Sangoma Technologies Corp

TSX:STC

Earnings Call Transcript 2023-Q1

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the Sangoma Investor Conference Call. [Operator Instructions]

I would now like to turn the conference over to Larry Stock, Chief Financial Officer. Please go ahead.

[Lawrence Stock, executive]

Thank you, operator. Hello, everyone, and welcome to Sangoma's First Quarter Fiscal 2023 Investor Call. We are recording this call, and we will make it available on our website for anyone who is 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 first 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 flow 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 '22 and beyond. This includes all prior period comparisons, which have been converted to USD as described in Note 2 of our financial statements.

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 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 posted on SEDAR and EDGAR.

And with that, I'll hand the call over to Bill.

[Bill Wignall, executive]

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 first time today, I would invite you to listen to the recording of our Q4 fiscal '22 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. So I've structured my prepared remarks for this call into 3 sections. I will first discuss our first quarter operating results, and then I'll add some commentary on a few strategic topics. And finally, I will review forward guidance for fiscal '23. As always, I'll then wrap up with a brief summary and turn the call back over to Larry for a typical opening Q&A session.

So let's get started with Q1 results. In this first section on operating results, I'll cover highlights from our first 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 first quarter of fiscal '23 were $64.1 million, which is up 24% when compared to the same period in fiscal '22. 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 Net Fortress. And this $64.1 million for Q1 is down 3% from the $66.3 million in the immediately preceding fourth quarter of fiscal '22.

It's not surprising for us to see our first 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 could be masked a bit depending upon the timing of certain acquisitions. But 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 key 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. And if those economic headwinds are a second order effect, then outside of North America, we also see a smaller third 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 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 USD 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. So 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 USD 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. And 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 today, and such trends have an impact on purchases of our Capital key products abroad.

So 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, and 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 that's what we expect, given it's the services business, which is the driver of Sangoma's growth, not our product side.

So let's look a little deeper to at our services revenue. The long-term trend of 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 '22. And just as importantly, our services revenue as a fraction of total sales crossed 75% for the first 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 '22. 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 first 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 '23.

Operating expenses for the first quarter were $44.4 million versus $45.7 million in the most recent fourth quarter. The reduction from the prior quarter by another $1 million per quarter is the result of the second and final stage of the net Fortress integration and restructuring.

Adjusted EBITDA in the first quarter of fiscal '23 came in at $10.7 million, an increase of 6% from the first 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 first quarter of fiscal '23. With the net Fortress integration and restructuring now in place, we expect EBITDA margins to continue in that range. And 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 first quarter of fiscal '23 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 first 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's 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 note 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 the 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 solution, but not exposing your company to undue leverage. And 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 increasingly 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 first 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 first 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 fourth quarter of fiscal '22. 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.

And 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 first part of the year, net cash from operating activities has run a bit lower than in the latter parts of the year. During this first quarter, that number came in at $3.6 million as compared to an average of $3.3 million for the first 2 quarters of fiscal '22. It has been common that the timing of some payments has occurred early in the year, and 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 first quarter financial results to a close, and I'll move to my second 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 Net Fortress. I'll offer a comment on our share price and finally, a word or 2 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, we had good solid in-house engineering augmented by strategic M&A, the breadth of our 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 involves getting Sangoma to the point where we had all the pieces of a cloud communication solution that would enable the 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 5 different products from 5 different vendors with 5 different bake-offs, 5 different contracts, 5 different invoices each month, 5 different tech support lines to call and 5 different products that they then need to integrate. We now have that capability, and we leverage it every day when describing our 3 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 SBA and et cetera. Sangoma has solutions for cloud, on-prem and hybrid. We find the path to us no matter which deployment option the customer prefers, something that no cloud or on-prem competitor can match. And 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 on [indiscernible].

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 and 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 underpenetrated, 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 and 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 Net Fortress. On our last call together, I explained in some detail the integration plan and that much of it was completed during Q4. There were 2 primary pieces remaining that I mentioned, the integration of the sales organization as well as the second and final stages of restructuring. I'm pleased to report that both are now complete, full stock. 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 net Fortress acquisition. This comment today on the integration of Net Fortress will be my last as it is now fully integrated. So no more net Fortress, one team, one Sangoma.

Next, at the risk of stating the obvious, I'd just like to confirm that Sangoma 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. And it's actually a really impressive story, growing from 0 historically to reach 25% of sales in fiscal '18,to 33% in fiscal '19, to 49% in '20, to 62% in '21, to 71% last year and now crossing the 75% threshold this quarter for the first time.

