STC.V - Sangoma Technologies

[doc75]

 

I don't know if anyone here looks much at Canadian microcaps, but I follow a few and figure I might as well throw them out here to be chewed on.  In particular, I think Sangoma Technologies is worth a look.  It's been around since 1984, and since 2000 or so it has traded on the Canadian Venture exchange (ticker STC). 

 

Sangoma is a leading provider of telephony hardware/software.  Their primary business is making PCI cards that handle various modern telephony requirements, such as conversion between IP based voice and old-school PSTN (including all the bells-and-whistles, such as hardware encoding, noise cancellation, etc.).  Originally they focused exclusively on the OST (open source telephony) market, and have done very well in that regard, but more recently they've been moving into proprietary systems and the Unified Communications market, in particular.  For instance, one of their flagship products (the "Net Border Express Gateway") can be tightly integrated with Microsoft's Office Communication Server (now called "Microsoft Lync").

 

STC trades at 0.62, having a market cap of 18M.  Book value is around 0.70, but that includes lots of goodwill/intangibles.  However, cash accounts for around 0.25 per share as of March 31/2010.  (Fiscal year end is June 30.  Annual results will come sometime within the next month.)

 

Revenue is in the 11-12M range and has grown very quickly over the past 5 years.  Top-line growth appears stagnant/negative for the past little while, but this is largely a result of FX gains/losses.  The bottom-line has been under pressure over the past few quarters because of increased development costs and those same FX issues. 

 

Gross margin stands at about 75% and has actually increased (albeit slightly) over the past couple quarters.  Profit margin has generally been around 25%.

 

I don't think STC is fantastically cheap if it is judged only on headline numbers from the past few quarters.  But I believe there's tremendous value if management continues to execute as they have in the past.  Here are a few considerations:

 

- The founder, David Mandelstrom, owns roughly 20% of the outstanding shares.  He resigned as CEO in Sept, and has been replaced by Bill Wignall, a very successful tech veteran. Wignall's interests are also aligned with Sangoma's, since his employment package grants him options to acquire about 6% of the company at valuations at-or-above today's market price.  The details of his arrangement, can be found here:

 

http://www.sangoma.com/about_us/newsroom/news_releases/news/1300250/Sangoma_Appoints_Technology_Industry_Veteran_Bill_Wignall_as_New_CEO.html

 

You'll see that Wignall's previous two management efforts have led to buyouts, so he is no stranger to tech growth stories and surfacing value.

 

- Much of the development as of late has been aimed at OEM products.  Over the past year, a number of significant OEM partners have been added, including Baracuda Networks (their Cudatel subsidiary), Commetrex, and 3CX.  It appears that a number of international operators are standardizing on Sangoma's products.  (Go to the company's webpage and read the press releases regarding various partners in Europe, Brazil, etc.)

 

- In April, Sangoma announced an OEM partnership with a "major computer/network" manufacturer that was expected to add substantially to the top-line starting in the second half of 2010.  The OEM partner has not been named, but it seems very likely to be HP, a company which itself has entered into a substantial venture with Microsoft to expand/attack the unified communications space. See

 

http://www.sangoma.com/about_us/newsroom/news_releases/news/1154109/Sangoma_to_Power_Telephony_Connectivity_in_Unified_Communications_Networking_Product_Line.html

 

for the original press release, and for more on the possible HP connection see

 

http://blog.tmcnet.com/blog/tom-keating/voip/sangoma-and-hp-partner.asp

 

- The 2009 purchase of Paraxip (a tiny Montreal-based tech firm) allowed Sangoma to branch out from the open-source market into the Windows-based communications market.  The OEM agreement alluded to above is one major example, and the NetBorder Gateway is the central product.  But Paraxip also gave Sangoma another product, namely a "Call Progress Analyzer" that is used by Call Centres to more accurately track when an answering machine has answered the phone vs. a human.  I personally *hate* telemarketing, so I feel filthy about having money in a company that supports them, but it appears Sangoma's product is top-of-the-line.  In late 2009 they inked an agreement with Teleperformance, a huge outsourced call centre based in France.  See:

 

http://www.sangoma.com/about_us/newsroom/news_releases/news/1076855/Teleperformance_Selects_Sangoma's_NetBorder_Products_for_Global_Outbound_Call_Center_Operations.html

 

- I expect Sangoma's investment in the Unified Communications space to drive revenue going forward, since this is predicted to be a huge market, and for the next many years there will still remain a central need to connect with the old PSTN.  Sangoma has also historically been very good at staying in front of the ball, developing new products to suit customer/OEM need and beating its main competitors to market.

 

- One of Sangoma's primary competitors in the OST space is Digium, makers of the predominant Asterisk OST platform.  Because Digium both develops the Asterisk software AND hardware cards for it, they are naturally difficult to compete with in this space... despite the fact that Sangoma's products are widely regarded for superior reliability/performance.  However, the OST space is changing, with other platforms such as FreeSwitch becoming popular.  On these platforms, Sangoma can compete on equal footing with its competitors.

