Q4 2020 Enghouse Systems Ltd Earnings Call
Ladies and gentlemen, good of the on the whole, what's what the discount that has gone and besides the of the funding for the Oh, the EPS I'd love to the other will be shortly thank you for your patience the leasing the number.
[music].
Good day, ladies and gentlemen, and welcome to the a chalk that's fourth quarter of tricky to like the confidence gone it's pretty much of today's conference is being recorded at just fine I would like the difficult the that's over to Steve Sadler Chairman and CEO. Please go ahead Mr. Sadler.
Good morning, everybody.
And this is errol social distancing.
I'm here today, we're talking about the P. legal counsel.
Manager VP of corporate development that breaks in the VP of finance.
It's the sort of the global President of the World here [laughter] of before I begin the I will have to read the forward display from certain statements made maybe forward looking by their nature forward looking statements are subject to various risks and uncertainties, including those interest charges continues to support the filing touches the quick.
The caused the company's actual results and experience could differ materially from anticipated results or other expectations undue reliance should not be placed on these forward looking statements 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 Oh stuff.
Don't know give an overview of the from an actual results.
Thank you Steve well.
I'll now give a brief overview of the quarter.
Yesterday, and chefs announces fourth quarter unaudited and year end financial results for the period ended October 31st 2020.
The financial and operational highlights of the three months ended October 31st 2020 compared to the same period of 2019 are as follows.
Revenue grew 10.6% to 120.9 million.
Results from operating activities increased 31.2% the 42.7 million net income increased 19% to 29.4 million.
Adjusted EBITDA increased 37.1% of 46.6 million in cash flows from operating activities, excluding changes in working capital increased 41.8% of 48 million.
The financial and operational highlights for the year ended October 31st 2020 compared to the same period of 2019 are as follows.
Revenue grew 30.6% the 500 of 3.8 million results from operating activities increased 44.7% to 162 million net.
Net income increased 39.2% to 98.6 million of <unk> dollar 77 per diluted share.
Adjusted EBITDA increased 53% to 176.8 million.
Cash flow from operating activities, excluding changes in working capital increased 50.6% to 178.5 million cash cash equivalents. The short term investments were 251.8 million an increase from 150.3 million at October 31st 2019, which.
Which was achieved after making payments of 27 million for dividends and 43.9 million for acquisitions.
Yesterday, the board approved the company's Els real quarterly dividend of 13.5 cents per common share payable on February 26, 2021 to shareholders of record of the close of business on February 12 2021.
Also like the highlight another key announcement from yesterday's meeting with our substantial cash balance.
No debt and significant operating cash flow. The board of directors also approved the special dividend of the dollar 50 per common share payable on February 16, 2021, the shareholders of record at the close of business on January 15, 2021, with low interest rates of the ability to acquire additional funding is needed the company believes.
The after returning these funds to shareholders of continues to have the necessary funding available force acquisition activities.
Now I'd like to turn the call back to Mr. Sadly the season.
Thank you Doug as Doug highlighted Doug has highlighted some of the key financial and operational items of the company. He noted our strong operating results and cash flow of the quarter and for the year, which resulted in cash and short term investments being nearly 250.
2 million with no bank debt.
As we go to the prior quarter. Some of the revenue was brought forward due to the parent debt, making up from Q4 and stuff in Q4 now because of the the second wave has been delayed so it's an interesting dynamic and net initially they brought it forward the got up to speed and now.
The second wave of a bit of revenue has been delayed TRASM was hardest hit what we did improve our future transportation business with the 55 million contract award over 12 years in our Nordic operations. This will help offset the decline of the trends the sector just fixed fiscal year being too.
2021.
Did not really kind of any impact on the last year fiscal 2020.
EBITDA margins improved in Q4 due to lower hardware revenue and minimal acquisition cost restructuring hardware of revenue, which has lower margin was down 5.2 million in Q4 compared to Q3 of 1.4 million the lower than the prior year.
As I said also some of our customers continue to be impacted by the pandemic delaying some new orders due to the second wave.
