STC.V - Sangoma Technologies

[cashisking]

FWIW

 

Looks like they (finally) started to buy back shares. Last quarter avg buy price was ~0.34. Looking at the cash flow statement, pre-working capital operating cash flow was over 300k, but development expenses and capex ate away almost twice that... Interestingly, the 450k options they issued in the quarter had strike prices of 0.5 (well out of the money) - shows there is at least some restraint in compensation. I believe the CEO's options from the original grant were around that exercise price as well. Talks of a large order being shifted to the next quarter could just be excuses, but it seems the CEO has been pretty transparent up to this point. The call will be interesting...

 

The stock is very cheap if they can leverage their product introductions into sales volume and positive fcf and buy back more shares. It seems to me the CEO is a capable operator and has attracted some talent at the senior level.

[doc75]

FWIW

 

Looks like they (finally) started to buy back shares. Last quarter avg buy price was ~0.34. Looking at the cash flow statement, pre-working capital operating cash flow was over 300k, but development expenses and capex ate away almost twice that... Interestingly, the 450k options they issued in the quarter had strike prices of 0.5 (well out of the money) - shows there is at least some restraint in compensation. I believe the CEO's options from the original grant were around that exercise price as well. Talks of a large order being shifted to the next quarter could just be excuses, but it seems the CEO has been pretty transparent up to this point. The call will be interesting...

 

The stock is very cheap if they can leverage their product introductions into sales volume and positive fcf and buy back more shares. It seems to me the CEO is a capable operator and has attracted some talent at the senior level.

 

The shrinking top line is a big concern.  I was expecting flat revenue from last quarter or a slight increase, but not a decrease.  The decrease was across all geographical regions.

 

They're clearly not gaining the expected traction in new products. The new VP of carrier sales is very experienced and has an incredible track record in telecom, so it will be interesting to see if he can replicate his past success at Sangoma.  I'd also be very interested to know the conditions of his employment, because executive compensation is making me uncomfortable. 

 

I take all mention of large orders with a handful of salt. That said, I have little doubt that management is truly befuddled by delays in closings, as opposed to lying about them.  The key is whether these are really delays or simply lost opportunities.  They mention in the PR that "certain significant orders" didn't materialize as expected, but then go on to say they now expect "at least one" of these to close in the current quarter.  We're almost 2/3 through the current quarter, so it seems likely that some of the large orders previously on management's radar won't materialize this quarter either.  Curious to know if these are now off the radar entirely.

 

About 300K of AR has been moved to "doubtful accounts", though the company is guaranteed to receive 90% of this number because of an insurance policy with Export Development Canada.  There's another 1M of AR in the 90+ day category.  This is claimed to be low risk but it will be nice to see the cash in the bank.  I'm curious where this revenue was booked.

 

Like you I was very happy that the options weren't granted at market price.  They basically granted a bunch of options at .50, and repurchased almost exactly that number of shares at .34. 

 

At this price I'm very pleased to see them renew the NCIB, even with the cash pile shrinking as it has.  They must have done the majority of their repurchasing in Dec, so I wonder why the NCIB wasn't renewed immediately when the prior one ended in mid-Dec.  Note that their share repurchases haven't been appearing on SEDI.  I mentioned this to IR and this will apparently be remedied going forward.

 

[cashisking]

Forgot another tidbit of some relevance. Trade receivables details in Note 10 show that ~$293k of receivables were deemed noncollectable and were sent to their receivables insurer. Although the net impact is only 10% of that amount (the deductible), its a yellow flag to me and makes me wonder about the other $1M in >90 days receivables balance (and the quality of the past quarter's sales numbers overall - which were quite decent imo). Low quality revenue and subsequent receivable writedowns are pretty bad in my books in terms of quality of earnings and management... This hasnt occurred in the recent past (off the top of my head), so it doesn't seem like a major concern at present. As always - FWIW

[cashisking]

Doc,

 

Good point about "significant orders" not materializing even as we are through 2/3 of the next q.

 

All things considered, I am not ready to cut bait. At this price, a very small positive change could move the stock considerably. The changes to their distribution and it's development has been impressive. They have plowed a lot of money into development and when looking at those as a % of market cap, the valuation doesnt give much value for any of that. Finally, (as you mention above) I cant see Mandelstam letting this thing rot down to nothing...

