Q2 2020 Enghouse Systems Ltd Earnings Call

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Good day, ladies and gentlemen, and welcome to the edge How's This Choo Choo 2020 conference call.

I Wonder if today's conference is being recorded.

I'd like to turn the conference over to Mr., Steve Sadler, Chairman and CEO. Please go ahead mr. side.

Good morning, everybody.

In this area so to get something I'm here today with taught me repeat legal counsel and sad manager VP corporate development.

That's right and Vince said are on the full remotely but are also available to answer questions.

Before I begin over towards read the forward disclaimer certain statements made maybe forward looking by their nature such forward looking statements are subject to various risks and uncertainties, including goes in terms of country wants to soldier, probably such as it may I ask which could cause the company's actual results and experience could differ materially from anticipated results where their expectations.

Undue reliance should not be placed on these forward looking information statements in the company has no obligation to update or revise any forward looking information whether as a result at new information future events or otherwise.

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Thanks, Todd Dog will now give an overview of the financial results.

Thanks, Steve.

Yesterday on chokes announcers Limiteds second quarter financial results for the period end of April Thirtyth 2020, all the financial information is in Canadian dollars unless otherwise indicated.

Can you financial and operating highlights for the three months ended April Thirtyth 2020, compared to the three months ended April 32019 are as follows.

Revenue grew 58% to 140 point Ninemillion.

Results from operating activities increased 73.8% 46.3 million.

Net income increased 63.8% to 27.1 million worth 49 cents per diluted share.

Adjusted EBITDA increased 81.3% to 49.3 million.

Cash flows from operating activities, excluding changes in working capital increased 72% the 50 million.

Cash cash equivalents in short term investments were 168.1 million an increase of 150.3 million from 150.3 million at October 31st 29 came despite making payments of 12.1 million for dividends at 48.2 million square acquisitions year to date.

The company has no long term debt other than nominal a nominal amount that is non interest bearing.

In the quarter the company experience growth from both internal sources and from the acquisitions of video enough steel both acquired in Q3 of 29 team. That's what was that logic acquired in Q1 of 2020.

Internal growth includes the expansion of the acquired businesses, particularly video and dialogic since acquisition.

To date cope with my team has had an overall positive financial impact on bench I was just sales of solutions that support remote work, including working from home increased the meat heightened demand sales of video or remote conferencing and tell that helps financial services video platform and a remote computing solutions were particularly strong this quarter.

Although the over all impact to revenue. So far has been positive sales with hardware professional services in certain business units have been tempered as a result of procurement delays deferral onsite installations and customers postponing upgrades and implementations.

While the pandemic continues to have a significant impact on the economy. Our team has reacted quickly and successfully transitioned to a work remote work environment.

We're pleased that our team has remained sage productive Dennis continuing to deliver high quality results critical to the success has been our previous investment in upgrading our financial systems combined with the internal deployment of interest products such as video that support remote work.

During the quarter, we substantially completed the integration.

Logic, which was EBITDA positive as expected following the acquisition on December 31st 2019.

Logic was accretive to both earnings and margins due to a significant perpetual license deal recognized in the quarter, which allows the customer to respond to increased demand, resulting from Tobey 19.

I'll now turn the call back to Mr. sat there Steve.

Thanks, Doug as Scott noted, we had significant revenue growth both from external sources and from recent acquisitions and the current environment when collect use of cash could be a concern for companies. We had strong collections and net cash flow from operations of over 57.5 million.

Our dividend was increased 22.7% in may, which you've received and our cash and sharp turn it that's been balance at the ended the quarter was 168 million.

Character prior years Q2, foreign exchange was an estimated headwind.

A minor amount point 2 million on revenue what foreign exchange over the prior period Q1 was the tailwind improving revenue by 3.3 million.

I should point out in Q1 foreign exchange had a negative impact on revenue of about 2 million over prior years Q1.

Q2, ending April Thirtyth had over 50% of the business in the pandemic locked down.

Many of you know we plan to operate the business for longer term, but I thought I should give some data and comment on our revenue and profitability in the quarter.

That's already know good foreign exchange rates added 3.3 million in revenue over Q1, but when compared to Q2 last year had a small headwind reducing revenue most of Q2 foreign exchange tailwind over Q1 came as a result out of the weak Canadian dollar compared to the U.S.

Today's foreign exchange rate the Canadian U.S. rate.

Revenue would be negatively impacted we sometimes mentioned a large scale gets delayed from one quarter to the future in Q2, we had a large license revenue saleable approximately 6 million, which was brought forward from future quarters related to our dialogic acquisition and included.

