Release Date: February 05, 2025

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Sangoma Technologies Corp (NASDAQ:SANG) achieved its fiscal year-end debt target of $55 to $60 million two quarters ahead of schedule, enhancing financial flexibility.
• The company reported a 30% increase in net cash from operating activities compared to the prior year, demonstrating strong cash flow management.
• Sangoma Technologies Corp (NASDAQ:SANG) has seen a significant improvement in churn rates, dropping below 0.95%, indicating stronger client relationships.
• The company is focusing on high-margin recurring revenue streams, with 83% of revenues from business services.
• Sangoma Technologies Corp (NASDAQ:SANG) is making strategic investments in CRM and process automation, which are already delivering operational efficiencies and improved client satisfaction.

Negative Points

• The third-party hardware resale business declined by $1.2 million compared to Q1, impacting overall revenue.
• Uncertainty in the US federal government spending has affected Sangoma Technologies Corp (NASDAQ:SANG)'s ability to secure expected contracts, leading to a strategic shift.
• The company has adjusted its year-end revenue guidance downward due to a strategic shift away from lower-margin hardware sales.
• Longer sales cycles for larger, more profitable recurring revenue deals are delaying revenue realization.
• Despite a shift towards higher-margin business, the adjusted EBITDA guidance remains unchanged, indicating potential challenges in immediate profitability improvements.

Q & A Highlights

• Warning! GuruFocus has detected 5 Warning Signs with SANG.

Q: Can you discuss the launch of the new Pinnacle partner program and its impact on sales? A: The Pinnacle partner program is designed to build intimacy and trust with key partners, focusing on high-margin product lines like UCaaS and CCaaS. It aims to move partners up tiers for more business, offering incremental discounts and marketing investments. The program is seeing good momentum, helping build the pipeline. (Unidentified_8)

Q: There was a sequential decline in the services line despite a drop in churn. Can you explain this? A: The decline is due to being two or three quarters behind in organic growth activities. The company is now focusing on accelerating organic growth by reallocating resources from lower-margin transactional products to core strategies. (Unidentified_4)

Q: What impact has NEC's exit from the premise PBX business had on Sangoma? A: Sangoma is seeing partners come over from NEC, although it takes time for them to get certified and trained. There is an increase in quotes and activity, and more partners are expected to join as other vendors exit the market. (Unidentified_8)

Q: How is Sangoma mitigating potential impacts from tariffs? A: The impact of proposed tariffs is expected to be immaterial. Sangoma has sufficient inventory and options to shift manufacturing to reduce exposure. Contract manufacturers are based in locations like Vietnam, which are not subject to tariffs. (Unidentified_6)

Q: Can you elaborate on the shift in guidance and its impact on EBITDA margins? A: The guidance shift is due to changes in federal government spending and the decision to accelerate divestiture of non-core assets. While revenue guidance is lowered, the focus on higher-margin business is expected to improve EBITDA margins over time. (Unidentified_6)

For the complete transcript of the earnings call, please refer to the full earnings call transcript.