Expect big things from Sangoma Technologies, says Beacon

Unified communications solutions provider Sangoma delivered on Thursday its third quarter fiscal 2021 numbers for the period ended March 31, 2021, showing sales down two per cent year-over-year to $35.44 million and EBITDA up two per cent year-over-year to $6.63 million.

The company said the year-to-year revenue comparison was impacted by exchange rate fluctuations, saying in a press release that in US dollars the Q3 revenue was about US$28 million versus US$26.6 million for Q3 2020, leading to a growth rate of five per cent.

CEO and president Bill Wignall said in his comments that management doesn’t normally comment on forex but the impact on the quarter was unusual.

“We sell almost exclusively in US dollars around the globe, and in that currency, total revenue was up by five per cent this quarter over the same quarter last year. This growth is driven by our Services business continuing to grow well at 15 per cent in US dollars this quarter compared to the same quarter last year. As a result, our Services revenue expanded to 57 per cent of total sales this quarter, up from 52 per cent in the same quarter of the prior year,” Wignall wrote.

Markham, Ontario-based Sangoma completed at the end of March a major acquisition in Florida-based Star2Star Communications, a cloud-based communications services company targeting mid-market and enterprise customers. Sangoma issued 110 million common shares at $4.17 per share for an aggregate price of paid $458.7 million and paid cash consideration of about $129 million, while Star2Star CEO Norman Worthington and cofounder Marc Lederman were added to Sangoma’s Board upon the close of the deal.

At the time of announcement, Wignall said acquiring Star2Star would generate scale and complete the company’s evolution “into a leading cloud services company,” with annual revenue closing in on $250 million.

“This transaction ensures we can meet any customer’s preference, be it for purely cloud solutions or for on-premise deployments or a hybrid combination, all the way from small businesses to large enterprises,” Wignall said.

Looking at the fiscal Q3 numbers, Leung said he was forecasting revenue and adjusted EBITDA of $36.5 million and $6.0 million, respectively, compared to the realized $35.4 million and $6.6 million. The analyst concurred with management’s call on forex, noting that the US dollar was down six per cent year-over-year based on average rates in the quarter.

Drilling down, Leung said product revenues at $15.4 million were down 12 per cent year-over-year and impacted by COVID-related delays, supply chain challenges and, according to Leung, a “continued structural shift in demand to cloud-based services.” The analyst also pointed to STC’s gross margin for the quarter which climbed to 65.6 per cent compared to 64.6 per cent a year earlier, saying that with the arrival of Star2Star they should hit closer to 75 per cent.

“EBITDA margins were 18.7 per cent, which was up from 17.9 per cent last year. We expect the inclusion of Star2Star will bring EBITDA margins in the ~16.5 per cent range before any potential cost synergies,” Leung wrote.

Looking ahead, Sangoma management has called for full fiscal 2021 revenue and EBITDA guidance of $166 million and $30 million, respectively, which would imply Q4 numbers of $60 million and $9.8 million.

For his part, Leung is forecasting fiscal 2021 revenue and EBITDA of $165.8 million and $30.0 million, respectively, and fiscal 2022 revenue and EBITDA of $252.0 million and $44.6 million, respectively.

“As it relates to the Star2Star integration, STC indicated that the finance, legal and HR groups have bee integrated with sales, engineering and operations expected to follow over the next couple of quarters. Conversations with customers and channel partners have been largely positive,” Leung wrote.

“Overall, we continue to expect Star2Star to drive a multiple expansion for STC given the combined company’s significant revenue (particularly recurring) and EBITDA scale, its full suite of cloud (and on-premise) communications solutions, and the significant potential top and bottom-line synergies. We reiterate our Buy rating, but are lowering our target (due to forex) to $6.50 (was $7.00), which is based on 6x FY22 EV/Sales,” Leung said.

At the time of publication, Leung’s new $6.50 target represented a projected 12-month return of 85 per cent.

With a $445-million market capitalization, Sangoma finished 2020 with a return of 43 per cent, while so far in 2021 the stock is down six per cent.