I haven't she group results.

As you May expect our transit revenue was well below expectation in terms of new revenue and most transit projects were put on hold this revenue is usually recorded in our AMC group.

Also several projects were delayed impacting both I am Gi and AMG groups impacting overall revenue and especially professional services revenue in the quarter.

Video revenue exceeded our expectations by a significant amount.

We completed the Microsoft teams integration and was one of the first contact center solutions to be certified we do not give quarterly guidance as we build for the longer term, but our solutions oriented toward visual computing solutions remote computing activities and network infrastructure.

Some of our customers have been significantly impacted by the pandemic and are very cautious and compete committing to do expenditures.

As to acquisitions, we didn't know new acquisitions in Q2, the dialogic acquisition has been mostly integrated by the end of Q2.

With the large order in the quarter, which we believe was brought forward.

Future quarters, the business had EBITDA positive a ballpark historic results, but without the large order the dialogic business progress as expected and was EBITDA positive in Q2.

We continue to focus on capital deployment as wells to improve our operations.

We we can do and have done most of our acquisition work remotely, but currently we are limited by opportunities focusing on their own businesses and true cash conservation delaying acquisition process. The pipeline for acquisitions remains active I would now like to open the call for questions.

If you'd like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using speakerphone. Please make sure you mute function is turned off so I like your signal to reach our assessments.

Once again star one.

Well take your first question from deep Taco shells from stifle JMP. Please go ahead.

Hi, Good morning, guys. Thanks for taking my question My hope, you're all doing well.

One certainly results well, okay, well regardless.

Steve I just wanted to ask you honest perpetual license for Datalogic.

You know what kind of color can you give us on the nature of deployment, you always an enterprise customer or customer.

And you know how sustainable this kind of momentum opportunity is what you're seeing couldn't manger.

Yeah. It was it was at networks customer with media processing software, that's why it's in D.A.M. GE group.

We don't have any large licenses sales like that so I pointed it out with the amount because I you know it is possible that that customer can order that im of the future, but you cannot expect it in your modeling our numbers.

Okay. So I mean is there a market up of similar types of customers that that could be similar things are that's really just a one off for fidelity.

We pointed out because it was a little unusual and at March in the quarter.

Okay. Okay excellent and then just on them on the optimism, but in general from network service providers.

What has I mean, we we obviously know what enterprises are doing in terms of spring work from home water network service provider doing or thinking about.

In terms of responding to creep back up to now what do you guys see what kind of time, if you think might be associated with.

Some of their business here.

I think he goes like said.

Service provider had the large order I think supplement lose some of their.

Purchasing up a little bit in the quarter.

I think they're seeing greater scale, but they also are looking at you know how does it impact them in the future. So it it's a bit variable right now, but they also have increased demand with more people working at home.

So, it's got pluses and minuses companies or.

Less demand people would hold more demand.

Okay and then my last question on the M&A, sorry, no I don't imagine you're seeing any cheap acquisitions. These days and communications station to video space.

We're seeing last year, you know what segments are you finding good value when these days.

The things that maybe that can get go ahead of the game.

Recover from cold, but what are your thoughts.

You know, we're finding the same value that we found in the past and I'm not no I wouldn't necessarily agree with your assumption.

Okay. So that is to say that in video conferencing communication Tele health.

You are seeing.

No valuation increases of in terms of any target.

Well you see not similar to what we're seeing a conversation you see some value increases in larger ones private smaller ones because a lot. If you remember we bought video a lot of companies in that space do not make money.

And therefore, they are challenged in getting money. These days so it hasn't really impacted values in some of them, but other companies Love course like zoo, they're not really in that space. There are more in the public.

Market versus the.

This is markets.

But if you look at the results they still make much money so think of the smaller guys.

They generally are challenged in making money and cash which does it.

Hurt us in our acquisition activities and no no change in terms of.

Bidding war in their competition from other other people looking for me say not.

Not really.

There may be bad we haven't really.

Nothing unusual that you said that way years.

You got to cash a lot of people reporting their cash not.

So the interested going out to get spending that cash buying something that maybe not making money.

Okay, well. Thank you again for taking my questions I'll talk one.

Thank you we'll take our next question from Daniel Chan from TD Securities. Please go ahead.

Hi, good morning, either resolutions on would be quarter.

Steve can you remind us what the major competitive getting sharper your digit Cappiccille solutions over other may get solution provides you mentioned so that's also webex disguise.

Yes, I, we're more concentrated in tele health at financials, we are therefore from day one.

