Sangoma Technologies
(STC-T) C$17.10
Q2/F22 Preview: Poised for Another Acquisition
Event
Q2/F22 Results: Thursday, February 10, after the markets close. Conference Call: 8 am ET, Friday, February 11 (Dial-in: 1 800-319-4610). Impact: NEUTRAL
Expecting another solid quarter. We are forecasting Q2/F22 revenue of $51.5mm and Adj. EBITDA of $10.0mm, in-line with consensus at $51.6mm and $10.4mm, respectively. We are expecting ~90% y/y revenue growth, primarily driven by the Star2Star acquisition but also complemented by solid organic growth, while Adj. EBITDA margins are expected to remain in the ~20% range.
Looking to make a deal. With most of the Star2Star integration work complete and leverage levels continuing to decline (we are forecasting net debt/pro forma Adj. EBITDA of <1.5x exiting Q2/F22, down from ~1.7x last quarter) aided by its strong FCF generation, Sangoma looks ready for its next acquisition in our view.
Given the share price weakness, we believe management may be more reluctant to issue equity at these levels to help fund its next acquisition so the next company it acquires could be significantly smaller than Star2Star with the transaction likely to be more heavily funded with debt.
Read-throughs from 8x8's Q3/F22 beat. Last week, 8x8 reported Q3/F22 revenue of US$156.9mm, slightly ahead of consensus at US$153.4mm. Services revenue grew 18% y/y to US$149.4mm while total ARR grew 16% y/y to US$572mm.
The Enterprise segment again drove revenue growth, with Enterprise ARR increasing 30% y/y to US$307mm helped by an increased focus by 8x8 on leveraging its XCaaS platform to win larger Enterprise customers. By contrast, Mid-Market ARR was US$102mm, up 9% y/y but has remained flat in F2022 while SMB ARR of US $162mm was down 1% y/y and has been trending downward in F2022.
Management indicated the slower/declining growth in Mid-Market and SMB ARR was due to higher churn and its increased focus on the Enterprise market, with the latter possibly creating more opportunities for vendors like Sangoma that have traditionally focused on winning SMB and Mid-Market customers.
TD Investment Conclusion
We are maintaining our C$31.00 target, which is based on 3.5x our C2022E revenue.