Thank you for standing by. This is the conference operator. Welcome to the Sangoma Technologies Fiscal Q3 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 David Moore, Chief Financial Officer. Please go ahead, sir.
Thank you, operator. Hello, everyone, welcome to Sangoma's Investor Call. We're recording the call, and we'll make it available on our website for anybody who's unable to join us live. I'm here today with Bill Wignall, Sangoma's President and Chief Executive Officer, and John Tobia, EVP Corporate Development, to take you through the results of our Q3 of fiscal year 2020. We will discuss the press release that was distributed earlier today, together with the company's unaudited interim financial statements and Q3 MD&A, which will be available both on SEDAR and our website very shortly. As a reminder, Sangoma reports under International Financial Reporting Standards, IFRS, and during the call, we may refer to a couple of terms such as operating income, EBITDA, and adjusted cash flow that are not IFRS measures, but which are defined in our MD&A.
For fiscal 2020, thus starting on July 1, Sangoma adopted IFRS 16, a new accounting standard, and the fiscal 2020 results incorporate that new standard. Please also note that unless otherwise stated, all references to dollars are to the Canadian dollar . Before we start, I'd like to remind you that the statements made during the course of this call that are not purely historical are forward-looking statements regarding the company or management's intentions, hopes, beliefs, expectations, and strategies for the future. 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 statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements are discussed in the accompanying MD&A, our annual information form, and in the company's annual audited financial statements, all posted on sedar.com.
With that, I'll hand the call over to Bill.
Thank you, David. Hello, everyone, and thank you for joining us today. I have structured my comments into five sections. I will start by going through our Q3 results, and second, I will cover year-to-date versus last year. I will provide a summarized update regarding the impact from COVID-19. Fourth, I'll touch on Sangoma's corporate strategy. Finally, I'll conclude with the section on forward guidance. Following my remarks, I'll hand the call back over to David for our typical open Q&A session. With that, let's turn to section one, our Q3 results. Sales for the quarter ended March 31st, 2020, were a record CAD 36.3 million, up 26% from CAD 28.9 million in the Q3 of fiscal 2019, and about 12% higher than the immediately preceding Q2.
The increase in sales was due to the acquisition of VoIP Innovations, the continued growth and compounding of our services business, where our recurring revenue is generated, all partly offset by some slight softening in demand for our one-time revenue product sales due to COVID. Overall services revenue as a percentage of total revenue continues to increase and exceeded 50% this quarter for the first time as recurring revenue continues to grow, and I will cover this in some additional detail in the strategy section today. Gross profit for the Q3 of fiscal 2020 was CAD 23.5 million, 31% higher than the CAD 17.9 million realized in the Q3 of last year.
Gross margin for the Q3 was 65% of revenue, 3% higher than the same quarter a year ago, due to the steady increase in the percentage of revenue from higher margin services and to the impact of VoIP Innovations. Operating expenses for the Q3 of fiscal 2020 were CAD 20.1 million versus CAD 16.2 million in the same period last year. This was primarily driven by the additional OPEX that came with the acquisition of VoIP Innovations earlier this fiscal year. For the Q3 of fiscal 2020, EBITDA at CAD 6.5 million was also an all-time quarterly record and essentially double that of the same quarter last year.
This was driven by the inclusion of VoIP Innovations for the quarter, the operational efficiencies introduced during the H2 of 2019, the adoption of IFRS 16 at the beginning of this year, and the gradually increasing fraction of recurring revenue as our services business continues to compound. Interest expense is up in Q3 year-over-year as a result of the debt utilized in the VI acquisition. As I shared in our call during February, we undertook a slightly complex debt refinancing in order to lock in a 4.2% interest rate versus the recent rate of 6.5% for half of the original loan time. This involved converting the base rate loan to LIBOR and then using an interest rate swap. The swap is for five years and so covers the bulk of the five and a half years remaining on the loan.
Since the interest rate swap was carefully matched for the payment terms of the loan, this is treated as a derivative and thus accounted for as a cash flow hedge under IFRS. This means that any fluctuation in its value is recorded in other comprehensive income does not impact our P&L. You will also note an offsetting derivative asset or liability on our balance sheet for the duration of this swap. Net income for the Q3 was CAD 1.7 million, compared to CAD 1.1 million for the equivalent quarter last year. For the final portion of my commentary on Q3 results, I'll briefly touch on a couple of highlights from our balance sheet and cash flow. Let's start with the balance sheet. On March 31st, we closed with CAD 12.5 million in cash after paying down about CAD 2 million in debt during the quarter.
Just after the end of the quarter, to further bolster Sangoma's cash balance, the company elected to draw on its swing line and revolver line for $1.3 million and CAD 5.3 million respectively, such that our cash balance is well over CAD 20 million. This was done defensively and proactively, simply to ensure the company was ready for anything, and at a time when it wasn't quite clear what the impact of the lockdowns would be and whether there might be a liquidity crunch. Next, I'd like to touch on inventory levels for a moment. As we've mentioned on recent calls, earlier this year we undertook a major project to consolidate some contract manufacturers, and in Q2 this had caused an increase in inventory buffer stock. With the project behind us in Q3, we began to draw down some of this buffer and reduced our inventory by CAD 0.8 million.
