Executive Summary / Key Takeaways

• Sangoma just completed a two-year operational transformation that structurally transformed it from a low-margin hardware reseller into a pure-play software company with 72% gross margins and 90%+ recurring revenue, yet trades at a multiple that still reflects the old business model.
• The simultaneous exit of legacy players Mitel, Avaya , and NEC from the on-premise communications market has created a once-in-a-decade consolidation opportunity, with Sangoma's Prem business pipeline up 60% year-over-year as partners and customers seek a stable alternative.
• Revenue headwinds are temporary and intentional: the VoIP Supply divestiture removed $7.6 million of quarterly low-margin revenue, while the Core segment's 6% year-over-year decline reflects longer sales cycles for larger MRR deals that are still building in the 39% quarter-over-quarter pipeline expansion.
• Trading at 0.73 times sales and 4.8 times free cash flow—below all key peers despite superior gross margins—Sangoma's valuation embeds minimal execution premium even as management guides to 17-19% EBITDA margins and sequential growth re-acceleration beginning in Q2 FY26.
• The critical variable determining whether this re-rates to peer multiples or stagnates is management's ability to convert its surging pipeline of deals over $10,000 MRR—up 39% sequentially—into recognized revenue before larger competitors can replicate Sangoma's integrated hardware-software approach in the mid-market.

Setting the Scene: What Sangoma Actually Does

Sangoma Technologies, founded in 1984 and headquartered in Markham, Ontario, built its foundation on Asterisk—the open-source communications software that powers millions of phone systems worldwide. This origin story matters because it explains why Sangoma can offer something legacy providers cannot: a fully integrated communications stack that combines proprietary hardware (VoIP gateways, session border controllers, IP phones), open-source software (FreePBX, Asterisk), and cloud-native platforms (UCaaS, CCaaS) into a single, customizable solution. While competitors sell discrete products, Sangoma sells a complete ecosystem that works out-of-the-box yet can be modified without vendor lock-in.

The company makes money through two distinct but complementary segments introduced in Q1 FY26. Core (74% of revenue) comprises the SaaS-led communications platform services—UCaaS, CCaaS, MSP services, and access—that represent the primary growth engine. Adjacent (26% of revenue) includes cash-generative technologies like SIP trunking and open-source platforms that provide stable foundation revenue and cross-sell opportunities. This bifurcation matters because it clarifies where to focus attention: Core is where growth lives, Adjacent is where cash flow is harvested to fund that growth.

Sangoma sits at the intersection of three powerful industry drivers. First, the $3.3 billion on-premise communications market is experiencing forced consolidation as Mitel's Chapter 11 filing, NEC (NIPNF)'s withdrawal, and Avaya 's struggles create a vacuum. Second, the broader UCaaS market is growing at 5-6% annually as businesses migrate from legacy PBX to cloud communications. Third, AI-driven automation is beginning to transform contact centers and unified communications, creating an opportunity for providers who can integrate intelligent features into their platforms. Sangoma's position is unique: it can serve the shrinking but profitable on-premise market today while maintaining a migration path to cloud and hybrid solutions, effectively bridging two worlds that competitors must choose between.

History with a Purpose: From Acquisition Spree to Operational Discipline

Before late 2023, Sangoma grew through 11 acquisitions that expanded its product portfolio but created operational chaos—11 product lines, 4,000 partners, and systems that couldn't talk to each other. This history explains why investors remained skeptical despite revenue growth: margin compression, integration costs, and lack of visibility made earnings unpredictable. The stock reflected a collection of acquired assets rather than a cohesive platform.

The arrival of CEO Charles Salameh and COO Jeremy Wubs in late 2023 marked an inflection point. Their "Project Diamond" transformation, completed in May 2025, consolidated 11 product lines into six categories, implemented integrated ERP and CRM systems, and rebuilt the sales team over 18 months. Why does this matter? Because it transformed Sangoma from a holding company into an operating company. The new systems provide "far greater precision, visibility and speed," allowing management to track unit economics by product line, partner performance, and customer cohort—insights that were impossible before. This operational foundation is what enables confident capital allocation decisions today.

