NetFortris, Inc. (STC) Earnings Call Transcript & Summary

Thank you for standing by. This is the conference operator. Welcome to today's investor conference call. [Operator Instructions] The conference is being recorded. I would now like to turn the conference over to David Moore, Chief Financial Officer. Please go ahead, Mr. Moore.

Thank you, operator. Hello, everyone, and welcome to Sangoma's investor call. We're recording the call and we'll 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; Larry Stock, Chief Corporate Officer; and Samantha Reburn, General Counsel, to take you through this morning's exciting news, which you may have seen in our press release available both on SEDAR and on our website. As a reminder, Sangoma reports under International Financial Reporting Standards, IFRS. And during the call, we may refer to a couple of terms such as operating income, adjusted EBITDA and adjusted cash flow that are not 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. Before we start, I'd like to remind you that the statements made during the course of this call that are not purely historical are forward-looking statements regarding the company or management's intentions, hopes, beliefs, expectations and strategies for the future. 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 our MD&A, our annual information form and in the company's annual audited financial statements posted on SEDAR. With that, I'll hand the call over to Bill.

Thank you, David. Good morning, everyone, and thank you for joining us today. As you know, we issued a press release this morning announcing we have acquired NetFortris. We are very excited about this transaction because it further accelerates Sangoma into the upper echelon of SaaS communications providers, and it extends our industry-leading suite of cloud services with new MSP capabilities, thereby delivering even more one-stop shopping for our customers and providing larger share of wallet for Sangoma. I've structured my prepared remarks into 4 sections today. I'll start first by describing NetFortris and its business. Then I'll walk you through the transaction details. Third, I will cover the strategic rationale behind the acquisition. And fourth, I'll share with you an early snapshot of the combined companies. Finally, I'll offer a quick summary to wrap up my comments, following which we'll open up the call for questions, as we always do. But first, just before I begin my prepared remarks on this call, it's likely that there are a number of folks from NetFortris listening in this morning. I would like to extend a warm welcome to that entire team along with their valued customers and partners. We very much look forward to having you as part of the ever-growing Sangoma family. So let's get started with that first section and overview of NetFortris. NetFortris is a privately held company with the majority owned by Spire Capital Partners and the remaining portion distributed across several other shareholders, both institutions and individuals. They have approximately 250 employees and 4 primary offices in Dallas, Seattle, L.A. and the Philippines. I'd like to now take a few minutes to introduce you to their products, their customers, the go-to-market approach and financials. Let's start with product. NetFortris has 2 key product lines: a UCaaS service and a cloud-based MSP offering. I don't plan to speak much about their UCaaS product today not because it's unimportant, of course, it's actually over half of their revenue, but simply because most everyone on this call will already be familiar with UCaaS from having followed Sangoma for years. As a result, I'd instead like to focus my product comments about NetFortris, mostly on their MSP offering. Their MSP product line delivers mission-critical communication services that customers need to complement their as-a-service applications, such as managed network security, managed SD-WAN, managed network access, et cetera. These MSP services are built upon a tightly integrated enterprise-grade and end-to-end managed network all backed by an expert 24/7 network engineering team. Because I realize some of those terms might be new to many of you, I'm going to take a moment to touch on each of those 3 primary MSP services I just mentioned. First, managed network security is one of the hottest areas these days as we all continue to hear about security breaches at so many companies and organizations all across the globe. Some of you, as STC investors, have even written to me personally asking if Sangoma could ever offer such a solution ourselves. Managed security sometimes called UTM, or unified threat management, is a cloud-based service, whereby NetFortris secures a customer's network and not only for voice traffic, but for data too. This intrusion prevention and detection capability helps to protect customers against the tax and losses from such things as spam, viruses, ransomware, botnets, et cetera. Second, managed SD-WAN is a fancy acronym that stands for software-defined wide area network. This service from NetFortris provides their customers with capabilities such as being able to handle multiple Internet connections from multiple providers so that if one connection fails, the customer does not lose connectivity, resulting in uninterrupted uptime or the aggregation of bandwidth from those 2 different Internet providers, such that customer kinds of sees this as one pipe or traffic shaping, whereby certain types of traffic can be given priority or forced down in priority. For example, a company can ensure that an employee who is trying to watch Netflix on the lunch break does not degrade an important video meeting. And third, managed network access is the NetFortris service, providing robust connectivity in a more sophisticated way than just buying a raw pipe from your telco or cableco. NetFortris offers network monitoring, analytics, backup, PCI compliance for payment card and credit card transactions, et cetera. Ultimately, because