In Q4, no acquisitions were completed prior acquisitions have been integrated into our operations and our operating as expected.
We continue to focus on capital deployment doing our acquisition work remotely well completing transactions are taking longer than they have historically due to the pandemic the.
The acquisition pipeline remains consistent with the true with extort levels.
With our high cash balances, Doug said, no bank debt and strong cash flow. The board of directors concluded that it was prudent to return some capital to work shareholders.
With our with extort low interest rates and capital available to edge House. It was decided the special dividend could be paid without impacting our funding for future acquisitions I would now like the open the call for questions.
Thank you Sir if you would like to ask a question Keith Siegner by pressing star one of your telephone keypad you figure of the Speakerphone. Please make sure. Your newest function is turned off the all I guess take note that each of the fifth and again the thought of one to ask a question would take the first question from the pop culture from.
Steve Stacy Adams.
Please go ahead.
Oh, Hey, good morning, everyone. Thanks for taking my question.
Steve I, just curious about your commentary on the M&A environment. The last quarter, you were pretty confident that you're still seeing attractive valuations.
And just the lead lost sight of the filing.
You are seeing some challenges of M&A I guess, what you're saying, it's moving it's not related to the valuation that's related to the ability to close transactions of the together maybe you can just give us.
Thank you.
Oh, Yeah. That's that's correct. We still you don't have items of the pipeline, they're taking longer to do the due diligence that we have to be more careful because.
Anyone who has some decline in revenue of the old blame the pandemic and that may or may not be true, but just maybe a decline in revenue. So it takes a little bit longer plus said all the legal work the due diligence and mostly from the seller side like we can do video a lot of her work of.
Using video of but it it does take longer to get done.
And you know companies they they've got a lot of things the focus on there's a lot of unusual things happening.
Initially with the pad that make it picked up the now the second wave is caused by the end up the wonder and you know kind of get their staff did can they provide the material. So just taking longer to get done, but I don't see any different LC of picking up I don't see it down.
Yes, there are some companies that are more highly valued because the public markets are highly valued but they tend to be larger ones. We tend to be at you know 50 million in less Ah.
And yeah, but it's been the same of the past we've had people who wanted more than we thought their companies were worth and they're still out there. So the.
Don't see much changing except that we have to do our work a little bit differently, we don't really do any on site visits.
Got it and so you know what your growth by M&A model and your I guess, the 15% to 20% of EBITDA growth targets.
Get bigger you have the generally either look at larger acquisitions or more tuck in acquisitions for smaller acquisitions, now you're giving back half you're almost half the cost of the special dividend.
Are you signaling a more smaller tuck in acquisitions.
Fewer larger acquisitions or is it just kind of get harder and harder.
Gross.
Not really I mean, we looked at it we always save money said the could be a bigger acquisition I don't like the bank debt because I don't like paying Baker, Steve's I don't like paying interest, but right now its free I mean, the interest rates are virtually zero you can borrow money easily so why am I holding cash that I'm learning.
The interest on when I can actually get a pretty readily with our cash flow and again, it's not a matter of here. So much cash we have after we get two of the special dividend. We also generate cash I mean, we're generating cash right now I'm talking to you. It's it's quite nice so we thought lets give some back some of the money to our flow share.
Holders of supported us for a long time and they may have a greater use for that cash of just sitting on our balance sheet, you don't need it to do our strategy and we of cash available at at low rates now.
To do the acquisition strategy of.
As we go forward, we're generating more.
I'm not saying that we again, we'll do another special dividend, but we do generate cash every day.
The general toss it is always nice Oh, a lot of questions from me on the organic growth so back of the envelope, where either calculating flat organic growth or the.
Dialogic strike, which of the two of the what can you tell us about.
The logic in house before.
Yeah.
So I I Miss that.
I can tell you die logic is performing exactly as we thought all of remember in a couple of quarters. The goal I said, we brought revenue forward. We had a large Q2 of some in Q3, because a large deal $6 billion was brought forward from Q3 out of walk from Q4 of.