My point is not that the figure in any one quarter is not 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 one way to see our share price is so obviously undervalued in today's market conditions. We are doing everything we can. But 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.

And 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. So I just wanted to answer it officially for everyone to hear. And 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.

So now let's move to my third and final section today on fiscal '23 guidance. As you recall, the last time you were all together in late September, we provided fiscal '23 guidance for the first 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 to $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 '23.

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 forced monetary policy in many countries around the world as well as trends in FX rates, the potential impact 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.

And 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 a well-defined competitively differentiated strategy, yield success and up 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 the [ misdeed ] awareness of share price, ensuring Sangoma would only consider acquisitions in this climate if they are accretive.

We have built our company with a 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 their 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 levering, 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. And with that, Larry, I think we're ready to take questions now.

[Lawrence Stock, executive]

Thank you, Bill. Before we pause and cumulate questions, one question that has come up that we should answer now is why is services revenue down from last quarter?

[Bill Wignall, executive]

Okay. Well, I guess it's important to remember from my commentary in the prepared remarks that the sequential decline from $66 million to $64 million is really driven not by the services piece, but by the product category. That's the nonrecurring 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. And it's the trend that got services to over 75% of total sales this quarter. So there's truly not a structural problem in services revenue for us to be concerned about.

But yes, sure, there can be minor fluctuations from quarter-to-quarter sequentially. That's right. And 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 it will bounce back next quarter. This can happen in the services business for a number of possible reasons. 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, things like in the product side, but to a much, 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, but 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. And the customers are sometimes purchasing maintenance or have in the past. It's very small now and declining over time, as you would expect, but it is recurring, so it needs to get captured inside the services bucket. And during times of economic pressure, there's increased scrutiny on those kinds of maintenance purchases by customers, which is what we saw.

Those same macro factors can have an impact on usage. In one of our cloud services like our TAS offering, there's a small usage component to the pricing model like for all of our competitors. And that usage was down a touch with the macro factors.

We lost one midsized customer this quarter when they were acquired and the new parent company parachuted in their existing IT systems to the newly acquired company that's normal that happens. So I hope you can see that this minor blip is not some systemic issue in our cloud business, and we fully expect it to be back up next quarter. Surprisingly, given the question you got, 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 churn MRR, it's the way our competitors describe it, too, is the standard SaaS model. You even heard me reference 2 enterprise orders we won recently, each over $100,000 in MRR, which by any standard is a big cloud order being over $1 million a year. So of course, all bookings or orders in the cloud business they then need to go through the onboarding their activation stage, I realize. So there's a natural time lag in the book-to-bill step before it turns into revenue. I guess that's my thought on that one there.

[Lawrence Stock, executive]

Excellent. Okay. Thanks, Bill.

[Operator]

[Operator Instructions] The first question is from Mike Latimore from Northland Capital Markets.

[Mike Latimore, analyst]

I guess just picking up on that last comment, you said you had your best cloud booking quarter in a long time. Can you kind of sync that up with just comments around macro uncertainty? I would think you wouldn't have a record bookings quarter if the macro is having that big of an impact, but maybe just in those 2 sort of different comments up there.

[Bill Wignall, executive]

Yes, sure. Totally get why one would make that assumption, Mike, and we've had this debate internally many, many times. 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? So I think that's the first one.

And then secondly, when you asked about and I referred to large orders of enterprise customers, I realize you know this well, but for the group, those are the kinds of sales opportunities that have really long sales cycles. It's a normal customer with 100 seats, going to spend $1,000 to $2,000 a month with us. It's, I don't know, 30-day or 60-day sales cycle, big ones like that with hundreds of locations and the $1 million a year of MRR are 6 months or a year right? So the fact that the macro trends might be working against that, of course, come into play, but the decision processed by the customer was started like, whatever, you know what I'm saying, a year ago or something, right? So I think that's the explanation, Mike.

[Mike Latimore, analyst]

It sounds like you've had some good wins with the MSP offering from Net Fortress. 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?

[Bill Wignall, executive]

Yes. Maybe I'll tackle the second part because that's the more general case and then tell you how it's working. The go-to-market approach is, I think it's like exactly the one that you would intuit to be, right? The go-to-market is put the MSP offerings together with the rest of the over-the-top cloud services and position it as a single suite asset. We talk about it every quarter together. You and I have the discussion, one-on-one. So that's the same positioning, whether it's to a new logo or an existing customer.