The June 2025 divestiture of VoIP Supply LLC exemplifies this newfound discipline. The business generated $7.6 million in quarterly revenue but consisted of over 90% third-party hardware with sub-par margins. By selling it, Sangoma sacrificed top-line scale to improve gross margin from 67% to 72% overnight. More importantly, it freed up management attention and working capital to focus on high-margin Core growth. This is the kind of trade-off that value-accretive operators make but growth-at-all-cost managers avoid. The 9% year-over-year decline in operating expenses to $38.5 million, despite maintaining R&D investment at $11.3 million, demonstrates that Project Diamond delivered real efficiency gains—not just PowerPoint promises.

Technology and Strategic Differentiation: The Open-Source Moat

Sangoma's core competitive advantage rests on three integrated pillars that each reinforce the others: open-source software roots, proprietary hardware integration, and a rebuilt partner ecosystem. This isn't just a product strategy; it's a structural moat that determines margin durability and competitive defensibility.

The open-source foundation (Asterisk and FreePBX) provides a "build-your-own" flexibility that proprietary competitors cannot match. While RingCentral customers pay premium prices for a closed ecosystem and 8x8 users accept limited customization for simplicity, Sangoma's customers can modify source code, integrate third-party applications, and avoid vendor lock-in entirely. Why does this matter for margins? Because it creates switching costs that aren't contractual but technical. A business that has customized its FreePBX deployment over five years faces massive friction to migrate, resulting in churn rates below 0.95% and gross margins that improved to 72% as customers attach more services rather than defect. The open-source community also provides free R&D—features developed by global contributors get commercialized by Sangoma, allowing 90% of the $11.3 million quarterly R&D spend to target new capabilities rather than maintaining legacy code.

The integrated hardware-software ecosystem is the second pillar. Sangoma doesn't just sell software licenses; it sells complete solutions including IP phones, VoIP gateways, and session border controllers that are purpose-built for its platforms. This matters because it eliminates integration friction for customers and captures margin across the full stack. While software-only competitors like Five9 must partner for hardware and pray for compatibility, Sangoma's end-to-end control reduces failure rates and implementation times. The financial impact shows up in the 19% year-over-year increase in average revenue per customer—bundling hardware with software drives deal sizes higher and creates "wedge" opportunities to land with hardware then expand to cloud services.

The rebuilt partner ecosystem transforms Sangoma's go-to-market efficiency. By reducing 4,000 partners to 1,100 Pinnacle Partners and focusing on the top 400 that generate 80% of revenue, Sangoma has created a more loyal, higher-performing channel. The BV IgniteX program trains partners to bundle products, while the new wholesale channel (launched six months ago) has already secured its first $10,000 MRR deal. Why does this matter? Because it shifts Sangoma from a transactional vendor to a strategic partner for resellers. Partners now bring Sangoma into larger, more strategic deals rather than cherry-picking low-hanging fruit. The 39% quarter-over-quarter increase in new pipeline creation, with deals over $10,000 MRR up 72% versus FY25 averages, proves the strategy is working. This partner loyalty becomes a self-reinforcing moat—once partners invest in training and integration, they resist switching to competitors.

Financial Performance: Evidence of Structural Improvement

Sangoma's Q1 FY26 results require careful interpretation because they reflect deliberate strategic choices rather than underlying weakness. Revenue of $50.8 million declined $8.5 million sequentially, but $7.4 million of that drop came from the VoIP Supply divestiture. The remaining $1.1 million sequential decline represents the final unwinding of pre-2021 "tiny customers" on three-year contracts—a cleansing process that improves revenue quality. Excluding VoIP Supply, year-over-year revenue declined only 3%, but gross margin expanded from 67% to 76% pro forma. This trade-off—sacrificing low-quality revenue for margin expansion—is exactly what investors should want from a transformation story.

The Core segment's 6% year-over-year decline to 74% of total revenue masks powerful underlying momentum. Management explicitly stated this reflects longer sales cycles for larger MRR deals, which averaged over $10,000 and grew 39% sequentially. These deals have 6-12 month implementation cycles, meaning Q1 bookings won't appear in revenue until Q3 or Q4. The 39% quarter-over-quarter pipeline growth, with 62% now representing "higher velocity volumetric business," indicates the sales team has rebuilt capacity and is filling the funnel with bigger, stickier customers. This is classic enterprise software dynamics—revenue lags bookings, but the quality of revenue improves dramatically.

