Thank you. Thank you for coming, everyone. My name is Gavin. I work at Cormark Securities. I'm a Technology Analyst, and I've been covering the Sangoma stock for coming up on seven years now. I've witnessed a lot of M&A and consolidation and acquiring all of the pieces, and now the transformation under Charles, the new-ish CEO. Do we still call you the new CEO?
Yeah, you got it.
Yeah. Thank you everyone for coming. Maybe just to start out, Charles, you had a long career leading big P&Ls at some global companies. Maybe just to start out, what attracted you to Sangoma? What did you see to jump in and take the reins there?
Okay. Hey, everyone. How are you doing? I was just telling someone on the side who just had a baby that my daughter just had a kid. And I like, oh my God, I'm a grandfather. Yeah, I've been in the industry a long time, 35 years. Big company guy. Most of my first half of my career was with Bell Canada, and I started off there as a junior engineer and climbed to the top of the food chain. I then went to, took over Hewlett Packard Canada as their President, and then took over Hewlett Packard America's business. I did some stints at Nortel for three years. I was the President of LG in Korea for about three years, and then became Chief Revenue Officer at Infosys for about five years, and then joined Sangoma.
The story of my career is really one about the enterprise and the modernization of the enterprise from when the internet first sort of was born to the hosting world. As we got into the cloud migration, my team and I played a very big part in the migration of the enterprise to the cloud, really a trillion dollars between 2018 to 2023. The only reason I'm telling you this now is because it's very, very relevant to the question he just asked me. Why did I leave that career to come and join a $250 million company, a small publicly traded company? It was because of what I just did in the last 10 years before that, particularly with Infosys and DXC before that, was watching the migration of this large cohort called the enterprise make its move to the cloud.
As it began that journey in 2018, roughly it accelerated when COVID hit. What COVID did was expose business continuity problems, and we all heard about them with supply chain problems and things of that nature. The enterprise really moved rapidly. The next cohort that is going to come through that transformation is the mid-market. For the last 30 years, the mid-market or the four major cohorts in technology were consumers, SMB, enterprise, and public sector. In the last five years, the SMB has split, and the mid-market has become what the enterprise was 10 years ago. They're looking for a single vendor. They're looking to take advantage of new technologies. The last 10 years we've secured the enterprise. Hackers have come down market. There's been a 67% rise in ransomware attacks to that mid-market cohort.
Mainstream technology like ChatGPT has made technology much more pervasive to these mid-market customers, and they don't have IT departments. They're generally smaller, and they're looking to leverage technology. Most of the tech companies for the last 10 years supporting that SMB have been selling components. You buy your voice from Vonage. You might buy your UCaaS from RingCentral or Zoom, or you might get a Teams license. You might buy your security from Fortinet. You'll buy your phones from Polycom or from Fanville. Sangoma had come along, and I was presented with this company that I ended up watching this mid-market cohort. Just so you know, it's 44% of the global IT spend today. Fastest growing cohort by far of any of the cohorts is this mid-market emerging, highly sophisticated cohort that's coming into the tech space who are concerned about vendor sprawl and things of that nature.
Sangoma was a company that had almost all of the essential components to serve this mid-market from one company. If you think about the five essential components that any business requires, my wife's got a small little fashion store. She requires these same five components: voice, data, video, security, and hardware. You name a company right now in the small cap arena, never mind the enterprise, but in the small cap arena today that has all five of those proprietary owned technologies. That's what I saw when I joined Sangoma. Now you couple that with a stock that was trading around four times EBITDA when his peer group was trading at 10 times EBITDA. Career guys like me look for these companies. They dream of these kind of companies. I bring 35 years of operational experience with huge companies down into a small company that was missing one thing.
The previous CEO did a very good job of collecting assets, bought 11 acquisitions over seven years, but he didn't do a very good job of integrating assets. That's what the company needed. It needed to integrate these assets to unlock the value, because any one of those five components that I just mentioned, and if any of you are investing in any one of those components that are just single threaded, I will guarantee you they're all commoditizing rapidly at an accelerating rate. You just got to look at what the PE guys have been doing out in the market in the last sort of two years. The convergence of MSPs, UCaaS, CCaaS, call center companies, they're all collapsing because of commoditization impacts. Sangoma had all of them. It just needed to be put together. That's why I joined.
