Sangoma Technologies Corporation (SANG) Q3 2026 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the Sangoma Investor Conference Call. [Operator Instructions] 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 kind of 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 2 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, 3 to 5 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 a deeper, more embedded relationships with our customers, and that is fundamentally shifting in 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 positions 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, it 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. And 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 from its first location in Q1, 3 more in Q2 and 5 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 the 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 [indiscernible]. 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 2 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 3 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 in essential communications applications 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.

[Technical Difficulty] [Operator Instructions] 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, kind of 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 that 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 kind of in later quarters, go sell more applications and solutions on top of it. So on the -- we've got one component, very North American focused infrastructure based. And then the voice infrastructure base, there is some commonalities in the kind of the 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. It's ones that are more sophisticated, ones that have a better appreciation for kind of 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 time lines for some of that business to go live and start showing up on the services side.

Yes. Most of them take about 6 to 8 months to deploy. I mean the example I sort of talked about earlier, we closed in Q2 350 locations. It's about 15%, almost 20% implemented now. So you're talking a couple more quarters, 2 to 3 more quarters before they get up to full run rate, whether that's the 150,000 one I mentioned, there's another one I talked about last quarter is about 20,000. Those types of deals, you're talking 6 to 8 months. If it's a little more voice infrastructure related, probably in a quarter or 2, if it starts with kind of a national data network, like the bigger ones that are in the $100,000 plus range, that's more in the 6...

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 8 to 12 months. And every quarter, we keep adding to that portfolio. So the compounding effect of that is really hard to time it because some of it is not just our own capacity, it's the capacity of the clients themselves to organize their locations, get ready for us to install. So it's why we have difficulty sometimes so early like only 1 year into this sort of pivot to the larger transformational type deals to really pivot and when these will all land on whatever particular quarter. I think as we get more and 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. And so part of our mandate was really to get a to get the company into good operational strength, which is where it is now and good financial strength. And we knew when we got them into these 2 positions, we would have lots of options. One of the options would be to acquire a bunch of companies and start to build on our platform. The other option was potentially to exploit the value in our financial systems. Well, just like we've been trying to do with our own company, we've had interest really since we've begun the transformation. At the beginning of this fiscal year, we came out of transformation, and we've had lots of inbound 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 kind of been a slow growing, ongoing set of interest over the course of the last year. And just got to the point now where the Board felt it was our duty to announce that this was going on because the interest continue to increase. Inside that last 6 months, really the last 6 to 8 months, the market has dramatically shifted. There's been a lot of activity in this type of space. And so we thought it was like the right time to do it.

Okay. I appreciate that. And then just turning to your commentary around kind of 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 all these AI applications, just dollars where they're being allocated. Honestly, on the international front, our portfolios in international 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 out in those parts of the world. These are offerings that are generally fairly cost conscious. And with some of the activities in the state of [indiscernible] and the disruption to supply chains, shipping costs, production costs have gone up and a lot of our clients are basically telling us that the cost of have had some disruptions. And basically, most of it has been around cost of transportation. and shipping costs have just made it somewhat cost prohibitive and it slowed down our orders unexpectedly. And as you know by how fast this war came upon very, very quickly, which has caused a bit of a challenge we've had this quarter. And I was just being honest with you, I think the feeling I'm getting from customers in that market is still a little ambiguous. Do this thing shut down in Q4 and we go back to normal? Does it take a couple of quarters before cost of shipping settle down while they get to go into the backlog? We don't know. And as a result, we've been quite cautious about our guidance relative to the impact that would have. But also just one other thing, like we've had events being canceled by customers because of some of this turmoil that's going on in the market. And so the overall answer to your question is the feedback we're getting is the market is very uncertain as to what's going on. It's creating caution and that caution is translating into slower orders for us and delays in orders relative to the situations they're faced with. And to be honest, I don't blame them.