 

- The recently announced D100 card handles a ridiculous number of encoding/compression channels for a low cost and should be very popular in the PBX server space.  It was released in May.  I have done some searching but have not found anything online that indicates how it has been embraced by the industry.

 

And here are a few concerns:

 

- Growth has slowed, even without FX gains/losses.  I think a lot of this is due to heavy investment in the UC market and new-ish lines of business.  Aside from faith in Sangoma's solid reputation for development, there's no guarantee these products will be widely accepted by the market.

 

- A lot of the business going forward will result from small/medium business switching from their current telephony system to a VOIP-based one.  While Sangoma's products make this change less costly and more user-friendly, and while the end result should be lower cost telephony, the switchover still requires a capital investment.  The tendency toward such an investment will be muted while the business climate remains questionable.

 

- It's a micro-cap.  It has settled into the 0.62/share range, but with all the economic uncertainty right now, it will likely be volatile going forward.  (That said, I have no worries of insolvency or liquidity troubles, so no fears of micro-cap becoming micro-crap.)

 

- Like some other companies I follow, I am disconcerted by the lack of insider purchases.  THe major insiders have lots of exposure to the equity by way of options, and I know that with microcaps the insiders themselves have to be smart about managing their portfolio risk... but even still, I like to see someone backing up the truck when I think the stock is cheap.

 

- Almost all of Sangoma's revenue comes from products that interface between IP and PSTN voice systems.  It's unclear exactly how long legacy PSTN systems will be supported, given the rise in wireless & IP-based communications.  (But I really don't see PSTN disappearing any time soon.)

 

- Margins will decrease as OEM agreements ramp up.  (At 75% gross margin, there is some room to spare.)

 

- An increasing percentage of revenues has come from international sources.  Like most Canadian manufacturers, Sangoma is exposed to FX fluctuations.

 

That's it for now.  Any thoughts (good or bad) are appreciated!

 

J

 

 

[doc75]

 

Just to quantify things a little more, here are some historical numbers (approximated to the nearest 0.1M, with data taken from the fiscal year end dates of June 30 each year):

 

 

Year ending 2009-06-30:

 

Revenue:    11.1M

EBITDA:      4.3M  (margin 39%)

EV:            13.1M

EV/EBITDA:  3x

Net Income: 2.5M (margin 23%)

 

 

Year ending 2008-06-30:

 

Revenue:    12.3M

EBITDA:      5.3M (margin 43%)

EV:            29.3M

EV/EBITDA:  5.5x

Net Income: 2.9M (margin 24%)

 

 

Year ending 2007-06-30:

 

Revenue:    8.2M

EBITDA:      3.4M (margin 41%)

EV:            38.7M

EV/EBITDA:  11.4x

Net Income: 1.82M (margin 22%)

 

 

Year ending 2006-06-30:

 

Revenue:      4.8M

EBITDA:        2.0M (margin 42%)

EV:              11.3M

EV/EBITDA:  5.7x

Net Income:  1.0M (margin 21%)

 

 

For the 9 months ended 2010-03-30, we have revenue of 9.2M, EBITDA of 3.2M, net income of 1.35M, and (using today's share price and the 2010-03-30 balance sheet) an enterprise value of 11.3M (=18.3 market cap + 0.1 debt - 7.1 cash).

 

I don't think it's much of a stretch to expect another 3M in revenue for Q4 (ended 2010-06-30), with another 1M of EBITDA.  In fact, I think these estimates are quite conservative.  If cash levels have stayed roughly the same, we would have the following picture at year end:

 

Revenue:    12.2M

EBITDA:      4.2M

EV:            11.3M (again using today's share price)

EV/EBITDA:  2.7x

 

Unless I'm missing something obvious, this seems quite cheap.  The major concern is obviously growth.  But the numbers have been muted by FX, and are a bit dated since the last report was for the end of March.  Some of Sangoma's partners (such as Fonality) have recently been observing large increases in sales over the past couple quarters.

 

 

 

 

[doc75]

 

Sorry to post repeatedly on this:  I just noticed that Sangoma announced 2009-2010  year end results today.

 

For the year ended 2010-06-30, we have

 

Revenue:      12.5M

EBITDA:        4.4M (margin 35%)

Net Income:  2.6M (margin 20%)

 

On the balance sheet

 

Working Cap: 10.9M

Cash:            7.7M

Debt:            0.1M

 

At todays market prices, and assuming the same level of cash/debt as at June 30, we have a market cap of 18M, an EV of 10.4M and an EBITDA/EV ratio of 2.4x.

 

 

 

I also noticed that in my previous post I mistyped the EBITDA from the 2008-2009 year.  The correct numbers are:

 

Revenue:    11.1M

EBITDA:      5.2M  (margin 47%)

EV:            13.1M

EV/EBITDA:  2.5x

Net Income: 2.5M (margin 23%)

 

So EBITDA margin for the last year decreased significantly from this number, but this is due entirely to nasty swing of 1.4M in FX charges.

[Baoxiaodao]

 

Sorry to post repeatedly on this:  I just noticed that Sangoma announced 2009-2010  year end results today.