Pay more attention to security for example, zoom is had many articles where they happen, but don't really need to because you know it's really for the public talking to your kids. Its for school kids talking to their teachers, you know they still have some our business as well, but their focus was more rather the broader market.

So ours border security side, and you know we tight.

We mentioned that part it's a little harder sell for us So girls, so little bit harder because you really have to people, who really understand not only the video technology also your customers and how they can use it.

Yeah that's helpful. Thanks.

Steve you haven't view on whether the strength in the video segment will continue wants to lock ones are lifted.

No idea.

I was wanting to switch over to the network business.

Well, if you can comment a little bit on whether the capex spending has changed at all it would be a major carrier customers. Like you said there was a little bit of the mix, but in particular have they changed the timelines on network upgrades to things like Fiveg technology.

Yeah, the whole, they're working on five Gee, that's an opportunity for us, but the fiveg if its new things to put in today. They tend to have slowed that down a little bit, but they increase their spending on infrastructure that they need to run the extra volumes up today. So it's a mix just like you said.

Yes.

Okay, great. Thanks, I'll definitely.

Thank you we'll check our next question from pull steep from Scotia capital. Please go ahead.

Good morning, Steve could you maybe talk a little bit of.

How you're viewing the business I noticed you've tightened in some of the commentary, but how you're describing it in the overview the business.

It is should we sort of read away that sorry about that welcome to working from home [laughter] [noise].

Yeah.

[laughter] not everybody likes Canada post and itself can you talk maybe a little bit up but the other day.

If you're shifting the focus a little bit because I noticed there's more emphasis on remote works visual computing should we read into it that similar to when you went into communications and call center that were sort of heading maybe in a more of a new direction. Thanks.

Oh, you beat around long enough, we started out what I've said today is what we said when we started I didn't want to be back office I didn't want to be vertical markets I wanted to be remote computing and visual computing at the time, we were doing graphical information systems, where we started out that we bought.

Got into the contact center space and we have built up infrastructure that supports remote computing and visual computing, so actually we straight a little bit away from the overall.

Strategy or concept that I've always done from day, one whenever I've done anything I thought of that we cannot say here's a good.

You know GL system or accounts payable, we're not interested we're doing remote visual computing things are not in an office. That's what we've really done from day, one and so we've just gone back and made sure everyone understood. That's that's the overall umbrella over our tactical strategy that we're doing.

Great couple of quick clarification, just on that dialogic steel.

Everything sort of ship been booked into Q2 or is there some some to sort of come into the next quarter.

I think people have revenue in the next quarter I think the only thing that's really shifted into Q2 was that one big deal.

The rest.

It was pretty normal and that doesn't mean, there couldn't be more doesn't mean, it will pick up but you've got to be cautious in going forward because a lot of people once they're dealing with the capacity either waiting to see adds or is it a double you on the pandemic because they're going to be more so once they got the infrastructure in place, which they mostly.

I guess I'd be working on that they've got to think about new fiveg and do things that they will do that slowed down a bit. So I don't know, where that's going next quarter, but I do believe I had to point out that we had about a 6 billion dollar deal that I found the unusual that you cannot expect to be in the next few quarters.

And I think if it came forward because they needed to get their capacity up faster than you originally thought.

And last two ones for me just potential cost savings on facilities reduction you mentioned that the M. DNA you've always been.

Cost cost aware or what are we thinking in terms of you know.

Moves or changes there that you might make overtime.

So you've heard a lot of other people talk about everything is good but they're cutting staff, we have not cut any staff, we're adding staff.

Okay really nothing more to say that it's it you know we've always operated in a very.

Way if people don't perform we look at it dead, but we aren't doing any restructuring now really a unless it's the normal business thing, we would've done with or without dependent so we don't see.

We still have our current cost discipline.

For sure.

And we're going to continue that but what we've done for over 10 years, that's nothing new.

Others are all saying, yes, we're gonna grow and me back, but we're cutting staff, 5%, 10%, but we're not doing it we don't need to do that in fact, I would guess were in that higher or right now.

But last one was you know any comments just around the uptake of at no cost a video licenses are obviously, great move smart marketing.

What's been the uptake and then maybe to conversion that you're hoping to see on the backend. Thanks.

Yeah. The uptake you know, it's a new area for US we we had to move quickly to do it which we get Vince did a great job again getting that up and running quickly. We've had some interested it were that leads we don't know what was normal things. When you do that type of project people upcoming try it out, but you don't know what they're going to do.

Uhhuh afterwards, but one thing I will point out I Didnt say in my.