Yeah, no. It's just the based upon organic growth of it you know biologic grew then organic growth.
The core or organic growth grew the dialogic strength, so just wondering which of the two it was.
Well I don't know you know I've always said, we're low single digits organic growth, we had a surge in Q2, especially is a bit in Q3 lot of Q3, though was the hardware, which shrank the water in Q4 of.
So I'm still love that model I mean.
We look at we don't look at it quarter to quarter necessarily sometimes things get delayed some of this type of some came in early but we believe our model still low single digit growth and you know the capital allocation and growing the bottom line of 15% to 20%. So lots of we do.
Okay excellent well, thank you for taking my questions.
But the holiday.
China.
They have to you.
Thank you were thinking about next question from beneath the Chen from TD Securities.
Please go ahead.
Hi, Steve I'm, just looking at the hosting and maintenance revenue it declined by about 6% sequentially. Given that is recurring revenue. The usually expect that to be flat to up just can you give us any color on why that recurring revenue declined sequentially.
[noise] sure first of all the time because of went up remember a lot of the people ordered and when hosted and then you did extra especially video after Q2, not all of Q2, but as the got into Q2, it and so Q3 went higher well some of those things.
Got under control in the went down.
Plus we have true we had two major Rick.
Recurring revenue customers, who had financial difficulty there ones. The an airline I'm aware of what they do use their knowledge management systems and another one was in the travel industry and one was the hotel. They also basically reduced their volumes when the host of doesn't mean that it's you know set up like.
Maintenance upfront if you don't use of the systems as much you of revenue goes lower so.
They actually added to the video went down a bit again, because people got organised the on it when they use the word you almost could say there was a surge and then it came back to a normal level and in a couple of larger customers in the travel and hospitality side had difficulties and their volumes.
The drop virtually like basically the zero.
Okay. Thanks, that's a that's very helpful. So if you look at lack of you do a true look at last year take away. The Serge Yeah do the you know a little bit of Q2 that Q3, but everyone.
Talks about Hey, you're down you know really we were up [laughter] back to normal.
Yes, the makes sense, Okay, and then in the filings you mentioned the GAAP EPS was slower than expected on the benefited from cold related grants in the quarter can you quantify that for us.
[noise] a yacht you know we've got we're all over the world. So I don't go it in and check all that some of the grass, where you know some free loans the.
Get somewhere the late payments for that.
And some of the channel I think there was some I I'm pretty sure Republic publish something up because we Didnt Lady stop off so we kept the ball and yet some of our revenue dropped in some of the businesses in Canada. So we got some grants for that so it's the $2 billion for sure.
I'm not sure that's the quarter of the year, maybe a one for the quarter and it's that type of number.
I guess, what I was getting at was the margin that.
We publish yeah, we we publish it so when you you know you go through the results you'll see the exact number I just don't have not something like track. Okay. I'll take a look at I was just wondering because the the margins were pretty good this quarter just how much of the was it without the the gross look it up.
And then I can I guess I could I could talk to that of debt. If you want true I mean part of it travel way down that was positive.
You know we have a rule. The we've been you know people should be taking their vacations. They worked for a while there still vacation came down a bit travels down a bit you of a little bit on the new rules and the IRS 16.
So you know, it's a 38%, but that's not our norm.
I always tell people with.
The acquisitions that are normal range. It should be around 30, I can't give you take some of the unusual items out you'll be closer to 34 35 this quarter like it was before.
So that's how you can think about it because there's more than just grants to cause that the there's other items as well.
That's helpful. It's the same model, we haven't changed anything itself.
Yes.
Question, the delays that you're seeing in some of the orders from the customers can you kind of drill down into that little bit where are you seeing the which business lines and how long do you think that the label the encore.
Thanks.
So no I mean, it's generally newer customers like it in video got delayed Oh I had outside of leased one order I know that was delayed.
In our.
Networks Division, we had one.
We also had of course that whole.