I thought, wow, here's a company way undervalued, completely misunderstood because the previous regime used the leverage and the stock valuations that UCaaS players were getting during the COVID era. They called it the Zoom phenomena, the Teams phenomena. You're kind of seeing it now, the cycle coming through with the AI phenomena. Anything that's got AI attached to it, valuations go straight up. Sangoma is not a UCaaS company. It was one of the 11 acquisitions. For some reason, the brand got linked to that. It was misunderstood, highly undervalued, and needed to be integrated. When my eyes look at a company like that, I see a ton of things. I see consolidation, a new value proposition. The debt was not hemorrhaging money. It was $110 million in debt, roughly $100 million in debt, $8 million in cash flow, 16% EBITDA. It wasn't bad.
It just wasn't growing because all of the components were all various flavors of vanilla. When you put it together, now you got Neapolitan. You got something unique. That was a bad analogy, but that's kind of what we did. That's what the company is. It provides the essential communications for the mid and small end of the market: voice, data, video, security, and hardware. We have all of it proprietary, so it's a very high margin business. For the last 18 months, really, I've spent my energy building a new management team, enterprise class pedigree leadership team, which I'm very proud of. Clean up the balance sheet. Debt is down to, you know, in the $40 million range. Cash has doubled from $19 million to almost $33 million a year. Churn has been maintained at 1%. EBITDA has been accretive now 17% to 19% for this year.
Now the company is moving into the next phase, which is the growth phase. I joined, that's a long answer to your question, but I joined to put those pieces together to be at this point that I'm at right now. The stuff that I've done for the last 18 months with my team is the non-sexy shit. It's the operational refixing. It's the cultural integration. It's the new systems, new ERP systems, new CRM systems, really putting the company, reorganizing your partner ecosystem, which we had 5,000.
Now we have 1,000. They're managed and segmented properly where SG&A can be invested based on where the partner sits on the stack. Now we're executing on this value proposition. I was just telling someone the other day, I'm very proud of, you know, the deal sizes in this company were $500 a month, kind of MRR. We just did a deal last week in the $20,000 range per month because we're able to bundle now, integrate these essential communications to provide value and stave away commoditization of selling single components.
Wow, that was a long answer. Very helpful though. Lots of great context, lots of stuff to dig into. Yeah, you touched on the ability to provide kind of a turnkey solution. I'm curious, in a competitive industry, how else do you kind of stand out and what would your clients and partners say about how Sangoma differentiates itself in the mid-market?
When you have an integrated company with a low balance sheet and high cash flows, you have lots of options to be able to add to the portfolio. You can either buy. One thing Sangoma has, I'm an engineer, my COO, Jeremy Wubs, who was a number three guy at Bell Canada who came and joined me, he's an engineer as well. The first thing we noticed about Sangoma, this small tech company, 140 engineers, super high pedigree, which gives me an option to build. The balance sheet now was debt way down and cost of capital way down, giving me the option to buy.
The ability to bundle creates value because there's not many other players that can provide all five of those things to a mid-market customer, much lower TCO, and it removes vendor sprawl for them. The phones that I have, for example, that we engineer and manufacture ourselves, very high margin, I'm going to bundle them into the subscription model. Now the customer doesn't have to buy a phone separately from someone else, then their communication infrastructure from someone else, and their security from someone else. They can buy it all from us. I'll give you an example of a company like that in a few minutes. That's one of the value areas.
The second one is because of the engineering team and the balance sheet, I can either buy AI-enabled, vertically oriented SaaS companies and pour them into this integrated platform that we've now built, which operates at about 85% margin. As we add industry vertical software into the communication infrastructure, you start creating cool value for your customers. I'll give you a quick example. It's a partner that we're dealing with right now that is an AI-native company. What they do is they provide a virtual CMO for a mid-sized company. Imagine you're a mid-sized CEO. You've got, I don't know, 10,000 employees, $10 million a year in revenue. You're not that big. You don't have a big Chief Marketing Officer, all these big fancy titles.