our managed network access is integrated with managed security and managed SD-WAN services, NetFortris can offer unique capabilities such as secure end-to-end peering connections to critical destinations, including public cloud sites like AWS or Azure, and we can make quality of service commitments. The addition of MSP services is a natural extension of Sangoma's current strategy to offer the world's widest set of cloud communications as a service offering, something that is completely differentiated and will now be even more unique. I will speak about this in more detail in my upcoming section on the strategic rationale for this transaction. Let's now turn to customers. NetFortris sells to businesses of all sizes, from SMB to enterprise but with a focus on the mid-market and across all industries, including single-site and multi-site clients, just like Sangoma does today. Their customer base includes over 6,000 customers, representing more than 60,000 seats, but those clients are highly diversified with minimal concentration risk given no customer contributes more than 4% of revenue. The customer base includes recognizable brands like Jiffy Lube that you'll be familiar with; Thorntons, a chain of 175 gas stations and convenience stores in 6 states, processing over 55 million credit card transactions a year; and Lennar Homes, one of America's largest homebuilders, a NYSE listed company with over $5 billion in revenue in its first quarter this year alone. From a go-to-market perspective, the company is a channel-first sales organization for both its UCaaS and MSP services. Like Sangoma, NetFortris does not rely on a single channel structure but instead utilizes multiple types of channels, including agents and master agents, distributors, integrators and value-added resellers. NetFortris has many hundreds of active partners across the U.S. And for all these reasons, their go-to-market approach is very familiar to Sangoma. And for the last part of my NetFortris overview, I'd like to provide a financial picture of their business. On the top line, NetFortris generates expected annualized revenue of about USD 50 million, driven by their multifaceted model of both UCaaS and managed services. They are growing, albeit modestly at this point, in low single digits, a growth rate that Sangoma expects to accelerate. And NetFortris has very impressive recurring revenue with over 90% of total sales in MRR. They generate about 64% gross margin and are operating today at about adjusted EBITDA breakeven, a metric that Sangoma will improve dramatically as we have done repeatedly in other transactions with synergies that we expect to be about USD 4 million. More on that a bit later when I touch on the combined company. And now that I've given you an introduction to NetFortris, let's talk about the transaction. As you may have seen in our press release, Sangoma paid to NetFortris shareholders a total upfront or fixed amount of $68 million or about 1.3x revenue based on that upfront consideration. Of the $68 million in upfront consideration, approximately $48.8 million was paid in cash upon closing. The cash portion of the consideration was funded first from cash on our balance sheet; and second, through a $45 million extension to our existing credit facilities with our current lenders who are very supportive of this exciting transaction. This will bring our gross debt outstanding to about $110 million. On a pro forma basis, our net debt to adjusted EBITDA will be a very manageable 2.3x. The remainder in upfront consideration was satisfied with about $19.2 million in Sangoma's common shares. Based upon the 15-day volume weighted average closing price of Sangoma stock on the TSX, the NetFortris shareholders will receive approximately 1.5 million shares. An additional potential earn-out of up to $12 million also applies and is contingent on meeting certain financial metrics. In total, this brings the potential purchase price to an amount that could be up to $80 million on a debt-free, cash-free basis and subject to customary net working capital adjustments. Finally, the transaction on a pro forma basis with synergies is nicely accretive on both the revenue per share and adjusted EBITDA per share basis. And now with an understanding of the transaction details, let's discuss the strategic rationale for this acquisition. This acquisition of NetFortris and their leading portfolio of UCaaS and MSP services offers Sangoma many highly compelling advantages. I'd like to highlight 7 of those now. First, the addition of the MSP capability to our product suite. This, the first advantage of the acquisition and the most strategic is one that I'll cover in some detail given it's quite new for Sangoma. I'll start by reviewing briefly one of the key ways in which Sangoma positions itself to customers today and how that is completely differentiated. And then I'll explain how the addition of this MSP business is so complementary. Many of you will recall that Sangoma believes strongly that customers want an integrated buying experience, rather than buying 5 different cloud services from 5 different vendors. That is why we offer the widest set of cloud communications services in the industry, including UCaaS and Trunking as a Service and CCaaS and Video Meetings as a Service and Collaboration as a Service, and Desktop as a Service and Access Control as a Service. And those SaaS offerings are supported by our product portfolio that includes our own on-prem software, our own desk phones, SBCs, et cetera, all leading to our commitment to provide one-stop shopping. None of that should be news to investors who have been following Sangoma for some time. So what is new? What's new is that there's a growing awareness and acceptance of the idea that customers prefer to get even more of their communication services from 1 vendor, not just SaaS applications but also the services that they historically got from an MSP. This is a fairly new concept, and very few UCaaS