Q1 2020 Earnings Call

Good day, ladies and gentlemen, and welcome to the edge houses Q1, Twentytwenty Conference call [laughter] as a reminder, today's conference is being recorded.

Last time I would like to turn the conference over to Steve Sadler, Chairman and CEO. Please go ahead Mr. sadly.

Good morning, I'm here today with vis vis the.

Global President.

Brexit VP finance.

Well I may be P. legal counsel and Sam added your VP corporate development before we begin all talk read our forward display Mark certain statements me.

Maybe forward looking by their nature, such forward looking statements are subject to various risks and uncertainties, including those in and shows is continuous disclosure problems such as its half which could cause the company's actual results and experience to differ materially from anticipated results rather expectation.

Undue reliance should not be placed on these forward looking on these forward looking information pieces and the company has no obligation to update or revise any forward looking information, whether its results up new information future events or otherwise.

[noise] X taught Doug will now give an overview of the financial results.

Yesterday, and Jeffs announced its first quarter results for the period ended January 31st 2020 revenue for the first quarter was 110.7 million, a 28.6% increase compared to revenue of 86 million in the first quarter of the prior year, primarily Israel result of incremental contributions from acquisitions.

Red results from operating activities were 30.8 million compared to 25.8 million in the prior years first quarter and reflect the impact of changes in product mix on gross margins operating expenses and 47.3 million reflects incremental operating costs related to newly acquired operations, an increase noncash amortization charges.

Net income for the quarter was 16.1 million or 29 cents per diluted share.

It's 1.6 million and special charges, and approximately 3 million, an incremental amortization charges related to acquisitions.

Adjusted EBITDA for the quarter.

Was 35.3 million or 64 cents per diluted share compared to 26.3 million or 48 cents per diluted share last year with the increase being attributable the incremental revenue contributions from acquisitions as well as the impact of depreciation of right abuse assets as now required under the new lease accounting standard underwrite for 16.

Cash flows from operating activities, excluding changes in working capital.

35.2 billion compared to 27.1 million last quarter, an increase of 29.7%.

As a result venture has closed the quarter was 116.3 million in cash cash equivalent some short term investments compared to $150.3 million at October 31st.

Cash balance was achieved after payments of 6 million for cash dividends at 48.9 million net of cash required for acquisitions concluded in the current quarter and 500000 for acquisitions.

Closed in prior years.

On December 31st 2019, and she has completed the acquisition of dialogic and commenced integration into its asset management and interactive segments.

Dialogic reported revenue consistent with expectations, which is typically lower in January and was not accretive to earnings in the first month following acquisition.

Restructuring initiatives have been implemented that should improve operating results in the coming quarters.

Yesterday, the board of directors approved the 22.7% increase to the company's eligible quarterly dividends from 11 cents per common share to 13.5 cents per common share payable on may 29 to 2020 to shareholders of record at the close of business on May 15, 2020, and Jeff has now increased dividends each of the past 12 years by over.

10% each year.

Well now turn the call back to Mr. Sadler. Please.

Thank you Doug as Doug noted, we continue to have a strong cash balance and minimal bank debt. Our cash flow was strong with revenue growth revenue was up 28.6% with only one month of dialogic included compared to the prior year Foreign exchange had a negative impact.

On revenue of 2 million or having a positive impact of 1.5 million on costs, resulting in negative operating impact of 500000.

I've also mentioned, we adopted I far 16, which most companies.

I had to do on years beginning January one 2019. So many of you already know that a lot of companies have been doing this for year.

Therefore edge helps has adopted it because our your read was up for our fiscal years October 31st. So this is the first quarter that we adopted IRS 16.

It added about 2 million, an EBITDA or Pope our four cents per share, resulting in an adjusted EBITDA increase of 33% using the prior accounting standard our adjusted EBITDA would've been approximately a 25% increase in it.

Which is still a significant increase.

Wanted to come a little bit comment a little bit on cobot 19, everyone seems to be having questions about it.

And chose does not have much impact to date on the covert 19, but there could be a global business develop impact.

