Cloud And AI Recurring Revenue Shift Will Drive Long-Term Earnings Transformation

Catalysts

About Sangoma Technologies

Sangoma Technologies provides cloud, hybrid and on-premise communications and networking solutions for businesses and service providers globally.

What are the underlying business or industry changes driving this perspective?

• The shift toward software and services led communications, with over 90 percent of revenue now recurring, positions Sangoma to convert its growing bookings and backlog into higher visibility revenue growth and more resilient earnings.
• Expanding wholesale and white label offerings to CLECs, health care systems and other institutional buyers opens large new routes to market that can materially lift MRR, total revenue and operating leverage as these programs scale.
• Ongoing consolidation and exits by larger legacy prem UC vendors are creating share capture opportunities that have already driven over 60 percent growth in Prem, supporting near term revenue while enhancing blended gross margins.
• Focused investment in AI driven capabilities across cloud, hybrid and on prem platforms, backed by 90 percent of R&D spend on new products, should support higher value bundles, improve customer stickiness and expand net margins over time.
• Disciplined capital allocation, including debt reduction, share repurchases and selective M&A, combined with free cash flow conversion targeted at 90 to 100 percent of adjusted EBITDA, provides a foundation for higher earnings per share and the potential for multiple re rating.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Sangoma Technologies's revenue will decrease by 4.3% annually over the next 3 years.
• Analysts are not forecasting that Sangoma Technologies will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Sangoma Technologies's profit margin will increase from -2.4% to the average CA Communications industry of 11.6% in 3 years.
• If Sangoma Technologies's profit margin were to converge on the industry average, you could expect earnings to reach $23.0 million (and earnings per share of $0.71) by about December 2028, up from $-5.4 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 14.5x on those 2028 earnings, up from -32.8x today. This future PE is lower than the current PE for the CA Communications industry at 15.7x.
• Analysts expect the number of shares outstanding to decline by 0.78% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.71%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The pivot to larger, more strategic customers introduces longer and more complex sales and implementation cycles. Any slowdown in converting the growing pipeline and backlog into live deployments could cap or delay top line growth and constrain operating leverage, directly impacting revenue and earnings growth.
• The strategy leans heavily on new wholesale and white label channels with CLECs and institutional buyers. If these partners fail to successfully resell or adequately support Sangoma’s offerings at scale, the company may see weaker than expected recurring volumes and elevated churn in end markets, pressuring recurring revenue and net margins.
• The Prem UC and hardware portfolio is currently benefiting from competitor exits and channel momentum, but this is a structurally declining segment of the communications market. Any normalization of this temporary tailwind or faster migration to cloud alternatives could erode this contribution, reducing blended gross margins and overall earnings.
• The plan to invest an incremental 2 million dollars in SG&A, expand partner enablement and pursue selective AI driven acquisitions assumes that additional scale and innovation will offset the higher cost base. If these investments do not translate into sustained volume growth and pricing power, margins may compress and free cash flow could fall below the targeted 90 to 100 percent conversion of adjusted EBITDA.
• Guidance for accelerating growth in the second half of fiscal 2026 and an increasingly SaaS led model is sensitive to broader SMB demand and macro conditions. Any cyclical slowdown or budget tightening across verticals such as retail, hospitality and health care could extend deal cycles, lower average revenue per customer and undermine the expected improvement in revenue and adjusted EBITDA margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of CA$11.36 for Sangoma Technologies based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$11.98, and the most bearish reporting a price target of just CA$9.96.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $199.1 million, earnings will come to $23.0 million, and it would be trading on a PE ratio of 14.5x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of CA$7.4, the analyst price target of CA$11.36 is 34.9% higher. Despite analysts expecting the underlying business to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.