Prepared remarks
Thank you for standing by. This is the conference operator. Welcome to the Sangoma Investor Conference Call. The operator provided instructions to participants. The conference is being recorded. I would now like to turn the conference over to Samantha Reburn, Chief Legal Officer. Please go ahead, Ms. Reburn.
Thank you, operator. Hello, everyone, and welcome to Sangoma's Third Quarter of Fiscal Year 2026 Investor Call. We are recording the call and will make it available on our website for anyone who is unable to join us live. I'm here today with Charles Salameh, Sangoma's Chief Executive Officer; Jeremy Wubs, Chief Operating Officer; and Larry Stock, Chief Financial Officer. Charles will provide a high-level overview of the quarter. Jeremy and Larry will take you through the operating results for the third quarter of fiscal year 2026, which ended on March 31, 2026. Following our presentation, we will open the floor for Q&A with analysts. We will discuss the press release that was distributed earlier today, together with the company's 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 EBITDA and free cash flow, which are non-IFRS measures but defined in our MD&A. 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 may 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, unaudited condensed consolidated interim financial statements, our annual information form and the company's annual audited financial statements posted on SEDAR+, EDGAR and our website. With that, I'll hand the call over to Charles.
Good afternoon, everyone, and thanks for joining us. This quarter is an important one for Sangoma, not just in terms of results, but in how we want investors to understand the business going forward. The market is shifting quickly given the dynamics of AI. And before we get into the details of the quarter, I wanted to step back and provide a clearer view of how we are seeing the business evolve due to these shifts. This quarter, we are breaking Sangoma into its core components, hardware, applications, the data networking and the voice portfolios to better reflect where the growth is actually occurring inside the portfolio. What this view shows us is that it is a business in transition. When you look at Sangoma on a consolidated basis, you're seeing a blended view of very different businesses, some mature and under pressure and others growing and becoming increasingly strategic. That consolidated lens, while accurate from a reporting standpoint, does not fully reflect where the momentum is building or where we are investing for the future.
Our Data Networking and voice networking segments are performing very well, growing approximately 9% and 17% year-over-year, supported by increasing demand for trusted intelligent communications infrastructure. At the same time, our application business is in transition with growth in larger integrated contracts being somewhat outweighed by declines in more commoditized segments, which is impacting our consolidated revenue profile. That convergence matters because the value in this company is not evenly distributed. And increasingly, it is being created in areas that are not always visible in the top line number. And given where we are in the year and the visibility we now have into Q4, we believe it's important to be direct. We now expect that full year revenue to land somewhere between $204 million and $205 million. This revision reflects two factors. Recent geopolitical and global trade-related disruptions are affecting certain international markets for us and continued pricing and monetization pressure across parts of our software and UCaaS markets are also affected.
Importantly, there are parts of the business that we believe will drive long-term value, our infrastructure assets that are performing and growing well, and we are seeing early signs of that shift accelerating. As we outlined in our earnings release today, in response to increasing inbound expressions of interest, the Board has initiated a structured strategic process supported by a financial adviser to evaluate alternatives focused on ensuring the full value of the business is realized. This is an active Board-led process and a priority at the highest levels of the organization. We believe the platform we've built, particularly our communications infrastructure, our recurring revenue base and our AI-enabled platform strategies is increasingly relevant at scale, and this process is about aligning that strength with the right path forward. Our objective is straightforward: continue to execute the business while the Board evaluates the right path to ensure the value is realized.
So for today, I'm going to anchor our discussion in three areas. First, our go-to-market is evolving towards larger integrated deployments, which I've spoken about before. We are increasingly moving upmarket, not selling point solutions, but delivering integrated communication environments across our distributed enterprises. These are multiproduct deployments that combine network, voice, security and applications into a single managed framework. What's important here is not just the deal size, but the deal quality. These contracts are longer term, three to five years in duration, higher value and expand generally over time. As the deal size and the complexity increase, deployments are implemented in stages, which affects the timing of when revenue is recognized across these bundles. That dynamic is impacting the short term, but these larger integrated deployments start improving customer lifetime value, reducing churn and reinforcing our value proposition.