So if it's the part of the sales organization that's hunting, then when they're going out and talking to a customer about cloud service, you really need, I don't know, CCAP or UCaaS, they've been taught that the job is to explain, 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, "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 does 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 firming of the existing customer base. From the hunting side, 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 with almost all normal firms we have in which 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 further than normal suite, et cetera. And every one of those leads to a conversation about, oh, great, you're selling cloud service 1, 2 and 4. What about MSP services or you're selling managed access and manage the SD-WAN, what about CCaaS and UCaaS? So 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 2 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. And we have lots of deals that started at MSP and adding cloud. So 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.

So for instance, already a cloud communications customer have done the exercises as part of the normal touch space, stay in contact with your customers, ask them are we meeting your needs, we introduced this other new thing. And if that's true, whether they start as a cloud communications customer or started as an MSP customer, and that's starting to get traction, too, although they often have something else already. And so a normal reaction in that situation is, okay, happy to talk about if we are interested, but by the way, if we're, I don't know, the managed access customer, our UCaaS contract doesn't expire until February of '23. Let's start talking about it now, but please know we can't make the switch till then. So I don't know, maybe that was too much, but that's what...

[Mike Latimore, analyst]

No, no, perfect. One final real quick question. You mentioned there's still maintenance left in the service line. It's very small you said, but can you quantify that a little bit more?

[Bill Wignall, executive]

No, I wouldn't have that number off the top of my head, Mike. The cloud stuff is almost sold well over 90%, whatever that would be.

[Operator]

The next question is from Eric Martinuzzi from Lake Street.

[Eric Martinuzzi, analyst]

Yes. I was just curious to know, given you cited the economic headwinds, I would think that back to the end of September, 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?

[Bill Wignall, executive]

Yes. That's a fair question, Eric. 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, I guess, most people did. But 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. So I wouldn't want to pretend something though. It isn't a shocking thing to us. It's just more pronounced there.

[Eric Martinuzzi, analyst]

Regarding the Q4 results, you said there were a couple of deals, a couple of projects that sell out of Q4 and into Q1. A, did those close in Q1? And then B, did you have a similar situation where it's something you thought that's going to close in Q1 now pushing into Q2?

[Bill Wignall, executive]

Yes. So one of the large orders that I referenced that closed in Q1 was one of those orders that you just asked about from Q4. So the answer is yes. In general, I would say, 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. What I said about Q4 was completely true, but as we see more of it, maybe it will catch us less by surprise. And 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. It was a big deal. It was a complicated negotiation.

We were right down to the eleventh hour and looked like it was going to finish. But that last little bit, it's still a lot, right? And so like most companies in the SaaS business that start in the S of SMB, 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. And so 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, then the slightly longer sales cycle doesn't catch us as much by surprise.

[Eric Martinuzzi, analyst]

Regarding the Q2 outlook, I know you're just commenting on the full year, but historically, we would see a 6% to 8% sequential increase Q1 versus Q2. Any reason to not assume that same historical behavior for those of us modeling?

[Bill Wignall, executive]

No, I don't think there's any reason to not. I wouldn't want to be too precise in my answer here because we've not, as you just said, given quarterly guidance, but 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 '23 that are hugely different than fiscal '22 or fiscal '21. So I don't want to get into... I can't remember if you used 6% or 7% or whatever it was percent, but generally I think you're on track.

[Eric Martinuzzi, analyst]

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?

[Bill Wignall, executive]

Yes. Thank you. Exactly Eric. I appreciate that, very much.

[Operator]

The next question is from James Breen from William Blair.

[James Breen, analyst]

Just a couple. Could you talk about the growth you're seeing and how it sort of mixes between sort of larger enterprise, mid small?

And then also within that, is it growth coming from new customers or existing taking more products? And just talk a little bit about the cross-sell opportunity given the recent M&A.

[Bill Wignall, executive]

Yes, good question. Thank you, Jim. So 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. So as an example, and then I'll come to 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. And what we found was that wasn't working so great. Part of the conversation that falls into the first of those 2 buckets deals different, is received by the customer differently, involves different skills by our employees than the second part.

So going into fiscal '23, we've pieced those apart into 2 entirely different sales teams, one that does the servicing and one that does the upselling. And so we're getting better and better visibility to this. Part of the new MRR, the gross add, which comes from new logos and the part which comes from existing customers are equally important in any 1 month. The new logo revenue might be a little booking, might be a little bit higher than the existing customer expansion. And in 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 is 20%. They're both pretty similar in the middle. Typically, the new logos are a little bit more booking MRR than the expansion, but not always.

