Q3 2020 Enghouse Systems Ltd Earnings Call

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Good day, ladies and gentlemen, and welcome to the and Charles Q3, 2020 Conference call. As a reminder, today's conference is being recorded.

At this time I would like to turn the conference over to Steve Shindler, Chairman and CEO. Please go ahead Mr. Sandler.

Good morning, everybody.

Eric social distances.

Here today with taught me <unk> legal counsel.

Well I shouldn't VP finance and Vince MRD Global President before we begin all helped Todd read our forward disclaimer certain statements made maybe forward looking by their nature such forward looking statements are subject to various risks and uncertainties, including those in in terms of continuous to say for filing sensors, and say I asked which could cause the company's actual results and experiences to differ.

Materially from anticipated results or other expectations undue reliance should not be placed on these forward looking statements and information and the company has no obligation to update or revise any forward looking information, whether as a result of new information future events or otherwise.

Thanks, Todd Doug will now give an overview of the financial result, [laughter]. Thanks, Steve.

Yesterday interest announced its third quarter unaudited financial results for the period ended July 31st 2020.

All the financial information is in Canadian dollars unless otherwise indicated.

Keith financial and operational highlights for the three months ended July 31st.

Compared to the same period in 2019 are as follows revenue grew 29.7% 231 point Threemillion results from operating activities increased 56.2% to 42.2 million.

Net income increased 77.3% to 26 million of 46 cents per diluted share.

Adjusted EBITDA increased 62.4% to 45.6 million.

Cash flows from operating activities, excluding changes in working capital increased 58.8% to 45.3 million.

Cash cash equivalents and short term investments for 228.9 million increase up from 150.3 million at October 31st 2019.

Which was achieved after making payments at 19.5 million for dividends and 43.9 million for acquisitions. This year.

The company has long term debt other than a nominal amount that is non interest bearing.

In the quarter the company experience grows from both internal sources and from acquisitions internal growth includes the expansion of the acquired businesses, particularly video since acquisition.

To date Cobot 19 continues to have an overall positive impact on revenue, although the initial surgeon customers requiring immediate remote work and visual computing solutions. Upon the initial outbreak of the pandemic.

Primarily served in the second quarter of 2020 demand for these solutions remains above historic averages.

And then it gets tested winchesters ability and capacity to respond to significantly altered circumstances and shows as results continue to demonstrate the resiliency of its business model, which is based on significant recurring revenue streams positive operating cash flows.

Cash reserves with normal debt at a disciplined cost management and value for money philosophy.

Yesterday, the board of directors approved the company's eligible quarterly dividend of 13.5 cents per common share payable on November Sturdiest 2020 to shareholders of record at the close of business on November 16.

I'll now turn the call back to Mr. seven to provide his comments.

Thank you Doug as Doug noted, we had another good financial quarter from our operations. During these challenging times strong cash flow from operations of over 45 million increased or cash and short term investments to 229 million approximately from 168 million in Q2.

Who despite paying our quarterly dividend of 7.4 million.

Considering or changes in working capital and income tax installments paid.

Net cash provided by our operating activities was 55.7 million.

Compared to prior years Q3, foreign exchange increased revenue by 1.4 million, an increased operating costs by 1.1 million with a small positive impact on operating income.

Some of the revenue is being delayed by coal would 19 and the business environment remains challenging for new customers. Although one of our significant transit customers pursuant to rule. It's hardware purchased on a commitment related to a contract completed before the call with 19.

Impact.

This increased our hardware revenue in the quarter, but at a lower margin.

Video revenue once again exceeded our original expectations, but it was reduced from the high Q2 customer demand.

As stated last quarter some of our customers had been significantly impacted by the pandemic and can you do continue to be cautious in committing to new projects, although we have seen some improvements.

In terms of acquisitions in Q3, we completed no new acquisitions, a lower dialogic acquisition, which we did it. The ended December has been integrated into our operations and is progressing as anticipated.