Messages, we did very well with video in the U.S., but I've always had wanted to do it geographically and over other regions to me that was weaker than I would've liked in other words, we still have the opportunity to expand in or other geographical regions. Our video with our video product.

So most of the bid to go success was because of our U.S. group some outside but again I think you're still opportunity for us in our non north American operations to improve our video results.

Thank you.

Thank you we'll take next question from Stephanie price from CNBC. Please go ahead.

Good morning.

You mentioned and an earning money.

Thank you mentioned in the answer an earlier question that you know video at the moment is geared towards financial services healthcare can you talk about the opportunity to roll it out more broadly to other verticals and potentially even more broadly do like offering.

You know, we certainly can do that because we have a system that allows that to happen. Our limitation of course is their sales and marketing because we weren't preparing to do that so we're gearing up a little bit more therefore, the free offering that was.

Discussion on the previous call our previous caller.

So we can do that but let's face. It zoom is very good at that that's where they came from we still have some work to do if we're going to expand that area, but we are getting some interest again, because if you're a business and talking to your staff you need secured its not just in health care, you need or do you want people.

Oh listen in on your calls or do you want.

Zooms change some things, but they certainly have much superior marker press buttons and sales and marketing than we do right now, but they do not tend to do the private health care type stuff as much as we emphasized on that evermore public education, where security probably is not quite as simple.

And.

Okay. Thanks, and then and then you mentioned also delays in hardware procurement and system size deployment, you talk a little bit about the and environmentally team since the end does that seem to have.

The middle that.

It's pretty much the same remember our Q2 a lot of people that reported their Q1 was the end of March our Q twos. The end of April which is really a lot of but then it is already in there. So you probably had some people who said we got to do something and bought so that probably helped.

And you then you've got people says hold until we sort this out everything still hold.

Transit if you ever.

Everyone staying at home, there's not many people writing the trends. It. So of course, there's really struggling I think their numbers are down probably 80, 85%. So we got are ongoing revenue from that because we generally have maintenance. There. We don't have by subscriber. So that's okay, but it's down quite a bit.

And if you look at or a group you know we divided up by group segment reporting.

If you look at the asset management group you know the network side did okay, but transition which is also in there it was quite weak <unk>.

No. It so you know Weve got a lot of variances a lot of it's a little complex right. Now we're at all ends up I don't know or is it tries it picks up or people going to go back on the bus is how quickly are they could have money to spend.

There are certainly projects in the works and they're good projects for them, but.

You know they've all got different issues. These days, so I don't know.

Uh huh.

And then lessons to me is on the teams integration that you announced at the end of March teams, obviously things and strong growth in the current environment, just wondering what and check to see in a post integration announcements I was trying to think about the migration to contact center customers to team.

Yeah, we have a large skype for business. So we are we like the teams because they added to the lights Skype for business. So we hope to protect that pace. That's objective one objective to of course is get new revenue, we've seen interest, but everyone slowed all back down right now so there's really no.

How much.

Revenue I distill revenue in our numbers in Q2 related the teams, it's really being that were there to do it we've got interest but.

Everything sort of delaying as people want to know how long. This is going to Alaska is it a swishes it up double helix is it a b what paper curve. It is and so everyone are being quite cautious. So we're optimistic that will help us in the future but.

It hasn't really help that much so far other than people are more comfortable with Skype because we can now moving the teams when they want to move there.

Fair enough. Thank you very much.

Thank you very much we'll next go with Paul a cheaper from RBC capital markets.

Thanks, very much the morning, that's why did they fall clear on.

I just want to clear on Datalogic.

Well, you expect agonistic, <unk> 63 million and revenue there now no large 6 million dollar like is that upside.

Local or was it already previously reflected net outlook, but I just came earlier in the near than what you expected.

Good question.

I could answer that either way it might be upside.

But it might it be moved earlier and there's other things that won't make up for the future revenue. We thought we were going to get I wouldn't expect.

The immediate future, it's probably part of the 60.

But I I will say that in the quarter. We did that we did better than that ratio first quarter's a little light second quarter with that isn't there did better than the.

Multiple to get to the 60 so.

It it's hard to tell in this environment, you know, we react where we're not a huge company, but we do react well when we see what's happening. So if you're looking at it trying to figure out your model I would say its into 60 foot in the 60.

Okay. That's helpful.

Also during the prepared remarks, you mentioned video had significant contribution in the quarter, that's hoping if you can't.

Quantify significant liking and specifically and how much it video growth quarter over quarter or maybe put in dollar terms and then on the go forward basis do you expect that run rate to be sustained here.