We are distributed organization in terms of premises and staffing therefore limited concentration a lot of our staff have work from home sorts not form for us to do so we've had a high mix. So we have a higher mix of recurring revenue with communication products, possibly we could deploy capital and act.

Positions at lower valuations.

Understanding opportunities and risks is key at this time, maybe demand for video on contact centers will increase as a result of this virus. We do have a small presence in Italy, but not a other high risk geographies in summary, we believe our exposure is limited beyond it over.

All global impact.

As to acquisitions in terms of acquisitions completed we completed dialogic on December 31, partway through the quarter.

[noise] restructuring was done at the end of January and therefore costs.

Remained in the month of January in this business also January is traditionally a lower revenue month for dialogic.

Revenue was approximately 3.5 million in January for dialogic and with restructuring.

Costs done late in January the business had an operating loss of approximately 1 million in the month.

We expect improved revenue and performance from dialogic in Q2, the dialogic business will be EBITDA positive in Q2 with a further EBITDA increase expected in Q3, we continue to focus our capital deployment on our capital deployment activities.

Well as improving our operations and growth in future years.

I will now open the call to questions.

Thank you, ladies and gentlemen, if you would like to ask a question on today's call. Please signal by pressing star one on your telephone keypad. If you are using a speakerphone. Please make sure. Your mute function is turned off to allow you smelter, which I'll equipment. Once again it days saw one.

Ask a question, we'll now take all first question from Daniel Chan of TD Securities. Please go ahead.

Hi, Good morning, Steve The energy segment grew by about $5 million year over year.

I thought the.

We are forecasting acquired revenue.

Above that level, suggesting that maybe organic growth was negative in that segment.

Can you comment on whether my assumptions are correct and whether the organic growth was negative and if that's the case, maybe can give some color and what's happening there.

I don't think the growth was a negative it's up 5 billion. So it looks like it wasn't negative.

I think.

There was a little less hardware in that division in the quarter, so that maybe.

Make your numbers a little bit out, but maybe your number with just a little bit too high as well.

Okay fair enough.

And then you commented on potentially deploying more capital given the market volatility just want to get an update on you are you seeing some of the.

Valuation volatility in public markets, reflecting some of the targets you're looking at and whether you're a funnel is getting a wider as a result of it.

Not really I get when the public markets were roaring up until a few weeks ago, we didn't really see in the marketplace that we were at.

Prices, increasing that much and also today, we don't see prices the fighting that much it's pretty steady as it goes in the marketplace that we're in.

Okay. Thanks, I'll pass away.

Thank you, we'll now take our next question from Paul steep of Scotiabank. Please go ahead.

Morning, Steve I think you already gave us the answer but let's be clear for dialogic is there anything unusual that we may be slow us getting to full normal run rate. It sounds like by Q3, you're hoping to have it on plan is that the right.

Take away from the comment and then maybe also talk a little bit a bit uptick even though it's a smaller deal you called it out in the M.D. days wells needing a bit of time to get on plan.

Yes, you know we've always talked about in the first quarter. After an acquisition, we generally lose money second quarter, we generally are profitable.

Third quarter generally halfway to normal margins and in the fourth quarter at the normal margins.

And last year, we had two acquisitions, where they were looking at restructuring and get it before we acquired up or at least announced that and started that process. So we actually.

Started one quarter last year, which was a benefit but it does draw a little bit confusion to our normal model.

I would dialogic, we closed December 31st December basically the month of Christmas as lot of people away a lot of people, taking holidays, and we divided that company into two parts one going to the asset management group. The other one going to the I am GE group. So are the group here.

HR Vince I spent a lot of time in January figuring out the proper actions. The take so we did not take out any costs until the end of January so all the call. Their full costs are in January which is a slower month for dialogic, but we did take it out at the end. So we do expect the goal to the normal.

Model profitability in the next quarter or low the first quarter was.

Only a month it wasn't actually a quarter, but we do expect to be profitable in the next quarter and further profitability in the third quarter at full profitability in the fourth quarter.