Continue to focus on capital deployment doing most of our acquisition work remotely, but as indicated last quarter several opportunities continue to focus on their own business issues delaying acquisition processes.

The acquisition pipeline remains at it consistent with historic levels I would now like to open the call for questions.

Thank you.

At this time, we will open the floor for questions. If he would like you ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speakerphone. Please make sure. Your mute assumption is turned off to allow your signal to reach our equipment.

When it press star one to ask a question we will pause for just a moment to allow everyone an opportunity to signal.

Our first question comes from Stephanie price.

Please go ahead.

Morning.

Looking at video website.

Just wondering if you could talk about what that what you've seen with video so far in fiscal Q4 in terms of demand and just curious about what are the Q2 run rate is you know something you'd expect through kind of a pandemic here.

Hey, so.

You asked for Q4, I think you meant Q3, but we did see it initial demand mostly from current customers, but some new in Q2, Oh that lowered down in Q3 is they bought a lot of the requirements in Q2.

We still see.

More than we anticipated at the beginning of the year for video, but our international rollout of video has been slower than we expected and so we're still pushing to improve in that area.

Okay. Thanks, and then the empty and he mentioned the possibility of facilities reduction and other cost savings just curious around the margins and how we should kind of think about the impact those opportunities.

You know is pretty similar to the past when we don't do acquisitions in a quarter, which we all was trying to fix over one or two quarters.

Our margins tend to increase to about 35%.

If we do acquisitions I still maintain you got to think of it model. It at about 30% 25 to 30, depending how big and how much restructuring has to be done, but it's pretty much the same model what that its beat for the last 10 years.

Okay and Allison.

M&A environment as you mentioned that a you know you mentioned that some of the opportunities are kind of focused on internal operations. Here can you give us a bit more color there and how you kind of thinking about M&A in the back half the year here.

So we're pretty set up to do M&A, but you got to remember opportunities that we see there having their people work from home and there are a little slower gathering data for us and doing the due diligence process, all soltanieh issue or something comes up they can delay things for a week.

To sum of delayed it into next year.

Because they just have other things that they're focusing on that are more urgent Dan.

Doing a transaction with their company at this time.

But again, that's that's also freeing up a little bit, but it's still an issue today.

Okay and Everything's remotes.

Everything's remote access we're kind of lucky because we have people who've done acquisitions virtually in every geographical area. So when we looked at acquisitions, we tend to still send somebody an on premise to have a look at the environment culture and some other factors.

Great. Thank you.

We will go to our next question coming from Deepak Kaushal with Stifel. GMP. Please go ahead.

Hi, Thanks, Thanks for taking my questions. Good morning, everyone. I'm just couple of follow ups on stuff needs questions.

To start just on video.

Steve are you able to kind of.

Quantify or do you can give a qualitative sense of the pacing acceleration for that business and how much it's exceeding your your expectation.

Of course said you'd have to know my expectations to its hard to that Oh, but let me say that in Q2, it far exceeded it there's a lot of the current customers who already we're using the product ordered more <unk> you know ordered more.

The license revenue and some hosting revenue that was mostly in Q2, we saw still some in Q3, but it is slowed down in Q3.

Okay.

Good.

I don't really predict Q4, but it's still you know the work from home environment. There's a lot of moving parts, it's still an important area force going forward.

And for the non video part of.

Business or any color on a call center contact center side, Yeah. We if you remember at the beginning of the quarter, we've talked about how we got a certified by teams.

Which is the Microsoft product, which we've been working on for about 18 months.

And we've had several of our product certified now.

So that's positive, but again, new customers buying new contact centers in this environment, where it takes work and people coming in to set up it's being slower but the opportunities still there.

Okay got it and then just on the on the M&A side.

I'm just curious you know we've heard a couple of companies report and in as many days signaling valuation expectations of targets as.

Actually we see it in the public markets for tech stocks or what are you seeing in terms of valuation expectations and indata.

Hurdle for you guys get acquisitions done over about what you're saying.

