Sangoma Technologies Corp T.STC

TD

[retiredcf]

Sangoma Technologies Corp.

(STC-T) C$4.70

Q3/F23: In-line Quarter; High End of F2023 Guidance Trimmed

Event

Yesterday after market close, Sangoma reported its Q3/F23 results.

Impact: NEUTRAL; target price reduced on lower applied multiple

Strong margin expansion; back to pre-NetFortris levels. Sangoma reported in- line Q3/F23 results, with revenue of $62.8mm (TD: $63.3mm/consensus: $63.2mm) and adjusted EBITDA of $12.2mm (TD: $12.5mm/consensus: $11.9mm). Revenues grew 18% y/y, primarily due to the NetFortris acquisition, while adjusted EBITDA margins improved significantly to 19.5% from 17.0% last quarter, returning to pre- NetFortris levels (19.6% last year) just three quarters post-acquisition, in line with our initial expectations and similar to the post-Digium integration. The strong margin improvement was aided by post-acquisition cost savings, ongoing cost control initiatives, and revenue mix (increased Services revenue contribution).

High end of F2023 guidance trimmed on macro. Sangoma has reduced the high end of its F2023 guidance:

• Revenue of $250mm-$254mm (was $250mm-$260mm)

• Adjusted EBITDA of $46mm-$48mm (was $46mm-$49mm)

  Although the new revenue guidance is a bit below our estimate/consensus, the updated adjusted EBITDA guidance is still in line with pre-Q3/F23 expectations (TD: $47.3mm/consensus: $46.4mm). Management will begin providing SaaS-related metrics beginning in F2024 to help investors better assess its growth trajectory.

  Another quarter of solid Services revenue growth. Services revenue grew 2.3% q/q, in line with recent quarters, and implies ~10% annual growth rate. This compares favourably with the performance from some of its key peers, including RingCentral (1.3% q/q growth in subscription revenue) and 8x8 (0.5% q/q growth in services revenue). Management remains comfortable with the current Services revenue growth trajectory (~10% annualized) in the near term but is looking to accelerate growth into the teens, driven by cross-selling activity and strategic investments, which it believes should enable margins to hold if not continue expanding.

  TD Investment Conclusion

  We are lowering our target price to C$9.50 (was C$14.50), based on 5.0x (was 7.0x) our C2024 adjusted EBITDA estimate. The decrease in our target multiple reflects a decline in peer group valuations.