This company can build your website, do all your promotional materials, proactively send out campaigns, do all your product training for you, push out training for your sales folks, constantly update your website with new fresh information, use trends analysis to determine what kind of campaigns can be specifically sent to various geographies. If somebody's in downtown Alberta, they might want to see something different than someone in downtown Toronto or in Ancaster or what have you. This offering can be poured into our partnership with us in our solution and then bundled into an integrated communication platform that provides voice, data, video, security, and hardware. You can see I'm not selling the components anymore. I'm selling a business technology integrated solution, a mini SI. That's the world that I came from, the system integrator world. We did that for United Airlines and American Airlines, all these big companies.
It's the same thing for this cohort that's coming through. They want a single vendor, and that's a differentiating value that we have that there is not another small cap player that has all five of those things. That's proprietary owned, which means it's very high margin that I can think of. There are companies that are coming in this direction, no doubt about it. I'm not the smartest guy in the world. Everyone is seeing the convergence of these five areas, but most of them are private equity companies that are buying up assets and trying to integrate them together. Sangoma already had it all. We were a little bit ahead of the curve on that, and we're just starting to see some of that come to fruition.
The industry generally sells through a partner channel and generally sells through a partner channel. You relaunched your partner channel in November of 2024. Maybe you can discuss how you revised the channel, what metrics you're watching to see if it's working, and also maybe touch on a few new channels to market that you've uncovered.
In the enterprise world, you know, channel segmentation or partner segmentation, customer segmentation is kind of kindergarten level stuff. It's like you have to do it. In our small tech company, that kind of knowledge wasn't there. Sangoma had 5,000 channel partners. I want you to imagine 11 acquisitions done in seven years. Imagine each acquisition is a carrot growing in the ground. You know what a carrot looks like, right? It's got the green leaves on top, and it's got the carrot underneath. Every time I pulled up an acquisition, boom, underneath that was a set of partners. Not only did I have to integrate the company, I had to integrate the partners to cross-train them and to upsell and cross-sell on the portfolio.
That was too big of a task because when you do 11 acquisitions, these partners are like Bob and Tom's computer store in downtown Naples, or they're big distributors like Jenny, who's a billion-dollar distributor. We had to segment that, which we now have done. We've launched something called the Pinnacle Partner Program. Once you segment your partners, just visualize like a triangle. The top end of the triangle is where your most strategic partners are. You would allocate your SG&A to those partners differently than you would the partners just below them, which we would call the scaling partners. Below them, the bottom is the growth partners. What you want to create is an environment where the partners at the bottom want to be to the next level because they go to the next level by selling more of your stuff. Then they get more benefits.
They get more commissions. They get dedicated engineers on site. They get co-IP development. They get all kinds of, because they sell for me to their customers and they're basically my sales force. We took that 5,000, which were just, you know, we take our SG&A and basically peanut butter it across all 5,000. It was dumb things. Right? You still see it today. People will say, well, I'll give you a brand new car if you sell my stuff. There was no advocacy loyalty in the channel ecosystem. The advocacy came from who gave the biggest spiff or who gave the biggest commission or who gave away the biggest. Now these partners don't, the sophisticated partners, they don't want spiffs. They want recurring revenue. They get paid on our contracts monthly.
If I sell a five-year deal, which is most of my deals, they get a recurring revenue stream from that deal. If you heard what I said about commoditization, if they were selling point solutions from the other vendors and they're commoditizing, what's happening to their commission? If it's commoditizing and lowering in price, their commissions are lower. What they made $10 for selling $100 last year, now they're making $7 for that same $100. With our solution, because you can now bundle, the deals are getting bigger. They can integrate multiple components from one vendor. They get a much higher commission rate. That's a big differentiator with our partners. By organizing them this way and focusing on the top 1,000 versus 5,000, I'm able to align my SG&A much more strategically and create motivation for those partners to move up the stack as they get more benefits.
It's kind of like if you're an Air Canada and you're an elite member, you want to be super elite. I'll tell you a really quick story. My wife had a trip to Las Vegas after COVID. I was super elite for like 10 years. I lost it. My wife goes, "Hey, I'm a big gambler. Let's go to Vegas. WestJet's got a flight for $600 business class." I went, "No fricking way. I need one more flight in Air Canada to get my super elite back. It's $1,200, but I went and did it anyway." I spent the money on Air Canada super elite. That, exactly, that's not a new idea. That's an old idea. This idea of doing that with your partner ecosystem is what we've done with Sangoma.
