Q3 Results Signal an Inflection Point
Sangoma Technologies Corp (TSX: STC) reported fiscal Q3 2025 results that underscore a major turning point in its strategy. After a multi-year integration and restructuring phase, management emphasizes that the company’s foundation is now “firmly in place” and primed for a “multi-pronged growth journey” ([1]). In Q3, revenue was $58.1 million (down ~2% sequentially due to an intentional exit from low-margin product lines) while gross margin improved to 69% ([2]) ([2]). Adjusted EBITDA came in at $9.8 million (~17% margin) ([1]), and importantly, free cash flow was a robust $8.4 million for the quarter (with $0.25 per share, and $0.84 per share over the first three quarters) ([1]). Management reaffirmed full-year guidance for FY2025: revenue of $235–$238 million and EBITDA of $40–$42 million ([1]). While this implies roughly flat to slightly lower revenue versus FY2024’s $247.3 million ([3]), the CEO highlighted that Sangoma has completed its transformation phase and is “well-positioned to accelerate growth and expand profitability” going forward ([1]). In short, Q3’s steady results and strengthened balance sheet set the stage for potential explosive revenue growth ahead, driven by both organic initiatives and renewed capacity for acquisitions.
Dividend Policy & Shareholder Returns
Sangoma has no history of paying dividends, reflecting its growth-oriented strategy. In fact, the company explicitly states it has not declared any dividends in the past three years and intends to retain earnings to fund business development and debt repayment, with no plans to initiate dividends in the near term ([4]). This means the current dividend yield is 0.0%, as any surplus cash is reinvested or used to strengthen the balance sheet ([4]) ([5]). Instead of cash dividends, Sangoma has begun modest share buybacks as a way to return value to shareholders. In March 2025 the company launched a Normal Course Issuer Bid, under which 155,000+ shares were repurchased for cancellation by the end of Q3 ([1]). This buyback is relatively small (roughly ~$1 million worth of stock) but signals management’s confidence in the company’s undervalued equity. Overall, shareholders’ returns are expected to come from capital appreciation as Sangoma executes its growth plan, rather than from dividend income.
Leverage & Debt Maturities
Leverage has improved markedly due to aggressive debt reduction. As of June 30, 2024 (the end of FY2024), Sangoma carried about $77.8 million in gross debt under its credit facility ([4]). Management made debt paydown a top priority in FY2024–25: during Q4 FY2024 alone, they repaid $9.7 million of loans ([3]). In Q3 FY2025, Sangoma completely paid off one term loan (“Term Loan 1”) and reduced total debt to approximately $53 million ([1]). This already surpasses the company’s earlier target of getting debt below $55–$60 million by year-end FY2025 ([1]). The remaining debt consists of term loans under a credit agreement that carries standard covenants and default clauses ([4]). While the exact maturity profile isn’t explicitly disclosed in the press release, the current credit facility (a Second Amended and Restated Credit Agreement) likely has medium-term maturities and required amortizations – which Sangoma has been paying ahead of schedule. The company reports it remains “comfortably within its debt covenants” ([3]), reflecting a safer leverage position after these repayments. Reducing debt has not only lowered balance sheet risk but also cut interest costs. As detailed in the financials, net interest expense in FY2024 was about $4.0 million, down from $6.6 million the prior year ([6]), thanks to the shrinking debt load. Going forward, Sangoma’s goal is to self-fund growth initiatives without taking on excessive leverage – though it now has headroom to utilize debt for strategic acquisitions if needed. Overall, net debt sits around ~$35–40 million (after subtracting ~$17.3M cash at Q3) ([1]), putting leverage at a manageable level relative to EBITDA.