 

For the year ended 2010-06-30, we have

 

Revenue:      12.5M

EBITDA:        4.4M (margin 35%)

Net Income:   2.6M (margin 20%)

 

On the balance sheet

 

Working Cap: 10.9M

Cash:            7.7M

Debt:            0.1M

 

At todays market prices, and assuming the same level of cash/debt as at June 30, we have a market cap of 18M, an EV of 10.4M and an EBITDA/EV ratio of 2.4x.

 

 

 

I also noticed that in my previous post I mistyped the EBITDA from the 2008-2009 year.  The correct numbers are:

 

Revenue:     11.1M

EBITDA:       5.2M  (margin 47%)

EV:             13.1M

EV/EBITDA:  2.5x

Net Income: 2.5M (margin 23%)

 

So EBITDA margin for the last year decreased significantly from this number, but this is due entirely to nasty swing of 1.4M in FX charges.

 

Doc, I really appreciate your idea here. No need to sorry about posting more info. I used to post a lot of it, but seems free riders are too lazy to even write a thank-you to a good idea or useful information. It is not only this board; it is everywhere.

 

I looked into Sangoma a while ago but did not go into as much as detail as you. My concern is really that a small company with a great margin is very vulnerable to competition. Your post clarified a lot of issues(I am a noob to tec), thank you! Sangoma seems to be a good candidate to be acquired.

 

Keep your ideas flowing!

 

Fan

[nodnub]

Thanks for the writeup Doc,

 

On small companies, I find it is usually interesting to do some Phil Fisher scuttlebutt by talking to a third-party telephony consultant that installs these type of systems for businesses. They could likely give some idea of the product quality relative to competitor's products, and give an idea as to what technology is taking market share right now.

 

 

[doc75]

Thanks for the writeup Doc,

 

On small companies, I find it is usually interesting to do some Phil Fisher scuttlebutt by talking to a third-party telephony consultant that installs these type of systems for businesses. They could likely give some idea of the product quality relative to competitor's products, and give an idea as to what technology is taking market share right now.

 

 

 

I do the lazy man's version:  Read through technical blogs.  From everything I've read, Sangoma products are very highly regarded in the industry from a quality/reliability standpoint.  (This has given them some pricing power.)  And it also appears that their technical people are quick to jump on any issues that do arise.  App

 

I'm not an expert in telephony (by far), so to my perception of MOS in this investment is simply the apparently low valuation for a profitable company that has been growing its business for a number of years.

 

Lots of folks on here are far FAR more savvy than me, so my ears are open to cautions and red flags in my basic analysis. Thanks!

 

 

Other random notes:

 

 

- The latest annual MD&A is not very colourful.  It doesn't offer much in terms of outlook.  The previous CEO (founder) was not a "blue sky" over-optimist, but to me the historical reports gave a better indication of where the company was placing its bets. I presume the new CEO has a different style.  In any case, I've sent off an email to investor relations to ask for some specifics about certain products and will post if I receive anything eye-opening.

 

- It appears there are lots of shares available today at around 0.60.  Given the boring MD&A and the fact that YoY comparisons are so badly hurt by FX,  I expect the stock to drift lower for now.  It's currently 50% above its sky-is-falling low of 2009, despite business being back up to pre-recession levels.  The TTM P/E is currently about 7, even though over 40% of the share price is cash.

 

- There are now 30M shares out.  Insiders hold about 25%  (ex-CEO has 20, other insiders another 5% or so), and the new CEO has options on another 6% vesting over the next couple years.  Hummingbird Capital also has a nice sized chunk - something around 10-15% if I recall.  There are no other big holders that I know of.

 

- A few analysts were covering the stock in 2007-2008 and predicting massive growth.  The old reports are available on the Sangoma website, and some of them (aside from wild stock price predictions) contain some good info about the industry.  It appears Sangoma isn't on analysts minds any more.

 

- I've seen a few interviews and read a few exchanges with the previous CEO. I was impressed with his realism.  He made it clear that Sangoma is a niche player and had no intention of fighting behemoths like Microsoft for a big slice of the unified communications market, for instance.  Their  telephony products are based on the assumption that the old-school phone lines aren't disappearing for a while, so whoever wins the fight for the UC space will still need to be able to connect... and Sangoma will be there to connect them.  That said, VoIP is the future of telephony, so the company has been moving into other products that are not linked to the old phone system.  The big question is whether they'll be able to keep growing through innovation.  I suppose that's the risk of any tech company!

 

 

 

[doc75]

Doc, I really appreciate your idea here. No need to sorry about posting more info. I used to post a lot of it, but seems free riders are too lazy to even write a thank-you to a good idea or useful information. It is not only this board; it is everywhere.

 

I looked into Sangoma a while ago but did not go into as much as detail as you. My concern is really that a small company with a great margin is very vulnerable to competition. Your post clarified a lot of issues(I am a noob to tec), thank you! Sangoma seems to be a good candidate to be acquired.

 

Keep your ideas flowing!

 

Fan

 

Fan

 

I echo the concern regarding competition.  The barriers to entry in the OST market are not very high, and a number of other players have tried to get involved (including the usual generic imports).  From what I can gather, Sangoma's brand stands out because of:

 

- Reliability.  Everything I've read tells me they are well regarded for rock solid products.  Enough that they are preferred to Digium's own cards for use with the Asterisk platform (even though Asterisk is Digium's baby).