This is after adjusting for the foreign exchange impact, because our U.S. dollar inventory got converted to Canadian dollar and it looked like an increase on our balance sheet. That's somewhat misleading. Third, a few words on receivables. There's a lot of media coverage these days about how companies might stop paying their bills or perhaps significantly delay payment. I'm pleased to say that we've not really seen that from our customer base to any material extent. Sure, there are a few customers here and there that may be having some financial challenges, of course, Sangoma has no customer concentration and we're not seeing significant impacts on AR as a result. In fact, our receivables are at about the same level as they were on June 30th when fiscal 2019 ended, even with our larger base of business.
Though we have increased our AR provision from about CAD 300,000 at that time to almost CAD 600,000 now, just in case. Now for a few remarks on cash flow. In Q3, we generated adjusted cash flow from operations of CAD 3.7 million. This measure of cash flow excludes the impact of acquisitions and other unusual non-operating one-time anomalies. In our Q3, there is one such non-operating adjustment that's worth explaining. In the purchase agreement for the VoIP Innovations acquisition, certain telecom taxes owed by VI for several years prior to closing obviously remained the responsibility of the sellers. As such, funds were placed into escrow prior to closing to ensure payment of such liabilities when those amounts were finalized. Such payments have now been made, and since these payments were directly tied to the transaction and were for past periods, there was no operational impact on Sangoma.
We've adjusted for this amount, and it's already factored in to the CAD 3.7 million of operating adjusted cash flow. Naturally, normal course of business telecom taxes are indeed part of our normal operations as they always have been and are treated as a regular part of our OPEX. Finally, I'd like to provide a short explanation of an item you may have noticed on both the balance sheet and the cash flow that is a little confusing. You may remember when the COVID-19 lockdowns commenced in late March, the Canadian dollar was hit hard as the U.S. dollar strengthened by about $0.11. This sudden and significant FX movement had little effect on our Q3 P&L, since it happened so late in the quarter. As many of our assets are held in U.S. dollars, it did unavoidably have a significant impact on our balance sheet.
As such, this creates an unrealized foreign exchange gain in our cash flow statement. This means that in our reporting currency of Canadian dollars, our assets, such as inventory or receivables, were converted at CAD 1.42 on March 31st versus CAD 1.30 on December 31st, 2019, at the end of our Q2. Since we had not yet received cash for these assets, for example, a unit of inventory not being sold as at March 31st, then the gain in value has not yet been realized. I hope that this helps a bit to explain this entry. That brings my comments on Q3 financial results to a close, and I'll now turn to year-to-date results. We compare on a year-to-date basis, please remember that in addition to this year's VoIP Innovations acquisition, we purchased Digium in September of 2018.
That is consolidated in from the beginning of fiscal 2020, but was not included in the first couple of months of fiscal 2019. Sales for the nine months ended March 31st were CAD 96.6 million, 21% higher than the CAD 79.5 million in the first nine months of fiscal 2019. The increase in sales was driven by the acquisitions as well as by the ongoing growth and compounding of our services business, all more than offsetting a slight decline in one-time product sales. On a year-to-date basis, the percentage of sales from services has grown from 33% in the first nine months of fiscal 2019 to 47% for the same period in fiscal 2020. The cost of sales for the nine months ended March 31st was CAD 34.3 million, compared to CAD 31.4 million for the nine months ended March 31st, 2019.
Gross profit for the first nine months was CAD 62.2 million, 29% higher than the CAD 48.1 million realized in the first nine months of fiscal 2019. Gross margin for the first nine months of fiscal 2020 was 64% of revenue, up 3% from the 61% last year, reflecting slightly higher margins in the newly acquired businesses and a greater percentage of revenue coming from higher margin services year-over-year. Operating Expense for the first nine months of fiscal 2020 was CAD 55.1 million, compared to CAD 43.8 million for the same period last year, reflecting the additional costs of the recent acquisitions.
For the first nine months of fiscal 2020, EBITDA at CAD 15.4 million was 88% higher than in the same period last year, resulting from the inclusion of VoIP Innovations, the operational efficiencies introduced during fiscal 2019, the adoption of IFRS 16 at the beginning of this year, and the gradually increasing fraction of revenue from services. Interest expense is up substantially year-over-year as a result of the debt taken on for the acquisitions, just as it was for the quarter, as mentioned a few moments ago. The recent refinancing has locked in half of the loan at 4.2%, down from the 6.5% in recent past. During the first nine months of fiscal 2020, Sangoma recorded CAD 2.6 million of costs directly associated with the legal financing and closing of the VI acquisition on October 18th.
In the same period of fiscal 2019, we coincidentally incurred a similar amount of CAD 2.7 million for the purchase and integration of Digium. Net income for the first nine months ended March 31st was CAD 1.3 million, compared to a net loss of CAD 0.2 million during fiscal 2019. That brings my comments on our financial results to a close, and I'll now move on to a short COVID update section. As some of you may know, we held an extra investor call on April 30, specifically to discuss the impact of COVID on the company. That call was lengthy, so I will not repeat that level of information today. Instead, I would invite anyone looking for more detail about how we're managing the business during the pandemic to please listen to that recording, which is available on our website.
Today, I will seek only to summarize the key takeaways from that call for those who may have missed it and update anything I can from the past few weeks. COVID, and its economic impacts more precisely, is arguably the most critical near-term topic for business today. It's worth spending a few minutes on. I will cover two things. The three phases of impact on Sangoma, why we feel your company is well-positioned to withstand the impact so well. I'll start with those three phases. The team here listened to many companies describe the impact of COVID on them. It's admittedly a very challenging thing to explain and can come across as a bit muddled in many cases. I think Sangoma has been able to capture this quite clearly by describing it in three distinct stages.
