Sangoma Technologies: A look through the Alta Fox framework

If not already familiar, consider first browsing through Alta Fox Capital’s analysis of multi-baggers over a five year period ended summer 2020. I will be using their criteria to highlight what has already been and is on track to be another impressive multi-bagger: Sangoma Technologies, currently trading on the TSX Venture (and soon to be listed on TSX and NASDAQ).

Sangoma is unified communications business which optimizes the back-end equation alongside hardware and cloud. It has seen double digit organic growth over the past five years and cloud revenues increase over 50% the past two quarters. ~50% of service revenue is recurring, and EBITDA margins sit at 18.7%. They recently acquired Florida based Star2Star for US$437mm —- at the time of this writing (SP $3.05), Sangoma is trading near CAD$400mm, essentially at book value. Amongst its customers are well-recognized companies such as Domino’s, Spotify, AT&T, REMAX, Xerox, to name a few.

The stock pulled back after announcing the acquisition of Star2Star, and the company has yet to release financials inclusive of said acquisition — but in a recent corporate update they did mention exceeding 2021 guidance. Inclusive of Star2Star, EBITDA margins are expected in the ~16.5% range before cost synergies. This move further transforms the company with SaaS/Cloud now accounting for over 70% of revenues (there’s a great podcast featuring CEO Bill Wignall and how he helped transform the company from a hardware provider into a top UCaaS player).

Note: One major headwind is FX as all revenues are in USD.

A look through the AltaFox framework

Sangoma meets the above selection criteria.

Sangoma in Q2 21 had 66% gross margins. ~19% EBITDA margins, and a revenue CAGR of 58% since 2016.
Star2Star has 80% gross margins, ~15% EBITDA margins and 80% recurring revenue.

Alta Fox also notes top multi-baggers made large acquisitive acquisitions, which Star2Star fulfills for Sangoma given the above margins and recurring revenues in addition to Sangoma’s ~15% organic growth.

Alta Fox’s high level takeaways:

1 + 2) Look for businesses with advantageous positioning + Spend time on financially healthy companies:

3 + 4) Acquisitions can create value + Don’t rely on multiples

Alta Fox notes multiple expansion played about an equal role alongside EBITDA for TSR. While many UCaaS multiples have pulled back a bit, Sangoma is well aware of the likelihood of multiple expansion, especially after Star2Star. With that said, no need to rely on multiples to drive TSR with 76% gross profit margins and 18% EBITDA margins.

The Star2Star acquisition was the largest for Sangoma to date, but they have a proven track record of successful M&A. The upfront cost was significant, though it plays into the acquisition framework:

Finally, the Alta Fox framework also notes: Look for companies trading below 3x NTM Sales, 20x NTM EBITDA, and 30x NTM PE and/or those without forward multiples; 82% of companies from the set traded below these multiples or without forward multiples five years ago.

Sangoma currently trades below ~3x EV/Revenue (at ~$3/share).

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