Margin expansion validates the strategy shift. Gross margin hitting 72% (with management guiding to 75% for the remainder of FY26) represents a structural step-change from the hardware-reselling days. Adjusted EBITDA margin of 16% includes $0.4 million in one-time ERP implementation costs; the underlying 17% margin is already within the FY26 target range of 17-19% despite revenue being at a temporary trough. This implies massive operating leverage as revenue re-accelerates—incremental revenue should flow through at 70%+ gross margins with relatively fixed operating expenses guided at $30 million per quarter.

The company generated $3.2 million in free cash flow in Q1 despite the revenue headwind, and TTM free cash flow of $32.95 million represents a 4.8x multiple at the current $5.29 stock price—a compelling valuation for any software business, let alone one with 90%+ recurring revenue.

Balance sheet strength provides strategic flexibility. Debt reduction from $69.1 million to $42.8 million year-over-year, combined with $4.9 million in operating cash flow (60% EBITDA conversion, temporarily impacted by a resolved ERP payment processor issue), demonstrates that Sangoma is self-funding its transformation. The company expects 90-100% EBITDA conversion for the remainder of FY26. With no dividend and an active share repurchase program that has already retired 2.1% of shares, capital allocation is disciplined. CEO Charles Salameh's explicit commitment—"What I won't do, and I've committed to this, is I won't dilute the company"—signals that any future M&A will be accretive, not transformative for the wrong reasons.

Segment Dynamics: Core Growth Engine vs. Adjacent Cash Cow

The new segment reporting provides crucial transparency into where value is being created. Core segment revenue declined 6% year-over-year but represents the entirety of Sangoma's growth investment. The metrics that matter for future performance are moving in the right direction: MRR bookings up 6.4% year-over-year, deals over $10,000 MRR up 72% versus FY25 averages, and pipeline velocity increasing. The wholesale channel, though nascent, has already secured its first significant deal after only six months, suggesting Sangoma's platform is resonating with carriers and CLECs who want to private-label communications services.

Adjacent segment growth of 6% year-over-year, driven by the revitalized Trunking-as-a-Service offering, serves a critical strategic function: it generates stable cash flow with minimal investment, funding Core segment R&D and sales expansion. This is the classic "cash cow and growth star" portfolio management that successful conglomerates employ. Adjacent's stability (likely 60-70% gross margins) provides ballast while Core cycles through transformation headwinds.

The Prem business is the hidden gem. With over 60% year-over-year pipeline growth, this on-premise PBX business is benefiting directly from competitor exits. Charles Salameh noted, "we had a Mitel exit, we had an Avaya exit. We pounced in, and we have a 60% increase in our pipeline just in a short period of time." Why does this matter for a company pivoting to SaaS? Because every on-premise customer today is a cloud or hybrid migration opportunity tomorrow. Sangoma is aggressively pricing to win market share—"I want to woo these partners back to us in droves"—creating a "double-edged opportunity" to first harvest on-premise revenue, then migrate those customers to higher-margin UCaaS over the next five years. The blended churn rate below 1% proves that customers, once won, stick around for the journey.

Competitive Context: Winning Through Integration While Giants Falter

Sangoma's competitive positioning is counterintuitive: it's winning not by outspending larger rivals on AI or enterprise sales, but by excelling where they are structurally weakest—the mid-market hybrid deployment.

Scale disadvantages are overstated. Yes, RingCentral has 10x Sangoma's revenue and a powerful brand in enterprise UCaaS. But RingCentral 's gross margins are 70.75% versus Sangoma's 72%, and its operating margins are compressed by massive S&M spend targeting enterprise accounts Sangoma doesn't pursue. Sangoma's asset-light model—capitalizing only $1.5 million in development costs per quarter—allows it to compete on price while maintaining margins. RingCentral 's integration strengths are offset by higher TCO, which matters enormously to the cost-sensitive SMBs and channel partners Sangoma targets.

8x8 and Ooma represent direct threats but have narrower moats. 8x8 's 66.67% gross margins trail Sangoma's, and its focus on simplicity over customization creates openings for Sangoma's open-source flexibility. Ooma 's 61.02% gross margins and consumer/SMB focus make it a competitor for basic telephony, but it lacks Sangoma's hardware integration and hybrid capabilities. Sangoma's 19% ARPU increase versus Ooma 's likely single-digit gains suggests Sangoma is moving upmarket while Ooma commoditizes.