Cash Flow & Coverage Ratios
One reassuring aspect of Sangoma’s financial profile is the strong cash flow generation, which provides ample coverage for its financial obligations. Operational cash conversion has been exceptional – in Q3, net cash from operating activities was $10.6 million, which is 109% of that quarter’s EBITDA ([1]). In fact, the company has now achieved cash conversion above 100% for five consecutive quarters ([1]), demonstrating high earnings quality and effective working capital management. Over the first nine months of FY2025, operating cash flow totaled $34.7 million, up ~7% year-on-year ([1]). This robust cash flow comfortably covers interest payments and then some. With EBITDA of ~$42 million and interest expense around $4 million in FY2024, EBITDA/Interest coverage was roughly 10x – indicating plenty of cushion to meet debt service ([6]). Even after debt repayments, Sangoma retains flexibility: it ended Q3 with $17.3 million in cash on hand ([1]) and is generating ~$8–10 million in free cash each quarter ([1]). The company has also adhered to all bank covenants, reflecting healthy debt coverage metrics ([3]). In short, liquidity and coverage ratios appear strong. Sangoma’s recurring subscription revenues and tight cost controls are translating into cash flows that not only fund operations and interest, but also allow simultaneous debt reduction and selective share buybacks – a very positive sign for a company still posting net accounting losses. This financial discipline should support Sangoma’s growth plans and any future capital needs.
Valuation: P/S and EBITDA Multiples
Sangoma’s stock looks cheap on fundamental multiples relative to both its own history and industry norms. At a recent share price around C$7.80 (approx. US$5.80), the company’s market capitalization is about C$260 million ([2]). For context, Sangoma generated $247.3 million in revenue in FY2024 ([3]) – implying a price-to-sales ratio well under 1× (roughly 0.8× using current USD figures). During the tech bull market in 2020–21, Sangoma traded at much higher multiples; for example, in early 2021 the stock’s P/S exceeded 4× ([7]). By contrast, amid last year’s market downturn the P/S ratio fell below 0.5× (e.g. ~0.41× at year-end 2023) ([7]). Even after a partial rebound, the P/S remains under 1×, indicating investors are assigning very little growth premium. On an earnings basis, traditional P/E is not meaningful since Sangoma is roughly breakeven to slightly negative on net income. However, cash flow and EBITDA-based valuations are attractive. Using FY2024 Adjusted EBITDA of $42.6M ([3]) and adding net debt of ~$35M, the enterprise value is only about 6× EBITDA, a low multiple for a cloud communications provider. Peers in the Unified Communications/UCaaS sector have also seen valuation compress, but many still trade closer to 1.5–2.5× sales or high-single-digit EBITDA multiples. Sangoma’s discounted valuation likely reflects its modest growth in the past year and small-cap status, but it could offer significant upside if the company delivers on reaccelerating revenues. Notably, Sangoma’s share price had rallied from under $4 to over $7 in late 2024 (nearly a 0.99× P/S at that point) ([7]) as confidence grew in its turnaround, before pulling back again in 2025. This volatility underscores that market sentiment can quickly re-rate the stock on signs of sustained growth. In summary, STC shares trade at a low multiple of current fundamentals, which could prove opportunistic if the “explosive growth” scenario materializes.
Growth Outlook and Catalysts
Despite flat top-line performance recently, Sangoma’s management is signaling an ambitious growth outlook ahead. The company has deliberately been pruning lower-margin product revenue (such as third-party hardware resale) in order to focus on its higher-margin core business – a move that temporarily suppressed sales growth in FY2024–25 ([2]) ([2]). Now, with that transition largely complete, core platform and services revenue is growing again (up sequentially for two quarters) ([1]). Sangoma sees massive opportunity especially in the mid-market and SMB communications segment, which accounts for a ~$30 billion annual IT spend globally ([8]). Historically, many mid-size businesses have been underserved, and Sangoma is positioning itself as a one-stop provider of cloud, hybrid, and on-premise communications solutions at affordable prices ([8]) ([8]). The company’s comprehensive product suite (UCaaS, CCaaS, CPaaS, etc.) and its 40-year industry presence give it credibility to win these clients as legacy competitors exit certain markets ([1]). Indeed, management noted it is gaining market share in on-premise phone systems as some rivals pull back from that space ([1]).