Okay.

An uptick anything there are just if it's as norm. It was only because you called it out the document that sort of caught my eye.

It's pretty much the same pattern there wasn't much restructured would be done there some but it was again that time of year, where you do the product you go talk to them. It is France, where it could take longer to do some of the changes you want to do so it's progressing along basically the same way, but it was smaller so.

The impact is smaller for it it was about breakeven in the in the first quarter, maybe a slight loss, but not anything significant certainly it did not add to the profitability.

Which sort of says over the next couple of quarters, we would hope that our EBITDA would improve just by those two acquisitions doing what normally we do when we do acquisitions.

Okay, and then maybe for both you and Vince giving get your impression we're still a couple of months shy of getting to the one year anniversary for video in east feel.

Actually there are on plan for margin maybe talk about what we can think of it for hopefully upside from the organic initiatives has been working hard.

Yes, we've got a lot of things in place I'll, let Vince talked about a little bit.

But as you know there's quite a challenge there because we have to change we had to change the culture. We had to now put in some new techniques for selling.

A lot of that's being done and I'll, let Vince give you a little more detail some of the things he's been working on lately.

Yes, so on the videos stuff, we've got some very interesting use cases there.

Some of the ones that are getting good traction around tele health and using video and Tele health use case, so thats.

Putting a big push there there's lots of.

Demand, we think in that area and we also use video a lot to enable other tech companies. So we've done a number of partnerships there and then last quarter I talked about rolling video out globally. So weve.

Started at the higher sales direct salespeople in Europe, and mint and little bit in our Australia, New Zealand market to cells video into these unique use cases. In addition to selling video into a contact center use case. So that's all you know well underway and we've got we've got work to do that we're getting traction there.

So I think as we've also said in the past.

It's we the profitability is not a problem. That's the first thing we do is good.

Acquisitions that we buy profitable and now we're starting to invest a little bit to improve the revenue growth. There I'm, we're on track to do that.

Great last.

Last one I guess for me, just maybe talking a little bit about.

How you've seen the progress with teams, where we are in terms a getting product to market. It looks like uptake continues there and.

Because.

Oh progressing well I think we're pretty much there with all our work on teams.

And I.

You know I I see that as a positive catalyst going forward.

Great. Thanks, guys.

Thank you ladies and gentlemen, if you find that your question has been answered you remove yourself from the Q by pressing star too.

Reminder, to ask the question. It is stall one we'll now take our next question from Depop go shop of Stifle GMT. Please go ahead.

Hi, guys. Good morning, Thanks for taking my questions.

Steve I wanted to start off with Dialogic I can you walk us through.

The seasonality that business.

I used to recall it.

Telcos, how to budget flush it in December.

What's kind of the seasonality should we expect there.

So in general I mean, there year us on a calendar year.

Ours is it so it's a little bit different.

But seasonality there for art there first quarter generally was their lowest which includes January it was January February March.

There last quarter is generally the better quarter, because that's when again telco, sometimes have extra budget that they spend so first quarter I think will be the for us will still be the lowest quarter pretty even in the middle the second and third quarter and probably the fourth floor.

Order will be a little higher than any other quarter. So there is a bit of a seasonality there yes.

For Q4 are we looking for like higher than 30%.

Have you annual revenue in Q4.

I wouldn't say, it's 30%.

Well I would say it's about 30%.

You know maybe go 15, you know the middle two are pretty even 2020 and 37 lumber like that that's not the exact.

Does that exactly but that's sort of what we look at so if you usually do 25, a quarter first quarter would probably 15 between the second and third maybe third a little better. The second so 2025 thirtyth. It does have that type of seasonality at least they had it but then we do things a little differently because sometimes they would.

Discount to get revenue and a quarter and we generally don't do that.

We're happy to take it next quarter, rather than take less this quarter.

Okay that makes sense. Thank you for that's helpful. And then just on the Dol logic is there any kind of cyclical impact from from five degree that that we should be thinking about or is it just a different side of the telco business.