Okay. And lastly for me, just on the margin. So would you say the margin impact this quarter is kind of a function of what you just described? And because when I think of you guys historically, you've been pretty consistent in the margin that you've been able to produce. 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. So 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 that expand as we move forward. But for the next quarter, we built that into the guidance that we've given just 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 guys 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. So we're always looking at costs. And 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, which would be a reallocation. So from that point of view, we're looking at where we can deploy those assets to serve the -- where we're seeing the growth. So it is the combination of both, Suthan.

Okay. Okay. Great. And with respect to the color you guys shared on the pipeline trends sequentially, I think you touched on it in the earlier question, but is that sort of activity in the pipeline that you're seeing now, is that more reflecting more of a pause in overall client decisions here given the macro that's playing out? Or is this also a function of really just 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, if I understand your question. So first of all, the pullback or the hesitation is really pretty focused in on 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 of is, look, we kicked off in July of this year, this idea because we were post integration and transformation, bundles of larger deals upmarket, which requires three major things to happen. One, we need to find sales leadership that knew how to sell the integrated bundle value proposition. Two, we need to really isolate the partners that really understood the complexity of these types of larger lowering TCO type value propositions. And then three, we had to sort of land those deals and then roll them out. And so we got all three of those things actually 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. And as every quarter goes by, we get much more intelligent about how these things roll out, especially these larger, very large complex deals like the one Jeremy was talking about. We didn't anticipate that we would start at $150,000 MRR. And then within 3 or 4 months later, we're now adding another $50,000 of MRR. So now it's a $200,000. 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 going to see continued escalation -- not escalation, but increased volumes of these types of transactions. They're just going to be a little bit wonky for the first couple of quarters. In one quarter, you might have huge booking numbers where you'll do $10 million of TCV -- and in the next quarter, you might have half that. In the next quarter, you might have triple that. So as we get more and more mature over the coming quarters because we're now definitively focused on this business and couple that Suthan with -- we've made a conscious decision this quarter to really focus the growth of the company on these areas of the business and not try and invest in all the areas because there's a realization that the application side of this business, just a very tough slide. And I think it's commoditizing. I think it's an area of the business where you need to deprioritize. I don't mean stop growing, but sustain that business, but really put dollars that we have available to us into those areas that are growing double digit. And the value proposition that we tested in July of this year, at the beginning of July or beginning of this year has proven that this is the area that customers are appreciating and that we are going to start investing more and more of our energy and time. And we're just not at a point yet where I can pinpoint every single quarter the exact amount of revenue that's going to fall. What I can tell you is just it's growing, there's demand for it. And I think AI now and agent traffic on these networks is going to continue to increase the volume there, and we'll continue to learn as we deploy these things on a quarter-by-quarter basis. I know the vague answers to the question, but it's really the best we can tell you about right now. It's an exciting area of growth for us, but it's a new area that is now showing up in real numbers for the company as we announced today in terms of what we're seeing, and we're allocating the investments to support that.

Got you. No, that's -- helpful color. And just one last one for me, guys. Just 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?

Being active on, I'm sorry?

Active on M&A of the ambitions you've talked about in the past?

Yes, yes, yes. So of course, because what this announcement was about, and I know the general view is it just simply, hey, we're looking at strategic alternatives in one dimension. We're not. But looking -- we have been and continue to look at being an acquirer of companies, but now potentially being acquired. There's no definitive time line at this point. Do we see selling parts of the company, I think is what your question was. I don't think that's a logical answer because the value of this company has always been predicated in 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 -- it's a 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 all various options to maximize that.

The next question is from David Kwan with TD Securities.

[Technical Difficulty] I spoke a few months ago, and there was just a lot of bullish commentary and data points on the call and not so much on kind of some headwinds that you might have been seeing, especially internationally. So I'm just trying to reconcile that with kind of what came out this quarter, like how did things, I guess, seemingly change relatively quickly in some of your markets, most notably internationally? Was it just the Iran conflict? Or is there something else?