Deals that we did in the Nordics, which is.
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Oh.
It's 2020, what can I say, everybody I don't know why that God, we got cut off but we seem to be back I hope. We are so maybe we can go true.
So the next question or the last question if you didn't hear the answer.
And if the plan your line is still open and.
Do you have any more questions.
Oh the from me Thank you very much.
Thank you for taking our next question from Paul steep from Scotia capital.
Please go ahead.
Thank you good morning, Steve.
Can you talk just a little bit of both within the interactive how youre thinking of the performance of the contact center business growth within relatively within the mix and maybe the.
As a one off to sort of what the size of video is these days on the revenue basis I think it helps us tractor, where the business is out on that side.
The I don't think we divide the old because we've integrated the Lin with our IR group as we call. It contact center business I think is dynamic out there we were one of the first of good.
Certified with teams, but we haven't seen much revenue from that yet because it is still difficult with the many people the change systems right now little easier. If you just want to go into a hosted system or SaaS system the sign up.
Ours is a little more complicated than that the business is doing okay, I'm, hoping it does better in the future.
Which because we positioned to do so.
Below the what else you are looking for but.
There is nothing special other than the teams that we announced.
The four months ago, we really haven't seen the full benefit or much benefit from that yet, we'll hoping again as the pandemic.
Net resolve of the vaccine that that will pick up because the team is doing well but.
They didnt have all the connections for contact centers and again, we were the first of the certified by Microsoft in that zone.
We're still hopeful.
Okay.
Maybe on the and gene the slide in the document a little bit of more the mdna a little bit of the shift to hosted revenue just checking. The there is no trend there thats just some of the normal quarterly fluctuations since.
The called it out disposal.
No I think you know everyone's going a little bit more to hosted revenue.
Which is the recurring of course that makes revenue.
Is recognized over a period of time is not recognized like licenses upfront that trend still continues.
For the asset management group, the they still tend to be on premise for the most part.
For the contact center I Mg group that tends to be more hosted.
I hope that answered your question if not ask another one.
No that's good to see last clarification one on.
Setting and maybe the decision around the special dividend, maybe talk us through the alternative energy thought of it as a board net net.
Maybe just considerations for the some of the amount of these rates now there's no.
Perfect signs here in the one fast sort of clarification.
Yes, the alternative was the keep the cash revenue a special dividend.
The big on the share buyback side of things as a bit of a game, especially where markets are these days the public markets are.
Some would say fairly or.
The aggressively valued.
So the choice was that we just keeping the use of for acquisitions are in the.
Discussions we said we can borrow why are we holding us money and non earning anything on it.
Our shareholders might put it the better use in the sense that we don't have a problem with the.
Having the funding for acquisitions or strategy, if we do a larger deal we can get the funding and the rates are low.
Banks are variable is still trying to lend you money, even though they're not charging much interest on it.
So why not use some capital back we've generally patient.
Value share holders lets give us the money back the problem can use it in some other areas or the.
One of my other things in the over price market. So the.
Fair enough last one from me Steve is just on the government grants just to clarify the wheel don't end up maybe in the wrong direction here. The Mdna talks the 3.8 for the year, just maybe what the loading loans.
How we should think about it Q2 Q3 Q4 in terms of which one it was impacted and into the all actually a reduction of operating cost because when you talked earlier you mentioned free loans. So just that would be helpful. Well. There are some low those aren't reductions of operating costs because they are low the other ones generally have the.
I mean weve take kept all of the staff added more I would say you take it in two three and four probably impacted equally in each quarter.
It depends what happens going forward, if the government keeps giving out free money the head.
If we qualify we will certainly look to take our share, but we are not cutting back staff.
So we qualified pretty well for for that.
And again its by country. Some time, so you've got to is the only one of your revenue, but it could be up and if you're not of for example in Canada then the.
The things apply it doesnt apply on a consolidated basis.
Great. Thanks, Steve how the whole visible.
At the same you.
Thank you were taking our next question from go from of price from the IVC. Please go ahead.
