Sangoma Technologies Corp T.STC

TD

[retiredcf]

Currently have a $7.50 target. GLTA

Sangoma Technologies Corp

Q3/F24 PREVIEW: SOLID MARGIN GAINS EXPECTED DESPITE GROWTH HEADWINDS

THE TD COWEN INSIGHT

Despite the tepid near-term growth outlook, we believe significant margin improvements should help drive continued strengthening in FCF generation, allowing for more flexibility on the capital allocation front. With the stock trading at ~5x EV/EBITDA, at the bottom end of its peer group and historical range, and offering a mid-teens FCF yield, we believe shares are attractively valued.

Event:

Q3/F24 Results: Wednesday, May 8, after market close Conference Call: 5:30 p.m. ET (Dial-in: 1-800-319-4610) Impact: NEUTRAL

Revenue headwinds expected to persist. Our Q3/F24 revenue forecast of $61.8mm is in- line with consensus at $61.2mm. We expect revenues to fall ~1.6% y/y, driven by disruption from the change in its go-to-market strategy and continued macro/geopolitical headwinds that is delaying customer capex decisions, as we forecast Product revenue to decline ~12%  y/y. We expect a return to positive q/q growth in Services revenue this quarter, albeit marginal at ~0.6%, with a return to total revenue growth in Q1/F25, as we expect these headwinds to begin abating.

Expecting solid margin gains. Our Adjusted EBITDA estimate of $11.2mm is just above consensus at $10.8mm. We expect another solid quarter of Adjusted EBITDA margin expansion (18.1% vs. 16.8% last quarter and 15.7% in Q1/F24), driven by better revenue mix and flat cash OpEx. Our H2/F24 Adjusted EBITDA margin forecast is in-line with the mid-point of the reinstated F2024 guidance.

Potential update on its capital allocation strategy and GenAI plans. There has been a significant improvement in FCF generation this year, with >$10mm in FCF in H1/F24, almost equal to the total for F2023. We expect the improved FCF performances to continue, as we forecast FCF nearly doubling in F2024, helping provide more flexibility from a capital allocation standpoint.

Last quarter, management indicated it planned to provide colour on its capital allocation strategy this quarter. We believe M&A could be back on the table, with tuck-ins more likely until its valuation materially improves and/or its leverage materially declines (2.2x exiting Q2/F24). M&A has historically been a key catalyst for the stock, albeit under the prior management team.

Early GenAI-enabled features have focused on contact center solutions, where it is likely seeing the most GenAI-related competition, as features like real-time transcription services, summarization, sentiment analysis, and chatbots for agents are becoming must haves. We look for updates on related customer uptake, which should help drive ARPU expansion, and new GenAI releases.

[GeraldW]

TD Raised their target from 6.50 to 7.50 pre-earnings.

[AnitaGet]

with the TD increase, I'd call it a signal to sell. A.

[Torontojay]

These analysts are so out of touch with reality.  If stocks were to move in line with their targets for every company in their coverage, you would be earning 50% + cagr on your investments every single year.  Stocks generally increase 8-10% per year so the math does not compute.