat-driven SaaS revenue, whether it's, you know, UCaaS, CCaaS, managed services maybe, versus maybe some of the more variable types, like SIP trunking or CCaaS?
Yeah, sure. I don't have that mix off the top of my head, David. But the vast majority is, you know, the subscription-based SaaS revenue. Only the CaaS product line in the suite of cloud services has this usage component. It's only in part of the CaaS product line. We sell CaaS both retail and wholesale, but retail does not have a usage-based component. It's only the wholesale. In the wholesale, there's two parts to the pricing model. There's the fixed part and the variable usage-based part. You know, once you scope down like that, David, if you're thinking about it the way I just tried to describe it, right? You have all of our revenue, and then that total revenue breaks into product and service.
In the service, the service breaks into cloud and that little tiny bit of leftover stuff that I described earlier, like I don't know, man. Like the maintenance on, I don't know, some on-premises system or anyway. The cloud breaks into all of the different cloud products, right? The UCaaS and the CaaS and the CCaaS and the contact center. Inside that, it's only trunking. Inside trunking, it's only the wholesale, not the retail. Inside the wholesale, it's not the fixed part. Once you go through all of that telescoping down, it's a very small part, very small. I don't have the exact figure.
You know, that's why when I was answering the question that Larry was saying came in even before the call, I don't know, I must have went through three or four ways of explaining the factors that overlap. The usage component of Trunking as a Service that you asked about was only one of those three or four, right? You saw me telescope down five or six levels to get to that one and then say that one is only one of the three or four factors. I mean, without being able to quantify it off the top of my head, I think you get the idea. It's very small.
No, that helps. That really does help. I think maybe Larry might have preempted the Q&A. It's something that I had written up in my notes, so maybe he addressed that beforehand. Moving on to margin side, like, do you think Q1 is kind of the trough here for EBITDA margins, given your comments about the integration at NetFortris now being complete, and, you know, from a revenue perspective, expecting to see a rebound here in Q2?
I don't think so, David. You know, it's back to my comment about the crystal ball, right? If there was a trend I would point out, it wouldn't be we know the trend. It would be we know the trend less well now than last quarter and less last quarter than the quarter before. Uncertainty is increasing, right? The world is more uncertain right now. So there's no reason for me right now to believe that that 17% EBITDA margin in the quarter is what you call the trough. I don't think next quarter it's jumping to 19%, and the quarter after that, it's gonna come 22% on its own. I think that's the right level for us to be managing the business to, given everything else that's going on.
I'm just trying to acknowledge to everyone so that, you know, you feel the sense of transparency that it's harder to know exactly this quarter than it was last year. I don't want you to build into your model, you know, 17% EBITDA margins is the trough or the low, and it's about, you know, to shoot through the roof after this. I think it's more likely that it'll look like 17% next quarter. Let's see, and if that feels like it's starting to change, you know, of course, we'll tell you guys.
Yeah, I wasn't, you know, expecting the margins to get back to, you know, the pre-acquisition levels closer to 20% in Q2 or even Q3 or Q4. Just wondering, you know, we've seen the margins effectively flat sequentially, but to what extent we might see a, you know, a bit of a rebound from the 16.7% this quarter up to, you know, maybe closer to the 17% level in Q2, and hopefully, you know, higher than that in the 2nd half of the year. Just wondering how realistic or reasonable that is from your vantage point.
I don't think I have a better, more precise answer, David. You know, if you've already accepted the premise that it's not gonna go from 17% to 20%- 23%, then I think we all have to agree that we don't have the ability to be so precise that I could tell you is it gonna go from 17%- 18%. We just can't pretend that our ability to forecast has that much resolution attached to it, given the uncertainty in the world, right? I tried to share with you in my answer that I would not suggest you build in some ramp, that I think where we are now is a good level. You know, is it conceivable that it could go up a point? Of course, absolutely. To refine a forecast to 1 extra point of EBITDA margin is just something that I don't think we have the ability to do right now.