We are building deeper, more embedded relationships with our customers, and that is fundamentally shifting our models. Secondly, our communication infrastructure business is emerging as a primary growth engine. This is where we're seeing the strongest and most consistent momentum. Our data and voice networking businesses are growing ahead of the rest of the portfolio, driven by increasing demand for reliable, secure and scalable, intelligent trusted communication infrastructures. This reflects a broader structural shift in how communications are being consumed. But as automation and AI agents become embedded in these workflows, the volume and frequency of voice and data interactions increases, and we think this will continue. These are not traditional user-driven calls. They are system-driven, always-on interactions that require routing, validation and delivery across both the voice and the data network.
That drives higher consumption at the infrastructure layer and is showing up in the numbers that we are seeing. We believe this is where the next phase of value creation will occur, not just in the applications, but in the networks that carry and enable those interactions. Our owned global voice networks, combined with our broader communication stack, position us directly in that layer. And importantly, it allows us to participate in that growth, not just on a seat basis, but on a usage and consumption basis over time. This is where AI becomes a catalyst, not just the future, and where we see Sangoma playing a central role as that demand scales across our infrastructures. Now third, our financial models continue to generate strong cash flow and provide strategic flexibility. Our recurring revenue base, improved mix and operating discipline translates into strong conversion from EBITDA to cash.
That allows us to reinvest in growth, reduce our leverage and maintain flexibility in how we allocate capital. In Q3, we made deliberate efforts to reposition our investments towards the growing areas of our business that I spoke about earlier. As those businesses scale, we expect operating leverage to support margin expansion over the next several years. That flexibility matters, particularly in a market where valuation does not always reflect underlying performance. Sangoma is a classic case. It allows us to continue to execute the strategy while also evaluating broader opportunities to unlock value. Taken together, these three areas reflect the business that is shifting from a collection of products to a more integrated platform, from seat-based growth to infrastructure-led consumption and from short-term revenue focus to longer-term value creation. And with that, I'll turn it over to Jeremy to walk through the operating results in more detail. Jeremy, over to you.
Thanks, Charles. I'll focus on what we're seeing operationally across the business, pipeline and customer health, momentum in our MSP and voice infrastructure lines and how well positioned we are to support long-term growth. First, both pipeline and customer health remains strong. Overall, pipeline and backlog were relatively flat quarter-over-quarter, while bookings were lower following a particularly strong Q2. As deal sizes increase, the mix and timing of bookings can vary, but we continue to build and execute against the pipeline of larger, more strategic opportunities. This quarter has seen an abundance of add-on business to previously booked deals, further reinforcing our essential communication strategy and ability to capture share of wallet. For example, the large full stack retail solution with 350-plus locations that closed in Q2 started out as $150,000 MRR. It's about 15% implemented, and we've already booked an additional $50,000 MRR, taking this to $200,000 MRR.
We have a customer with a large national group of clinics. Over the last 12-plus months, they've expanded to 675 locations and $144,000 of total MRR with an additional 112 locations expected in the back half of this calendar year. And it's not just the larger deals that are getting larger. We have a multi-location health care customer that has expanded throughout the fiscal year from its first location in Q1, three more in Q2 and five more in Q3 with bookings now totaling $22,000 MRR. Expansion is all about trust and confidence in our ability to support our customers, which continues to be stable and highly sticky. Churn improved this quarter to approximately 0.79%, which is better than our historical level at 1% and a direct result of the significant improvements in CSAT and NPS that I talked about in prior quarters. Second, we continue to see strong momentum in our MSP and voice infrastructure lines.
Our MSP business is growing approximately 9% year-over-year, outperforming the broader market, driven by our strategy to move upmarket and deliver full stack deployments. These are multiproduct engagements where we move deeper into the customer environment over time. Our voice infrastructure and advanced SIP trunking lines remain a standout, growing approximately 19% year-over-year, driven by new customer wins, expansions within existing accounts and increasing traffic across our network. It's evident now more than ever that communications, relevance, reliability and trust reside in the infrastructure layer. This will continue to be amplified as cyber threats, voice and data phishing tactics and, importantly, AI agents become more prevalent and embedded in workflows and the way customers operate their business. Today, AI agents are already answering calls, booking appointments and following up with customers.