Five9 leads in AI but can't match Sangoma's integrated hardware. Five9 's 55.20% gross margins reflect its software-only model, but it misses the on-premise opportunity entirely. While Five9 invests heavily in AI for contact centers, Sangoma is "increasingly incorporating both in-house and third-party AI innovations across our cloud, hybrid and on-prem platforms," focusing on practical AI that enhances existing deployments rather than requiring rip-and-replace. This pragmatic approach may lag in hype but wins in customer retention.

The real competitive shift is the legacy exodus. When Mitel filed Chapter 11 and Avaya pulled back, they left behind millions of installed PBX seats and thousands of channel partners seeking stability. Sangoma's 60% pipeline increase isn't accidental—it's the direct result of being the only scaled alternative that can support both on-premise maintenance and cloud migration. This window won't last forever; eventually the market consolidates around 3-4 winners. Sangoma's transformation positions it to be one of those winners, but only if it converts pipeline to revenue faster than RingCentral or Microsoft can build competitive hybrid offerings.

Outlook and Execution Risk: The Bridge to Re-Acceleration

Management's FY26 guidance—revenue of $200-210 million and EBITDA margins of 17-19%—embeds critical assumptions that investors must evaluate. The revenue range implies 0-5% growth versus TTM $236.69 million, which seems conservative given the Q1 trough. However, this guidance is designed to be exceeded: it assumes sequential growth beginning in Q2, accelerating to year-over-year growth in Q3/Q4 as 6-12 month MRR deals convert.

The $2 million incremental SG&A investment planned for coming quarters is the key swing factor. Management isn't waiting for revenue to recover before investing; they're plowing cash flow into sales capacity and partner enablement now, confident that unit economics support the spend. Why? Because the average revenue per customer is up 19% year-over-year, and the NPS score improvement of nearly 300% indicates higher lifetime values. If this investment yields the projected pipeline conversion, Q3 and Q4 will show 10%+ year-over-year growth, making the full-year $210 million target beatable.

Gross margin guidance of 75% is achievable because VoIP Supply's exit removed low-margin third-party hardware, and bundled product attachment rates are rising as competitive displacements increase. Every legacy Mitel seat that Sangoma captures comes with an IP phone sale (proprietary hardware, 60%+ margin) followed by a migration opportunity to UCaaS (80%+ gross margin). This hardware-to-software flywheel is the economic engine that justifies the transformation pain.

Execution risk centers on two variables. First, can the rebuilt sales team close larger deals efficiently? The 39% sequential increase in big deals suggests yes, but these deals have longer cycles, creating quarterly volatility. Second, can Sangoma integrate AI quickly enough to compete with RingCentral and Five9 ? The commitment to "selective AI-driven software acquisitions" and 90% of R&D on new capabilities is promising, but execution is unproven. A stumble on either front could delay re-acceleration and trap the stock in its current valuation range.

Valuation Context: Pricing the Transformation, Not the Legacy

At $5.29 per share, Sangoma trades at an enterprise value of approximately $220 million (including $42.8 million in net debt). This represents:

• 0.73x TTM sales of $236.69 million, but pro forma for the VoIP Supply exit, forward sales are closer to $200 million, implying a 1.1x forward multiple
• 4.8x TTM free cash flow of $32.95 million, though Q1 run-rate of $3.2 million suggests this may be a peak
• P/OCF of 3.76x, exceptionally low for a software company
• EV/EBITDA of 5.11x on TTM basis, but closer to 6-7x on FY26 guided EBITDA of $34-40 million

Peer multiples provide context. RingCentral trades at 1.01x sales with 70.75% gross margins and negative free cash flow. 8x8 trades at 0.37x sales with 66.67% gross margins and minimal growth. Ooma (OOMA) trades at 1.15x sales with 61% gross margins. Five9 trades at 1.28x sales with 55% gross margins but positive growth. Sangoma's multiple sits at the low end despite having the highest gross margins (72%) and positive free cash flow, suggesting the market still prices it as a hardware distributor rather than a software platform.

The balance sheet is investment-grade for this size. Debt/equity of 0.24, debt/assets of 0.17, and interest coverage of 1.71x (suppressed by one-time costs) show manageable leverage. The current ratio of 0.87x and quick ratio of 0.69x are tight but typical for a recurring-revenue business with minimal inventory risk. With $0.50 cash per share and $1.09 in free cash flow per share over the last year, Sangoma has the liquidity to self-fund growth or make selective acquisitions without dilution—a key differentiator from money-losing peers like RingCentral and 8x8 (EGHT).