I did some calls with some of your partners recently, and some of the things that I heard from them was some of the other vendors that you're competing with are not really providing great support. They're end-of-lifing some products. Some of them have gone through bankruptcy recently. How is the competitive landscape evolving, and how is that impacting you?
It's evolving because of what I said, right? The industry is going through an incredible period of transformation right now. The call center business, the unified communication business, the MSPs, the VARs, they're all struggling right now because they're mostly component providers and they don't have a balance sheet. A lot of them don't have balance sheets that can get them out of it. One of the things that you have to do if you're going to be in our world, this vision that I have with the company of being this mini system integrator, providing essential communications to our mid-sized and small end customers, is you have to focus on support and service.
The reason why the company really didn't grow very much in the first couple of years while I was transforming the company is because the worst thing I could have done was pour SG&A in to feed investors a salacious appetite for revenue, revenue, revenue, give it to me every single quarter. I got to get support fixed first. I got to get the systems in place, the right competency, the right culture. What these small medium businesses are doing is they're not just essentially handing over their communications to you. They're basically, you're the virtual CIO for them, right? When they have a ransomware attack, they need to be able to call someone that's going to be able to respond to them with high-end customer service. That's become a big differentiator for us. We're not an MSP.
We're an integrator of technology, but we provide this unique level of help desk, level one, level two engineering support. We pride ourselves on NPS scores, on customer SaaS scores, which have all increased significantly in the last couple of years, which is now why we're ready to start growing. The support issue, you lose that, you're dead. It takes two outages. That's the theory. I've been in the SI world for a long time. You could build an emotional bank account with your customers, and it takes two outages, and you are drained. Just look what happened to AWS. One global outage lasted four hours.
Their brand has been devastated just on that one app. Guess who's taken advantage of that? Microsoft Azure. No one would have ever thought that the AWS cloud would ever go down. They've been known for this brand damage that they've done is going to cost them 10s of millions of dollars to fix it. Now, take a small company like ours. Partners don't forget when they get phone calls because your service is crappy. I'm glad to hear that partners are recognizing. We put a lot of cool technology in. That's the world that me and Jeremy came from. You can't sell anything if you don't have good support.
We're starting to run light on time, so maybe a couple last ones from me, and then we'll open up for Q&A. You said at the beginning that you joined to join this turnaround for this point now and for what comes next. What are you seeing in the pipeline and your KPIs that's giving you confidence about the go forward trajectory of the company?
The company is now, if you kind of like think about, you know, I joined in September, so December, January, about 18 months ago is when we really started the transformation. We're now out of that. I sort of announced that was ended back in April. We're now in the quarter where we switch over from an NRR and MRR business to a pure MRR business. When you have the NRR, if you know what that is, non-recurring revenue, when that hardware business comes out, that stuff churns every quarter. It goes up and down, up and down. Where the MRR business is five years, it takes six to 12 months to implement it, six months to go get it. They're bigger deal sizes. When they hit, they're like base building. They stay for five years.
There are three metrics that I now look at as we come out of this quarter and we go into the growth phase, which is Q1 and Q2, Q3, sorry, Q2, Q3, and Q4. Start looking at bookings. As our bookings get bigger, those bookings take time to roll in. I'll give you an example of a booking we just did. It's the largest one that Sangoma has ever done. It's $24,000 of MRR. It's a big multi-franchise pizza outlet. They had bought, each franchise owner kind of bought their own stuff from Home Depot, or they went down to Best Buy and picked out a router, just a hodgepodge of stuff. The corporate franchise was trying to send out information about training for how to make pizzas and new ovens that they wanted to put in, blah, blah, blah.
Long story short, the customer had a completely disparate set of networks, no security. Apparently, a hacker got into one of the franchises, broke into the environment, and asked us to come in, and we redid the entire infrastructure flow. That booking took six months to develop it. It's going to take, you know, 380 locations. We do about seven locations, roll them out kind of per week. You can think about when the revenue starts to trickle in. As those big deals come in, revenue starts to come through. Bookings is really important. Pipeline, as we come into this new phase, so pipeline, bookings, and then revenue and churn. Those are the four metrics that I really look at that are really going to be now important as we kind of move into Q2, Q3, and Q4. We had a great Q4. We reset the base for this year.