As these workflows move deeper into business operations, they rely on secure, trusted communications infrastructure with appropriate regulatory and compliance measures in place, whether that's PCI, HIPAA, and other regulations. These capabilities don't get built overnight, and they represent the areas where we've invested for years and continue to expand. At the same time, we are beginning to bring AI capabilities directly into the platform with both AI IVR and conversational receptionist agents now in beta and additional capabilities being added through select third-party integrations. We also continue to evaluate targeted acquisitions, particularly in AI and security, where those capabilities directly strengthen our intelligent trusted communications infrastructure. As voice becomes more embedded in automated workflows, it is clear this will continue to be one of the fastest-growing and most strategic parts of our portfolio. With that, I'll turn it over to Larry to walk through the financials in more detail.
Thank you, Jeremy. As Charles outlined, the consolidated view of Sangoma masks the growth that's happening within the portfolio. And that's particularly important as we think about the underlying value of the business. At a high level, approximately 60% of our revenue comes from applications, which includes UCaaS, CX and CPaaS technologies. Over the past two years, we've consolidated this portfolio significantly, moving from a fragmented set of platforms to a more focused integrated stack. Within this segment, we serve both the lower-end customer base where the market has become increasingly commoditized and a larger mid-market customer where we're growing through a vertical-led bundled strategy. Overall, this portfolio has declined at a low single-digit rate year-to-date, but we're seeing improving trends as our mix shifts towards larger, higher-quality deals. Approximately 30% of our revenue comes from our data networking and voice networking portfolio, which includes MSP access and carrier voice.
Together, this infrastructure portfolio is growing in the mid-teens and becoming a more strategically important contributor as usage scales and value concentrates at the infrastructure layer. The remainder of the portfolio includes our open source business and hardware, which each represent single-digit percentages of revenue. While smaller in size, both play important strategic roles in supporting our infrastructure platform and bundled essential communication solutions. The most important point is this: different parts of the portfolio are growing at different rates, but the portfolio is built to generate cash across the board, and that cash flow is the foundation of value at Sangoma. In the third quarter, we generated $6 million in net cash from operating activities, representing an 80% conversion rate from adjusted EBITDA. Year-to-date, our conversion of adjusted EBITDA to net cash from operations was 87%, which is right in line with our expectations for the fiscal year.
Free cash flow for the third quarter was $3.6 million or $0.11 per diluted share and remains a core driver of shareholder value. During the quarter, we repurchased approximately 196,000 shares under our NCIB, bringing total repurchases to approximately 271,000 shares year-to-date. Subsequent to quarter end, the TSX approved the renewal of the NCIB for an additional 12-month period. We also continued to reduce our debt. During the first three quarters of fiscal '26, we repaid approximately $15.5 million of term debt. Total outstanding debt at March 31 was $32.5 million and quarter end cash was $15.2 million. Our consistent cash generation, ongoing deleveraging and disciplined capital returns have continued to reinforce the underlying value of the business and provide strategic flexibility as we move forward. Now turning to the P&L. Total revenue for the third quarter was $51 million, reflecting the mix and timing dynamics we've discussed across the portfolio.
Revenue from outside the U.S. was down approximately $300,000 quarter-over-quarter and $660,000 year-over-year, reflecting the macroeconomic and global trade-related pressures that have impacted demand in certain international markets. Gross margin for the quarter was 71% compared to 74% in the second quarter. The change reflects a combination of factors, including a higher contribution from infrastructure services with respect to product mix and higher fulfillment costs in certain international regions. Adjusted EBITDA for the third quarter was $7.5 million or 15% of revenue. While margins were impacted by the factors I just outlined, we've been actively reallocating investments in both R&D and SG&A towards the faster-growing parts of the business, particularly infrastructure and AI-enabled capabilities, allowing us to continue investing in growth while maintaining solid profitability and cash generation.
Turning to our outlook. We are updating our guidance for the fiscal year. We now expect full fiscal '26 revenue in the range of $204 million to $205 million. This reflects continued momentum in infrastructure and services alongside the timing of revenue recognition on larger integrated deployments. It also takes into consideration the headwinds we have experienced on the international business. We now expect adjusted EBITDA margin in the range of 15% to 16%. The change reflects the evolving mix of the business with faster-growing infrastructure representing a larger share of revenue in the near term. Over time, we expect margin expansion from both the infrastructure side of the business as consumption volume grows and essential communications applications and as larger customer contracts scale. Importantly, this outlook continues to be supported by strong cash generation, disciplined capital allocation and improving visibility as deployments mature. Before we open the line for questions, and as always, I want to thank the broader Sangoma team for the hard work, dedication and execution. Operator, we're now ready to open the call for questions.