 

- Availability.  Sangoma makes a point of keeping items in stock.  I'm not really sure why this is a big issue for others, but I've read in numerous places that people know they'll be able to source product instantly.

 

- Innovation.  To date, Sangoma has kept ahead of the pack with enhancements to its cards.  They perform better & do more, sooner than the competitors.

 

- Large partner program.  Within their niche, it seems Sangoma has done a good job with their branding... including a large number of "partnership" programs with related players.

 

- Sangoma has been working with the various open source platforms right from the beginning, which appears to have given them some credibility/admiration amongst the open source community, and also gives them a big competitive advantage in terms of keeping on top of new developments/innovation in this area.

 

These views are undoubtedly biased and I'm not suggesting they constitute an impenetrable moat in any case.  But for a small company, i think they've definitely set themselves apart enough in a niche market that a bigger fish would rather swallow them then go at it themselves.

 

 

 

[Baoxiaodao]

Doc, we definitely need a update here from you. Any thoughts on the Q?

[doc75]

 

The quarterly numbers were an unpleasant surprise, to say the least.  I wasn't expecting much revenue growth (certainly not Q-over-Q) because I know they've been delayed with a major product (more below).  In fact, I was surprised how high last Q's numbers were.  But I certainly wasn't expecting a 20% decrease from last year. Sangoma hasn't seen revenue at this level since 2006. From the CC and news release it sounds like the new management was also very surprised at the sudden downturn.

 

Here are some thoughts:

 

- From what I gather, they have been putting huge time/effort into a major OEM deal.  This is the deal that was announced in May, and from which they expected "several millions" in revenue.  A little digging on the web leads to the conclusion that the deal is with HP.  In particular, I think Sangoma is making the PSTN component of HP's new "Survivable Branch Communications" module (blade) for their ProCurve servers.  The Survivable Branch idea is pretty cool -- do a Google search to read about it.  Revenues were expected to start flowing in the second half of calendar 2010, but that hasn't happened.  Here are some reasons:

 

  1) The HP module is designed to work with Microsoft's Communication Server, now called "Microsoft Lync".  Unfortunately, the release of Lync was repeatedly delayed by Microsoft.  It was only officially released on November 17.  Management alluded to other delays, some of which may have initially been on the Sangoma end.  But on the CC the CEO made it clear that Sangoma was not holding anything up, and revenues were expected possibly late this quarter or into Q1 of 2011.

 

  2)  On the CC, management was asked about this deal and its presumed impact.  They stood by the previously stated "several millions", in the sense that that's what they hope/expect, but cautioned that with the OEM deal they're really at the whim of their partner.  They only get paid if HP (or whoever?) can sell the product. 

 

  3)  The small/medium business market is fundamental to the success of this line of products.  As we all know, the SMB market hasn't been too healthy for quite a while.  With the economy as it is, I can't see many SMBs rushing out to upgrade their network infrastructure very soon.  So the revenue may be delayed further.

 

-  On the CC, the new CEO said that a great deal of R&D resource over the past year has been directed at legacy products (minor modifications thereof) and the big OEM deal mentioned above.  He was emphatic about changing this immediately.  He is pushing resources towards new products, so that innovation can continue at a higher pace without the need to increase R&D budget from current levels.  It seems very plausible to me that the R&D team has been distracted with work that hasn't added immediately to the top line.  For now I have faith that Sangoma will return to consistent innovation.

 

-  Management states that they intend to grow their way out of the revenue shortfall, rather than scale down to increase short-term profitability.  They claim to have "more ideas for products than time to implement them".  They have apparently set out a map for priority new products over the next couple years, with the intention of releasing at least one new product per quarter.  This is the only way to grow a small company with a solid reputation but no dominant market presence.  The new CEO also made it pretty clear that sales/marketing will be emphasized more than under previous management. 

 

- It will be interesting to see how things evolve under new management.  The new CEO was clearly very disappointed with the results.  He's been talking to investors etc. and has some strong ideas as to how to proceed.  He said something like "I didn't come here to lead a shrinking company". He has certainly been successful in his past endeavours.  He was forthright about the company's shortcomings and I am convinced that he is strongly motivated.  Whether his vision pans out is, of course, yet to be determined. 

 

- Bringing top-line growth back up to historic levels is an immediate priority and they have concrete plans to make this happen. However, they were careful not to make too many promises.  I would be *very* surprised if current Q's sales are back over $3 million. Their sales model (many distributors, no backlog) makes it difficult for them to give guidance, but I assume if they knew sales were looking strong through Oct/Nov then they would have said something to that effect.  My guess is that we'll see a slight top-line improvement this quarter, and substantial progress will only be made once some new products are released and marketed.

 

- They just announced the D500 transcoding card and claim to be starting a new marketing program for this line of business.  From what I can gather, people are excited about the prospects (from official Sangoma propaganda and also various independent tech forum postings).  They'll almost certainly move into video transcoding in the near future, but I don't know much about the size of the markets here. 