Okay. Yeah, I appreciate that. I guess the last question I've got is just on capital allocation. You know, how would you rank, you know, say, M&A versus debt repayments versus share buybacks right now, especially given where the share price and valuation is?
Well, I think there's no doubt in our minds that paying down debt is a no-brainer, and we're gonna keep paying down debt, and that seems like a good idea at the best of times, and it's exactly what Sangoma has done historically, and these aren't the best of times, so we're gonna keep paying down debt. On the share buyback thing, you know, we're just constrained by the trading volume and the windows during which we can buy and during the windows in which we can only buy on some kind of a pre-built, predetermined schedule. So we're buying what we can. We're very unhappy with where share price is, so there's no better acquisition in the world than buying Sangoma right now, so we're continuing to do that.
Then the 3rd bucket you asked about in terms of capital allocation of M&A, I guess my answer to that, David, is I personally don't quite think of it that way right now. I don't think we would say, you know, if we had $100, you know, would we put a 3rd into, you know, debt and a 3rd into share buybacks and a 3rd into M&A? It might be zero into M&A, and it might be something else because it just depends entirely on our ability to find an acquisition that now meets tighter restrictions, given where our share price is. I mentioned on the call that we continue to be very active in that area. We've built a team around it now to treat it more rigorously.
Our degrees of freedom on acquisitions has been reduced, and we just have to be much more careful and selective. Maybe there'll be some capital allocation to it, but we just can't say definitively right now.
I appreciate the comment. Thanks, Bill.
Okay. Sure, sure, David.
The last question today is from Robert Young from Canaccord Genuity. Please go ahead.
Hi. Just a high-level question, I think, around the decision to reiterate the guidance. Just trying to parse some of the comments on the call around, you know, seeing the buying behavior worse than month-over-month in September, October, November. I think you said cloud booking, however, was strong and supply chains improving. Like, what leads you here at this point in time, you're confident that, you know, that guidance for the full year is reiterated versus maybe weakened or brought down a little bit given the outlook for, you know, the macro outlook seems so clouded right now?
Yeah. Perfectly fair question, Rob. Thank you. I think the answer sounds a little bit like the way I described the answer to please explain why services were down a little bit. There's no one answer. It's this combination of three or four factors and, you know, usually the three or four factors don't happen at one time, and here they do. I think we just have to acknowledge to The Street that given we see uncertainty as higher, as you've heard me say twice in answer to two separate questions, that the combination of these competing factors is why we've not changed guidance. It's not that every factor's positive, nor is it that every factor is negative. You heard us say that bookings are up, and bookings are up. It's really good.
You know, the bookings are up not by a bit, but to the highest they've been in quite a long time. We've got some really large orders and it's up not just on a gross basis but on a net basis. There's several factors that would suggest things look encouraging. Yet you also heard me talk about several factors that look the other way, right? We've seen product revenue dip by 9%. As you just asked me about the macro factors, are kind of, you know, a little bit more risky now than they were in the past. Those are not within our control. We're not sure how to predict them.
You add all that stuff together, you know, in some subjectively evaluated opinion, when we acknowledge to each other, we don't know the real final numbers. In our minds, there's nothing there that would suggest we should change guidance right now based upon how all of that sums together. That's not to say, Rob, that, you know, everything is locked in and 100% and all of the factors are positive. I hope you've heard that from my comments and that we've tried to be balanced and candid with you guys and acknowledged the stuff we do know and the stuff we can't know. I've answered the stuff we can know definitively. I tried to explain the factors that affect the things we can't know definitively.
You know, we've done the best we can as a bunch of human beings who care about this immensely to figure out how all of that lumps together, and we haven't changed guidance. if things change down the road, of course, you know, we would tell you guys that. that's, I realize, not a very satisfying answer, but it's the truthful answer.
Thanks a lot. That's it for me.
Okay. Thanks, Rob.
This concludes the question and answer session. I'll now turn the call back over to Larry Stock for any closing remarks.
Thank you. Thank you everyone for joining us today. This concludes our conference call today, a recording of which will be available on our website shortly. Have a wonderful day.
Thank you, everyone.
This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.