Questions and answers
Technical difficulty. The operator provided instructions to participants. The first question is from Gavin Fairweather with ATB Cormark.
Hopefully, you can hear me. There's a bit of background noise. But just on the new focus around the voice and data networks and the infrastructure side, maybe you can just refresh us on kind of the capacity and geographic coverage of that segment, how you win in that segment and differentiate yourself versus competitors? And just lastly, how much of that is being sold through existing channels and existing clients versus it being separate?
Yes. I'll talk... Gavin, it's Jeremy. A couple of things. First, the kind of data infrastructure is more North American focused and runs on a pretty advanced infrastructure backbone we have. That's really tied to a lot of the large deals and logos we talked about in previous quarters. It starts with the network infrastructure, getting that traffic running over top and it gives us the opportunity to sell more applications and solutions on top of it in later quarters. So on that side, we've got a North American-focused infrastructure component. And then the voice infrastructure base, there are some commonalities in the kind of network it operates on, but that's sold mostly to a lot of large other UCaaS trunking providers that have software offerings that need to run calling, run AI agents, run more advanced applications. That infrastructure is both North American-based and actually reaches out globally into the worldwide theater.
I would say, for the most part, it's a lot of the same partners in our partner ecosystem, but it's a subset—ones that are more sophisticated, ones that have a better appreciation for the more advanced features and services that we're able to provide. They have a propensity to go after larger logos, and that's really what's helped us win a lot of those larger deals I talked about in other quarters and see that 19% growth on the voice infrastructure side and 9% year-over-year growth on the data infrastructure side.
Appreciate that. Very helpful. And then just on the multiproduct larger wins that you secured in recent quarters. I think you said that the backlog of deals kind of booked, but not yet live was pretty unchanged with last quarter, which I think was at an elevated level. Maybe you can just talk about the timelines for some of that business to go live and start showing up on the services side.
Yes. Most of them take about six to eight months to deploy. The example I mentioned earlier closed in Q2 with 350 locations; it's about 15%, almost 20% implemented now. So you're talking a couple more quarters, two to three more quarters before they get up to full run rate. For deals in the $150,000 range I mentioned, and others in the $20,000 range, those types of deals generally take six to eight months. If it's a little more voice infrastructure related, probably a quarter or two. If it starts with a national data network like the bigger ones that are in the $100,000-plus range, that's more in the six to eight month timeframe.
Every quarter, though, we're continuing to build on the foundation of more bookings in this area. The simple way to look at it, Gavin, is we're getting these customers onto our networks through a value proposition that standardizes the network platform, reduces the total cost of ownership and secures their network. We bring them on every quarter. They get rolled out over the course of eight to twelve months. And every quarter, we keep adding to that portfolio. So the compounding effect of that is really hard to time because some of it is not just our own capacity; it's the capacity of the clients themselves to organize their locations and get ready for us to install. So it's why we have difficulty sometimes—so early, like only one year into this pivot to the larger transformational type deals—to really predict when these will all land in any particular quarter. I think as we get more mature, every single quarter, we'll get much more clarity on understanding how the impact has to revenue relative to the other pressures that we're facing and that we talked about earlier.
The next question is from Daniel Rosenberg with Paradigm Capital.
Sorry for any background noise and just in transit. But my first question was around the expressions of interest that you mentioned. Any color you could give about are these several expressions of interest, how initial conversations, how deep these conversations have gone? Just any color there would be appreciated.
We've been looking at ways to drive value creation with a company of our size. We're a small cap Canadian company with some liquidity challenges. Part of our mandate was really to get the company into good operational strength, which is where it is now, and good financial strength. When we got them into these two positions, we knew we would have lots of options. One option would be to acquire a bunch of companies and start to build on our platform. Another option was potentially to exploit the value in our financial systems. Since we've begun the transformation, we've had interest to look at the company from all kinds of scenarios: mergers, potentially combining efforts, partnerships where we would combine portfolios. Obviously, we've been looking at acquisitions. So it's been a slow-growing, ongoing set of interest over the course of the last year. We just got to the point where the Board felt it was our duty to announce that this was going on because the interest continued to increase. Inside that last six to eight months, the market has dramatically shifted. There's been a lot of activity in this type of space. And so we thought it was the right time to do it.