 

- For a while, Sangoma was riding the growth curve of open-source telephony.  It's difficult to tell how much of the slowdown in that growth is because of the recession versus market saturation.  I suspect it's more the former than the latter, but again it's very difficult to get a feel for the size/health of the open-source market because it is composed of many small players.

 

- I would like to know more about the distribution of Sangoma's revenue amongst their various product lines.  I'll try to get further information here and let you know if I succeed.

 

In summary, I hold a significant number of shares and don't intend to sell based on one bad quarter.  But I will only add once I see strong evidence that they have the house in order.  (Such as timely product releases, positive press coverage/awards, insider buying, substantial OEM deals etc.) 

 

 

[Baoxiaodao]

Thanks a lot doc. I am wondering how low it can go with tax-loss selling and a bad quarter. If the price is attractive, I do not mind taking risks here.

 

 

[doc75]

Thanks a lot doc. I am wondering how low it can go with tax-loss selling and a bad quarter. If the price is attractive, I do not mind taking risks here.

 

 

 

I wonder the same thing.  Tax loss season can lead to some pretty crazy prices, and I will dip in again if it goes much below todays prices.  Frankly I'd buy more today if I had a bunch of cash just sitting around. (But I'm not so smart.)

 

Remember that they have about $0.26 per share in cash. Today it was trading under $0.40, down from $.60.  That's a pretty big haircut.  And, based on historic earnings, it was already seriously undervalued at $.60/share.  So really it's a bet on whether the last quarter was a harbinger of the future, or just a nasty blip.

 

I would like to see some insider buying, but they're all compensated with options so perhaps it's not likely.

 

 

 

[Mark Jr.]

This is an interesting one, thanks for posting. Especially with the .25/share in cash, after the recent breakdown in price it appears insanely cheap at first glance.

 

I've never heard of this company, we've been using asterisk and ser on the open source side at the office for our SIP gateway for a couple years and plan to add some customer facing services using this combo. We're also replacing our P.O.S windoze based telephone system with an IP PBX in the new year and started sourcing vendors for that. I think it might be an idea for me to kick this name over to my guys without comment and see if they get any traction with our systems group. That would be a good sign.

[doc75]

This is an interesting one, thanks for posting. Especially with the .25/share in cash, after the recent breakdown in price it appears insanely cheap at first glance.

 

I've never heard of this company, we've been using asterisk and ser on the open source side at the office for our SIP gateway for a couple years and plan to add some customer facing services using this combo. We're also replacing our P.O.S windoze based telephone system with an IP PBX in the new year and started sourcing vendors for that. I think it might be an idea for me to kick this name over to my guys without comment and see if they get any traction with our systems group. That would be a good sign.

 

I'd be very interested to hear the results.  I'm not in the business, so can only go by what I read.  It certainly seems that Sangoma enjoys a very solid reputation in the open-source space.  The gist seems to be "more difficult initial configuration than some other vendors, but superior engineering & capability".

 

 

[doc75]

Just an update for anyone who cares:

 

- Since the last Q report, Sangoma stock has hovered around $0.40, with $0.25 of that being cash. 

 

- On Friday, Sangoma announced a share buyback program will commence on Dec 14.

 

- The large OEM deal announced in the summer does appear to be with HP, as I conjectured in an earlier post.  The HP "Branch Survivable ZL Module" is now being marketed by HP as a branch survivability solution based on Microsoft Lync.  HP is now selling Sangoma cards as PSTN add-ons to this module.  No announcement has been made by either party... I just did a search and saw that "HP Sangoma telephony cards" are listed as add-ons in HP's official flyer on the SB module.

 

- It's hard to predict the revenue effect of the HP deal.  Sangoma initially stated they expect "several millions" in revenue over the next few years, but the new management backed off any claims on the last Q call.  At that point, Microsoft Lync had still not been officially released and HP was not yet officially marketing the module.  That changed as of Nov 17, so some revenue may even start to trickle in this quarter.

 

- As part of their employment arrangements new management was promised a large number of options, which were granted in late November.  Lucky timing for them, since the options range in prices from around 0.45 to 0.55, well below the typical trading range of the past few years.  I'm not so thrilled with these cheap options but I presume there was no scheming to make them cheap.

 

- There has been no insider purchasing at these levels, which presumably means that the people who know best don't think the stock is as cheap as I think it is.  The new CEO & CFO have plenty of cheap options, and the old CEO holds a tonne of shares... but even still...

 

 

-

 

 

 

 

[Baoxiaodao]

Doc, thanks for the update. Just let you plenty of people here care about your insights and hard work.

[doc75]

Update:

 

The most recent quarter (Q2 ended Dec 2010) was a pretty significant improvement over the bad surprise of the previous quarter.

 

- International sales were up considerably (a continuing trend).  US sales were up over last Q's dismal numbers but not up to historic highs.

