Sangoma Technologies keeps “Buy” rating at PI Financial

Canadian tech name Sangoma Technologies (Sangoma Technologies Stock Quote, Chart, News TSXV:STC) delivered mixed results in its latest quarter, according to PI Financial analyst David Kwan, who reviewed the results in an update to clients on Monday.

The analyst has lowered his estimates going forward for STC but maintained his “Buy” rating and $2.85 per share target nonetheless.

Sangoma, which is a global provider of on-premise and cloud-based unified communications solutions, reported its fiscal second quarter 2020 results on February 27, showing sales hitting a record high of $32.29 million, up ten per cent year-over-year and up 15 per cent sequentially. EBITDA was also an all-time high at $5.2 million compared to $2.4 million a year earlier.

President and CEO Bill Wignall noted that the Q2 represented the 20th straight quarter of revenue growth for Sangoma and the first time EBITDA was over $5 million for the quarter.

“Our second quarter had a number of features worth noting including the acquisition of VoIP Innovations to kick off the quarter (which is delivering nicely to our expectations), the really encouraging signs of continued solid growth in our services business, slightly softer demand for our one-time product sales like many companies are seeing these days given events around the globe, and a significant reduction in debt service costs as we locked in half of our loans at a lower interest rate of 4.2 per cent,” said Wignall in a press release.

Comparing with analysts’ expectations, Sangoma’s Q2 revenue of $32.3 million was below Kwan’s $35.0-million forecast and the consensus $35.5 million, with Kwan attributing the miss to lumpy and lower margin product revenues ($16.2 million versus his $19.3-million estimate).

Adjusted EBITDA of $5.2 was above Kwan’s $4.9-million estimate and in-line with consensus, due to higher-than-expected gross margins, according to Kwan, who had forecasted 62.0 per cent margins versus Sangoma’s 66.0 per cent.

But the overall impact of the quarter was “slightly negative,” according to Kwan, who noted that management has lowered its fiscal 2020 guidance from between $135 and $145 million to between $128 and $132 million, while raising its EBITDA guidance from between $19 and $20 million to between $19 and $21 million.

Kwan said COVID-19 could be the wild card for Sangoma’s year.

“The new guidance reflects what STC believes is achievable based on what it currently knows, including Q3-to-date performance. The decrease in revenue guidance is solely due to lower-than-expected low(er) margin product revenue,” wrote the analyst.

“STC has already seen headwinds in its supply chain related to COVID-19, even though their two China-based contract manufacturers are not located in Wuhan/Hubei province, as access to components and a delayed ramp after the extended Chinese New Year holiday has slowed production in particular. COVID-19 along with global macro concerns has also helped curtail some customer demand, similar to many other
companies,” he said.

The analyst thinks that while upside over the near-term could be limited given the current global headwinds, increased volatility in STC’s share price “could create very attractive buying opportunities,” Kwan said.

The analyst revised his estimates and is calling for fiscal 2020 revenue and adjusted EBITDA of $127.5 million (was $136.0 million) and $20.1 million (unchanged), respectively.

His $2.85 target represented a projected return of 29.5 per cent at the time of publication.