Okay. I appreciate that. And then just turning to your commentary around the macro, some international impacts. I'm just curious if you could tell me what you're hearing from the budgets of your target customers. Has there been any change in propensity to spend?
I think there's reallocation of dollars to AI applications and that's changing how budgets are being allocated. On the international front, our portfolios there are somewhat restricted to a handful of offerings. We have a cloud-based offering that can operate in multiple countries, and we have a lot of traditional voice hardware business in those parts of the world. These are offerings that are generally fairly cost conscious. With some of the activities in the state of conflict and the disruption to supply chains, shipping costs and production costs have gone up and a lot of our clients have experienced disruptions. Most of it has been around cost of transportation—shipping costs have made it somewhat cost prohibitive and it slowed down our orders unexpectedly. The conflict came upon very quickly, which caused a challenge this quarter. The feedback we're getting from customers in that market is still a little ambiguous.
Does this shut down in Q4 and we go back to normal? Does it take a couple of quarters before cost of shipping settles down and they work through backlogs? We don't know. As a result, we've been quite cautious about our guidance relative to the impact that would have. Also, we've had events canceled by customers because of turmoil in the market. So the overall answer is the market is very uncertain, creating caution, and that caution is translating into slower orders for us and delays in orders. I don't blame them.
Okay. And lastly for me, just on the margin. Would you say the margin impact this quarter is a function of what you just described? Historically, you've been pretty consistent in the margin you've produced. So just wondering how you're thinking about margins on a go-forward basis? Any expectations of a rebound as some of these issues get resolved in the near term?
Yes. For the next quarter, as we're guiding, we see it relatively the same given the visibility that we have. As we transition to seeing some of the volume in some of these other areas and our ability to increase the margin there moving forward, we would expect to see expansion as we move forward. But for the next quarter, we've built that into the guidance we've given because of the uncertainty in those areas.
The next question is from Suthan Sukumar with Stifel Canada.
For my first question, I wanted to touch on some of the commentary you made around keeping the investments going into the growth categories of the business. Is this more of a reallocation of resources? Or is there now a new incremental scope of investment given some of the market signals that you're seeing?
It's really both. We're always looking at costs. On a net basis, we'll be at about a $2 million annualized cost reduction. However, we are putting back into the business significant investments in those areas; that's the reallocation. So from that point of view, we're looking at where we can deploy those assets to serve where we're seeing the growth. It is the combination of both.
Okay. Great. And with respect to the color you shared on the pipeline trends sequentially, I think you touched on it in the earlier question, but is that activity in the pipeline you're seeing now more reflecting a pause in overall client decisions given the macro? Or is this also a function of the larger scope of deals that you guys are working with now and the lumpy nature of those deals? And moreover, what are you seeing post the quarter?
So I'll be clear on a couple of things. First, the pullback or the hesitation is really pretty focused in some of our international markets and those customers. In the U.S. markets, where 90% of our revenue exists today, we're not really seeing a pullback. What we're seeing there more is that since July of this year, post integration and transformation, we've been pursuing bundles of larger deals upmarket, which requires three major things. One, we need sales leadership that knows how to sell the integrated bundle value proposition. Two, we need to isolate the partners that understand the complexity of these larger lower-TCO value propositions. And three, we had to land those deals and roll them out. We got all three of those things pretty right in the first couple of quarters. What we're still struggling with a little bit is just the speed of execution of deployment. As every quarter goes by, we get much more intelligent about how these things roll out, especially the larger, very complex deals like the one Jeremy mentioned.
We didn't anticipate that we would start at $150,000 MRR and then within three or four months add another $50,000 MRR. We've never done deals of that size before, and so we're learning as we go. We don't see any real pause here. In fact, we're seeing continued demand for these types of transactions. They're just going to be a little uneven for the first couple of quarters. In one quarter, you might have huge booking numbers, and in the next quarter you might have half that. So as we get more mature over the coming quarters, we'll have better clarity on timing. We made a conscious decision this quarter to really focus the growth of the company on these areas and not try to invest in all areas because the application side of the business is commoditizing. I don't mean stop growing, but sustain that business and put dollars into those areas that are growing double digits. The value proposition we tested at the beginning of this fiscal year has proven this is an area customers appreciate, and we are allocating investments and energy to support that.