 

- The big OEM deal with HP has not started kicking in revenues yet.  This should soon change, and could provide a nice boost to earnings when it does.  Management refuses to make any predictions regarding this revenue stream, saying that the way that OEM deal was inked means Sangoma's revenue is entirely dependent on their partner (presumably HP) selling widgets that use Sangoma gear.  As a reminder, the "widget" in this case is a Survivable Branch Module that fits into HP blade servers.  Sangoma provides telephony add-on cards for these modules (and presumably some of their gateway software has been worked into HP's suite).  Management is pushing for better revenue clarity in new OEM contracts.

 

- Revenues from transcoding cards (a new line of business) have not yet kicked in to any substantial degree.  Management says it's still early in the game and believes demand is out there.  They are working on adding video transcoding capability to their audio transcoding devices.

 

- The majority of company revenues come from old products.  But the new management team is shifting to focus more on product development, with the goal of 5-6 new product launches per year.  They are apparently working on or considering such things as: higher density telephony cards (more ports per card),  wireless cards to enable connection to GSM (e.g. in 2nd/3rd world countries where land lines are unavailable),  fibre connectivity, video transcoding (as mentioned above).

 

- Shares are up to .50 from the low of .39, but still slightly more than half of market cap is cash.  Assuming annual EPS of 0.04/share (very conservative, in my estimation), and backing out cash, the PE is under 8.

 

It seems the company is all but forgotten. There were hardly any questions on the CC and I only know one analyst following them (Ryan Irvine of Keystone, a very small shop).  This is quite a different story as compared to 2007!  But the company weathered the downturn extremely well and is now poising itself for renewed growth.  Even if the recovery stalls (or tanks) they have plenty of cash to continue quality R&D.  I think the market is being unduly pessimistic with this one.

 

Final thought:  The CEO was quite surprised on the CC with the lack of questions.  At the same time, he's very vague with the few questions that are asked.  (For instance, he refuses to give any guidance.)  I think he holds back information with good reason, but it's odd to feel there should be more questions while basically refusing to answer the type that any analyst cares about.

 

[oddballstocks]

I wanted to follow up on Sangoma, I did a post about them on my blog here: http://oddballstocks.blogspot.com/2011/07/sangoma-technologies-cheap-turnaround.html

 

I came up with three values

Base case (liquidation) .36

Depressed level is new norm .65 (25% upside)

Margins return to 20% 1.04 (100% upside)

 

This is a very cool little company, lots of excellent information in this thread.

[Baoxiaodao]

The best way to think about Sangoma's product suite is to think of your office phone system.  Sangoma builds all of the hardware to handle voicemail systems, routing calls to different offices, transitioning between digital and analog among other things.  The software to manage the entire system is custom built on the Open Source platform.

 

A customer might buy a Sangoma telephone card for a standard PC and then install the Asterisk software on the PC turning a cheap PC into an office PBX solution.

 

Oddball, can you kindly explain why Sangoma's products are more competitive here? Is it because they are cheaper?

 

I think everyone who is interested in Sangoma should read your post. Good job.

[oddballstocks]

Baoxiaodao,

 

I think there are a few value drivers for Sangoma, the first is supportability.  I took a look at the list of operating systems that support their cards and the cards work in every possible obscure system imaginable.  Secondly they have an integrated software hardware approach, so you can get the software that's tailored to the hardware.  Their biggest competitor is the creator of the Asterisk program but Sangoma has modified it and added features whereas the competitor is just selling the version that Sangoma has used as a building block.

 

Outside of that I think there might be value in how versatile their products are, they support every phone feature imaginable.  A customer can buy a product from them and not need to buy any other cards to implement a complete system.

 

Nate

[Baoxiaodao]

Nate, thanks for the reply. I understand the business better now but I am still not comfortable enough making the investment. One thing troubles me is the share grants it gives out every year. This is the case as with other tech companies, but still a minus. The other thing is that I think Sangoma does not have pricing power.

 

What's your opinion on Sangoma's competitors Digium and Rhino?

[oddballstocks]

Baoxiaodao,

 

I don't really know enough about the actual products (i.e. real life experience) to rate the competitors, it seems like their offerings are similar.  Seeing as how Sangoma works in a niche market I'd say that having three major players is probably about the correct size.  Going forward outside of new product developments I don't see an enormous growth market.  I think the company realizes this, as mentioned earlier in the thread the CEO wants to drive new development, and this past year they've put some significant capex towards it as well.

 

As for the options grants... It doesn't hit me well either but I recognize the need in a way.  The person who sent me the idea actually viewed that as a value driver in the sense that the execs hold so many options that they're motivated to move the price up.  My concern is that buyback is somewhat offset by the option grants.

[Mark Jr.]

They recently took over a VOIP gateway manufacturer out of the UK called Vegastream:

 

The press release:

http://www.vegastream.com/index.php/Current-News/22nd-august-2011-sangoma-acquires-all-key-assets-of-vegastream.html

 

and a bloggers take on it:

http://matttownend.wordpress.com/2011/09/05/vegastream-assets-purchased-by-sangoma/

 

It was an asset purchase "out of administration", is that British for receivership?

 

All cash, 1.4M. Looks like they're looking to put that money to work.

[doc75]

For anyone else interested in this tiny company: 

 

Year end results came out last week.