 

Thanks for your thoughts

[doc75]

Doc,

 

Good point about "significant orders" not materializing even as we are through 2/3 of the next q.

 

All things considered, I am not ready to cut bait. At this price, a very small positive change could move the stock considerably. The changes to their distribution and it's development has been impressive. They have plowed a lot of money into development and when looking at those as a % of market cap, the valuation doesnt give much value for any of that. Finally, (as you mention above) I cant see Mandelstam letting this thing rot down to nothing...

 

Thanks for your thoughts

 

I agree:  Any positive change would likely lead to a dramatic bump from here. But I think the share price will languish with little-to-no volume until they start showing some solid cash flow, which likely won't be for another few Qs.  All the operational improvements will be ignored until they bump up the bottom line.  I look forward to seeing if the reinvigorated sales team can deliver.  I hope to be able to buy lots more cheap shares once there is more top-line visibility. 

 

A few more notes from the CC:

 

-  It sounds like there is some bona fide reason for optimism that at least one of the significant orders will land this quarter, as opposed to pure wishing well stuff.  I have to give credit to the CEO for religiously sticking to his "no guidance" rule.  All that was said was that they wouldn't have expressed optimism if nothing had changed since the end of Q1.

 

- Management takes responsibility for some poor sales staffing decisions, in particular giving legacy sales people the opportunity to try their hand in new markets. The recent hiring of a very experienced VP Sales is meant to remedy that.

 

- It appears Paul Sonkin did indeed liquidate his position in Sangoma, which explains a lot of the selling pressure, particularly on high volume in December.  I suspect Sangoma was on the other side of much of this trading, given the volume and the fact that their avg purchase price was 35.5 cents.  Unclear when Sonkin was done selling but he is no longer the source of selling pressure.

 

- The options were not granted at above market value so as to rein in compensation. The price was based on the market price at an earlier date (just shy of 0.50) by prior arrangement.

 

- Their blackout period is pretty extensive: Right from the end of a quarter to the release of the financials.  So they couldn't have been in the market until last week even if an NCIB was in place.  One will be in place within the next week.  It will be interesting to see what effect this has.  I would expect the sub .30 ask to disappear pretty fast.

 

- Management continues to frustrate with lack of insider purchasing. This frustration was communicated on the call. (The blackout periods also encompass insider purchases but this doesn't get them off the hook IMO. There were plenty of shares available in Nov/Dec while they were publicly saying they believed their shares to be materially undervalued.

 

 

[doc75]

Nice to see a little insider buying this past week - 50000 shares apiece for the CEO & CFO.  Not big money but still very a welcome sight at these levels.

[cashisking]

FWIW - this guy does a write up and the stock rips ~30%... go figure  ???

 

http://www.investorfile.com/blog/readblog.asp?blogid=2957

 

 

[oddballstocks]

I've had an unfilled buy order on this thing for almost a month.  I've tried to purchase both the Canadian shares and the US pink sheet shares.  I'm an idiot on this one, I've been dinking around for pennies trying to buy right at the bid.  Looks like I missed the run for that.  This is one that's so cheap I should have just paid up a few cents to get in.

 

Maybe it'll fall back in a month or two with some neglect..

[shamelesscloner]

What do folks think of Sangoma 7 years later?

[TheThinkingInvestor]

What do folks think of Sangoma 7 years later?

 

I got interested in Sangoma after reading the ROE Reporter by Jason Donville. I started buying some shares at the end of 2020. The main bright points are that this company is incredibly misunderstood. It's seen as a hardware company, because that what's it's been for a loooooong time. But with the merger with S2S they will be getting 70% or so recurring revenues. As they outlined the industry-standard EV/Revenue multiple is 13x.

 

Post merger puts Sangoma at 3x. They also have top of industry profit margins and EBITDA margins, and they're also profitable. If you go by earnings, then yes they are vastly overpriced, but since the industry is growing so much and they are loading money into R&D and SG&A, their profits aren't where I think they will be in the future once the industry is more mature. I think using EBITDA and Revenue multiples is a better evaluation metric.

 

The merger did dilute the stock by quite a bit. They also used equity from the summer to help purchase part of the merger. So if you are scared off by share dilution, you will be pretty scared at what you see. But the merger essentially doubles the companies sales, and S2S is also profitable. With the combined leadership between both companies, I think they will have a lot more merger opportunities in the future.