Sangoma's 2025 Earnings Calls: Contradictions Emerge in Investment Strategy, M&A Priorities, and Churn Control

The above is the analysis of the conflicting points in this earnings call

Date of Call: None provided

Financials Results

• Revenue: $59.4M in Q4 FY2025, up 2% sequentially
• Gross Margin: 67% in Q4, compared to 69% in Q3 (mix shift to product sales)

Guidance:

• FY2026 revenue expected at $200–$210M (vs $209M in FY2025 excluding VoIP Supply).
• Sequential growth expected to begin in Q2 FY2026; Q1 is the low point.
• Gross margin to improve to ~75% beginning in Q1 FY2026.
• Operating expenses to remain ~$30M per quarter (excl. amortization of intangibles).
• Adjusted EBITDA margin for FY2026 targeted at 17%–19% (up from 17% in FY2025), with margins lower 1H and expanding in 2H.
• Strong cash generation expected to continue; no further divestitures planned in adjacent businesses.

Business Commentary:

* Revenue and Earnings Growth: - Sangoma Technologies Corporation reported revenues of $59.4 million for Q4 of fiscal 2025, with an increase of 2% sequentially from the third quarter. - The growth was driven by strong performance in prem-based product sales and strategic execution, reflecting the discipline of their model and transformations.

• Profitability and Cash Flow:
• The company achieved an adjusted EBITDA of $11.4 million for the quarter, representing 19% of revenue.

• This was supported by strong cash generation and disciplined execution, enabling the company to invest in growth and return capital to shareholders.

• Strategic Focus and Divestiture:

• Sangoma completed the sale of its VoIP Supply business, marking a deliberate shift towards software-led recurring revenue services.

• The divestiture was part of a strategic focus on high-margin core services, with software-led recurring revenue services now representing more than 90% of revenue.

• Inorganic Growth and M&A Strategy:

• Sangoma emphasized its appetite for strategic acquisitions, particularly in areas like SD-WAN, security, and zero trust networks.
• This strategy is aimed at enriching the portfolio, creating stickiness, and entering new markets, with a robust funnel of targets identified.

Sentiment Analysis:

• Management exceeded consensus in Q4 ($59.4M revenue; $11.4M adj. EBITDA; 19% margin), sold low-margin VoIP Supply to sharpen mix, and guided FY2026 revenue to $200–$210M with gross margins ~75% and adj. EBITDA margin 17–19%. They expect sequential growth starting Q2, backlog up 3% in Q4, and three consecutive quarters of prem-UC sequential growth driven by share gains from Avaya/Mitel.

Q&A:

• Question from Gavin Fairweather (Cormark): How are incremental go-to-market investments split between deepening existing channels vs. adding new ones, and what gives confidence on returns?
  Response: Investments focus on field coverage, new partner recruitment, and marketing; improved unit economics show early pipeline and quality gains, with spend ramping prudently as ROI proves out.

• Question from Gavin Fairweather (Cormark): Any changes in macro or competitive dynamics affecting growth timing?
  Response: No notable competitive pressure; longer sales and implementation cycles from moving upmarket are the primary reason, with growth expected from Q2 onward.

• Question from Gavin Fairweather (Cormark): Did VoIP Supply sell much proprietary Sangoma product?
  Response: Over 90% was third-party; they remain a distributor of Sangoma products post-sale.

• Question from Gavin Fairweather (Cormark): Appetite and readiness for M&A?
  Response: High; ERP and integration capabilities are in place, pipeline active (e.g., SD-WAN/security), and inorganic growth is a top priority.

• Question from Mike Latimore (Northland Capital Markets): What underpins confidence in Q2 sequential growth—existing bookings or new, faster deals?
  Response: Both: closed/late-stage larger deals plus an increasing mix of shorter-cycle cloud deals support back-half acceleration.

• Question from Mike Latimore (Northland Capital Markets): Will both total revenue and services be up sequentially in Q2?
  Response: Total revenue expected to increase; tracked and reported within the new core and adjacent categories.

• Question from Mike Latimore (Northland Capital Markets): How critical is the adjacent category, and any divestitures ahead?
  Response: Adjacent gets limited targeted investment; it’s cash-generative with modest growth, and no further divestitures are planned.

• Question from Suthan Sukumaran (STEPL): Status of churn amid refocusing efforts—stabilized or more to come?
  Response: Churn is under control and expected to decline, aided by AI tools and stronger cross-sell/upsell stickiness.

• Question from Suthan Sukumaran (STEPL): Outlook for mix between expansion and new business in bookings?
  Response: Both will contribute: expansion via Ignite upsell/cross-sell programs and new logos in targeted verticals; large strategic deals are upside and not assumed.

• Question from Suthan Sukumaran (STEPL): M&A priorities—market access vs. tech vs. consolidation?
  Response: Focus on adding SASE/SD-WAN/security capabilities and partner ecosystems to bundle with UCaaS/CCaaS and drive cross-sell.

• Question from Robert Young (Cormark): Is the 75% core / 25% adjacent split for Q4 or FY2026+?
  Response: It reflects FY2026 and forward.

• Question from Robert Young (Cormark): Clarify return-to-growth timing—Q2 or second half, and which segments?
  Response: Growth begins in Q2 across both core and adjacent and continues through the year.

• Question from Robert Young (Cormark): Bridge from ~20% Q4 adj. EBITDA margin to FY2026 17–19% guide?
  Response: OpEx ~ $30M/quarter; remove VoIP Supply’s EBITDA (~$1.1M FY) and revenue (~$4M), plus mix effects, yielding 17–19% with back-half expansion.

• Question from Robert Young (Cormark): What drove 18% Q4/Q3 prem channel growth?
  Response: Proactive share capture from Avaya/Mitel exits via targeted hiring and partner recruitment; creates funnel for future cloud transitions.

• Question from David Kwan (TD Cowen): Are on-prem gains from share capture rather than slower cloud migration?
  Response: Yes—primarily share gains due to competitor exits; cloud migration remains intact.

• Question from David Kwan (TD Cowen): Will you do a dilutive acquisition to boost growth?
  Response: Potentially small, minimally dilutive deals if strategic; valuations are improving in target areas.

• Question from David Kwan (TD Cowen): How large could acquisitions be?
  Response: Range from small tuck-ins to larger deals, based on strategic fit in priority verticals and portfolio enrichment.

• Question from David Kwan (TD Cowen): Will you provide historicals and new metrics (e.g., ARR) with the new reporting?
  Response: Yes; comparatives and additional metrics will start in Q1.

• Question from David Kwan (TD Cowen): Why weaker international trends vs. U.S.?
  Response: Resources prioritized to U.S.; international was hardware-heavy and deprioritized; plan to expand SaaS-led offerings in Canada/UK next.