The impact on our supply chain, followed by the impact on business continuity, and finally, the impact on demand. Stage 1 for Sangoma was all about our supply chain. As you may recall, coronavirus first started to get attention in early January as it emerges in the city of Wuhan, China. Initial fears were all about China as the world's factory. Although our services business now represents about half of our revenue, the other part involving the sale of products does indeed involve suppliers in China. Thus, Sangoma's focus during stage 1 of the COVID crisis was to ensure we were able to get our products from our suppliers in a timely manner and sufficient quantities in a way that did not negatively impact our customers.
During this period, our operations team was working very diligently with all links in our supply chain to make sure that raw materials were available at factories when needed, that our contract manufacturers could build, especially as this was happening during Chinese New Year, that our suppliers could deliver to us across international borders, and that we could subsequently ship to all of our customers around the world. This is perhaps not glamorous work and not the type of in-the-trenches effort that we'd stand up and tell investors about while we were handling it.
In the end, this first stage of dealing with COVID lasted about four to six weeks for us, and most importantly, significant work by our teams ensured that virtually all customers were able to get their orders filled on time, and thus our revenue was not impacted in a material way as we wrestled the supply chain challenges during stage 1. I'm pleased to share with you that Sangoma is now through that phase, and it is now behind us. Stage 2 is the impact on Sangoma, from COVID on business continuity. Stage 2 begins in or around late January or early February. At this point, it had become clear that coronavirus was no longer only a China problem and was turning into the global pandemic we know it to be today.
Sangoma's top priority during this stage had to be the safety and well-being of our employees while ensuring business continuity for partners and clients, much like many of your organizations, I'd suspect. Like many companies, we began to gradually reduce business travel ahead of public policy, eventually eliminating all travel. We instituted new policies such as no visitors to Sangoma offices, social distancing, hand sanitizer, and stay at home if you're feeling ill. By early March, we had required all of our staff who could work from home to do so. We've now seamlessly migrated to this model with no material impact on operations. This was especially complex for a highly globalized company with staff in over 20 countries and in about 25 states around the U.S., all needing access to the right systems, all at about the same time in March.
Sangoma has now fully adapted to this way of working, with 90%-95% of our staff working from home, and only those who need to be in an office coming to work. As complex as that was, we benefited from the fact that we make many of the products or services that work from home staff need, so we know those tools very well. We were able to continue serving our customers who count upon us every day, perhaps now more than ever, for mission-critical communications. Stage 2 continues to this day, of course, but it is now fully under control, and concern about the impact of our business on our business from stage 2 is now also behind us. Sangoma describes stage 3 of the COVID crisis for us as the impact on the demand side of our business due to government-mandated shutdown of businesses.
We see this third phase starting to surface in March as the shutdowns begin and lasting at least into our Q4. Our management team and board have many years of experience managing through disruptive change. As a result, Sangoma has proactively taken action during this third phase to mitigate such possible impacts, including we've taken prompt, prudent expense mitigation steps to appropriately control discretionary spending, such as a temporary hiring freeze, scaling back on non-essential marketing investments, eliminated business travel, removed investor relations expenditures, et cetera. We've adjusted our product roadmap in a very nimble way to reprioritize the launch or plan products earlier than scheduled, where they fit with the increased needs of employees working remotely. We've launched numerous customer-focused initiatives to win new clients in need of improved communications during the crisis and to secure our existing customer base.
We're ready to step on the accelerator immediately as soon as the crisis begins to subside, and in fact, have already begun planning for back to work and any changes that may be necessary at our worldwide offices around the globe. This planning accommodates for enhanced social distancing, frequent cleaning, hand sanitizer, rules regarding employees with any symptoms remaining at home, and regular enforcement of such rules. The net result is that we feel Sangoma has understood the impacts of COVID on our business, even as they changed over these three phases, and we have controlled the things that are within our control. The second key takeaway from the extra COVID call about a month ago is that we believe strongly that Sangoma is well positioned to weather the current uncertain climate for a number of reasons.
Sangoma continues to operate in as close to a business as normal manner as is possible under these conditions as an essential service. Sangoma has repeatedly demonstrated an ability to adapt as part of our team's core competency, whether it was turning ourselves into a software company from a hardware business, or building out an entire portfolio from a single product, or creating a fast-growing services business based upon recurring revenue in just a few years. This track record makes me confident that Sangoma will emerge from the COVID-19 crisis ready to step on that accelerator. We have a very large customer base, diversified on multiple dimensions. There's no customer concentration, with our largest customer representing less than 10% of sales, a geographically distributed client base in over 125 countries around the globe, many customer segments, including SMB, enterprise, service provider, and contact centers.
Services revenue now accounts for about half of sales and is more insulated. We have customers across many verticals, including manufacturing, military, aerospace, government, retail, education, transportation, technology, et cetera. We have a broad portfolio of products that appeal to many different users and needs, from connectivity to premise-based UC to cloud. In-demand products that are critical in today's work from home world, including softphones, headsets, audio conferencing, and the ability to take an employee's desk phone home and use it there in a way that matches exactly the way it worked when it was on their desk at the office. An ever-present focus on the customer, enabling Sangoma to respond quickly with an empathy towards clients. Our staff have been asked to be patient and supportive towards our customers and to each other during these times of high stress.
