Sangoma Technologies (TSXV:STC)
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From Jul 2019 to Jul 2020
Sangoma Technologies Corporation (TSXV:STC) (“Sangoma” or the “Company”), a trusted leader in delivering Unified Communications solutions, both in the cloud and on-premises, and the provider of the two most widely used open source communications software products in the world, has acquired VoIP Innovations, LLC (“VI”) today.
VI is a privately-held, Pittsburgh-based technology company that specializes in wholesale SIP trunking offered primarily to resellers, service providers, MSPs, and call center customers across North America, utilizing a recurring revenue model. VI has over 1,400 customers (with no significant customer concentration), about 35 employees, and has been growing consistently the last several years. The company has also recently launched its new, strategic Communications Platform as a Service (or CPaaS) product. CPaaS is an exciting new product category receiving significant attention from customers and investors alike, that enables developers to add communication capabilities (such as voice, video, messaging, etc.) to their software and web applications without having to be communications nor networking experts.
Sangoma’s pedigree in the SIP Trunking business is underscored by its performance in the recent report titled “2019 SMB SIP Trunking Customer Satisfaction”, conducted by the Eastern Management Group. The report details a survey of 3,000 IT managers in a side-by-side comparison of 29 SIP trunk providers. Customers evaluated their SIP vendors on six Customer Satisfaction Measurements under the headings of product, vendor experience, and customer delight. In Eastern Management Group’s survey, Sangoma received the highest possible ranking — four stars, in every customer satisfaction measurement: technology and product, purchase experience, support, management tools, total overall satisfaction, and recommend-to-a-friend. Out of 29 SIP trunking companies examined in the Eastern Management Group’s latest survey, none beat Sangoma. No vendor other than Sangoma received the highest possible ranking — four stars — in every customer satisfaction category.
“We continue to look for prudent ways to grow our product portfolio, customer base, distribution network, overall sales, recurring revenue and EBITDA,” said Bill Wignall, President and CEO of Sangoma. Wignall continued, “This acquisition is strategic to Sangoma for all of those reasons, and with about 90% of VI revenue being recurring, it should increase Sangoma’s proforma recurring/services revenue to approximately 45% of total sales. We know the SIP trunking business well, so adding a wholesale channel model to our existing go-to-market approach is quite strategic and it may provide the sales organizations for both companies with additional revenue synergies. We are also excited to now add a CPaaS offering to our growing product portfolio. I’d like to welcome all of our new staff who I’m very pleased to say will be staying with the company, as well as our valued new clients and partners, to the expanding Sangoma family.”
The acquisition, Sangoma’s eighth in eight years, provides the combined Company with several strategic advantages including: increased scale, a recurring revenue contribution that continues to grow, an entirely new product category in CPaaS, robust EBITDA margins, and an excellent new sales channel that has expressed the desire for Sangoma’s broader portfolio.
“One of the things that mattered most to us as former owners, was how the buyers would handle the VI employees and customers,” said Jason Tapolci, co-founder, shareholder and longtime CEO of VoIP Innovations. “Of all the buyers who considered the acquisition of VI, it became very clear to us that Sangoma was the company that most understood, appreciated and valued our long-term staff, loyal customers and company vision. We are very pleased that Sangoma will continue on with the VI business and we are confident it will continue to grow under the leadership of their very capable management. We have had the pleasure of getting to know the Sangoma team through these discussions and are excited to see VI taken to the next level.”
VoIP Innovations’ employees will continue to work out of their current Pittsburgh office and will be led by Sebastian Kiely, VI’s President, who will report to Sangoma’s CEO, Bill Wignall.
Under the terms of the agreement, Sangoma paid an upfront consideration of US$36 million (the “Upfront Consideration”) which consisted of US$30 million in cash and US$6 million in Sangoma common shares, representing 5,500,417 Sangoma common shares based on the ten (10)-day volume weighted average price as of the date of execution of the definitive agreement. In addition, there is a contingent consideration component of up to US$6 million (the “Contingent Consideration”) that will be payable in cash upon achievement of certain revenue milestones in the twelve (12) months following the date of closing. This would lead to a total purchase price of US$42 million if achieved, on a debt-free and cash-free basis, subject to customary net working capital adjustments. VI has no debt, generated US$18.9 million in revenue for the year ended December 31, 2018, with US$3.3 million of Net Income under US GAAP, that would have generated EBITDA of about US$5.6 million, implying an upfront purchase price of about 6.4x EBITDA on a trailing basis. Please see below for a reconciliation of Net Income to EBITDA.
The cash portion of the consideration was funded through a combination of cash on hand and, to minimize dilution, a new credit facility, jointly from TD and BMO replacing Sangoma’s existing debt. Approximately C$46 million has been drawn on this facility of which approximately C$22 million will be used to pay off all existing debt and around C$24 million to fund this acquisition. This new facility also provides for up to C$8 million in a term loan, which would be utilized in about one year, to pay out any of the up to US$6 million in contingent consideration earned, but which would only be drawn upon if required at that time. Finally, it also includes a C$10 million revolver available for general working capital purposes. The new credit facility will be drawn in US dollars, be repaid over 6 years and is expected to have an interest rate of 6.75% per annum at closing.