No I don't think there is they've done a lot of work on Fiveg, So which is positive for us, but I don't they could change the seasonality or anything.

Okay. Okay, and then I had a follow up for Vince some good details last night on on the go to market strategy.

Are you guys able to give us.

Kind of a percentage of revenue today on channel versus direct sales, almost total business and and how that might evolve going forward.

Yes, I mean as I mentioned in the yesterday in the meeting in eight at ATM.

We are putting a little bit more emphasis on direct than we did historically, but it's not that we're ignoring the channel or our OEM partnerships there still important.

But we're trying to raise the direct mainly because a lot of that.

Verticals customers want us to go direct you know there it's a better.

Sales execution, sometimes in the mid to larger account so I.

I would say our percentage towards direct is growing.

Over the last several quarters.

At the end hopefully for me it'd be nice to have a balanced 50 50 between channels in direct today were little bit more towards channels.

It.

Varies by age.

It also varies by each one of our division. So it's kind of hard to answer that question on a global basis, because each one of our even in each one of our geography that slightly different right. It makes sense is there or is there an appreciable margin difference.

When you go direct versus channel.

And what kind of magnitude I think you would say the margin is better direct but the costs are higher as well. So if you're talking margin like when you do have a channel you do have to give the channel partner pardon the part of the selling price so the margins better direct but the costs or.

Higher for direct as well.

Thank you cash margin if we just think of cash margin how would that please.

I think directs a little better but you do have to have a good demand gen. At some of the other things Vince is put in place so were better prepared to do that now, but the margin direct is probably a little better.

But it's a little riskier like Theres downturns recession, you've got to direct salespeople, who might have a decline in revenue when it's in the channel it's not our problem.

So it's a little higher risk on the direct as well.

And therefore, the margin should be a little bit better the net margin as you call it should be a little bit better.

So it is.

And Deepak into direct is that.

You typically have the bigger you handle the bigger deals indirect in terms of the size of the customers. So generally the channels are good in the mid market.

And then the upper Midmarket and enterprise is it better handle direct.

Okay, Okay that makes sense and then segway into cash.

Cash before working capital group quite strongly there was a big working capital hit in the quarter can you kind of walk us through what those moving parts.

There relative to talk to that is a problem when we emphasized before working capital because the way we do acquisitions.

And the way the accounting works can cause confusion, there because sometimes what we do we do a lot of changes are they have done changes are they held payables.

We buy it reduced the price, but then we do pay it out in the let's say 90 days following we sort out old liabilities. They had so it can be confusing.

And it can be confusing the other way if once you've gotten that then your cash silicon look better.

Well, because then you pay those out people think thats the trend when it really was a onetime thing with the acquisition it will change with acquisitions, but datalogic was a bigger ones. So.

We cleaned up some of their liabilities there that we don't have any.

Et cetera.

Should we then expect Oh, a swing back.

The positive and then a normalization or.

Just a normalization and you have to absorb some of that structural shift.

It's hard to say it depends on what other acquisitions, we do but I think a more normalization is probably the way you should think about it and hopefully that will be conservative.

Okay excellent. Thank you for taking my questions.

We'll talk to answer.

Thank you, we'll now take our next question from Stephanie price of see IVC. Please go ahead.

Good morning.

Can you talk a bit about the growth that you've seen in video since acquisition and whether you've seen any changes in the sales pipeline just given cobot 19.

Well you know the Carbonite seems pretty early still.

Early in the cycle you mean, if you looked at three months ago, known even mentioned that so again, we haven't seen we've seen interest we're taking some actions to see if we could approve revenue in that area for us for example, going to our customers and offering them a pre trial because.

There are customers anyways, so why not give an idea of other products that we just got.

And also remember what we said from last year. After we bought it up a lot of time was that Rightsizing the company to make it profitable we weren't worried and we didnt try to put a lot of things in for growth that just started in November. So it's still quite early because as we approach acquisitions, we get them very.

Profitable and then we see how much of that profit we should reinvest to grow so we've done a profit and now we're doing the reinvesting to see if we can grow.

