Q3/F24: IN-LINE QUARTER, GUIDANCE TIGHTENED; ATTRACTIVE VALUATION AND FCF YIELD
THE TD COWEN INSIGHT
Despite the tepid near-term growth outlook, we believe significant margin improvements should help drive a 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 >20% FCF yield (LTM), we believe its shares are attractively valued.
Impact: NEUTRAL
Growth challenges persist, but solid cost control/restructuring gains drive strong margin expansion. Revenue of $61.0mm was in-line with expectations (TD: $61.8mm/consensus: $61.2mm). Revenue declined 3% y/y and 2% q/q, as macro/geopolitical headwinds and delayed orders hurt Product revenue in particular. Meanwhile, disruptions from changes in its GTM strategy continue to hinder Services revenue growth, with Services revenue declining 1% q/q again.
Adjusted EBITDA of $11.2mm beat consensus at $10.8mm and was in-line with our estimate. Adjusted EBITDA margins increased to 18.3% from 16.8% last quarter, as Sangoma is increasingly benefiting from its restructuring that is expected to generate ~ $6.2mm in cost savings in F2024 and ~$9.1mm on an annualized basis.
F2024 guidance tightened. With one quarter to go, Sangoma tightened its F2024 guidance, with projected revenue of $246.5mm-$248.5mm (was $245mm-$250mm) and Adjusted EBITDA of $41.5mm-$43.5mm (was $41mm-$44mm). The mid-point of guidance is ~0.4% below consensus for revenue, reflecting the aforementioned headwinds, but ~1.3% above consensus Adjusted EBITDA and implies adjusted EBITDA margins of ~17.2% for the year and ~18% in Q4/F24. We have assumed Adjusted EBITDA margins remain at the ~18% level for F2025E and F2026E.
Solid FCF generation; leverage drops below 2x. FCF was $12.3mm in the quarter, well ahead of our $6.5mm estimate, and net debt was $81.2mm. Sangoma ended Q3/F24 at ~1.9x leverage, down vs. 2.2x from last quarter. On an LTM basis, FCF was ~$30mm, up almost 200% y/y and implying ~22% LTM FCF yield.
Capital allocation to focus on debt repayment; M&A also under consideration. Management indicated that debt repayment is currently the top capital allocation priority, but it is also evaluating how to best allocate its capital to where it can best drive sustainable growth, whether it be organically, inorganically/M&A, and/or geographic expansion.