No real change and are parameters haven't changed certainly if you're going to the public markets and looking at very large deals there Oh, there's a lot of money it virtually it's free no interest rates the private equity has so I suspect that.

Those valuations are higher, but we're not seeing that and what we're looking at.

Okay and is that because.

Oh, you're seeing more companies with problems or because they're just.

Smaller and private they haven't really.

The not kinda basically not public that and a low monies cheap you still have to get money and some of these companies have difficulty getting money, even though it's cheap.

So.

We aren't seeing really any difference there in fact was going to make any comment we probably see a little better valuations.

And what we're looking at.

Okay. That's interesting and then my life.

Well, yes, where your comments are coming for M&A is probably in the public markets.

You know that's what you generally look after a we find the public markets are a little expensive based on the criteria that we usually look for yeah, no I mean, it's often apart.

Hi, guys because these companies typically acquire private companies and their signaling higher valuation expectations. So HM.

Oh.

I guess, you're finding them and took pocket or are there any particular segments that are showing better value than others.

No. We've always had some companies that we've always had some companies that want higher valuations if it doesn't meet our financial criteria, we just pass.

Many of those companies are still available.

So you know often when people say yeah. The numbers are higher et cetera, I did their justifying pay more or justifying not doing stuff, we're not finding that in the areas that we're lucky.

Okay. Okay. That's very helpful. Thank you for taking my question and.

Well talk to against it.

Thank you and once again, if he would like to ask a question you May press Star one now.

We will go to our next color commentary bar with RBC capital markets. Please go ahead.

Oh, Hi, good morning, Paul Treiber, I, just follow up on M&A. The Mdna mentioned other income increased by about two and a half million because of unrealized gains and investment in equity positions are those.

Trading positions or are you considering acquisitions of public companies.

We're always considering acquisitions of both public and private when I, you say trading positions. If we see a company that is a potential acquisition, sometimes we take a foothold in it.

Often when they do that for some magic reason the stock runs up and then if we make some money in its above our valuation expectations, we sell it.

Okay. So nothing nothing disclosure, we're not we're not trading but but they are potential companies, we would buy the whole company.

And you know, sometimes when you talk to them.

Magically.

All of a sudden their stock goes higher and we're not interested in paying up we're very disciplined. So then we may just seller positions at that point.

Okay.

Also on in regards to M&A, you mentioned that you have people on the ground that can visit.

Hi targets in in all your regions.

But.

From your perspective, though I mean, you tend to be hands on with the M&A.

How are you adapting to this you know the to the challenge of travel restrictions in this environment and also doing M&A from a remote access it isn't something you're finding yeah comfortable adapting to or easy when would you prefer going back to the I'd be deal to hold up traveling in person meetings.

Okay. So about 80% plus all of our M&A work is done remote and always has been we tend to go to the site to finish off and just you know maybe have the talking to people. We now have video we do that through video and online.

And we really just have someone remotely goal there just sort of get delay out and get another view. So will you never just do with one view, we always have several people maybe asked the same questions and make sure we get the same answers.

Alright, Thanks, a lot for second one more from me Congrats professional services was flat quarter over quarter by E are you still think challenges in terms of travel restrictions in the inability to travel to customer locations has just restraining the ability to do professional services and.

More recently has mentioned that fall are you seeing that beginning to lift or is it still a challenging environment.

It's still pretty challenging there, but a lot of or professional services is not done on a customer site. It's done on our site or Donny from people working at home, but.

But there sometimes implementation has to be done on a customer site.

So there is.

Some limitations there, but it's not a big factor.

Hi, Thanks for taking my questions.

Thank you there are no additional questions at this time Mr. Sandler at this time I'll turn the call back to you for any additional remarks.

Okay. Thank you and shows is well positioned both operationally and financially for this unusual business environment, we look forward to finishing our fiscal year 2020, and preparing for whatever business environment develops for next year.

Thank you and thank you all for your attention. This concludes today's conference you may now disconnect.

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