companies are on this yet, certainly none of our most direct competitors. But don't take our word for it. Here's what one of the top industry analysts from Frost & Sullivan had to say about this idea. Our research continues to show that customers want 1 vendor to go to for their cloud communications and collaboration requirements. And many organizations also prefer to purchase additional services such as cybersecurity or broadband access from their UCaaS providers. With the addition of NetFortris, Sangoma's approach will resonate extremely well with customers of all sizes. And what's most exciting about this concept, specifically in Sangoma's case, it's just how beautifully it fits with our existing strategy and competitive differentiation. Adding an MSP capability is a perfectly natural extension to our positioning of the widest set of communications SaaS products in the industry. The bottom line on this first strategic advantage of the NetFortris acquisition is that we believe strongly that the addition of MSP capabilities present Sangoma with a very compelling extension to our industry-leading Communications as a Service offerings. It will further differentiate us in the market and provide an even more unique offering when we believe will be a lucrative model for us securing larger share of wallet and ARPU while being much appreciated by our customers and our channel partners. The second critical reason for the acquisition is all about recurring revenue. As you know, Sangoma has rapidly transformed our company from a product business with onetime NRR sales into one of the communications industry's leading SaaS companies. NetFortris has very strong recurring revenue with over 90% of their total sales being MRR. This meshes well with our long-term strategy, and we will continue to elevate the fraction of Sangoma's revenue in our services portfolio currently at about 70% of sales, bringing the combined company closer to 75% on a pro forma basis. The third strategic rationale for the combination is that it creates much needed scale, maintaining and accelerating our presence in the top tier of industry players so important in the consolidating space. The fourth reason we like this deal is the compelling valuation. Sangoma is seen as a highly regarded buyer now, one that knows how to get transactions done, does what we say we will do, is inspiring to staff and customers at such acquired partners and gives confidence inspiring to sellers. This enabled an attractive price for NetFortris of approximately 1.3x revenue. With about 1/3 of the upfront consideration being in Sangoma shares, it's clear that the former owners of NetFortris also believe strongly in our company, our business model, our competitive positioning and where Sangoma is headed. Fifth, the addition of NetFortris brings Sangoma an impressive customer base of over 60,000 seats, 6,000 diverse clients with very low concentration, an average customer life of about 6.5 years and a channel structure that is very similar to what Sangoma uses today. Their channel model aligns well with Sangoma's reach across the different types of channel structures, one that is amongst the broadest in the industry. So the addition of over 700 partners will only further accelerate that flywheel. And as I shared earlier, NetFortris has proven their ability to win and serve customers of all sizes right up to enterprises. Many of you will have heard me say multiple times that Sangoma does not want to simply chase those competitors that pay the largest commissions to the channel in order to acquire customers at any cost. We are constantly looking for cost-effective ways to add customers. Sure, we could just follow the crowd and pay those very large [indiscernible] and trading commissions forever, but this is one more example of an alternative way to do so in a transaction with valuations and multiples that I'm sure you'll agree are compelling. The next advantage to point out is somewhat less intuitive, but also perhaps one of the most creative and interesting. Our industry continues to consolidate, and having this new MSP part of our business will open up a whole new category of M&A targets for Sangoma to complement those in the UCaaS space. And last, but certainly not least, this transaction adds a strong management team and highly skilled employees so valuable to help us grow still further during the time of such intense competition for talent these days. Well, that wraps up my top 7 reasons for acquiring NetFortris, and I'd now like to provide a first glimpse into a combined company. In this section, I'd like to touch on a few things, some of the upside opportunities we see between the businesses, some of our preliminary integration thoughts, possible synergies and a quick financial snapshot of the consolidated company. On the topic of upside, we see such benefits coming mostly from the cross-selling opportunities between the respective product portfolios. So for example, we are excited to offer Sangoma's wide portfolio of as-a-service products, think CCaaS, Video Meetings, Access Control as a Service, et cetera, into net fortresses base of UCaaS customers who have not had access to such a wide portfolio of SaaS products in the past. And in the other direction, we anticipate cross-selling NetFortris' portfolio of MSP services both to Sangoma's installed base of cloud customers and also to the portion of our channel that is already selling MSP services and they prefer to source them from us. Regarding integration, I suspect it will be no surprise to anyone who's been watching Sangoma for some time to hear that the general approach to integrating NetFortris will be to gradually integrate their business into our broader company, rather than have it remain a stand-alone entity operating independently. We already know that several functions will be integrated immediately, such as finance, HR, legal, engineering, et cetera. And we also know that some other functions such as sales, in this case, will