And then the other portion of your question, if I got it right, is just the market segmentation, how much of the business as how much in them and how much in enterprise. The portion of the installed base, and I realize you know this, Jim, I'm just answering it for the group, that falls into those buckets, it's different than the portion of the new bookings, right? So 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. So on a peg count basis, the number of customers, the vast majority of customers are more S and then less and M, of course, fewer enterprise.

On the new MRR, we had very, very few orders in the past like we're starting to see now in that enterprise bucket. Like we just didn't get $100,000 MRR orders before. And now we do. And not like once, we get them pretty regularly. It's still not the norm. If we closed 100 orders in the quarter, you can still count the big ones on one hand like that. But it's not 1 and it's not 1 quarter out of 4. We get them regularly. One of those is probably going to be more than $200,000 a quarter. You never exactly know until it's finished implementing. So 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 spent 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. So if 4 or 5 years ago, it was normal to get a customer, a cloud customer with 10 seats, that's not the norm anymore. So S for us is bigger. There's much more in the median bucket, and we're starting to get consistent enterprise traction.

[Operator]

The next question is from Deepak Kaushal from BMO Capital Markets.

[Deepak Kaushal, analyst]

I got a couple of questions. First, Bill, you mentioned earlier, the macro is causing the pause on CapEx spending and that could, both in the case for a shift to kind of SaaS and OpEx spending. Are you seeing that transition now? Or is this just still a theoretical and we're still in the pause phase on CapEx? Because there's already a general shift to cloud and OpEx pending which is CapEx. Are you seeing an acceleration of that now?

[Bill Wignall, executive]

It's a perfectly fair question. I'll give you an answer that I guess is at risk of sounding like I'm officiating, which is not my objective to feedback. 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? And so 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, but there's just a bit more. And when I see more, I see up in one and down in the others. So the more means a little bit more OpEx extraction and a little bit less CapEx traction, and that's the transition I referred to.

It's very hard to know whether that's a 1 quarter thing or it's going to be in place for a while, and it's hard to know if it accelerates based upon what happens with the economy and what's the Fed going to do with interest rates. And are we almost through that, and there's some encouraging sign that maybe inflation's peaked in starting to come down a little bit and, honestly Deepak, I think everybody is having trouble forecasting right now. Our crystal ball is no better than the next guys. I have no bloody idea what the Bank of Canada or the Fed is going to do. We all hold our own opinions. Certainly, what we call the hawkish policy has been more hawkish than we at Sangoma probably thought it would be, but it is. And I just don't want to pretend that we know that answer more definitively than we really do.

[Deepak Kaushal, analyst]

Got it. Second 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 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 want to give that as well. But just to help us kind of see how that relative trend might impact gross margin going forward.

[Bill Wignall, executive]

Yes. 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, 6 of these meetings, sometimes to MSP versus cloud or UCaaS versus CCaaS or managed SD-WAN versus managed security. For us, 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 whatever the number works out to be right, $57.49 per seat. And 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 product.

When you and I were first meeting each other, I remember sharing with you that 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 going to be [ doing ] in that video meetings, right? We weren't going to be kind of really with CPAP. 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. And so if that's going to be our strategy, then we have to sell that way. So we sell that suite of services as a suite, as a bundle, not as how much of it is 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 say for a customer that's paying us $20,000 a month, how much of that is for UCaaS or how much is CCaaS as or how much is for MSP or how much is perceived assets. It's all just this blended price.

[Deepak Kaushal, analyst]

Got it. I fully respect that. I guess what I was just trying to gather, I mean, how much of your services are you managing on behalf of the customers versus how much are they managing themselves? And if that's not something you can give today then I'll probably ask the question again in the future. But that's kind of what I was getting at the high level.

[Bill Wignall, executive]

Yes. Well, I think it's a bit hard to know exactly what you mean by that. But in general, we manage the service for the customers, 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. And some of them choose to do that and some don't, some of them choose to delegate that to the channel partner. But they're not the UCaaS expert. We are. They're not the CPaaS expert. We are.

If we're talking to a school for the deaf and blind who needs us to do something to make a 911 call using our CPaaS app connect into strobe lights they can't do that stuff, right? That's us. And yet, it's a normal IT administrator running the system and they're doing typical routine things, I don't know UCaaS that's probably too abstract. They're hiring 3 new employees that they don't need to come to us to add 3 new employees for their system, right? That's what I wanted you to get a feel for.