No, I. I mean the Middle East crisis, the disruption to the supply chain directly affected our mostly NRR business, which is tied to the international side of our revenue stream. It's a very stable the international markets for us and the leader who runs it is usually very stable. Q3 is actually our strongest quarter, generally speaking. It has been for multiple years. This is the seasonality trend of the international market. The only thing that's really disrupted it, and we're getting direct feedback is the very rapid implications associated with the macroeconomic issues that are going on. It's created problems with shipping costs. It's created problems with clients' belief that we can get product to them in a certain time and orders were delayed, and it's just caused a short-term impact. And I don't know how long it's going to last. And that's why I'm being a little bit more conservative about where I think Q4 is going to end. And if it does, like, okay, ask any of my CEO friends the same question, okay, what's the backlog implication to this? If you're an NRR seller, you're a product seller, which we are for international. That's mostly what we sell out there. There's a direct impact there. And it creates a lot of ambiguity. And that's why I said in my remarks, I got to be direct with you guys, I'm going to have to lower guidance as a result of it because I cannot put my finger on where they're going to be. We were quite bullish on them going into January, when did this thing happen? It happened in February and March and it has that kind of an impact. I'm not being cute, but that's as honest as an answer I can give you.

No, I appreciate the color, Charles. I guess 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 kind of what you guys had kind of guided to in terms of year-over-year sequential growth this quarter about $2 million. So I'm trying to understand what the difference was. Was there -- the FX was a bit of an impact there, but what happened there?

So I'm sorry, with respect to what the...

Just on the services revenue side, like you guys have been talking about Q3 being a quarter of returning to not just quarter-over-quarter growth. in services revenue, but also a year-over-year basis. So relative to where the revenues fell out this quarter, it looks like there was about a $2 million shortfall given that churn was actually seemingly down this quarter based on Jeremy's commentary. I'm just trying to reconcile that.

David, it's Jeremy. A lot of it was what Charles just mentioned previously, like this timing really of some of those larger, more strategic deals. We booked a tremendous TCV in Q2, very strong bookings in Q1 as well around some of these larger strategic deals. And I wouldn't have predicted that they'd only be on some of these larger ones, 15% deployed. I thought we'd be at 40%, 50% deployed and that MRR would have shown up this quarter. It's not kind of our ability to implement and kind of pace these deals. It's just the pace at which the customers grow one of the large account I mentioned before, large retail, 350-plus locations, some of them are in strip malls. They got to do it after hours. They got to coordinate it with the landlord. They got to get to the telecom room. So you've got it on a schedule for whatever the first of the month and sometimes with -- by the time you can get all that coordinated, it's 2, 3, 4 weeks later. And that's really what's impacting our Q3 services revenue, the lumpiness and the pacing of these larger deals. So as we have a larger and more stable volume of large deals, that will help create more predictability in the MRR services business.

And I mean, David, I made it clear as well, like that is certainly a big part of it. The product -- we have a big portfolio. Part of the portfolio is NRR and the product business, which has generally grown. So then you've heard some there's been some headwinds associated with that, that we described. But there's also the third bucket, which I've been very open about, right? The market has dramatically changed in the software industry in the last 7 to 8 months. No one would have -- you asked me a year ago, would I have thought the infrastructure, networking and data businesses would have been a strength of Sangoma. I would have said you're smoking grass. It is now -- and you talk to any of the major players in this space, infrastructure plus AI is -- could become the new sexy because there's a realization AI agents are coming on the network at an extraordinarily rapid rate and they need an infrastructure that can trust ah time to these agents just like you would with voice calls. And so we've begun to realize that the services, the pure software side of the business, the traditional UCaaS business, which makes up a large chunk of our revenue, is just commoditizing at an accelerating rapid rate. And I can either fight that I thought we could over the course of the year, I could fight it hard or and try and differentiate with a company of my size, $200 million or we can really put the guns of growth towards what we think -- where we think the puck is going to be, which is in the infrastructure. So we kind of made a pivot in Q3 under that realization. And given the adaptability of this company and how fast we can pivot, we pivoted in Q3. We took out some costs. We reallocated those costs into the growth engines, and that's had a bit of an effect on the year-over-year, the consolidated view, as Larry said in his remarks, it's hiding the underlying growth of what's really happening in the company and what I believe the market is actually doing and rewarding. But I guess the simple way of saying it, the plan in July is a little bit different than the plan now, some 8, 9 months later, primarily because the market -- you cannot deny the market has absolutely shifted in technology and particularly in the last 8 months.