remain separate for a year to avoid disrupting sales momentum and the go-to-market channel, a decision which also supports the earn-out structure. During this period, we will use NetFortris, a Sangoma company, as we have with other acquisitions during the transition phase. There are still other functions that remain to be determined from an integration point of view, and we just need some time to explore options together. We do know that the NetFortris' office in Manila is a high-performing and cost-effective one, and I've spoken with them personally already. We will be retaining that team and adding even more focus there. We estimate synergies to be about USD 4 million annually. Such cost savings will come from efficiencies and duplication typical of our prior acquisitions, such as things like consolidating traffic, duplicate marketing programs, amalgamating data centers, audits, insurance, et cetera. We believe the majority of those savings will be available within about 6 months, whereas things like network savings can take a bit longer. And finally, from a financial perspective, it's obviously very early for me to offer a detailed financial view of the combined company, given we've owned NetFortris for all of a few hours now. So I can't be too precise in my comments on this topic today, quite yet. We will, as always, be updating our guidance for fiscal '22 when we release our Q3 results in May, and that update will naturally factor in NetFortris for the remainder of the financial year. Given it's almost the end of March, however, this acquisition will not have a material effect on Sangoma's Q3 results, of course. What I can say at this point is that if you take NetFortris' top line, which I've already shared, should exceed $50 million in expected annualized revenue. And if you added that annual figure to Sangoma's current revenue guidance, for fiscal '22, which is $215 million to $219 million, you get a very simplified estimate of over $265 million in revenue for a combined company have we been together for the 12-month period that would have ended June 30 this year. Going forward, we foresee NetFortris' strong MRR taking Sangoma to about 75% of our sales in recurring services revenue, up from about 70% today, and we don't foresee a significant impact to our gross margin percentages once consolidated. Please note that at this very early stage, I don't plan to comment quantitatively on going forward adjusted EBITDA in the combined company, other than to say we're confident Sangoma will get NetFortris to adjusted EBITDA levels under our ownership that allow us to continue delivering the kinds of adjusted EBITDA margins that our investors have come to expect from us. With that, I'd like to offer a brief summary and then turn the call back to David for questions. The journey that Sangoma has been on over the last several years from a one-product hardware company to a true industry leader in cloud communications has been tremendous, a journey that is perhaps the thing I am most proud of about our company. We remain steadfast in our strategic approach of organic growth driven by investments in R&D and customer acquisition, augmented by deliberate and disciplined M&A. And once more, you see that strategy realized again today with the addition of NetFortris, continuing Sangoma's place in the upper echelon of cloud communications. As you've now heard, there are many reasons this transaction looks so good, not the least of which is the strategic addition of MSP capabilities. Business needs are changing and companies are looking for cloud-based communication solutions for connectivity anywhere, anytime and on any device. And they don't want to go to several different vendors in order to meet those needs. Instead, they want fully integrated communications from one trusted supplier, and it is this expectation that fits so perfectly into Sangoma's existing strategy and competitive differentiation with the widest set of communication SaaS products now being elegantly and not truly extended with NetFortris' robust MSP offering. Our ability to meet our customer needs through one-stop shopping has now been strengthened even more further differentiating Sangoma. We are confident that our customers will value this creative innovative approach, that our partners will appreciate the ability to get more of what they need from the vendor they trust. And indeed, that Sangoma will benefit from stronger share of wallet and higher ARPU. But this acquisition is appealing not only for that reason, it brings highly sought-after recurring revenue with over 90% of NetFortris' sales being MRR, it adds much needed scale in a growing consolidating industry, it comes with a very compelling valuation at about 1.3x revenue on an upfront consideration basis, and it offers Sangoma an excellent team of employees at a time when competition for talent is so intense in today's hot job market. On that note, before we open up the call to questions, I would like to once again welcome the entire NetFortris' team to the Sangoma family, a still expanding family with an employee base that is now approaching 800. I'd also like to thank our existing Sangoma team for all of their hard ongoing work over the years, work that helped get us to the point where this acquisition, our 11th in 11 years, was possible. And finally, to you, our valued shareholders, we appreciate so much your investment and your confidence, confidence in our vision, in your company's consistent performance and our track record with acquisitions and in your leadership team. Without your continued support, we wouldn't be where we are today. And indeed, where we are today is a pretty attractive place to be. We have a tremendous opportunity ahead of us with such a large, under-penetrated total addressable market with Sangoma well positioned to capitalize on it, and looking forward with all of you I'm sure to much higher stock prices from today's current depths. Okay. David, back to you for questions.

