Sangoma Technologies Corp.
(STC-T) C$6.12
Q1/F23: Margins Set to Rebound Event
We are updating our estimates and target price following Sangoma's Q1/F23 results. For our initial take, click here.
Impact: SLIGHTLY NEGATIVE
Services revenue is expected to rebound next quarter. Services revenue fell 1.5% q/q in Q1/F23, the first sequential decline since Q4/F20, the first full quarter since the start of the pandemic and related lockdowns. Management indicated that a confluence of factors led to this result, including seasonality, FX, a modest decline in wholesale SIP trunking usage, and some customer churn including a midsize customer that was lost due to M&A (i.e., the customer switched to the communications platform utilized by its acquirer).
Management expects services revenue to return to sequential growth next quarter, helped by the company having the best cloud bookings quarter in a long time in Q1/F23, as Sangoma had one of its highest gross and net add MRR bookings performances to date. The company also indicated that the vast majority of its services revenue is recurring cloud-based revenue with some maintenance revenue. A small portion comes from variable sources, most notably the usage-based component of its wholesale SIP trunking business.
Gaining more traction with larger customers. Sangoma is seeing and closing larger deals (>$100k in MRR) in its pipeline with higher frequency, particularly following the acquisition of Star2Star, which already had many enterprise customers. The company looks to be increasingly focused on mid-market and enterprise customers who can benefit more from its single, integrated suite of cloud-based communications solutions that is amongst the broadest on the market. Furthermore, we believe customers of all sizes are likely to be attracted to Sangoma's value-based pricing, particularly in the current macro environment. Besides, we think they would also prefer the simplicity with customer/technical support, billing, etc., given that Sangoma's comprehensive communications platform essentially eliminates the need to deal with numerous vendors of various communications solutions, particularly whenever a technical issue arises, for example.
TD Investment Conclusion
We are lowering our target price to C$16.50 (was C$17.50), based on 1.7x our C2023 revenue estimate. Our target price implies an EV/EBITDA (C2023E) multiple of 9.4x.