 

http://www.marketwire.com/press-release/sangoma-reports-q4-and-annual-results-for-fiscal-2011-tsx-venture-stc-1578937.htm

 

The numbers seem pretty good for this business environment.  I was hoping for a dip in price because of the net loss which resulted from a  goodwill impairment; alas, no such luck.  But it trades for approximately working capital anyway, with most of that being cash.  (Current market cap approx $13M and nearly $8.8M in cash at June 30.  Cash would now sit around $7M after the Vegastream acquisition.)

 

The new management is clearly putting their stamp on things; lots of extra spend on sales/marketing and noticeably more "activity", with new product releases, announcements etc.  They just released a beta version of a new card that connects to the GSM network.

 

Q1 results will be out within the next few weeks.  On the YE conference call the CEO refused to give Q1 guidance but said everything was going "perfectly well".

 

Concerns:

 

- They do a lot of business in Europe.  Apparently Europe is in some sort of trouble?

- In general they'll really only shine when SMBs begin to spend some more $ in US/Europe.

- New management has gobs of cheap options but essentially no shares.  And they haven't been purchasing shares even when it has traded 10% below working cap.

 

 

 

 

[Mark Jr.]

I brought in a new CTO at my company this year who knows this sector inside out, so I recently asked him about Sangoma and this is what he had to say:

 

"SANGOMA  is over extended in certain areas with a reliance third party firms to build  and source parts for their interface cards..  The cards are very dependent on server configurations for them to work.  This means the product must be placed in the customers server and their solution quality is truly dependent on external factors.  Ability to close larger sales in third world telcos (Zaire! here we come) depends on the work of the local integrator.      If you dont control the parts that are going into your product and dont have much influence on how your product is going to be used, your ability to scale is hampered. 

 

SANGOMA can develop products faster that other companies in their space.  Look at the firmware release dates on their website --- they respond quickly.    Possible Breakout:  New Product that is certified for use in 911 Voip solutions in the united states and works will call recording systems

 

Companies like AUDC as a comparison have much tighter controls over their products:  They own the chasis, they have the in-house research team.  They have the entire product built in house.    Cloud Vendors are looking integrated products that can be quickly deployed.  With a few errant delivery problems that are fixable with their "quiet" restructuring they should be back on track soon."

[doc75]

I brought in a new CTO at my company this year who knows this sector inside out, so I recently asked him about Sangoma and this is what he had to say:

 

"SANGOMA  is over extended in certain areas with a reliance third party firms to build  and source parts for their interface cards..  The cards are very dependent on server configurations for them to work.  This means the product must be placed in the customers server and their solution quality is truly dependent on external factors.  Ability to close larger sales in third world telcos (Zaire! here we come) depends on the work of the local integrator.      If you dont control the parts that are going into your product and dont have much influence on how your product is going to be used, your ability to scale is hampered. 

 

SANGOMA can develop products faster that other companies in their space.  Look at the firmware release dates on their website --- they respond quickly.    Possible Breakout:  New Product that is certified for use in 911 Voip solutions in the united states and works will call recording systems

 

Companies like AUDC as a comparison have much tighter controls over their products:  They own the chasis, they have the in-house research team.  They have the entire product built in house.    Cloud Vendors are looking integrated products that can be quickly deployed.  With a few errant delivery problems that are fixable with their "quiet" restructuring they should be back on track soon."

 

It's been over a year since the last posting on this thread so I figured it was time for an update.

 

Business summary:

 

In 2010, the BOD brought in new management to grow the company through the inevitable downturn in the old line of business (TDM telephony cards).  Upon joining the company, the new CEO stated his #1 goal was to increase revenue by ramping up product development and moving into new (but related) lines of business.    So far, great success:  Fiscal 2012 saw record revenues and about a dozen new products introduced.  New product deployment has continued into fiscal 2013.  About 1/3 of revenue now comes from non-legacy products.

 

The new management has clearly been working hard to address some of the concerns that Mark Jr. mentioned above.  The old business model was to produce telecom and datacom cards that others would then integrate into various products (e.g. an individual integrator or OEM would build their own server/appliance with a Sangoma card inside).  Sangoma is still producing com cards -- and enhancing them -- but they're also now offering ready-to-use appliances.  The purchase of the Vegastream assets allowed them to quickly enter the external VoIP gateway market, and they have since introduced other appliances, such as a "Microsoft Lync in-a-box" unified communications solution for small-to-medium enterprises, a high-capacity transcoding appliance for service providers, and very recently a line of SBCs (session border controllers) for  both enterprise and carriers. 

 

The company mantra is "everything connects", and much of their effort has gone into products that allow legacy TDM equipment (think old-school phones) to interoperate with new systems. (For instance, you could convert a dormitory over to VoIP without rewiring all the rooms by instead passing the old lines through one of their high-density analog gateways.)  However, they are making a concerted effort to branch out into non-TDM-related products, since the TDM world is clearly shrinking as everything moves to digital telephony.  Their new transcoding appliances, multiplexers and SBCs all fit into the "non-TDM" category.  It appears that they plan to roll out some type of video device this year, along with a handful of other new products.  (I presume the video offering will be in the form of an MCU and/or a series of transcoding cards, building on their audio transcoding abilities and the partnership with Octasic.)