Outlook for Fiscal Year 2020 to Include the VI Acquisition
For fiscal year 2019, Sangoma had previously issued guidance of over $100 million in revenue and $11 million in EBITDA. Subsequent to the end of fiscal 2019 on June 30, Sangoma announced in early August, that preliminary, unaudited revenue for the full fiscal 2019 year, was over $109 million. Sangoma earlier today released its audited results for fiscal 2019 with revenue of $109.6 million and EBITDA of $12.3 million. Following the closing of the acquisition today, VoIP Innovations, LLC will contribute just over eight (8) months of results towards Sangoma’s fiscal year 2020 which runs from July 1, 2019 to June 30, 2020. It is expected that combined revenues will increase to between C$135 million and $143 million in fiscal 2020. Further, the Company anticipates generating EBITDA of between approximately C$19 and $20 million this fiscal year. Sangoma’s leverage would then be projected to be about 2.4 times total debt to EBITDA, or under 2x net debt to EBITDA.
INFOR Financial Inc. acted as the exclusive financial advisor to Sangoma in connection with the transaction.
Conference Call Information
Management will discuss this acquisition more fully on a conference call at 8 am EDT, Monday October 21, 2019. The dial-in number for the call is 1-800-319-4610 (International 1-604-638-5340) and investors are requested to dial in 5 to 10 minutes before the scheduled start time and ask to join the Sangoma call.
About Sangoma Technologies Corporation
Sangoma Technologies is a trusted leader in delivering Unified Communications solutions for SMBs, Enterprises, OEMs, Carriers and service providers. Sangoma’s globally, scalable offerings include both on-premises and cloud-based phone systems, telephony services and industry leading Voice-Over-IP solutions, which together provide seamless connectivity between traditional infrastructure and new technologies. Sangoma’s products and services are used in leading PBX, IVR, contact center, carrier networks and data-communication applications worldwide. Businesses can achieve enhanced levels of collaboration, productivity and ROI with Sangoma. Everything Connects, Connect with Sangoma!
Sangoma Technologies Corporation is publicly traded on the TSX Venture Exchange (TSX VENTURE: STC). Additional information on Sangoma can be found at: www.sangoma.com.
About VoIP Innovations, LLC
VoIP Innovations offers a business class wholesale VoIP network that is designed with performance, availability, and security in mind. Our data centers, located on multiple power grids, are interconnected via a robust dark fiber network that provides both the scalability and flexibility that our customers demand. Internet transit points within each discrete data center are served by multiple tier 1 peerings in order to provide the most direct service to our customers, reduce latency, and ensure maximum performance between endpoints. VoIP Innovations has over 8,500 rate centers and a wholesale DID warehouse that holds hundreds of thousands of DIDs that are ready to be provisioned on demand, offering us the unique ability to be an agile partner that can meet customers’ constantly evolving business requirements.
Cautionary Statement Regarding Forward Looking Statements
This press release contains forward-looking statements, including statements regarding the future success of our business, development strategies and future opportunities.
Forward-looking statements include, but are not limited to, statements concerning the combined financial performance of VI and Sangoma, estimates of future revenue, EBITDA, debt, expected expenditures, expected future production and cash flows, and other statements which are not historical facts. When used in this document, the words such as "could", "plan", "estimate", "expect", "intend", "may", "potential", "should" and similar expressions indicate forward-looking statements.
Readers are cautioned not to place undue reliance on forward-looking statements, as there can be no assurance that the plans, intentions or expectations upon which they are based will occur. By their nature, forward-looking statements are based on the opinions and estimates of management on the date that the statements are made and involve numerous assumptions, known and unknown risks and uncertainties, both general and specific, that contribute to the possibility that the predictions, forecasts, projections and other events contemplated by the forward-looking statements will not occur or will differ materially from those expected. Although Sangoma believes that the expectations represented by such forward-looking statements are reasonable based on the current business environment, there can be no assurance that such expectations will prove to be correct as these expectations are inherently subject to business, economic and competitive uncertainties and contingencies. Some of the risks and other factors which could cause results to differ materially from those expressed in the forward-looking statements include, but are not limited to changes in exchange rate between the Canadian Dollar and other currencies, the variability of sales between one reporting period and the next, changes in technology, changes in the business climate in one or more of the countries that Sangoma operates in, changes in the regulatory environment, the rate of adoption of the Company’s products in new markets, the decline in the importance of the PSTN and new competitive pressures. The forward- looking statements contained in this press release are expressly qualified by this cautionary statement and Sangoma undertakes no obligation to update forward-looking statements if circumstances or management's estimates or opinions should change except as required by law.
Readers are directed to Sangoma’s filings on SEDAR with respect to Management’s Discussion and Analysis of Financial Results for the basis of Sangoma’s reconciliation of EBITDA to net income as calculated under IFRS.
This press release contains references to certain non-IFRS and US GAAP financial measures such as EBITDA. Non-IFRS and non-US GAAP financial measures are used by management to evaluate the performance of the Company and do not have any meaning prescribed by IFRS or US GAAP and therefore may not be comparable to similar measures presented by other reporting issuers. “EBITDA” means earnings before interest, income taxes, depreciation, amortization and one-time charges. EBITDA is a measure used by many investors to compare issuers on the basis of their ability to generate cash from operations.
The following table reconciles the EBITDA for VI cited above to the US GAAP Net Income for the last completed fiscal year 2018:
| || || ||Twelve months ended|
| ||$USD Thousands|| ||Dec 31, 2018|| |
| ||Net income|| ||3,305|| |
| ||Interest income|| ||(4)|| |
| ||Depreciation of property, plant and equipment|| ||472|| |
| ||Extraordinary contract expense|| ||1,844|| |
| ||EBITDA|| ||5,617|| |
Neither the TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.
Sangoma Technologies CorporationDavid MooreChief Financial Officer (905) 474-1990 Ext. email@example.com