We're not yet at a point where I can pinpoint every single quarter the exact amount of revenue that's going to fall, but it's growing and there's demand for it. AI and agent traffic on these networks is going to continue to increase volume, and we'll continue to learn as we deploy these things on a quarter-by-quarter basis. It's an exciting area of growth for us, but it's new and now showing up in real numbers for the company, and we're allocating investments to support that.
Got you. Helpful color. And just one last one for me. On the strategic review, would you entertain selling parts of the business? And if the Board ultimately deems that you guys stay the normal course of business, would you continue to be active on M&A going forward?
Of course. This announcement was broad. We've been and continue to look at being an acquirer of companies, and now potentially being acquired. There's no definitive timeline at this point. Do we see selling parts of the company? I don't think that's a logical answer because the value of this company has always been predicated on the foundation of the essential communications bundle that we believe the mid-market is moving towards, and selling parts of the company doesn't seem to make sense, although the Board is willing to entertain anything that creates shareholder value. So it's a very broad announcement on how the Board feels about what we want to do. We want to unlock value for the company that creates shareholder value, and we're going to look at various options to maximize that.
The next question is from David Kwan with TD Securities.
I spoke a few months ago, and there was a lot of bullish commentary and data points on the call and not so much on headwinds that you might have been seeing, especially internationally. So I'm just trying to reconcile that with what came out this quarter. How did things seemingly change relatively quickly in some of your markets, most notably internationally? Was it just the Iran conflict? Or is there something else?
No. The Middle East crisis and the disruption to the supply chain directly affected our mostly product business that is tied to the international side of our revenue stream. International markets for us are usually very stable, and Q3 has been historically our strongest quarter. The disruption created problems with shipping costs, problems with clients' belief that we can get product to them in a certain time, and orders were delayed. It just caused a short-term impact and I don't know how long it will last. That's why I'm being more conservative about where I think Q4 is going to end. If you're a product seller, that's most of what we sell internationally and there's a direct impact. It's created ambiguity, and that's why we lowered guidance. We were bullish going into January; the situation changed in February and March and it had that kind of impact. That's as honest an answer as I can give you.
I appreciate the color. When you look at the breakdown of the revenues, the product revenues actually were quite solid. But on the services side, it looks like the shortfall was relative to what you guys had guided in terms of year-over-year sequential growth this quarter—about $2 million. I'm trying to understand what the difference was. Was there an FX impact or something else?
David, a lot of it was timing of those larger, more strategic deals. We booked tremendous TCV in Q2 and strong bookings in Q1 around these larger strategic deals. I wouldn't have predicted that they'd only be 15% deployed on some of those larger ones; I thought we'd be at 40% to 50% deployed and that the MRR would have shown up this quarter. It's not our ability to implement and pace these deals; it's the pace at which customers can enable the rollout. One large retail account with 350-plus locations needs to coordinate with landlords and the telecom rooms, and sometimes installs are scheduled after hours. By the time you coordinate everything, it can be two to four weeks later. That's really what's impacting our Q3 services revenue—the lumpiness and the pacing of these larger deals. As we have a larger and more stable volume of large deals, that will help create more predictability in the MRR services business.
To add to Jeremy's point, we have three buckets: product, infrastructure, and applications. The product business internationally has had some headwinds we described. The services and application side—the traditional UCaaS business—has been commoditizing rapidly. We realized that we could either fight commoditization across the entire portfolio or shift to where we think the puck is going to be, which is infrastructure. So we pivoted in Q3, took out some costs and reallocated investments into the growth engines, which affects the consolidated view and hides the underlying growth in parts of the company. The market has shifted significantly in the last eight months and we've adapted accordingly.
I appreciate the color. For the strategic review, did that just commence? Or did it start earlier and you're only disclosing it now?
We've been working with our bankers since about the beginning of the fiscal year, but the early focus was broad—acquisitions and other options to unlock shareholder value because we didn't feel the market was rewarding the company for the value it had. We strengthened the financial position and the portfolio over the last two years and engaged the process at the beginning of the year. Because of increasing attention from the market, we felt it was appropriate and our fiduciary responsibility to announce it now.