Equally important, Sangoma now has the “financial strength, operational structure, and capabilities” to pursue growth aggressively ([1]). The CEO highlighted three enablers: (1) strong financials and cash position (operating cash flow is at record levels), (2) an experienced go-to-market team now in place, and (3) the underlying infrastructure (ERP systems, etc.) to scale efficiently ([3]) ([3]). Over the past 15 months, the company executed “Project Diamond,” a major internal transformation that consolidated operations (reducing legal entities, streamlining processes) and upgraded systems (like a new ERP and CRM) ([2]) ([2]). Sangoma also invested in new product development – launching AI-powered features and industry-specific solutions – aimed at differentiating its offerings ([8]) ([2]). With these efforts largely done, management asserts that Sangoma “has never been stronger or in a better position to tackle growth” ([2]).
Quick — Want the report emailed now?
Enter your email and we\'ll send the full guide: “Trump's Secret Fund: How to Collect Passive Income.”
No tricks — instant download after you click.
Looking ahead, Sangoma’s growth strategy has three prongs: organic growth (through new products and channel expansion), strategic acquisitions, and geographic expansion ([2]) ([2]). Now that leverage is down and integration of past acquisitions is complete, the company is openly considering M&A again. In fact, leadership indicates inorganic growth will compose about one-third of their growth plan, and they wanted to halve debt first to enable this comfortably ([2]) ([2]). With net debt already at its lowest level in years, Sangoma has regained optionality to acquire complementary businesses. Any future acquisitions could quickly boost revenue (“explosive” growth inorganically), given the relatively small current base. On the organic front, Sangoma is aiming to reignite services revenue growth into double digits. Service revenue (mostly cloud subscriptions) is already 82% of total sales ([9]), and churn remains under 1% quarterly ([1]), which provides a stable recurring base. If the company can accelerate new customer wins via its refreshed channel strategy (it has over 400 channel partners, who drive ~80% of revenue) and increase sales to existing clients, even mid-single-digit organic growth would add meaningfully to EBITDA due to high gross margins. Management expects gross margins to continue trending upward toward 75–80% (from ~70% now) as the revenue mix shifts fully to software/services ([2]). Higher margins plus any uptick in growth should expand profitability significantly. In sum, the groundwork is laid for a potential inflection in revenue growth. The next few quarters will test Sangoma’s execution on upping its sales momentum. If successful, the combination of operating leverage (higher margins) and even moderate revenue growth could yield outsized increases in cash flow – supporting the thesis of explosive growth (in value if not in raw percentage terms) in the near future.
Key Risks
While Sangoma’s outlook is optimistic, investors should consider several risk factors and uncertainties:
– Macroeconomic Headwinds: A weak economy or tight IT budgets can crimp Sangoma’s sales, especially hardware or capital expenditures. Management has noted that macroeconomic conditions have dampened product revenue, as customers delay capex on telecom equipment ([10]). High interest rates and recession risks globally could continue to make SMB clients cautious on new investments ([4]).
– Competitive & Technology Risk: The unified communications market is highly competitive and fast-evolving. Tech giants (like Microsoft Teams, Zoom Phone, etc.) and numerous smaller players compete for the same mid-market customers. Sangoma’s AIF warns of “new competitive pressures” and the rapid decline of legacy PSTN phone networks that could impact its business ([4]). Additionally, overlap in software functionality raises the risk of patent infringement claims – the company has received occasional allegations that its products infringe third-party IP, a potentially costly distraction ([4]). Staying innovative (e.g. with AI features) and avoiding legal/patent landmines will be an ongoing challenge.
– Indebtedness and Interest Rates: Although debt has fallen, Sangoma still carries over $50M in debt. The credit agreement contains customary covenants and default clauses ([4]) – a breach or unexpected downturn could trigger accelerated repayments. Higher interest rates also make borrowing more expensive; management acknowledges that rising rates have impacted its cost of capital ([4]). If cash flow were to decline, a still-significant debt load could pressure the company’s financial flexibility (though at present coverage is strong).
– Acquisition Integration Risks: Sangoma’s growth strategy partly relies on M&A, which comes with execution risk. Past acquisitions (like the 2021 StarBlue/Star2Star deal) brought significant integration work and debt. Future deals could strain management if not well-integrated, or could dilute shareholders if paid with stock. The company cautions that integration efforts might expose process deficiencies, and any large deal would need to be absorbed without disrupting operations ([4]). There’s also the risk of overpaying for acquisitions in a competitive market for tech targets.
