Sangoma Technologies and the Future of Telco

I own many shares of Sangoma Technologies (STC symbol) and have been wondering lately how the increasing use of Skype and the growth of Google mobile would impact the voip products of companies such as Sangoma and Digium.

So I emailed the CEO of Sangoma and got a reassuring answer. (I've omitted the personal comments including in our email).

I wrote to David Mandelstam;

ME: I'd like to ask you a question that I've been worrying about for a while. I don't understand how the growing use of Skype (now even in many small businesses) will impact on Sangoma. People who use skype have no need for sangoma products, right?

DM: Sangoma's role in Voice over Internet Protocol (VoIP) like Skype is that we provide a connection from the VoIP system to the plain old telephone system (POTS) that has been round for decades. Whenever you do a Skype Out call to someone not on their computer, you go through a gateway to the POTS. In some situations, you may be making the call through a Sangoma card!

VoIP is sexy and in the news, but as you know from Skype not every call is reliable. The most successful VoIP systems use voice on a network inside the office, where the line quality is controlled. These systems use the POTS for calls outside the office because it is reliable and has high voice quality. That kind of system is where you will find Sangoma products.

As long as the public switched Telephone network (PSTN) is around, there will be a need for Sangoma products.

The huge opportunity for us is that traditional PBX systems are being replaced by PCs running voice s a software service. All of these systems need PSTN POTS gateways, and we have a very powerful set of unbeatable advantages in that space.




ME: Thanks much for your answer to my question. But what I'm worried about is that people will increasingly be calling each other computer to computer. And the voice quality for Skype is much better there, is that correct? They will bypass POTS altogether. So in this situation, Skype is a direct competitor to Sangoma right? There would not be any reason for a Skype person doing computer-to-computer calls to need Sangoma products?

I realize that such a scenario may take years to develop, but with the rumour of Google purchasing Skype, or partnering with them, this scenario may be much sooner than we think?

DM: There is no question at all that packetized voice over data networks, like Skype, is the wave of the future. Paradoxically, it is the reason I think we will do well.

As a relatively small niche player, it is hard for us to compete with Microsoft's Office Communication Server or similar offerings from IBM, Nortel etc. These guys are concentrating on the gee-wiz aspects of unified communications and they will certainly be duking it out in the marketplace.

However all these systems need access to the PSTN at least for the next decade or two, probably much longer, and this requirement is right under their radar. We don't care who wins in the war, we just care that we can be there to meet their PSTN needs. I put my bets on Microsoft, but that is irrelevant.

PC to PC communication is wonderful, and we use it a lot in our business. We have 6 hour video conferences with a colleague in Sydney, for instance. But even I use Skype and other VoIP services sparingly for business, and the call is very often Skype Out to an ordinary phone.

You are right in that one of the promises of VoIP is improved quality. As you say, a good Skype-to-Skype call is magnificent. A bad Skype-to-Skype call is just impossible. And you never really know which one you are going to get.

We don't have to be a $5Billion company to do well by you and ourselves. We know that for the next 15 years at the very least, we will have a very attractive market, one that by rights we should be very successful in.


ME: Thanks much for your comments about this.

Mine is Not a Diversified Portfolio

About a year ago, I re-allocated my portfolio and placed over 85% of it into just two stocks. I don't really believe in the theory that a diversified portfolio is the best strategy. At least not until my portfolio is big enough that I'm happy with lower growth in return for possibly more safety.

For now, I'm looking for high growth. So I chose the two stocks carefully. One a large cap, and one of the largest companies in the world, and trading around $500, the other, a tiny company with under $15 million in annual revenues and trading for around $1.20 per share.

The first stock is Google. Google seems like one of the very safest stocks out there, yet it also delivers high growth, no debt, lots of cash on hand (9 billion) and an increasingly non-US-based revenue base (over 50% this year). Over the year, I've watched it climb to $747 per share and then take a sharp nosedive to under $450. But I feel very safe owning this stock. Their quarterly numbers are due this Thursday (April 17) and I think the results will reassure everyone that growth in online advertising is not stalling anytime soon. The stock is trading many times cheaper than Yahoo (P/E and PEG wise) but is a greatly superior revenue model.

The second company I threw all my savings in is a tiny one - Sangoma Technologies (STC.CVE). Like Google, they are growing quickly (and still much faster than Google at this early stage), have no debt, have lots of cash on hand, and have an incredibly low P/E ratio given their growth rate and near-term prospects. Their stock has also been pounded down from a very short-term high of about $1.70 last year to about $1.25 today. But this stock is completely under the radar, no one seems to know about it. There are no funds looking at stocks with a market cap of under $50 million, so this stock trades very sparsely but continues to show astoundingly pleasing growth rates each quarter.

Recently, with the rumor that Google may be talking to Skype about a partnership and buyout, I got to wondering how this would impact on Sangoma's business. So I emailed the CEO of Sangoma, and he was very kind to answer me.