Q4/F24 PREVIEW: FOCUS ON F2025 GUIDANCE
THE TD COWEN INSIGHT
We believe Sangoma is turning a corner after some challenging times, including a significant slowdown in growth across the industry. With its new management team putting their stamp on the company, we believe better times are likely ahead, including a return to growth and stronger profitability and FCF. We will review our estimates, target price, and recommendation after the results are released.
Event:
Q4/F24 Results: Wednesday, September 18, after market close. Conference Call: 5:30 p.m. ET (Dial-in: 1-844-763-8274). Impact: NEUTRAL
Revenue headwinds expected to persist. Our Q4/F24 revenue forecast of $61.4mm is in-line with consensus at $61.1mm and guidance. Although we expect revenue to grow slightly q/q for the first time in F2024, it is still expected to decline ~4% y/y driven by an expected 19% y/y decline in Product revenue due to ongoing macro headwinds delaying capex decisions.
We are forecasting a slight q/q increase in Services revenue, following two quarters of sequential declines, as we expect headwinds from its GTM strategy changes to begin abating.
Restructuring gains are aiding the rebound in margins. Our Adjusted EBITDA estimate of $11.3mm is slightly above consensus at $11.0mm and in-line with guidance. We expect Adjusted EBITDA margins to expand from 17.1% last year to 18.4%, helped by restructuring activity that is expected to generate cost savings of ~$6.2mm in F2024 and ~$9.1mm on an annualized basis.
Debt repayment is a priority; $5.3mm lump sum repayment provides increased financial flexibility. The business continues to generate a lot of cash, with ~$30mm in LTM FCF (~17% yield), and our F2024 forecast of ~$23mm is more than double F2023 levels.
The strong FCF generation enabled Sangoma to make a $5.3mm lump sum debt repayment in Q4 (~$9.7mm in total debt repayments in Q4), with it targeting to get debt to <$60mm exiting F2025.
Leverage was <2x exiting Q3/F24 and we expect it to get to ~1.0x exiting F2025.
Focus on F2025 guidance; return to growth expected. We are forecasting F2025 revenue of ~$259.5mm, which implies ~4.7% y/y organic growth, slightly ahead of consensus at ~ $254.9mm (~2.9% y/y growth). Despite an easy comp, we are only forecasting ~1.7% y/y growth in Product revenue with an ~5.4% y/y increase in Services revenue.
Meanwhile, we expect Adjusted EBITDA margins to remain near Q3/F24 levels (18.3%), with our estimates implying ~18.1% margins, in-line with consensus. Although we think there is more cost savings that could be realized, we believe increased growth investments could limit further margin gains.