I appreciate the color, guys. And just last question. For the strategic review, did that -- did you just commence that? Or did that start earlier and you're only disclosing that now?

No, we've been sort of working with our bankers for about -- since about the beginning of the fiscal year, but really it was mostly focused on a hugely broad mandate that kind of went into acquisitions, went into all kinds of potential ways to unlock shareholder value because we just didn't feel the market was rewarding the company for the value that it had. I mean we got value in two areas. We strengthened the financial position of the company with its balance sheet, its debt, its cash flow position. And we strengthened the portfolio after 2 years of ruling transformation. And we still didn't feel the market was ruling. And so we wanted to get a different set of eyeballs on it, and we engaged that process at the beginning of the year. And -- it's just because of what's happening in the market, the company drawn a lot of attention to itself, and we thought it was appropriate and our fiduciary responsibility to announce it.

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 -- the answer to the last question partly answered. I think 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, if I'm trying to understand the answer to the previous.

That's right, Robert. You're right. As usual, smart as a way.

And I mean, you're already looking at divesting slower parts of the business like the VoIP Supply transaction. And so is this just a continuation of what you had been doing before, just more formalized?

Yes, it's a little broader than that now. And I think like I said earlier, the market -- we're -- we, like most CEOs who are in my space right now are a little frustrated by this dramatic structural changes that are hard to understand in the software industry, and the UCaaS industry. And we believe there's value in this company in Sangoma, in particular, dual value and its financial strength and dual value in its portfolio and the richness of the portfolio and certainly what we're starting to see now with the growth in the business in certain areas, combined with the compression in other areas. And we're just -- the value is just being locked up and the market is not appreciating. So we're looking at broader ways to unlock shareholder value. That's my job, first and foremost, beyond protecting the integrity of the employees of the company is to increase shareholder value. And so I think we've just taken the mandate broadly. We've had a lot of inbound interest on the company. It's increasing, and it became for us, something that we felt it was our responsibility to announce, and that's what we did.

Okay. So digging a little bit into the pricing pressure, you already suggested it was related to specific areas. I think you UCaaS, I missed the other parts. But is this where bundling has not been a factor? And I think you said that there was strong demand in the U.S. Is the pricing pressure outside of the U.S.

No, no. The pricing pressure is across the UCaaS portfolio as a point solution. And so the way you stave off commoditization when you have that is you move into value proposition that blends a commoditized offering with a better premium offering or a better value proposition. And so the bundling strategy was our way. We always knew pricing compression was coming. I joined the company in 2023, I joined it knowing full well that over the next 2 years, we're going to be in a commoditization cycle. There were too many UCaaS players out there. But what Sangoma had that was different than anybody else is that it had voice, data, video, security and its own proprietary hardware. So moved the company towards bundling, which we took us 2 years to kind of get the transformation enabled to make that happen, launched that in July, which was the beginning of this fiscal year. logged $11 million of TCV in the first 2 quarters, more coming this quarter and more coming next quarter. But those deals have a very different business model than selling point solution UCaaS by itself. And so the timing of revenue between selling a point solution and UCaaS at a super high margin by itself is way different than selling a bundle, which gets rolled out over 8 to 12 months, depending on the speed of the client's ability to execute. So it's getting the timing right of dealing with commoditization while executing the bundle that we're still -- I'm just being honest with you, still struggling to pinpoint how to land the plane in every 90-day cycle to meet these quarterly numbers at such a tight range. It's just hard to do. It's always been that way for anyone that plays in this space until you get volume. And so as we go into '27 and '28, we're going to -- every quarter, we begin to understand better how to realistically time the revenue drop from the time of revenue contracted.