[Operator]

The next question is from Gavin Fairweather from Cormark.

[Gavin Fairweather, analyst]

I wanted to start out on new logo ARPU. In the past, you've talked about how that's been 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 kind of netting out on that?

[Bill Wignall, executive]

Yes. 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 way. So I think the starting point before the specific causation, you asked about like bundling or whatever it is, what's just the general trend in price in the industry? And 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 that.

So for a product which has been around a longer time, like UCaaS, it's a bit more mature, the general trend in price for exactly the same thing delivered now versus 4 years ago would be a little bit lower. And what the companies who are best 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 solutions. And as you're asking about 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 was right, $28 a seat and now it's $26 a seat.

And we have some that were paying $20 a seat then it goes to $45 a seat. It's a little bit harder to figure that all out right now just 1 or 2 quarters after the Net Fortress acquisition because now there's a bunch of new services going in there as well. And 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. And now customers are under the price pressure.

And for us, that should be a positive competitively differentiated opportunity. If the customer is 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 broadband internet access from another place and manage that. So in general, that has been working in our favor. It's absolutely the strategy and one of our competitively differentiated strengths.

But how that is all playing out and adding together, Gavin, is it's just such an uncertain time and whether that price pressure from the macro environment is going to last 1 quarter or 3 and what we all feel about whether the world will tip into a recession and how that is affected by foreign exchange rates and oh, in the U.K., everybody was fine paying whatever it was $18 a seat, but now the pound has moved and in pounds that changes and now $18 a seat seems like too much in pounds. So 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 want to get to the position where we're saying that it's gone up by $2 or down by $1.50 and then those trends accelerate or subside. And I told you $2 and it turned out to be $1 or something, right?

[Gavin Fairweather, analyst]

I appreciate the color. It was something I was thinking about and trying to come to an answer on to.

[Bill Wignall, executive]

No, it's hard. It's really hard.

[Gavin Fairweather, analyst]

Maybe just on operating expenses, we obviously saw those come down given the Net Fortress integration is now complete. How are you thinking about that investment lever and kind of the decisions between growth and supporting that versus driving kind of further cash flow given some of the uncertainty?

[Bill Wignall, executive]

Yes. That's obviously an easier question to answer, right? Because it's asking about stuff that's within our control as opposed to guessing about the impacts from things that are outside our control. So I can do a much more definitive job with that one. Thank you for giving me an easy one. 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 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?

And those are the conditions under which we would consider adjusting it, Gavin, I don't see it going up for the next quarter or 2, given what's going on in the world out there. But if demand were to soften a little bit, then we have lots of places to adjust, whether it's traveling to see customers or how much marketing you do or how many trade shows you go to. So I feel really good about that. But 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 a quarter or 3 from now.

[Operator]

The next question is from David Kwan from TD Securities.

[David Kwan, analyst]

Bill, I appreciate the color you provided on the services revenue and the sequential decline there. It's just, I think, something we all haven't seen, I think, since the start of the pandemic, which would be probably quite, I don't think, at the time in particular, got 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. Kind of how much is really coming from more traditional kind of seat-driven SaaS drive, whether it's UCaaS, CCaaS, managed services maybe, versus maybe some more variable types like SIP trunking or CPaaS?

[Bill Wignall, executive]

Yes, sure. Not off the top of my head, David, but the vast, vast majority is the subscription based CAS revenue. Only the CAS product line in the suite of cloud services has this usage component. It's only in part of the CAS product line. We self CAS both retail and wholesale, as retail does not have a usage-based component, it's only the wholesale. In the wholesale, there's 2 parts to the pricing model. There's the fixed part and the variable usage-based part. So one should 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.

And then 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, the maintenance on, I don't know, [ some on-premise them or anyway ]. And then the cloud breaks into all of the different cloud products, right, the UCaaS and the CAS and the CPaaS and the contact center. And then inside that, it's only trunking and then inside trunking, it's only the wholesale, not for retail. And then 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. But I don't have the exact figure. And 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 3 or 4 ways of explaining the factors that overlap and the usage component of trunking as a service that you asked about was only 1 of those 3 or 4, right? So you saw me telescope down 5 or 6 levels to get to that one and then say that one is only 1 of the 3 or 4 factors. So I mean, without being able to quantify it off the top of my head, I think you get the idea. It's very small.