Thank you, Bill. To make sure everybody knows how to ask questions, I'll ask the operator to take you through the process. Operator, we're ready to take questions now, please.

[Operator Instructions] The first question is from Eric Martinuzzi from Lake Street.

Congratulations on the transaction announcement. I have a question just regarding the pro forma cash and debt. You talked about the debt being at $110 million. What is the pro forma cash?

David, could I ask you to take that one, please?

Eric, we're right in the middle of closing our books with 2 or 3 days from the end of a quarter where a lot of transactions go through. So on an estimated basis, we'll end up with more than the $10 million that is required to get the full benefit of our credit agreement, but it will be a result -- releasing those full results in 45 days. But there's a lot that happens right at the end of the quarter. So you can imagine, I can't give you an exact cash balance right now.

Okay. I was just trying to take word back into the 2.3x pro forma net debt to adjusted EBITDA, but I can -- I'm pretty well there. Let me shift gears and talk about -- go ahead.

Eric, sorry to interrupt. The maximum deduction that's allowed under our credit agreement of $10 million will be in place without giving inflation.

Yes. Got it. All right. And the -- you talked about the cross-sell opportunity both from the Sangoma side into the NetFortris side and then vice versa. Which do you see there as the easiest kind of cross-sell opportunity? Which can you sort of pounce on first?

Well, I think in terms of timing, there won't be a first. We'll be doing both ASAP. But I think you're probably right in your assumption, if I guess what's underneath your question, Eric. The ability to add more cloud services to a customer that's already buying cloud services from you is probably a little bit easier than the ability to go in and tell a customer who buys multiple cloud services from you that we're your best choice of whatever managed security or managed access or managed SD-WAN, which I think is a newer concept in the industry and will need a little bit of education and evangelizing. So that's kind of how I see the two.

Yes. And then you talked about the synergies of, I think, $4 million that the -- how quickly can we expect to see that -- those synergies realized?

I think the majority -- probably the vast majority within about the first 6 months. I mentioned in my prepared comments the stuff that tends to take a little bit longer, Eric, is the network stuff, right? So consolidating traffic or bringing together data centers and colo facilities, you often have contracts with those places and you have to move equipment. So that's the part that takes a bit longer. But if you think about -- I don't know, man. In 2 weeks, one of the large industry events called Channel Partners is taking place. And for example, both companies have a big presence there, and going to trade shows is expensive, right? So things like that get sorted out right away or doing their company audit. We're not going to have 2 different audits. So most of that stuff will happen pretty quickly, and really the network stuff is the set of synergies that take a little bit longer.

Next question is from Deepak Kaushal from BMO Capital Markets.

Can you guys hear me, okay?

Yes. Got you. Deepak.

Just a quick question further on synergies. Just curious, how many of your existing customers don't already have an MSP service provider from an alternative vendor? And the reason I'm asking that, average customer life is 6.5 years. What's the average contract length? And if there is an installed base, how long could that kind of turn over to start driving some synergies?

Yes. I don't think we want to comment on how long it would take to turn over, but I can comment on the rest of your question. So contract lengths in the industry range from, I don't know, 3 years to 5 years is kind of the typical range. We would certainly expect the customer who wants to sign a shorter contract but, of course, with trade-offs and commercial terms. And that's also the way it works at NetFortris. How many of our customers already have MSP services? It's a question that makes it sound like MSP services are homogeneous. But in fact, they're not. So let me just peel back that a little bit and talk about it with you. All of our customers have broadband access by definition. You can't use cloud communications without it. So everybody has that from someone, whether it's just the raw pipe from your telco or your cableco or something more sophisticated like we can now do. But not everybody has, I don't know, managed security or SD-WAN services. And so when you ask how many have MSPs, the answer differs depending upon which MSP services we might be referring to. If you think about the amount of media coverage of, I don't know, hacked sites and security breaches, I think we can all speculate together that it's still the minority of companies who have very sophisticated security in place, especially managed security. And that's why we see that as one of the big opportunities for us as we cross-sell MSP services into the as-a-service apps space.

Okay. Great. That's a great color. I appreciate what you told there. I think you mentioned on the gross margin side that you expect pro forma combined gross margins to be in line with kind of existing for Sangoma. But I also think you mentioned that NetFortris comes in at 64% gross margin. So what are the kind of levers or changes you're expecting to do to keep that gross margin flat for the combined entity.

Yes. There's a couple of things there. One is just the combined company and economies of scale, right? And so one means fewer of the things one does in 1 company than you do in 2. And so as we bring together groups of people and networks, the cost of goods line will tick down a little bit. And that's the biggest contributor. The second biggest contributor is just the relative sizes of the business, right? We're going to be -- I said $265 million if you looked at that simplistic way of combining their expected annualized revenue with our fiscal '22 guidance. And we think they're going to be over 50 of it. So a 5-point difference in gross margin when looked at relative size is only a point or 2 on a consolidated basis anyway. And so that's how it all comes together.

Okay. That's helpful. And then my last question, and then I'll pass the line. Just any other factors we need to consider when we think of top line forecasting pandemic impact, post-pandemic normalization or deferred revenue, amortization, anything like that?