We will be flexible with them, helping customers beyond strict contract entitlements because we have the financial resources to do so, and how we handle them in difficult times will be remembered in the good times. Investment in innovation continues unabated by the crisis, resulting in our ability to reprioritize roadmaps and quickly launch new products. Last but certainly not least, our proven financial strength. Consistently growing our top line over 21 straight quarters, generating half of our sales and services revenue, which is more insulated, producing very healthy EBITDA over CAD 6 million this past quarter. We are cash flow positive and Sangoma has a strong balance sheet, having maintained all principal and interest payments on all existing loans, and continues to comfortably meet all debt covenants.
We are well-capitalized and have over $20 million in cash reserves to take advantage of opportunities that may arise, as well as being fully prepared for any further uncertainties during the COVID-19 pandemic. For all these reasons, both financial and strategic, we strongly believe Sangoma is unusually well-positioned to weather the COVID storm. Now to a short recap of corporate strategy. In general, I typically provide a comprehensive update on strategy once per year, usually on the Q4 calls, with shorter updates to specific strategic information on a quarterly basis. I'd like to start today's quarterly short update on strategy with a very simple reminder that at the highest level, we use two approaches to scaling Sangoma. One is organic growth, the other is prudent acquisitions to complement that growth.
On the organic side, Sangoma's growth is driven by new products or services, new customers, and the compounding effect of our recurring revenue. I'd like to comment on all three of those areas for Q3. For new products or services, we launched both our new line of headsets and our newest cloud service called Sangoma Meet. Headsets were important to round out our portfolio of endpoints, which included desk phones, soft phone client software for your computer, and soft phone software for your mobile device. Sangoma Meet was launched by reprioritizing our product roadmap, demonstrating our agility to bring it forward given the adoption of video meeting services during the current work-from-home trends. Sangoma Meet is our brand-new cloud video service for meetings, collaboration, and screen sharing.
Very early feedback is positive, and we've got more of it than we expected, with over 300 users submitting reviews and the average rating coming in at about 4.5 out of five. Pretty good for a brand-new product. Usage by region has been a little surprising to us as well, with 40% of usage in North America and fully 60% coming from the rest of the world, a higher international ratio than I'd expected. This might be partly because it is being offered free of charge for a while during the COVID-19 crisis. On the topic of customers, I think the key thing to point out for Q3 is that we started proactively checking in with existing customers via campaigns to make sure they knew we were here for them as their communications partner during these stressful times.
Examples of such campaigns included, for instance, explaining how they can better leverage the capabilities they already had from Sangoma to improve remote worker efficacy. We covered such things as how their employees could take advantage of their sophisticated UC software from Sangoma to enable staff to take their desk phone home and use it there, just like when located in the office. After all, it's an IP address after all. Or how they can make use of newer offerings such as our headsets or video meeting software. Third, our services revenue exceeded our product revenue for the first time, and this is a key milestone in our transition to becoming more and more a recurring revenue company. Last year, I shared how important this transition is to Sangoma, and I want to reiterate that again now. In fiscal 2018, we averaged about CAD 5 million per quarter in services.
By last year, that was CAD 10 million per quarter, and this year we're now over CAD 15 million per quarter. The other key driver of growth that I mentioned for Sangoma is our M&A strategy. On this strategic topic, I'd like to offer a quick update on the VI acquisition and introduce the .e4 acquisition a bit more. Regarding the VI deal, the most important thing to say is that we remain very pleased with the decision. As some of you will recall, VI specializes in wholesale SIP trunking as the primary line of business, something we refer to internally as Trunking-as-a-Service, using the same naming convention as SaaS or UCaaS. This service is sold to partners, not typically to end users, and is sold with a usage-based pricing model.
We've been hard at work on integrating the parts of the business that we deemed wise early on, so that VI is now on Sangoma's accounting system. Their sales efforts are now harmonized with Sangoma's general sales process. VI has seen an uptick in leads and opportunities from the Sangoma installed base as a result. We're now beginning to coordinate the VI product roadmap with the rest of Sangoma's product management process. Of course, revenue has held up pretty well at VI, given it is almost all recurring. The other acquisition I'd like to cover is .e4. This acquisition was announced in the middle of Q3 and closed right at the very end of the quarter. .e4 has been a channel partner with Sangoma for many years. We know them very well as a company, their leadership, their culture, et cetera.
They're very good, honorable people that have been big supporters of Sangoma for a long time. .e4 is a smaller, very focused organization with less than 12 people, and that's why I described it as a kind of tuck-in type acquisition. Mike White, their founder, and his team concentrate on selling Sangoma products into the open-source ecosystem, something they've developed definite skills at. That community is somewhat different from other markets we serve, with their own unique set of needs and expectations. This deal was done to strengthen our sales capabilities in open source. Accordingly, the .e4 team joins the Sangoma sales organization to focus on that part of the market, and we've already seen the benefit of that focus in the early part of Q4. They will remain geographically where they are based today in Traverse City, Michigan.
That concludes my comments on our general strategy, and I'd like to move on to the final section about forward guidance for fiscal 2020. As you know, Sangoma had announced for fiscal 2020, our guidance from before the COVID lockdowns swept across the world. That guidance was for revenue of CAD 128 million-CAD 132 million, and EBITDA of CAD 19 million-CAD 21 million for this fiscal year. COVID hit, and the world changed for everyone in the most dramatic of ways. Accordingly, in April, we provided a COVID update to the markets, presented via a press release and an extra conference call. In that update, we said that we are cautiously optimistic about hitting those targets but could not confirm our guidance at that time.
