Sangoma Technologies Corp.
(STC-T) C$6.93
Q1/F23 Preview: Solid Execution Expected to Continue
Event
Q1/F23 Results: Thursday, November 10, after markets close.
Conference Call: 8:00 a.m. ET, Friday, November 11 (Dial-in: 1-800-319-4610). Impact: NEUTRAL
Expecting NetFortris-driven margin compression to bottom. We are forecasting Q1/F23 revenue of $66.5mm, in line with consensus at $66.4mm, with the expected 29% y/y growth driven by the NetFortris acquisition and solid organic growth. Revenue should also benefit from certain projects that were pushed out from last quarter. Our Q1/F23 Adjusted EBITDA forecast of $10.9mm is slightly below consensus of $11.3mm. Based on Sangoma's past experience with Digium, a near- term dilutive acquisition like NetFortris, we expect margins to bottom this quarter and start rebounding next quarter, with a return to pre-acquisition levels expected exiting F2023.
Increasing macro challenges factored into guidance? On its Q4/F22 conference call, Sangoma indicated seeing some signs of a more challenging macro environment, with sales cycles lengthening in certain cases due to either more deal scrutiny and/or increased financial challenges being faced by some customers. There has been similar commentary from some of Sangoma's peers as well as across the tech sector in recent weeks as earnings have been reported.
Strong FCF provides flexibility in capital allocation. Sangoma continues to generate solid FCF that has helped fund its M&A activity and lower its leverage levels (~2.6x net debt/EBITDA; forecasting <2x exiting F2023). More recently, given the significant pullback in the stock, Sangoma has started buying back its shares, with ~41k shares repurchased in Q1/F23, according to SEDI. At just 1.0x EV/Sales (C2023E) and ~5x EV/EBITDA (C2023E), we believe the depressed valuation (in our view) will limit Sangoma's ability to pursue larger acquisitions, leaving more capital to buy back its stock at these attractive levels and also further reduce its leverage.
TD Investment Conclusion
We are maintaining our C$17.50 target price, based on 1.7x our C2023 revenue estimate.