– Foreign Exchange and Global Exposure: With operations and customers worldwide, currency fluctuations (USD vs CAD and others) can impact reported results ([1]). Geopolitical events and tariffs are also mentioned as risk factors ([4]). For example, supply chain issues or import/export restrictions could affect hardware delivery (though hardware is now a smaller part of business).
In summary, Sangoma faces a mix of macro, competitive, and financial risks common to its industry and size. The company’s ability to manage these risks – by controlling costs, differentiating its offerings, and prudently financing growth – will influence whether it can truly capitalize on the optimistic outlook.
Red Flags & Watch Items
Beyond the general risks, a few red flags and areas to monitor stand out in Sangoma’s story:
– Lack of GAAP Profitability: Sangoma remains bottom-line unprofitable on a net income basis. In FY2024 it recorded a net loss of $8.7 million, albeit smaller than the $29.0 million loss in FY2023 ([3]). While adjustments show healthy EBITDA and cash flow, sustained GAAP losses could be a concern if they continue, as they may indicate ongoing amortization or integration costs and can limit the company’s ability to accumulate retained earnings. Investors will want to see a turn to net profitability as a sign of complete financial health.
– Past Internal Control Weakness: The company previously identified a material weakness in internal controls over financial reporting (as of FY2022) along with certain significant deficiencies ([4]). Management believes it has remediated the issue, but this is a red flag from a governance perspective. Any recurrence of control problems could undermine investor confidence and raise the risk of financial misstatements ([4]). Stakeholders should monitor audit opinions and certifications for FY2025 to ensure the weaknesses have indeed been fully resolved.
– High Goodwill & Acquisition Intangibles: Following its acquisitions, Sangoma carries substantial goodwill and intangible assets on its balance sheet (from deals like StarBlue). This creates a potential for impairment charges if those acquired businesses underperform. In FY2023, the large net loss included charges related to acquisition costs and possibly impairments. The AIF explicitly lists impairment of goodwill as a risk factor ([4]). Going forward, if Sangoma does more acquisitions, investors should watch the purchase price allocations and resultant goodwill – a red flag would be overpaying for growth that doesn’t materialize, leading to write-downs.
– Share Liquidity and Volatility: As a smaller cap stock dual-listed on TSX and Nasdaq, STC/SANG shares can be volatile. The average daily trading volume is relatively low, which means price swings may be exaggerated on modest news or market moves. The company notes that dual listings can lead to fragmented liquidity and “increased volatility due to the ability to buy and sell in two places” ([4]). This volatility is evident in the stock’s wide 52-week range (~C$5.87 to C$11.20). Investors should be prepared for price fluctuations and possibly lower liquidity if trying to build or exit a large position.
– Equity Dilution: While not an immediate concern, Sangoma’s growth strategy could involve issuing equity. The company had a structured share issuance as part of the StarBlue acquisition (issuing ~12.27 million shares over time) ([10]), which increased the float and diluted existing holders. In May 2023, the final 9.14 million shares were issued under that deal ([10]). Future acquisitions or capital raises – if done at depressed share prices – could similarly dilute shareholders. The recent buyback is a positive sign in this regard, but any sudden pivot to equity financing would be a red flag to monitor.
Overall, none of these watch-list items are deal-breakers on their own, but they warrant attention. Sangoma’s progress on tightening financial controls, reaching profitability, and avoiding costly dilutive moves will be key indicators of management’s execution quality.
Open Questions and Uncertainties
Finally, there are some open questions about Sangoma’s path forward that investors may want clarity on in upcoming quarters:
– When Will Substantial Revenue Growth Kick In? The crux of the bull thesis is that revenue growth will accelerate now that the transformation is done. However, FY2025 guidance was actually trimmed to $235–$238M ([1]) (slightly below last year’s revenue), reflecting the near-term impact of exiting lower-margin lines. Can Sangoma reverse this trend and deliver meaningful organic growth in FY2026? Management insists the pipeline is strengthening and that services revenue can grow again, but the proof will be in future quarterly sales figures. A key question is whether mid-market demand and Sangoma’s sales efforts will translate to double-digit growth (tantamount to “explosive” growth) or if gains will remain incremental.
