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Sangoma Technologies Corp.
(STC-T) C$7.38
Q2/F23 First Take: Macro Headwinds Drive Miss and Lower Guidance
Event
Yesterday after market close, Sangoma reported its Q2/F23 results and lowered its F2023 guidance.
Conference call: 8:00 a.m. ET; 1-800-319-4610.
Impact: NEGATIVE
Organic growth turns negative. Sangoma reported Q2/F23 results below expectations, with revenue of $62.0mm (TD: $66.5mm/consensus: $67.7mm) and Adjusted EBITDA of $10.6mm (TD: $11.2mm/consensus: $11.8mm).
Revenue grew 17% y/y, driven by the NetFortris acquisition. We estimate organic growth was down ~6%-7% y/y, a continued deceleration over the last year.
Product revenue was $12.6mm, well below our $16.5mm estimate and down 23% y/y. Similar to last quarter, management indicated that customers continue to be sensitive to capex purchases given the current macroeconomic environment, while continued supply chain issues and the stronger US$ made things worse.
Service revenue rebounded to $49.4mm, up 2.3% q/q, following the 1.5% q/ q decline last quarter.
Gross margin of 69.0% beat our 67.5% estimate due to revenue mix. This level is at the upper end of management's expectations for F2023.
Adjusted EBITDA margins improved slightly q/q to 17.0%, helped by the better- than-expected gross margins and OpEx.
FCF was just $0.3mm, as FCF has been hampered by non-cash working capital challenges for most of the last two years (~$11mm headwind on a LTM basis alone), with Q2/F23 FCF particularly hurt by a $3.8mm decline in accounts payable/accrued liabilities.
Net debt was $108.1mm and Net debt/LTM Adjusted EBITDA was ~2.5x, both essentially unchanged from last quarter.
Lowered F2023 guidance implies continued growth challenges but solid margin expansion. Due to the YTD results and macro headwinds, F2023 guidance was reduced by ~9% for revenue and ~5% for Adjusted EBITDA at the mid-point. The updated guidance implies that organic revenue growth could remain negative for the next couple of quarters but Adjusted EBITDA margins are poised for a sharp improvement in H2/F23 to pre-acquisition levels (~20%), as we have been expecting (similar to the Digium acquisition).
Our take. Despite an expected significant improvement in margins in H2/F23 implied by the revised guidance, we believe the Q2/F23 miss and reduced guidance, particularly the implied tepid growth outlook, could cause the stock to give up much of its solid gains YTD.
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