 

Current situation:

 

- The shares have been on a steady downward trend for over a year.  They currently trade at multi-year lows, giving a market cap of $8.9M versus working capital of $11.3M (including $4.5M) in cash and TTM sales of $13.8M.  Discounting inventory at 50% gives an NCAV of approx $9.5M.  Stated book value is $19.5M.

 

- The impressive top-line growth in F2012 did not make it to the bottom line.  F2012 net income was only $0.41M, compared with F2010 income of $2.85M.  Q4 of F2012 saw an operating loss.  Cash has also decreased substantially because of the Vegastream investment and inventory build-out.  Inventory was up to $3.7M as at Sept 31, 2012, more than double historical levels.  Inventory build is to be expected with all the new products, but this is something to keep a close eye on.  Management claims the increase is due to the much longer production time for appliances, and the level will now be approximately stable going forward.

 

- Executive compensation seems pretty excessive for a company at this stage.  The CEO took home north of $600,000 of cash compensation in F2012, more than half of that being bonus.  The CFO and VP Sales also receive very healthy paycheques.  I think new management is doing a very good job trying to return this company to growth, and the CEO/CFO do have a good past track record. But these three named executive salaries alone amounted to over $1.6M in total compensation last year, which is far too big a chunk of earnings (and market cap!!!).  They have also made a number of other executive appointments in the past couple years -- VPs of this-and-that -- but these are not "named executive officers" so I don't know the salary structure.  However it appears they have brought some of these people over from stronger/bigger competitors, so I doubt they come cheap.

 

- The compensation noted above would be easier to swallow if the executives interests were thoroughly aligned with those of shareholders.  That is not the case here. Current management continues to own a negligible (effectively 0) share of the company.  The CEO and CFO were granted a tonne of (then ATM, now OTM) options upon employment, but there have been no reported open-market share purchases by insiders over the past couple years, despite generous compensation and the shares trading at less than working capital.  Management is pushing a lot of cash at this turnaround attempt, including pushing a lot of cash at themselves, without taking on any market downside if their bet doesn't work out. .

 

- Notwithstanding the above, the previous CEO remains a director and holds about 18% of the shares.

 

- The company did have a NCIB in effect until Dec 2012.  I don't believe it has been renewed.  In any case, they have not been aggressively repurchasing shares. In F2011 they bought back around 500,000  shares, and in F2012 (ended June 30) they bought about 300,000 at an avg price of $0.52.  They didn't repurchase any shares in Q1 (July-Sept).  I suspect they want to preserve cash to fuel opportunistic growth, regardless of the market price.

 

- Management claims that op-ex is essentially now at the level necessary to drive growth.  They've definitely cranked up the spend on R&D, sales and marketing, so it would be nice to see some improvement in the bottom line before those numbers grow further.

 

- Other companies in Sangoma's space have experienced shrinking revenues and operating losses over the past couple years, so Sangoma's growth is coming at a difficult time for the industry.  They're clearly doing something right.  But they'll need to start making some larger sales to bigger customers to drive the type of growth they're after.  From what I understand, telcos and carriers always involve very long sales cycles, and recently they haven't been spending at all.  So it's still early days for Sangoma's growth initiatives.  They very recently hired a new VP of Sales to target the carrier and unified communications markets.  Whether that's a signal that they're gaining traction or a signal that they're desperate for traction is yet to be seen.

 

- There has been some suggestion over at Whopper Investments that selling pressure might be coming from the (conjectured) liquidation of the Hummingbird Value Fund, as manager Paul Sonkin has moved to Gamco.  Hummingbird was at one time a 10% owner of Sangoma, but they passed under the 10% threshold some time ago so I can't track their current interest.  The liquidation hypothesis is based on a recent cluster of filings documenting Hummingbird sales in various illiquid microcaps.  It's entirely possible that Hummingbird has been selling STC, but I haven't noticed any pattern when I've looked at which brokerages are selling on Quotemedia.  (I also don't know how reliable this information is.)  In any case, there has been consistent selling pressure since August, mostly in small volumes.

 

- Barel Karsan recently did a small writeup on Sangoma, which you can find here:  http://www.barelkarsan.com/2013/01/sangoma-drops-like-rock.html    He points out that development expenses have been capitalized, and suggests we may be in store for a future writeoff, citing substantial writeoffs in F2011 as evidence.  This is a valid point, but to be fair to Sangoma, the 2011 writeoffs were the result of the expensive acquisition of Paraxipmade by previous management in July 2008. (A bunch of goodwill was written down, and  $1.5M  disappeared when a Paraxip patent was not granted by the US patent office.)  I believe the acquisition of Vegastream by current management was a much better investment, but only time will tell.  On that point, management has repeatedly mentioned that they are keeping their eye out for further  appropriate acquisitions.  They insist that they will be very selective.

 

Summary:

 

The stock is cheap on an asset basis, and dirt cheap if revenue continues to grow and costs are contained as per management's claims.  Q2 results should come out shortly.  I expect a bump from Q1 revenue, but don't foresee a huge increase and/or a tasty bottom-line quite yet.