Instead, we committed to providing a formal update to guidance when we released the Q3 results, at which point we expected to have better visibility regarding the financial recovery in the various countries in which we operate, as governments around the world reopen their economies. We indeed thought we'd have better, more reliable information about that recovery and reopening by late May. I think we'd all have to acknowledge that such information has been somewhat slower to come than we might have hoped. I'm guessing most of you on this call might still be in work from home mode or know many people whose businesses are still closed or observed a reopening of companies around the globe is happening slowly and inconsistently thus far. At this point, we still see the effects of COVID-19 on Sangoma from the phase 3 stage I described earlier.
There remains some modest softening of demand on the one-time product sales due to COVID, and it varies by region. The services revenue is holding up well. All in all, the additional market clarity we'd hope for is still kind of tough to come by, and it remains somewhat challenging to forecast how the next few months will unfold. In spite of those challenges, we remain determined to hit the targets we've set for ourselves. In our press release of earlier today, you will have no doubt noticed that Sangoma has now confirmed we expect to meet both sales and EBITDA guidance for fiscal 2020. This is, of course, based on what we've seen so far this quarter in Q4.
We still have about half our revenue tied to one-time sales, so there always remains some risk, and like so many other companies around the world, the April to June quarter will be a tougher one. Despite the challenges imposed by COVID, we remain committed to meeting our guidance for the year, namely CAD 128 million-CAD 132 million of revenue and CAD 19 million-CAD 21 million in EBITDA. With that, I'd like to bring my prepared remarks to close with a short summary. Sangoma has grown from a very small nano-cap company with about CAD 10 million in sales to a strong, growing business that anticipates hitting CAD 128 million-CAD 132 million this year, a level we fully expect to continue adding on to significantly.
We've demonstrated proven top-line growth over an extended period, solid and expanding EBITDA, increases in our services business, where the recurring revenue is generated, and positive cash flow.
Highlights from Q3 would include all-time record sales of CAD 36 million, EBITDA of CAD 6.5 million, exceeding CAD 6 million per quarter for the first time ever, and services revenue over 50% of total sales for the first time. A very strong quarter. Sure, we see some of the temporary COVID-19 headwinds that so many other companies are experiencing too, but we are very well positioned to withstand them. Our recent acquisitions are bearing fruit as expected. We have good M&A opportunities in front of us. Share price has been recovering, albeit more slowly than I'd like, and we expect to hit guidance in spite of the worst economic disaster of our lifetime. As I just mentioned, all in all, a pretty good quarter in context. With that, I'll turn the call back over to David to prepare for questions.
Thank you, Bill. To make sure everybody knows how to ask questions, I'll ask the Operator to go over the instructions. Operator, we're ready to take questions now, please.
Thank you. We'll now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You'll 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. Our first question is from Nick Corcoran with Acumen Capital. Mr. Corcoran, your line is open.
Hey, guys. Thanks, Dave. My questions.
Hi, Nick.
I guess my first question just has to do with, we're about two months into the quarter, and I'm just wondering if you could maybe talk about how you feel about your product orders so far in the quarter and whether or not they may be lag behind your expectations and there might be some catch-up in June or how you kind of see that unfolding?
Yeah, I don't think we want to say a whole lot more than what I mentioned in my prepared remarks, Nick. The world's pretty uncertain right now. As you said, there's a bit of COVID headwind on the one-time product sales. The services business is holding up pretty well. You've seen that we're committed to meeting our guidance. Being more specific about what might happen in the tail end of May or June, I think is unwise. I will say that there's some inconsistency in different regions. There are parts of Europe that have restarted reasonably well and others that really haven't very much. Let's leave it there, and we'll know much better in the next five or six weeks.
I think that touched on my next question, is how different regions have been recovering at different speeds. Can you maybe give a little bit more detail of how, say, North America has compared to Asia or Europe?
For sure we could talk about that. At the highest level, a simple starting point for my answer would be, different parts of the globe entered their own COVID crisis at slightly different times, right? It obviously emerged in China, Asia was hit first. I would say we saw Europe second, North America third, and probably Latin America fourth, from our perspective. You started seeing the recovery in terms of health outcomes somewhat follow that same sequence, then to at least a limited extent, the opening of economies kind of not in every country case, but by region at least following that as well. We started to see a couple of Asia countries open up first and some countries in Europe open before some of the states in the U.S.
I'm sure you're very aware that there's a couple of places in Europe that really didn't shut down in the same way at all. They practice social distancing and good hygiene, didn't force businesses to close. It really runs the gamut. In North America specifically, I could offer a little bit of additional color, like you asked. It's particularly challenging for a company like us that has employees in so many states as our HR teams figure out what's our back-to-the-office plan, and some states have already reopened, and some haven't reopened, and some have dates, and some don't have firm dates, and it's kind of all over the place. In terms of demand, there are states that have reopened, like Georgia or Alabama, business is getting back to normal there.
Other places have limited reopening, like we do in Ontario here, where there are some businesses that are open, but most are not, and the ones that are open might be open at a limited capacity or with certain restrictions, like if it's, I don't know, a retail store, the store can be open for pickup, but you can't go in and roam around. That's the stuff that affects demand for us. The variability is high, and so we have some countries like Germany where things were hit less severely and have come back a bit more quickly. We have other countries in Europe where they were hit much more quickly and much more deeply, like Italy or Spain.