We're now in the growth phase. Balance sheet is very, very low. We're at 0.8 something on trailing EBITDA, so very low. Cost of capital is down. Company's fully integrated. Cash is way up. It's time to grow both organically because now we have an integrated company. That's where you're going to get bookings, revenue, churn, and pipeline. Now inorganic because now I have the opportunity to go buy companies, bring them in, integrate them, take out the integration savings, and just roll the company and keep rolling it because now I have an ERP system and a CRM system that allows me to do that efficiently. Those are the things that I'm looking at, mostly organic right now and then inorganic as the year progresses.
I think we have some time for a couple of questions from the audience if anyone wants to jump in.
I see roughly the trajectory. I mean, it's been a great job growing revenue, but while the revenue has grown roughly over the five years from about $100 million to $250 million, you're at close to break even, but it's not yet kind of break even. What's the largest component of variable cost or what's contributing to the cost as revenue is growing rapidly?
I couldn't really hear much of that.
No, I was just wondering what is the largest component of variable cost, because revenue seems to have gone from $100 million to $240 million over five years, but it's kind of become loss-making in the interim, you know.
What's the largest component of variable cost?
Of variable cost, yeah.
I would say it's labor. It's our studying with, you know, you buy 11 acquisitions, 11 companies, and you don't integrate anything. Just think about it for a second. You know, billing, I'm just giving you something simple, like billing. Every one of these companies had their own billing engine. That billing engine has its own language, which means you have to have a resource to run each billing component. You have to have another team where a customer wants to buy two or three products. They've got to cut and staple from each of these billings. As we put a new ERP system in, that variable cost shrinks because I don't need that many people, right?
Which is why I was telling the investors now that ERP is done, there will be $5 million of EBITDA improvement over the course of the next three years as we restructure the company because we've digitally transformed the bill. That's just one example. That's where, as the company refines itself, variable cost will continue to drop. The other big element right now is AI technology. We're bringing that inside the company as well for ourselves to automate processes. I just read this incredible article. AI is not attacking, like most people think, the software industry with the $300 billion. AI is really going after the $13 trillion labor market. That's really what it's going after. We see it inside of my small little company. I can see variable cost reducing by implementing it. I mean, it's a scary thought, guys, for all of us. It's a scary thought. That is what's happening. I see it every single day. I think that variable cost element will continue to shrink based on those two things: more integration, automation, and this idea of AI technology.
Yeah, Charles. For maybe some investors to hear, what types of acquisitions are you looking for over the next 12 months in size, and what type of verticals interest you the most?
Okay. Type of acquisitions, there are going to be three types. First of all, they'll be likely in the $20 million range. I don't think I'll do anything that big. It might be bigger, it might be smaller, but I don't really see much bigger. I want to write a check. I don't want to use shares right now because my stock is trading five times EBITDA, which is ridiculous. Just so you guys know, I sold off our hardware resale business, which was about 8% margin. We sold it off in June because it didn't fit my strategy. We got four and a half times EBITDA for that at 8% margin. I'm 17% margin right now. Just do the math.
One of the acquisition areas will be AI vertically oriented SaaS companies that really bring incremental value to that mid-sized customer relative to the discontinuity that their industry is facing. Hospitality, healthcare, education, retail. Those are the areas that I'm focused on because we have strength there. There are lots of phenomenal AI companies that I know personally that would go incredibly well with our communications infrastructure. The second is geo expansion. Canada, for example, I'm from Canada. Jeremy's from Canada. I was the President of Hewlett Packard Canada. I know everyone in the market quite well. We have no business here. I don't know why. Maybe because the previous CEO was American. Now there's Buy Canadian. It's a big patriotic thing. I could buy a small company in Canada. Now take this integrated company, port it into Canada, and I'm live.
Versus hiring a Canadian President, and they're going to take six months, and they've got to hire six more people. It'll be forever. Those are the two areas that we're really focused in on. UK is another interesting market for us because we're already established there. Those are the kind of acquisitions that we're thinking about. As the company re-rates and the stock gets better, which I hope it does, we're going to get into a position where the aperture opens wider, where I can raise some money or do something really interesting.
Thanks so much. I think we're out of time. Thanks for coming. You can find Charles out in the hall or up at his table. Thanks so much, everyone, for coming. We need to clear out the room. Thank you.