But that just started in this quarter it hasn't been going on for six or nine months fair enough. Okay.

And then with increase in the dividend can you talk a bit about your thoughts on capital allocation here.

Yes, I mean, it's an interesting market what happens with covert 19 to valuations is subject to break debates our acquisition pipeline is sort of normal I don't think it's going up or down.

So we just keep plodding, along and we'll see what happened.

Fair enough. Thank you very much.

Thank you once again, ladies and gentlemen, if you would like to ask a question. It is stall one we'll now take our next question from Paul.

Of RBC capital markets. Please go ahead.

Oh, thanks, very much and good morning, I just wanted to hone in on a license revenue for a moment it looked like in the quarter. It's.

A multiyear high or perhaps a record high what do you attribute the strength to in the quarter and then do you see license at the and then like at the high $20 million range of sustainable going forward.

Yeah, we had some a couple of good deals in the quarter, which again were license revenue deals it's hard to say because as you know, we're going more to subscription or recurring revenue.

So.

So I don't like making predictions on that because it will be what will be in this sense said you know we do the right thing for what the customer wants and it doesn't matter to us soul.

Again, we don't really emphasize a lot quarter to quarter, we've had pretty consistent but that's not our focus our focus is the you know build a business for the longer term.

Justin Delving, a bit further like game, where those deals in the pipeline for a while or are they on.

Randy because some of the new demand Gen investments that you've done a last couple of quarters.

So you got the answer there is both they'd be near for wall, but our demand Gen is being there for a while too. So you know both are both are helping and now you've got the covert 19 virus that going to do that going to hurt that are people going to slow down there's a lot of moving parts.

Both has helped get.

As we said we generally you should think of the business is low single digits, what we're trying to improve on that.

Okay, and then and then that date looking at hardware revenue had it dropped in the quarter I assume that was related to acquisitions.

On you know as maybe you exit or run off some at hardware revenue and it shouldn't just said that the new normal or was it a one off on that led to that drop this past quarter.

I would say, it's probably a one off drop in the quarter.

That area, which is lower margin can be lumpy.

So the quarter was lower than usual and I wouldn't project future quarters to continue at that amount, but you may have some quarters in the future that are lower but you may also see some that are.

Higher by a fair amount depending when.

We deliver hardware I remember a lot of our software comes in the deals that end customers want US also be the hardware supplier, we don't make the hardware.

We just buy and sell it to them because they want to buy from one company.

There's a saying they want one throat to choke. So unfortunately in some cases, that's our throat.

Uh huh.

And that's that's helpful. B M inked and turning to ask steel and he can you provide an update in the IP product and I could TV product development and that you know how that's progressing and if you still expect a launch I think its second half of this fiscal year.

Absolutely you've got it right, it's progressing nicely and we still expect the launch in the second half of this fiscal year.

Have you seen the orders for that product and increase as you get closer to two entre they've been pretty stable.

We've had some orders from customers in the past we have interest, but you know orders or when you have a product and sell them I don't count orders before that too soon because people don't.

The other ready to buy I don't count it so I wouldn't say, there's the interest is increased but the orders have been pretty stable from sort of the initial group, who who showed interest the started the project off.

Hi, Paul you remember how that works.

Sorry, I was just saying that works as well once you launch the IP TV in the customer buys it as they add subscribers, we get more revenue. So that's how that works. So you plan to feed and in it.

<unk> silver overtime.

Yeah, you're going to grow.

Once it gets it.

Huh.

Hi, Thanks for taking my questions.

Thank you, ladies and gentlemen, once again, if you would like to ask a question. It is stall one.

Take a brief moment hello, everyone and opportunity just signal for questions. Thank you.

That doesn't seem to be any further questions. At this time I would like to turn the conference back over to the speakers. Thank you.

Well. Thank you everyone for attending the call and your continued support.

We hope to build on our positive start to the fiscal 2020 year.

Ladies and gentlemen, this concludes today's call. Thank you for your participation you may now disconnect.

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