I don't think so, Deepak. The stuff I chose to comment in my prepared remarks are the things that are much more impactful than the 2 or 3 smaller ones you've just asked about. You've seen whatever the impact of the pandemic is on Sangoma over the last multiple quarters. And that impact is not shifting greatly now. The impact on us is similar to the impact that's existed on NetFortris. There are small little fluctuations from quarter-to-quarter from the pandemic, which are not really unique to NetFortris nor would they be different in the consolidated company. But just in fairness and full transparency, you have seen product revenue a couple of points up above our expectations some quarters and product revenue down a few points in other quarters, mostly related to the pandemic impact on supply chain, right? And so when it's down, it's because Sangoma, like everybody else, had trouble getting supply of components or parts from a particular manufacturer, and that's happened a few times. And when you see a quarter's product sales up, it's because we did a good job of managing supply and had more inventory available to meet customer needs when some of our competitors did not. But that answer for me feels more like a Sangoma and consolidated answer than it does one that really relates somehow specifically to NetFortris.

The next question is from Gavin Fairweather from Cormark.

Congrats on the deal. I wanted to start just on kind of the NetFortris' customer base. Is there a lot of overlap between the UCaaS side and the managed services side? And are they also supporting customers of other UCaaS platforms?

Yes. Good question. The answer is there is overlap. It's not as much as we think we can create under Sangoma's ownership, and that's similar to the idea of the earlier question about how many of Sangoma's Communications as a Service customers already have MSP services from someone. And they said, everybody has access but most will not have the other things. And then do they support other UCaaS companies? I think it depends what you mean by support, Gavin. There would absolutely be MSP customers at NetFortris who do not get their UCaaS service from the same company. And there's nothing strange or different about that. That would be perfectly normal and expected, and Sangoma would not anticipate changing any of that. If a customer starts with MSP and doesn't want to change the UCaaS provider at the beginning, we would take that in a heartbeat and then work on converting them to our other services over time, just like we do with the Trojan Horse strategy in Sangoma proper today. If we go in and the customer says, I don't know, man. We only want UCaaS to start. The fact that they didn't buy, I don't know, CCaaS at the same time from us, wouldn't cause us to avoid that customer, we take them the way they want it at the beginning and work on cross-selling them contact center later, exactly the same.

Got it. And just to make sure I'm understanding this correctly. So the UCaaS customers that aren't using managed services. For the most part, these are services that are bundled in there by the other UCaaS providers, right? So this is stuff that the internal IT departments are kind of taken care of despite already moving to UCaaS.

Yes, that's exactly right. You've understood it precisely. And that's my point that it's such a new concept. It's emerging. We're seeing more of it. When I talk to customers and partners, I'm hearing it all the time right now, but none of our direct competitors, RingCentral, Zoom, 8x8, none of those guys do this, right? And so that's why I think the opportunity is so interesting.

Is there an even bigger opportunity for managed services around hybrid deployments?

Well, I don't think we fully understand that yet to be completely transparent, Gavin. The way I think about that question is the same way I think about trunking. We know that when a customer buys a UCaaS service from us, they don't also buy trunking as a Service. Because part of what they get when one buys UCaaS is the connection, right? It's all part of that bundled service. Whereas when it's a hybrid deployment with some cloud and some prem, the prem systems need to be connected with trunking in some point, whether it's ours or not. And so there is an opportunity there. And without me going further than we fully understand yet and pretending that we fully have our hands around this business after a few hours, the analogy that makes sense to me is, in a hybrid deployment, there is more of that kind of thing needed. And I think it's likely, yes, that the MSP, at least the access part, might be more up for grabs. And I think if you give me a quarter or 2, we'll have a better answer on that over time.

Okay. Sounds good. I'll take a note to ask in a quarter or 2. And then just on the UCaaS offering, is there a lot of third-party tech in their tech stack? How much of it will be proprietary? Is part of that -- part of your synergies maybe switching out some of the pieces for your proprietary IP?

Yes. It's not third party. It is proprietary. They built their UCaaS stack the same as we did. There absolutely will be an opportunity to think about what to do about those different platforms. There will be features and functionality in the NetFortris UCaaS platform that may be a little bit different or unique from what Sangoma has, and I would expect the other way around. But we -- it's just way too early for me to have any real opinion about that. We've looked at it in detail. We've looked at their product. We've looked at the technology stack. Sangoma has multiple platforms already that we operate. So we've gotten good at that. So we don't feel any need to force customers off any platform they're using. We're going to keep operating and keep investing in the NetFortris platform. And if there's a way to bring them more closely together over time, then, of course, we would do that.

Great. And then just lastly for me. Can you just touch on the channel and channel overlap and whether they're selling both the UCaaS piece of the channel and managed services to the channel? Or is it 1 of the 2?