[David Kwan, analyst]

That really does help, but I think Larry may have pre-empted the Q&A. It's something I had written on my mind, so maybe I should have written it down beforehand. Moving on to margin side. Do you think Q1 is kind of a trough here for EBITDA margins, given your comments about the integration and networking being complete? And from a revenue perspective, expecting to see a rebound here in Q2?

[Bill Wignall, executive]

I don't think so. David, 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, Uncertainty is increasing, right? The world is more uncertain right now. So there is 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% in the quarter after that, it's given some 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. But I'm just trying to acknowledge to everyone so that you feel the sense of transparency that it's harder to know exactly this quarter than it was last year. And so I don't want you to build into your model, 17% EBITDA margins is the trough or the low end, it's about to shoot through the roof after this. I think it's more likely that it will look like 17% next quarter. But let's see, and if that feels like it's starting to change, of course, we'll tell you guys.

[David Kwan, analyst]

Yes. I wasn't expecting the margins to get back to the pre-acquisition levels closer to 20% in Q2 or even Q3 or Q4. But just wondering, we've seen the margins effectively flat sequentially. But to what extent we might see a bit of a rebound from the 16.7% this quarter up to maybe close to 17% level in Q2 and hopefully, higher than that in the second half of the year? Just wondering how realistic or reasonable that is from your vantage point?

[Bill Wignall, executive]

I don't think I have a better, more precise answer. If you've already accepted the premise that it's not going to go from 17% to 20% to 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 going to go from 17% to 18%. We just we can't pretend that our ability to forecast has that much resolution attached to it, given the uncertainty in the world. I've 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, but is it conceivable that it could go up a point? Of course, absolutely. But to refine a forecast to one extra point of EBITDA margin is just something that I don't think we have the ability to do right now.

[David Kwan, analyst]

Okay. I appreciate that. And this last question is just on capital location. How would you rank say, M&A versus debt retainments versus share buybacks now, especially kind of where the share price valuation is?

[Bill Wignall, executive]

Well, I think there's no doubt in our mind that paying down debt is a no-brainer and we're going to 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 going to keep things on that. On the share buyback thing, 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 prebuilt predetermined schedule.

And so we're buying what we can. We're very unhappy with where our share price is. So there's no better acquisition in the world than buying Sangoma right now. So we're continuing to do that. And then the third bucket that 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 if we had $100 would we put 1/3 into debt and 1/3 into share buybacks and 1/3 into M&A.

It might be 0 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 prices. So 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, but our degree of freedom on acquisitions has been reduced, and we just have to be much more careful and selective. And so maybe there'll be some capital allocation to it, but we just can't say definitively right now.

[Operator]

The last question today is from Robert Young from Canaccord Genuity.

[Robert Young, analyst]

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 seeing the buying behavior worse than month-over-month in September, October, November. I think you said cloud booking, however, was strong and supply chain is improving. And so like what leaves you here at this point in time, you're confident that. that guidance for the full year is reiterated versus maybe weakened or brought down a little bit given the outlook for the macro look seems so clouded right now.

[Bill Wignall, executive]

Yes, perfectly fair question, Rob. Thank you. Well, I think the answer sounds a little bit like the way I describe the answer to "please explain why services were down a little bit". And there's no one answer, it's this combination of 3 or 4 factors. And usually the 3 or 4 factors don't happen at one time and sure. I think we just have to acknowledge to the Street that given we see uncertainty is higher, as you heard me say twice in answer to 2 separate questions, that the combination of these competing factors is why we've not changed guidance. It's not that every factor is positive, nor is it that every factor is negative. You've heard us say that bookings are up, and the bookings are up. It's really good.

And the bookings are up not by a bit, but to the highest they've been in quite a long time, and we've got some really large orders and it's up not just on a gross basis, but on a net basis. And so there's several factors that would suggest things look encouraging. And 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, a kind of a little bit more risky now than they were in the past, and those are not within our control. We're not sure how to predict them. And so you add all that stuff together in some subjectively evaluated opinion, we acknowledged to each other we don't know the real final numbers.

And 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 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. And 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. And if things change down the road of course, we would tell you guys that. But that's, I realize, not a very satisfying answer, but it's the truthful answer.

[Operator]

This concludes the question-and-answer session. I'll now turn the call back over to Larry Stock for any closing remarks.

[Lawrence Stock, executive]

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.

[Bill Wignall, executive]

Thank you, everyone.

[Operator]

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.