Sangoma Technologies Corp.
(STC-T) C$5.08
Q4/F23: Q4 Misses & Guidance Suspended; Downgrading to HOLD
Event
Yesterday after market close, Sangoma reported its Q4/F23 results.
Impact: NEGATIVE
In-line revenue, but adjusted EBITDA misses. Revenue of $63.7mm was in line with expectations (TD: $63.2mm/consensus: $62.9mm), as higher-than-expected low-margin Product revenue offset lower-than-expected high-margin Services revenue. Accordingly, gross margin fell to 66.3%, below our 70.2% estimate, which led to lower-than-expected adjusted EBITDA of $10.9mm (TD: $12.6mm/consensus: $12.7mm).
Services revenue down q/q. For the second time in F2023, Services revenue fell sequentially. Following the Q1/F23 1.5% q/q decline, Services revenue fell 0.7% q/q this quarter, with management stating the shortfall vs. its expected ~2.5% q/q growth target was completely due to pricing pressure in its wholesale SIP trunking business (~$1.5mm impact), which was also a key contributor to the weakness in Q1/F23. Sangoma indicated the business is stabilizing and rebounding nicely in Q1/F24, and that it still believes ~10% y/y growth in Services revenue is achievable in F2024.
Guidance temporarily suspended for F2024. As part of new CEO Charles Salameh's strategic plan to position the company in an ideal position for long-term profitability and growth, Sangoma has suspended guidance for F2024, but it currently plans to resume providing guidance in F2025. Management remains focused on driving profitable organic growth, with no plans for M&A for the next year or two.
Putting together a plan. Both Mr. Salameh and new COO Jeremy Wubs believe Sangoma has an attractive suite of communication solutions complemented by its managed services offering. One near-term priority is to determine how to better package these offerings for its core SMB customer base (e.g., vertical-specific solutions). They also plan on transforming the organization, including building cross- functional teams and better consolidating platforms/systems.
TD Investment Conclusion
We are downgrading Sangoma to HOLD (was Buy) and lowering our target price to C$7.00 (was C$9.50), based on 5.0x our C2024 adjusted EBITDA estimate. We believe the stock is attractively valued, particularly given its solid FCF (~9% trailing yield). However, we believe near-term upside could be limited given the lack of catalysts and the impact of potential disruptions from changes implemented by the new leadership team.