Yes, good question. So the answer is both. Yes. Like you would expect for any hypothetical channel partner, it would be quite common that a channel partner would have some -- I'm not sure what word to choose, Gavin. I don't want to go too far. Specialization or leaning or preference is maybe too strong a word. And so for us, it's normal that if you found any one individual Sangoma channel partner and said, are they more comfortable with UCaaS or more comfortable with CCaaS. It depends upon the partner, right? If the company started in the UCaaS world, they're probably a little bit more comfortable with UCaaS, and we're having to bring them along on CCaaS. If they started as a contact center partner, they're probably more comfortable in CCaaS, and we have to bring them along with UCaaS. And it's exactly the same way in the NetFortris channel structure. Their partners are able to sell both, and many do. But like most channel partners, they probably started on one side or the other, right? So if they began as a UCaaS partner, they probably feel a little bit more comfortable with UCaaS. And if it's been taught and being introduced to MSP, and if they started as an MSP channel partner, they're probably a little bit more comfortable with the MSP product offering, and they've had to be introduced to the UCaaS offering. And that is exactly what Sangoma has experience in because of the rest of our existing product suite.

The next question is from James Breen from William Blair.

Just one on NetFortris' customer base, 6,000 customers. There's a lot of overlap there between that customer base and your existing customer base. And just in terms of the size of the customers, I know you said they have everything from small to enterprise. Is there any certain focus or geographic focus there as you look across the company?

Good question, Jim. So on the first one, there is surprisingly little overlap between the NetFortris customer base and the Sangoma customer base. And I say surprisingly very consciously, there's 6,000 of them, and I don't know what the number is yet, Jim. We haven't really had time yet to go through our database and go through their database, but it's small. Most of them are unique to each respective company, and that's why the cross-selling opportunity is so good. And then in terms of customer size, if I remember the second part of your question here, yes, they go right from SMB to enterprise. I tried to give you a couple of examples of some of the larger customers, and I just pick 2 or 3 at random. We have multiple customers with hundreds and thousands of sites, not a lot of seats, so everything from 10 seats to 1,000-plus seats. But the focus, I would say, is mid-market, right? Like for Sangoma, sure, I can point you to many large customers. But if Sangoma gets a 3,000-seat or 10,000-seat or 40,000-seat opportunity on the book, the whole company kind of rallies around it because it's not that common that we win a 10,000-seat customer. And it's very similar for NetFortris. When they're winning a very large one, Jim, it's all hands on deck. Everybody knows about it. Oh, there's this 10,000-seat opportunity, whereas it would be much more normal to have a 367-seat customer.

Great. And then just on the M&A side, we've seen a lot of M&A within the MSP space here in the last probably 2 to 3 years. This opens up a new channel for you inevitably to be able to provide all the IT services to a midsized company, et cetera. You don't have to worry about how to do it. As you think about that, are there other products that sort of are at the forefront for you to add to the current set that you have now to further drive ARPU?

Well, we've already started some of that. In some ways, Jim, I feel like the company, our company, is even a little bit further in front of our customers and channel on this. And we've got an MSP offering now that most of our channels at Sangoma and sales reps haven't sold before, and we have Access Control as a Service and Desktop as a Service, all new things. My sense would be the focus for the next year is probably on ramping up revenue with the new products we've recently introduced rather than looking to add a next brand-new product. But I would also acknowledge to you that predicting that is inherently difficult, right? One goes out and looks for acquisitions, and we sometimes joke on these calls. I use the phrase, you have to kiss a lot of frogs, right, to find a prince. And sometimes you're out there talking to a company and find out as part of the thing you knew they had. They had something different. And all of a sudden, you're intrigued and could that fit. So I'm not going to focus on adding the next new product over the next year. We need to get more of our customers buying the whole suite. We have to get Desktop as a Service tracking. We have to get MSP tracking. But I'm open to it and we think about it. And my view is really, it's less about whether an IT department at a customer is competent and technically capable of sourcing other products on their own. For most of our customers, especially in the mid-market enterprise, they absolutely are. It's not about whether they can do it. It's whether it's in their best business interest to do so, right? You have to go look at a bunch of vendors, pick the one you want and negotiate a contract and onboard that vendor that replaces something your employees already need to do. And then you have to deal with a different way of getting tech support from a different vendor, and you have to get a different set of invoices. So it's, for us, very, very clear that our customers would rather get more from fewer trusted suppliers, and that's why I'm interested in doing more stuff for them. It's not because we're trying to jam it down their throats. It's them kind of pulling us along on that path.

The next question is from David Kwan from TD Securities.

Curious to get your thoughts on NetFortris and maybe why the business wasn't growing faster.