What matters most is the margin-adjusted multiple. If Sangoma achieves 75% gross margins and 18% EBITDA margins at $210 million revenue, it would generate $37.8 million EBITDA. At a 10x EBITDA multiple—conservative for a 90% recurring business with negative churn—the stock would be worth $8.50, representing 60% upside. The current price implies perpetual stagnation, which is inconsistent with 39% pipeline growth and a 60% increase in competitive displacement opportunities.

Risks and Asymmetries: What Could Break the Thesis

The primary risk is pipeline conversion failure. Sangoma's transformation thesis rests on converting larger MRR deals (6-12 month cycles) into revenue. If macro conditions cause SMBs to freeze communications spending, or if implementation challenges delay go-live dates, Q3/Q4 acceleration could disappoint. The 39% pipeline increase is impressive, but management acknowledged "the broader SMB market conditions can influence deal timing." A 2-3 quarter delay in large deal conversion would trap the stock below $6 as investors lose confidence in the re-acceleration story.

Competitive response from scaled players could compress margins. While Mitel and Avaya (AVYA) are retreating, RingCentral and Microsoft Teams are aggressively targeting the mid-market with bundled offerings. If RingCentral decides to sacrifice margins for market share, or if Microsoft (MSFT) integrates Teams deeply enough to replicate Sangoma's hybrid capabilities, the competitive displacement opportunity could evaporate faster than anticipated. Sangoma's cautious pricing approach—"I want to woo these partners back to us in droves"—risks leaving margin on the table if competitors don't reciprocate.

Technology lag in AI could become a structural disadvantage. Five9 (FIVN) and RingCentral (RNG) are investing heavily in native AI for contact centers and analytics. Sangoma's approach of "incorporating both in-house and third-party AI innovations" is pragmatic but could result in a less compelling product experience. If AI becomes the primary purchase criterion rather than total cost of ownership or customization flexibility, Sangoma's open-source moat may not be enough. The risk is particularly acute in CCaaS, where AI-driven routing and sentiment analysis are becoming table stakes.

Integration risk remains despite Project Diamond completion. The new ERP and CRM systems went live in May 2025, and Q1 showed a temporary working capital hit from a payment processor issue. If additional integration problems emerge—data quality issues, partner onboarding friction, or internal adoption challenges—the operational efficiency gains could be delayed. This would stall the margin expansion story and raise questions about management's execution credibility.

The upside asymmetry is significant. If Sangoma captures just 5% of the $3.3 billion on-premise market, that's $165 million in additional revenue—more than double its current size. If the wholesale channel scales as quickly as the first $10K MRR deal suggests, Sangoma could add another $5-10 million in high-margin MRR within 18 months. And if the migration thesis plays out, converting even 20% of the Prem business to UCaaS over five years would create a recurring revenue compounding machine with minimal customer acquisition cost. The stock's 0.73x sales multiple prices in none of these upside scenarios.

Conclusion: The Investment Decision in One Question

Sangoma has completed the operational transformation that typically precedes a software re-rating: it shed low-margin hardware, unified its platform, rebuilt its sales channel, and positioned itself to capture market share from failing incumbents. The financial evidence is clear—72% gross margins, sub-1% churn, 39% pipeline growth, and a rock-solid balance sheet. The strategic evidence is compelling—a 60% increase in Prem pipeline, a wholesale channel that is working faster than expected, and partner loyalty that competitors can't replicate.

The investment case distills to one question: Do you believe management can convert its surging pipeline of larger MRR deals into recognized revenue within the next two quarters? If yes, Sangoma will deliver Q3/Q4 year-over-year growth that validates the FY26 guidance and forces the market to re-rate the stock from hardware multiples to software multiples, implying 50-60% upside. If no, the transformation story becomes a value trap—well-run but unable to scale, deserving of its current 4.8x free cash flow multiple.

The risk/reward is attractive precisely because the market demands proof before paying a premium, yet the proof is accumulating in metrics that matter: deal size, pipeline velocity, margin expansion, and competitive wins. For investors willing to underwrite execution risk in exchange for a margin of safety on valuation, Sangoma offers a rare combination of operational transformation, market tailwinds, and a balance sheet that can weather delays. The next two quarters will determine whether this $5 stock is a hidden gem or a polished stone.