In North America, you have a similar set of differences, perhaps not quite as widely varied as that, but that's part of why I'm a little bit hesitant to say a whole lot about what we specifically expect on certain products or product versus services over the rest of the quarter. We kind of expected, Nick, to have a slightly better read on things when we announced in April during the COVID call that we'd give guidance by late May. I think if anyone was to be honest, that's gone a little bit slower than some of us anticipated.
That's fair. Then can you give an update on how you're thinking about M&A and what the potential for more tuck-ins like you did with .e4 will be going forward?
Sure. For a company that's been acquisitive the way we have and has bought a number of companies on average, kind of one per year rate, we always have stuff in the pipeline. That's no different now. We have multiple opportunities in front of us. Some are, as you've just pointed out, tuck-ins and a little bit easier to do. Others are much larger. That's exactly the way it typically is for us. I feel like the market for acquisitions has not changed as much as some people expected. If you're a good company that's well-run and financially stable and you're, I don't know, publicly traded, your value has changed. If you're private and someone owns you're not likely to sell your company at a point where the price goes down dramatically just because something happened for a short period of time.
If you're a small company with financial struggles, for sure, those businesses have come off the boil and are available at slightly lower prices. But in general, although we wouldn't avoid buying a business like that, I wouldn't say that Sangoma is a distressed asset acquirer who's going out and looking for struggling companies, Nick.
Great. That's good color. Thanks, yeah.
Sure.
The next question is from Gavin Fairweather with Cormark. Gavin Fairweather, your line is open.
Hey there. Good afternoon.
Hi, Gavin.
I wanted to start out on the services revenue line. It was about CAD 16 million in Q2, I guess just a tick under kind of CAD 19 million this quarter. I realize kind of VI, you get a full quarter's contribution, but definitely still stronger than what I was expecting. I guess you've talked about the compounding of your cloud services business, and that's been a trend for some time. I guess I'm curious if VI is kind of coming in ahead of plan given that strength.
No, I don't think it's ahead of plan, Gavin. I think it's pretty much on plan. It's not under either, so I wouldn't want you to interpret that as something negative. It's kind of where we expect it to be, to be honest.
Okay. Then, we've talked in the past about how Sangoma can accommodate customers, either on-prem or in the cloud, and I think, pre-COVID, there was various estimates on the split of cloud versus prem for new installs. Lots of chatter in the marketplace about how one of the things coming out of COVID could be an acceleration of this shift towards cloud. So I guess, given your viewpoint, I guess I'm curious if you've seen any change in kind of customer preferences in that regard.
Not to a material extent, to be candid. I think, for folks who may not have quite as deep a technology understanding, there was a little bit of confusion about that. People had this perception that if you have an on-premise PBX, your employees are not able to work from home. That's not accurate. It depends upon the kind of on-premise system you have. If you have a traditional, very old PBX, then there's some truth to that. If you have an IP PBX like Sangoma's that's running on UC software, the phones and the endpoints, as I said in my prepared remarks, are just IP addresses and the brains of the system can find you, whether your phone's plugged into your wall at home or plugged into your wall at the office.
Really what I think, Gavin, is if you were a business owner who was running a PBX that's 30 years old, then your employees really did have trouble, and some of those people were forced to move quickly and might have chosen cloud because it's quicker to get turned up on and newer. I don't think it changes our strategy or the split we're seeing in May versus in, I don't know, March, about the percentage of customers that are going to prem versus cloud.
Okay, that makes sense. Then maybe one for David. Cash OPEX in the quarter was about CAD 17 million. I think late in Q3, you pulled back some discretionary spending, but obviously some costs in USD. Is this kind of a good run rate, like where those two kind of balance each other out?
I would say that is a pretty reasonable assumption, yes.
Okay, I'll pass it on. Thank you.
Thank you, Gavin.
The next question is from David Kwan with PI Financial. David Kwan, your line is open.
Hey, guys.
Hi, David.
Good job on the quarter. I was wondering on the gross margin side, maybe just looking at least sequentially, given the revenue mix, I thought the gross margins might have been up a bit. Was there anything going on there or was it just kind of more product mix within the revenue ones?
Yeah, there's nothing special or specific, as I said. It's up a little bit because of the contribution from VI, because of a higher fraction of revenue coming from services. Services generally have slightly higher margin. There's so many variables to that in any one quarter, David. The most important one is the mix of products or product lines that are sold in that quarter. We could have products that range from 40% gross margin to 85% gross margin. An extra fraction of the overall sales coming from a product at either end in that spectrum can tilt it a couple of points.
Well, that's good color. Thanks, Bill. I guess, assuming the revenue mix stays somewhat similar, is it fair to assume that gross margin should stay somewhere in the mid-60s and if we start to see a much more material growth in contribution from services revenue, that that number should trend upwards?
Yes, I think that's right. In the short term, that's correct, mid-60s feels about right. Over the long term, as services ticks up the way it has over the last three or four years, that's exactly what we'd expect.
That's helpful. I guess on the EBITDA margin side, you came in at just shy of 18%, which I think is a record high here. Maybe looking out beyond COVID-19, obviously, given how uncertain things are right now, but could you get your margins north of 20%, maybe without doing any other acquisitions, just kind of on your organic growth pace?
Oh, David, I'm not touching that with a barge pole. In general, you're heading in the right direction, and yes, of course, given what I just said about gross margins, you could expect that over time, EBITDA margins would tick up, too. I don't want to comment on that quite yet, David. We have competitors who outspend us because they're larger and never even think about generating any EBITDA. If we could accelerate growth by maintaining EBITDA where it is at a certain fraction of revenue for an extra quarter or year and build more shareholder value, I'd absolutely be considering doing that. While hypothetically what you've described is absolutely possible, I wouldn't want to commit to that right now in the middle of this crisis until we see how things unfold.