Yes. It's always a tricky one. We've bought other businesses in the past that weren't growing as fast as we were, and then we're able to accelerate it. There are so many factors, David. Part of it is related to just kind of the company DNA, how important is it to the company, and how much does the company focus on it and talk about it. And I think that's different for us than it is for many smaller or midsized private equity firm-backed companies, right, who may be looking for growth at some stages and cash flow at other stages. So that's one factor. I think the narrowness of our product portfolio contributes. The fewer products you have, the less you can cross-sell other new products into the same installed base. And it's harder and takes longer and costs more to acquire a new customer than it does to expand your footprint with an existing customer. I think part of it is the people. They had some turnover challenges a few years ago. So for me to comment explicitly on what exactly caused an issue 3 years ago or 2 years ago is less what we're focused on. What we're focused on right now is what is the growth rate, what will we do to accelerate it even further, what's the right valuation for the set of parameters that existed inside a company we're thinking about acquiring?

No, that's helpful, Bill. On the MSP business, I'm just curious to get a sense of how much of a priority it is for your business. Like how much of the business you think it could be in 3, 5 years? Whether you look -- obviously grow that organically but also from an M&A perspective? I'm just trying to get a sense on a capital allocation standpoint, how much of a priority the MSP business would be versus kind of the core cloud communications.

Well, I mean, I think I can talk about it qualitatively, but quantifying how much of the business it could be in 3 or 5 years, I wouldn't touch that with the bargepole. A couple of hours after owning the business, we have to dig in there and understand it and see how the cross-selling is going and look at whether we would like to do more acquisitions in this area. Before I talk about it qualitatively, I will say that one of the things I really liked about NetFortris on this topic, David, is we looked at other MSP businesses, $50 million, $100 million MSP businesses. And one of the challenges with buying a company like that is it's a very big bite on something that is 100% new to us. So you go buy $100 million of MSP, and it takes you longer to figure it out than you thought it would, and now you're not feeling great about buying that $100 million of revenue before you got it all sorted. Whereas here, we're buying a $50 million company that's over half UCaaS. And so we've really thought about both the upside opportunity for shareholders and how do you mitigate risk as you're going through the introduction of this brand new thing without biting off more than you can chew. So that's kind of my comment about MSPs and acquisitions, and I'm not going to go to the -- how much will the revenue be in 5 years and how much will be MSP. On the qualitative part of my answer, I would say, we're pretty excited about this. I think there is a very big opportunity here. We know that all customers need some of the things that are inside our MSP portfolio now. We know that all of our customers already have one of those things from some vendor. As I joked with several of you, but literally several of you on this call have reached out to me by e-mail over the last few months saying, would it ever make sense for Sangoma to do managed security? Every time we turn around, we read an article about some company being hacked. So there's a lot of excitement at Sangoma. We're going to get a lot of attention. One of the benefits of economies of scale is that as we get bigger, we can afford to do those kind of bets. And this is one we're going to invest time and energy in absolutely 100%. But I don't think I want to try and tell you a fraction of revenue or how many acquisitions in that space yet. So soon into it, man.

Okay. That's fair. Last question. Can you talk about what the implied valuation multiple would be if you paid out the earn-out in full?

Yes, we did that calculation. I am wondering if somebody would ask it. I'll try and answer it. And Larry or David, if I need help, please jump in. Interestingly, David, it doesn't change very much. And I totally realize why you would expect it would. I think at a 100% turn-out, the 1.3 actually drops slightly, like somewhere between 1.25 and 1.3. And that's because once you're talking about the earn-out, we're no longer looking backwards on trailing 12 months or this year. By definition, you're talking about the next 12 months. And in that case, the extra revenue that would be part of the company during those forward 12 months that led to them getting the full earn-out just offsets the additional earn-out payment. So that's how it works. David or Larry, do I need any help there? Or is that pretty close?

That's good, I think, Bill.

So I guess the way to take out, Bill, is that -- to get that earn-out, Bill, like the business, the revenue growth really needs to accelerate here. It looks like kind of in the mid to high teens.

I don't know if it is mid to high teens, David. What I would say is it needs to accelerate and it is accelerating now, and we expect to accelerate it further, absolutely.

Okay. Yes. I [ had just stuff ] like that. The increase like the 80 over the 68, so that gets into the high teens. If you're saying it drops a bit, then maybe it's in the low to mid-teens, I guess, maybe.

Yes.

This concludes the question-and-answer session. I'd like to turn the call back over to David Moore for any closing remarks.

Ladies and gentlemen, thank you very much for joining us today. This concludes today's conference call, a recording of which will be available on our website shortly. I want to thank you for participating today and have a very pleasant rest of your day.

Thank you, everyone.

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