– What M&A Moves Are on the Horizon? With the balance sheet recapitalized (debt halved) and M&A explicitly back on the table, it’s worth asking what kind of acquisitions Sangoma might pursue. Management indicates that inorganic growth is planned to contribute about one-third of overall growth ([2]). Will the company target small tuck-in acquisitions (perhaps to acquire new technology or customer bases in specific regions), or could it attempt a larger transformative deal? Also, how will any acquisitions be funded – via remaining debt capacity, equity, or a mix? The timing is also a question: Sangoma mentions a growth plan “beginning in July” (the start of FY2026) where M&A could play a major part ([2]). Investors will be watching closely for announcements of any deals and evaluating whether those moves accelerate growth without introducing undue integration risk.
– Can Sangoma Win in the Mid-Market Segment? Sangoma’s strategy of focusing on the mid-market and SMB segment assumes it can carve out a defendable niche against both larger and smaller competitors. The company cites a significant market opportunity and some early traction (e.g. capturing business from competitors exiting on-premise solutions) ([1]). The open question is how effectively Sangoma can scale up its go-to-market to penetrate this segment. Will its channel partners and new Chief Revenue Officer be able to drive substantially higher customer acquisitions? Additionally, as cloud communications adoption grows, will Sangoma face pricing pressure from bigger players bundling UCaaS with other services? The execution in sales & marketing, and the ability to tout its “one-stop” solution advantage, will determine if Sangoma can truly exploit the mid-market opportunity it has identified ([8]).
– How Will Margins Evolve with the New Mix? Another question is whether the ongoing shift to a software-and-services-centric revenue mix will deliver the expected margin expansion. Management’s target is to push gross margins toward 75–80% (up from ~69–70% currently) and EBITDA margins to ~19–20% ([2]) in the coming periods. Achieving this likely requires both growth in higher-margin cloud services and realization of cost efficiencies (for example, benefits from the new ERP system and other automation). Investors will be asking: are these margin goals realistic, and on what timeline? If margins improve even faster than revenues, Sangoma could see outsized profit growth (“expand profitability” as the CEO noted ([1])). Conversely, any stumble – such as needing to ramp up operating expense to reignite sales – could keep margins flat. This balance between investing for growth and expanding margins will be a key storyline to watch.
In conclusion, Sangoma Technologies (STC) has emerged from its restructuring phase with a stronger balance sheet and a clear mandate to resume growth. Q3’s results and management commentary paint a picture of a company on the cusp of an acceleration in revenue and earnings trajectory. The stock’s low valuation suggests skepticism still lingers, but also means any upside surprise in growth could lead to substantial re-rating. Investors should keep an eye on the execution of Sangoma’s growth initiatives (both organic and inorganic) and weigh them against the risks. If Sangoma can deliver on even a portion of the “explosive” growth its setup seems to allow, the rewards for shareholders could be significant – but the next few quarters will be crucial in validating this promising outlook.
Sources
- https://sangoma.com/company/press-releases/sangoma-announces-third-quarter-fiscal-2025-results/
- https://alphaspread.com/security/tsx/stc/investor-relations/earnings-call/q3-2025
- https://sangoma.com/company/press-releases/sangoma-announces-fourth-quarter-fiscal-2024-results/
- https://sec.boardroomalpha.com/2024/QTR3/0001753368-24-000014/annualinformationform-f24y.htm
- https://macrotrends.net/stocks/charts/SANG/sangoma-technologies/dividend-yield-history
- https://sec.gov/Archives/edgar/data/1753368/000175336825000018/financialstatementsf25q4.htm
- https://macrotrends.net/stocks/charts/SANG/sangoma-technologies/price-sales
- https://alphaspread.com/security/tsx/stc/investor-relations/earnings-call/q3-2024
- https://sangoma.com/company/press-releases/sangoma-announces-third-quarter-fiscal-2024-results/
- https://sangoma.com/company/press-releases/sangoma-announces-third-quarter-fiscal-2023-results/
For informational purposes only; not investment advice.