I shouldn't ask you for a date then?
Oh, you can ask me.
I think I know what the answer will be.
Yeah.
Again, another somewhat related question. Just as things are starting to open up here, I know it's still very early, but do you have a sense of when you might start to increase some of that discretionary spending, like on sales and marketing and travel and the like? Is it something probably later on in the summer?
Yeah. We've talked about it. It is really quite difficult to comment on, David. I will say that some of those lines are really hard to comment on, and some are a little bit easier. Something like travel is partly within our control, but partly not, right? While we may be able to have employees driving from state to state to visit a customer hopefully soon, we've already had some salespeople asking if they can do that. It doesn't look like we're about to be flying from Toronto to Texas in the next week or two, right? That one is harder for me to comment on. On the marketing side, the good news is we can turn that tap on and off fairly quickly. There's a set of baseline marketing activity that we think is critical to continue, and we don't cut back beyond.
Then the stuff that feels a little bit more discretionary is where we turn that tap off or back on. That can be done within a week or two. Once we see that some of the demand is returning and more and more states are opening up their economy and more and more people are going back to the office, that would really help me answer that question. It feels like your assumption is reasonable, David. But until we see what happens to the U.S. and how many of those states reopen quickly, and then a business reopening doesn't immediately lead a business owner to say, "Okay, we're reopen.
Now it's time to spend money on our communication system. There might be a little bit of a time lag there, we just need to have that play out a little bit before I would consider re-upping again on marketing. I talked about travel and marketing because those are the two largest chunks of discretionary spending for us at Sangoma.
That's helpful, Bill. Two more quick questions. Just on the inventory side, given the potential for a second wave to hit possibly later this year, are you guys planning to hold higher inventory levels, I guess, especially for components at some point?
Right now, we don't see a need to do that. We have critical components held in inventory that are long lead items, and that would affect our ability to convert a bill of materials to a product anyway. We don't do it for all of them, and it depends which CM we're talking about. Some of them are very good at doing this on their own and don't need us to do it. In other cases, we do it. Right now, David, I'm working on the assumption that if there were to be a second wave, it would be not as deep and not as long, and we've managed our way through the first wave quite well. We've got lots of experience doing it, and the second wave would be unlikely to happen or coincide with Chinese New Year.
I feel like if we got through the situation during what I call phase one, we'll be able to manage our way through a second wave. Although I will say that there are a few parts that we do need to deal with for multiple reasons, not only long lead item parts, and the ops team has got that under control.
Great. Last question. Just what are your plans, I guess, with the revolver and the swing line? It sounds like you're happy to sit on that cash for the time being.
David, do you want to try that one?
I think you've answered your own question there. Yes. It's still early days to see quite what's going to happen and what opportunities may arise for us. Yes, for the immediate future.
That's great. Thanks, guys.
Thanks, David.
Once again, if anyone has a question, please press star then one. The next question is from Michael Wu, a private investor. Michael Wu, your line is open.
Hello. Hi.
Hi.
Hi, Bill. Yeah. I have a question about the work at home. Basically, I think a lot of business after this pandemic should probably never continue to doing this working at home practice, because they find this is more kind of a long-term thing. Do you think you got any shift from the demand side? For example, more on service or whatever on the market, is there anything create a new demand from working from home?
Before I tell you the answer to would it change demand, it might be worth just touching a little bit upon whether your assumption is 100% guaranteed. There are two schools of thought on it. Certainly, some people seem to feel like there'll be a set of companies and employees who choose to continue working from home, and there's a different set of people who feel like employees can't wait to get back to the office. I don't think we know how that's going to play out. I'll not prognosticate on that too much other than saying the good news is that for us. Whether this leads to a slight increase in the fraction of employees that work from home or not, probably doesn't change anything about product strategy and probably does not impact demand in a big way.
The kinds of communication services that a company needs for their employees, whether the employee sits at a desk in a corporate office or sits at home, are generally not that different. They need a computer. They need productivity software. They need a phone, either a desk phone or a softphone. They need some ability to join meetings. They need some ability to join conference calls. Those are the kinds of things we do, Michael, whether they choose to use it on premise or from home, doesn't affect us in a very big way. The more modest impacts are things like you heard me talk about in my prepared remarks, right? It might affect something like the prioritization of a product roadmap, a particular situation like this, where it causes more people to work from home, makes a certain product category a little bit more important, like headsets.
Headsets were in high demand during this period, and many vendors sold out. Other than that, I don't think you need to read anything into it about a big positive or big negative impact on demand.
Okay. there's no big changes on your side, on your product, like demand or-
I think that's right.
settings. Yeah. Okay. My second question is about the capital raising. I remember, if I'm correct, quite a while ago, you'd raised some capital at CAD 1.75 or something. Would you think in the future if the share price is getting higher, would you consider to raise more capital to bring down the debt, and then you have more capital for more acquisition stuff?
Yeah, I think I can answer part of your question, which is would we raise capital for the primary purpose next to paying down debt? The answer is probably not. We're quite comfortable with the debt levels we have. They de-lever very quickly, very naturally. Interest rates are at an almost all-time low. If we were to raise capital, I can think of better ways to deploy that capital to create better shareholder value, whether it's investing in more products or buying more companies or spending money on marketing and sales to win more customers. While at some point down the road, it's certainly possible we would do another capital raise, I think it's more likely to be for those kinds of strategic reasons than simply to pay down the debt, at least in the short term.