Don't do forecasts. So we don't know what happens going forward and in the quarter. It's significant we don't give numbers, we don't want people to focus on a quarter, we try and take longer run I don't know where the longer run his with work from home and all the changes that happened. So we're just not willing to give any more information than say we had to fit.

Terrific and increase in the quarter.

Okay and those are license deal specifically, how does seem to be the ongoing maintenance associated with those yet so.

Correct and they're also some deals that would it be hosted or in the cloud as well, but most of the benefit in the quarter where license deals.

Yes, that's right.

Okay.

Hey, How's everyone going to predict what's gonna have to go as they're going to be a vaccination like I don't want to predict the future. We we've never really did forecasts and now everyone else seems to be following us they're not getting forecast because of the pandemic certainly I'm not going to start.

[laughter].

Yeah, I know that that's totally understandable.

Looking at.

No I.

I think it's it this quarter Q3 is whereas skills isn't expected to launch its new IP TV product and in Sach launch on track and then you know like like our the other carriers planes roll it out.

And then how material revenue associated from that launch.

So the launches on track, we actually have an initial customer installed we have some interest and I don't do forecasts.

[laughter].

Okay, well I loved ones for me.

In Q2.

Howard renewal rates.

Ball business tracking no compared.

To your.

Historical average.

I'd say pretty normal you have a couple of customers might be in in some difficulty, but we had before customers that would be required. So I would say, it's it's pretty normal there.

Okay. Thanks for taking my question.

Thank you we'll next go with Mark Gaskin from 92 investment management.

Hi, good morning, guys.

So my previous questions being asked already.

Vince can you just give us a little bit of an update on organic growth.

And how you're seeing a.

I'll pick up amongst the various companies in terms of selling a suite of products about some of these new acquisitions, maybe helping some of your existing companies sell more more product.

Yeah. It is a few questions. There can you guys hear me.

Yep.

Yeah, Yeah, Yeah, I mean, we just continuing a lot of the things that Oh, we started a couple of years ago, and so like things like the manage and customer success.

The video business trying to expand it outside of just the U.S. market. So.

Things you know things are progressing well.

From an organic perspective.

Okay.

Steve do you have any comment on that.

No Big said it very nicely.

Okay.

Well I'm doing the doing well done guys.

Thank you we'll next go with Deepak Kaushal from stifle GMP for a follow up question.

Oh, Hey, Steve you know I, just got a follow up to Paul's question.

Going to back up my total analysts here I know you guys don't give forecast, but when we look at SPL and we look at the launch of Aneel I could see Pete I paid TV product excuse me.

I'm not parking at the close then.

What kind of parameters can you give us to help us get a sense of what this business could do if this product is successful how many telcos are you speaking to what kind of bomb ASP and looking out or or how much.

[laughter] I was told the only talking 10 $12 million for telco when you're looking at 20 of them.

Any kind of grammar he can give us hope it works out.

Oh, Oh would be helpful. Here.

Yep can't do it no parameters you know, we're just putting it out there now whenever you put out for us but early version out you've always got to fix some things I don't know people are going to put in more products with a pandemic or what's going to happen within the future. So you know we've done what we see.

We are due and getting the product gone.

We think we have a good product we had some interest but.

That's all I got.

Okay, and so that would be primarily organic initiatives in terms of that.

Line of business in terms of television for telco IP TV side are there any things that you need to round out the products. We found that we'd be looking to put it on your side or was this a purely organic getting cut everything.

We always look for things on the acquisition side as well.

And you know and there's opportunities there, but mostly this is on an organic thing they were in the middle when we bought a spiel of developing IP TV, we wanted to finish it and then take it to market. So we've done that and so we'll have to see how that goes this is not one where you know you've got massive.

It is all at once so it is a business the business sale. So it takes time to put it in and with a newer system you know you're gonna have issues. So it takes time to fix them.

When we add some items to that system absolutely. It takes time, but we have a system we can sell now.

Ill call. It a basic first level system, if you want but yeah. It showed progress we've got interest and of course will be putting more things into that system as we as we go along.

Okay. Thanks appreciate you I'll stick with your discipline and seeing success. Thanks again.

Thank you it appears that we have no more questions at the moment, but once again, if she'd like to ask a question signaled by pressing star one on your telephone keypad.

It appears that was supposed to have any questions at the moment I'll give the flow back over to the speakers.

Okay. Thank you everyone for attending our call and your continued support in these unusual of times stay well unsafe and we look forward to updating you again next quarter.

This concludes today's call. Thank you for participating you may now disconnect.

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