TOP IDEAS: Sangoma Technologies’ (TSX: STC, NASDAQ: SANG) transformation, led by a new management team is showing green shoots of success, which could lead to a significant recovery in the stock price.

No doubt, 2023 was a disastrous year for shareholders in Sangoma Technologies. But, if you are looking for a small cap investment opportunity, 2024 could be a fantastic year to own shares in Sangoma Technologies. The Company’s recent quarterly results and investor call provides us with the clues to support this idea.

Sangoma Technologies (TSX: STC - C$5.32, NASDAQ: SANG – US$4.00) is a trusted leader in delivering value-based Communications as a Service (CaaS) and Managed Service Provider ("MSP") solutions for businesses of all sizes. Today, this Company provides the Industry’s most comprehensive cloud communications suite and broadest product portfolio in the market, with the ability to provide a full end-to-end communications solution for enterprise customers over the cloud, on-premise or hybrid.

As a services provider, Sangoma has differentiated itself from competitors by being a one-stop shop solution to the SMB enterprise market and by providing a fully integrated experience for support and cost savings to its customers. The Company provides an array of cloud-based communication services, including Unified Communication (UCaaS) business communications, Contact Centre as a Service (CCaaS), Video Meetings as a Service (MaaS), Collaboration as a Service (CollabaaS), Communications Platform as a Service (CPaaS), Trunking as a Service (TaaS), Fax as a Service (FaaS), Device as a Service (DaaS), Access Control as a Service (ACaaS), Security as a Service (SaaS), SD-WAN Management Services and Network Access as a Service.

Sangoma Technologies has undergone – and continues to undergo - a significant change since a new Management team (CEO & COO) began executing on its business transformation plan for the Company over the last 120 days. The plan referred to as "Project Diamond” by Management in the Company’s most recent investor presentation deck includes the rationalization of Sangoma’s cost structure, a new Go-to-Market (GTM) marketing and sales strategy and a refocused R&D effort to embrace AI into its solutions.

With the recent release of Sangoma’s Fiscal 2024 Q2 results and from the information provided on the subsequent investor call, the Company’s CEO and COO provided a detailed update on the significant operational and sales and marketing changes that have since been implemented. First, according to Management, cost reduction initiatives already undertaken will save the Company US$9 million on an annualized basis. Changes were also made to Sangoma’s GTM approach, with vertical specific offerings and the bundling of its product and service offerings. Finally, the Company revamped its product road map and Management indicated it has already begun rolling out the first wave of new products with GenAI capabilities specifically in its contact centre, UCaaS and security solutions. Furthermore, to manage the Company’s R&D programs, Sangoma recently hired its first Chief Innovations Officer (CIO) along with new senior marketing heads.

The print on numbers in the Q2 results reconfirm to us that the financial fundamentals remain strong for Sangoma. The Company reported solid adjusted EBITDA margins at almost 17% of revenues, with a strong free cash flow (FCF) yield of greater than 20%. Also, Sangoma continues to pay down its debt. Net debt is currently equivalent to about 2 times adjusted EBTIDA, which is acceptable leverage.

The biggest telltale SIGN for Sangoma's near-term prospects is that the Management team is confident enough for its outlook to reinstate the financial guidance for the Company’s fiscal 2024 annual results (ending on June 30) at $US245M-250M in revenues and $US41M-44M in EBITDA.

Therefore, what makes Sangoma Technologies such a compelling investment today for small cap investors? First, based on the current financial fundamentals, there is the opportunity for small cap investors to be exposed to a very attractively valued company that has a history of growth and profitability and now has lower debt leverage.

Based on the guidance for Fiscal 2024, Sangoma Technologies’ current share price values this Company at a ratio of Enterprise Value (EV) to adjusted EBITDA near 5 times. Given the industry peer group and similarly sized SaaS growth companies, this valuation is significantly discounted to any comparable.

Finally, in addition to the Company’s current financial fundamentals and the aforementioned operational improvements, Sangoma Technologies is a strong brand within its industry and has a growing, diverse customer base, comprised of over 100,000 enterprises in more than 100 countries. The Company has no concentration risk and a very high customer retention rate.

While we knowledge Sangoma may not report growth in its revenues for fiscal 2024, we do see good growth returning in fiscal 2025 with the new marketing plan in place. Also, given the rapid pay down of in its debt from the cash flow being generated from its operations, the Company’s strong balance sheet provides the flexibility to grow the business faster, both organically and through acquisitions. Management said it will communicate its capital allocation plan to the investment community in the coming months.

We reiterate that from Investorfile’s very first blog post introducing Sangoma Technologies (See: Sangoma Technologies: A small cap tech stock trading for value with prospects of growth.), the stock did return a high-point investment gain of 2,377%.Notwithstanding that the share price had retreated significantly from its highs during the bear market period for technology small cap stocks in both 2022 and 2023, we can honestly say that Sangoma Technologies may be in a better position today to reclaim the title as a small cap investment performer.

Of note, investment analysts covering Sangoma Technologies have recently reinstated their buy recommendations for this stock.

The Company has approximately 33.3 million shares outstanding.

Sangoma Technologies website: www.sangoma.com

Author Ownership Disclosure: TSX: STC – Yes

Investorfile's share price accumulation target of $0.40 (pre-consolidation) for Sangoma Technologies Corp. was initially reached on April 24, 2014.

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This article is for informational purposes only. This article is based on the author's independent analysis and judgment and does not guarantee the information's accuracy or completeness. The information contained in this article is subject to change without notice, and the author assumes no responsibility to update the information contained in this article. The information contained within this article should not be construed as offering of investment advice. Those seeking direct investment advice, should consult a qualified, registered, investment professional. This is not a direct or implied solicitation to buy or sell securities. Readers are advised to conduct their own due diligence prior to considering buying or selling any stock.

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The author of this article has acquired and may trade shares of Sangoma Technologies Corporation through open market transactions and for investment purposes only.