The next question is from Robert Young with Canaccord Genuity.
I was going to ask why now on the strategic review, but I think the last question partly answered that. If I were to look at the previous comments you just made, it sounds as though you're looking at optimizing the business. This isn't a situation where you've had an outside offer that's forcing a process, is it? I'm trying to understand the answer to the previous question.
That's right, Robert. As usual, you're right. We've been looking more broadly at ways to unlock shareholder value. It's not in response to a single outside offer. It's a broad process because the market dynamics have changed and we believe there are options to realize value that the market isn't currently reflecting in our stock price.
You're already looking at optimizing slower parts of the business like the VoIP Supply transaction. Is this a continuation of what you've been doing before, just more formalized?
Yes, it's a little broader now. The market has created frustration across the industry given dramatic structural changes, particularly in software and UCaaS. We see dual value in Sangoma's financial strength and the richness of its portfolio, and we're looking at broader ways to unlock shareholder value. We've had inbound interest and it became something we felt responsible to announce.
Digging into pricing pressure, you suggested it was related to specific areas—UCaaS and others. Is this where bundling has not been a factor? And you mentioned strong demand in the U.S. Is the pricing pressure outside of the U.S.?
The pricing pressure is across the UCaaS portfolio as a point solution. Bundling is how you stave off commoditization—by combining a commoditized offering with premium value. The bundling strategy was our response. I joined the company in 2023 knowing we would face a commoditization cycle given too many UCaaS players. Sangoma had voice, data, video, security and proprietary hardware, so we moved towards bundling. It took two years to transform and we launched bundles in July. We logged $11 million of TCV in the first two quarters, more this quarter and next. But those deals have a very different business model than selling a point UCaaS solution—the timing of revenue recognition is different. Bundles get rolled out over eight to twelve months depending on client speed. It's been difficult to time revenue on a 90-day cadence while transitioning through commoditization, which is why the consolidated numbers can look uneven in the near term. As we get volume and maturity over 2027 and 2028, timing will become clearer.
The churn number is still very impressive. You noted large expansions. I would think net revenue retention or net dollar retention would be very high this quarter. I know you don't give that number, but was it abnormally high? Also, is the channel go-to-market strategy driving some of this expansion activity with large customers?
Not yet; it's just starting. On churn, Jeremy and the team have done an outstanding job. That comes from focusing on customer service. With bundles, you become the virtual CIO for your customer, and to retain customers you need trust built through good service and support. Between Jeremy and Joel Kappas, our Chief Client Officer, they've driven churn down and improved NPS. On the bundling side, once we land larger contracts, Phase 2 is account expansion. We couldn't do that until we had a cohort of bundle-aware contracts. As part of reallocation, we're moving six people into the account expansion team. Mining value from our 100,000-plus customers has been underexploited; now we have a leader running that function and we're putting more resources toward it. We have a strong customer base and NPS that makes it easier to sell more features and services to that base. So we have two plays: new logo acquisition for large integrated contracts and farming existing accounts for expansion. Both are moving into full motion this quarter and going into fiscal '27.
Last question: when you say infrastructure, can you clarify simply what that means? I think of hardware like session border controllers and... Just think about it simply.
Think of it like a layer cake. The bottom layer is the voice network—a global network that moves voice traffic. It carries voice traffic on a wholesale model and we sell it to ISVs, ISPs and carriers. Increasingly, we're going to see agent traffic moving back and forth communicating with humans. The next layer above that is the data infrastructure, mostly North American-based, our own network that carries machine-to-machine application traffic, internet traffic, with security embedded. That carries mostly data traffic and in the future agent-to-agent communication. These two layers we call infrastructure and they carry traffic that used to be primarily human-driven. Increasingly, we're going to see more agent traffic 24/7 consuming these network infrastructures and, hopefully, commanding more of a premium price than traditional human-to-human conversations would get.
And just for clarity, those are services businesses. They're recurring services for usage on those platforms, not hardware sales.
The data networks, for example, can be five-year contracts or three-year contracts on average. The voice ones are recurring revenue generally on a yearly basis. It's very high-quality, consistent revenue, and once you get agent traffic on these networks, it's very hard to get off. So it's going to be a very sticky business and continue to be so as long as you maintain strong customer satisfaction and support.
This concludes the question-and-answer session and today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.