Great. Okay. And then the churn number is still very impressive. I was just -- you noted there was a lot of large expansions. And so net revenue retention or net dollar retention number, I would think would be very high this quarter. I know you don't give that number, but was it abnormally high this quarter? And maybe if you could just talk about whether the channel go-to-market strategy is that driving some of this expansion activity with these large customers?

Yes, not yet. It's just starting to. And so first of all, on churn, Jeremy and the team have just done an outstanding job of -- and that's certainly from his background and focusing on customer service. You're going to get these bundles, you're going to become the virtual CIO for your customer. And therefore, in order to maintain and retain that customer, you've got to have some degree of trust built up through good service and good support. And between Jeremy and Joel Kapppas, our Chief Client Officer, they've driven that number down, including bringing AI technologies in to better help us understand our client base and get them through the pre-2023, I guess, Sangoma that had some challenges and that caused a lot of this churn to kind of go through the system. On the bundling side, now that we're landing these larger contracts, there's a kind of Phase 2, right, first land the contract and then now we're going to invest heavily into account expansion. We really couldn't do that until we got a bunch of these contracts in that were bundle aware. And so part of this reallocation that Larry talked about, we're actually moving 6 bodies into the account expansion team as part of that investment and reallocation because mining one of the core value capabilities of Sangoma is it's 100,000-plus customers. And we really haven't got into harvesting them well. We now have a great leader who's running that for us. We're putting more resources towards that. And we have a portfolio that has a good customer set and NPS score attached to it that makes it a little easier for us to sell more features, more services, more capabilities to that base. And so you've got these 2 plays, new logo acquisition going after large new contracts on these 5-year terms that are more infrastructure based and then moving them over to a farming function to allow for account expansion because the company is now ready to do so. just like I said, those things are both moving into full motion really this quarter and kind of going into '27.

Okay. Last question. Just the infrastructure, if you could just clarify what that means. When you say that I think of hardware like session board controllers and... Just think about it simply, right?

Think about like a layer cake. So the bottom of the layer cake is the voice network. It's kind of A to Z country that's global, and it moves voice traffic. It carries voice traffic on a wholesale model. We sell it to ISVs, ISPs, carriers, those kinds of people. And then they move traffic -- voice traffic across these networks. And more increasingly, we're going to start to see more agent traffic moving back and forth communicating with humans. So agents communicating with humans, humans communicating with humans over voice traffic. The next layer above that is the infrastructure of data, mostly North American-based, our own network -- and it's really more machine-to-machine application traffic that moves across these networks, Internet traffic, that type of stuff. It's got security embedded on top of that. And that carries mostly data traffic and then I think in the future, agent-to-agent communication. And so these two layers we call infrastructure in the simplest terms, and it's just carrying traffic that used to be primarily humans. And increasingly, we're going to start seeing more agent traffic 24/7, 7 days a week, consuming more of those network infrastructures and hopefully commanding more of a premium price than what traditional human-to-human conversations would get.

And just for clarity on those, those are absolutely services business. They're not hardware. It's recurring services or reoccurring services for usage on those platforms.

The data networks, for example, can be 5-year contracts, 3-year contracts on average. The voice ones are recurring revenue generally on a yearly basis. And so very, very high-quality revenue that is very consistent. And once you get agent traffic on these networks, it's very hard to get off. So it's a very -- it's going to be a very sticky business and continue to be so as long as you don't have the customer, which is why NPS and customer sat are so important to us.

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.