Okay. Great. Thank you. Thank you very much.
You're welcome.
The next question is from Gabriel Leung from Beacon Securities. Gabriel Leung, your line is open.
Good afternoon, Bill and David. Thanks for taking the questions.
Yeah.
Just have two follow-up questions. Bill, I know you don't like to provide margin guidance, but maybe I can ask this another way. As we think about sort of growth and profitability, is there sort of a level of margins that you don't necessarily want to go above and that you would prefer to reinvest back into the business? Have you guys talked about that internally, whether it's sort of the current 18%, 20%? Have you guys put thought into that, and what's your view on that?
Yeah. I don't know if you heard some of the earlier questions, Gabe, or if you joined later. There was one that was a little bit similar to that question. The idea of could 18% become 20% plus, and if so, when? My answer was, I don't think I want to get pinned down on when will it go to 19%, and is 18% going to go to 17%, and when will it be 21%? You've seen our margins go from very low, gradually ticking up over time.
Part of my answer was kind of along the lines of what you just said, and that is, yes, I do feel like there may indeed be opportunities at some point for us to make conscious decisions about do we take EBITDA margins up a point, or do we use what could be an extra point of EBITDA margin and invest a little bit more in, I don't know, R&D or marketing and sales or something. That is a hard question to answer hypothetically, as it depends on the market conditions at the time and what's going on with the competitive landscape. As I said earlier, there are lots of our competitors, including some of the bigger ones, that have never generated any profit, and their plan is not to generate profit in the near term.
I feel like we already do a much better job of that, and if holding back on a little bit of extra EBITDA growth could allow us to scale more quickly, especially in strategic markets, I think we'd be willing to consider that, yeah.
Got you. My second question was just going back to your services revenues. I know somebody asked a question earlier, you did have a very nice sequential lift, I guess, from CAD 16 million to just under CAD 19 million in service revenues from a quarter-over-quarter perspective. I know you got an extra 15 days from VoIP Innovations, that's a pretty meaningful lift quarter-over-quarter now. I just wanted to check whether that was all organic or was there, maybe this is a question for David, whether it was helped by just some purchase price accounting on deferred revenues on a quarter-over-quarter basis?
Well, there are 12 factors that go into that, all of which can go up or down, some of which are impacted by exchange rates, some of which aren't. Some are, like maintenance, impacted by deferred revenue schedules. Others kind of grow steadily because they're a recurring revenue stream that is building in our case. I think if we look at one quarter at a time, you can't really draw many conclusions from that. We've been saying that that percent will increase. The VI acquisition, as you explained or mentioned, did help for sure. I think right now, we're just looking to secure the revenue opportunities that we have and keep our eye open for the future.
Got you. That CAD 18.8 million, that's largely recurring. All else being equal, you should be able to grow on that as we look into fiscal Q4 and beyond.
It's a mix of things. Yes, we would expect that to gradually keep increasing, subject to Q4 being a bit unusual given all the changes that are happening with COVID-19. I wouldn't take this next quarter as being necessarily, or this last quarter as necessarily being representative of exactly what will happen in the next couple of quarters. Overall, we're continuing to take advantage of every opportunity that comes to us.
Got you. I appreciate the feedback.
Thank you. Although you kind of downplayed a little bit the impact of the extra time from VI, I do want to just mention that that's not insignificant when you compare Q2 to Q3 growth, right? I don't remember what it was, David, around three weeks or something into Q2 when we closed. An extra three weeks on a 13-week quarter, it's, I don't know, 20-ish% or something on a CAD 5 million. You can do the math, right? My point is, it's not the whole explanation, as you rightly pointed out, but it's not CAD 100,000 or CAD 200,000 either.
Got it. Appreciate the feedback, guys, and congrats on the quarter.
Thank you.
Thank you.
The next question is from Agam Sharma, a private investor. Agam Sharma, your line is open.
Hello. Good afternoon. Thanks, Bill and David. Thanks for taking the call. I just wanted to ask if you can talk about the demand trends you've seen in respect to the customer type. I'm just curious to see where you've seen the uptake recently, if it's from contact centers or more from just SMBs moving from work to home. Thank you.
I would say the uptick is not really driven that much by the move to work from home. That's not been a big positive impact for us. I would also say that while contact centers are for sure a customer segment that we pay attention to, I would not say that we've noticed a very big spike or jump in that part of the business. One of the things about Sangoma is for a company of our size, which is a lot bigger than we used to be, but still a small cap company as a public business, we have a lot of customer categories and a lot of product lines. It's heavily diversified, and it's unlikely that any one particular product line or trend is going to be a singular cause for a growth outcome.
It's much more likely to be across a set of products or services, or the compounding of the services business, or a trend that's taking place across the entire industry. Although you asked about contact centers, I'm trying to generalize it. It's unlikely, I think, that we're going to be sitting here on a call in a quarter or two and say, "Oh, the growth in quarter X was because this one thing happened.
That's great. Thank you.
Okay.
This concludes the question and answer session. I'd now like to turn the conference back over to David Moore for any closing remarks.
Ladies and gentlemen, thank you for joining us today. This concludes today's conference call, a recording of which will be available on our website shortly. Thank you for participating, and we really appreciate your ongoing support for Sangoma. Have a very pleasant rest of day or evening. Thank you.
Thanks, everyone.
This concludes today's conference call. Thank you for participating, and have a pleasant day.