Good morning.
Hi, Stephanie.
Hi, I'm just wondering if you could talk a little bit more of that video and what you saw in terms of Q4 of man then how the international rollout.
Sales of that.
General line going into two of the line to the okay.
So in the us where we had a pretty large presidents.
It's going pretty well continues on its not as much of the was in Q2 and Q3.
But we have a good product and we don't have of product for like the public necessarily we tie into hospitals financial institutions et cetera.
Geographically, we have a great opportunity there, but it's really the didnt have a large price.
Presence of the customer base the itself and.
And we now have got the people hired in place Weve hired dedicated salespeople.
But we weren't ready at the start of the pandemic with all that in place. So it took a little longer than usual that's in place now we haven't seen.
Significant results from the yet, but we're hopeful that we will in the future, but remember our products the matter of signing up the talk to your kids. The university are tying into hospitals and things at the little bit longer sales cycle.
But we're still hopeful that our geographic expansion of the product well will prove to and help us with revenue in the future.
Great. Thanks, and then in terms of the transportation Division and the Mdna mentioned from delays there net you mentioned the new contract when the script just wanted to give you the give us a bit more of an outlook for that division placed on line.
So that is struggling of course of being we top transportation because we have a wider net but most of our stuff is transit or 911 for example of the Nordics.
So that division actually didn't do was down a few basis.
Basically two three and four are two not so bad because again, we're in the middle of doing things. They finished the loss of three and four year transit agencies are struggling a little bit.
So, yes down, but we were fortunate enough that a large contract 55 million probably our largest for long time, we use the over a larger one but only people whove back 10, 15 years Nova debt.
And that was in a different different sector actually.
And so we have the as the 12 year contract a lot of work upfront and maintenance for probably the last six years or so.
So that basically will allow us that division, which would have been down and continue to be down debt.
That will help us get back to even on that maybe a little bit ahead as we.
Implement those systems in the Nordics. It also gives us a good system the take elsewhere, but no it's still a difficult marketplace. So I wouldnt count too much on that.
But it will what would normally be telling you transportation in transits down that's weak it has been but that deal makes us back to be okay.
Let's just put it that way I don't think it will be down.
You'll have the normal down but this is the big project that they decided the nordics to do now and they chose US it's actually was delayed because.
Because of the pandemic, we were going to do it in may or earlier in the start so would it be partly in this year. It got delayed with people off getting signings et cetera. So it's basically started now with some work and and mixed.
The next year, you should see some benefit from it which will help the.
The gate the decline that we would see in transit generally.
Well congrats on the contract win and happy holidays.
Thank you.
Thank you once again, ladies and gentlemen, please does bottom line to ask the question. We think of next question from.
Non kleber from RBC capital markets. Please go ahead.
Thanks, very much and good morning, I just want to follow up on your comment thank all of the surge in Spain.
One of the Barbie and comment on the surge in video can you remind us again of the pricing model for video is the predominantly on premise license or is the is it hosted subscription.
We do both we're one of the few who are willing to do on Prem still.
Most of the competition does only hosted.
We do both sold or the.
Both.
Or a lot of people initially did hosted.
Because of it varies with how much you use it but.
But but we do of customers, who drive there'll be on prem with their own system, rather being in the.
In the public domain. So so we do both.
No.
You mentioned the surge.
As of now and then and at less than the in subsequent quarters. It does that imply the lower revenue base for video now and and the like that anyone turn off their subscription or hosted.
Subsequent to the surge.
I don't think its really the hosted part where the surge came some people didn't and all of it help when you get into the maintenance going forward.
But most of it was people, adding and current customers, adding more people to their hosted system.
And then actually as.
A lot of people, especially in the US decided that maybe the pandemic was so bad they may not have been right. But you also then they did they stopped some of the host of workflows hosted is it just sort of pay a standard model, there's probably a minimum volume that we try and do.
Some people signed up for three and six months.
And as the sorted themselves out.
And then the volume are taking less or decided to do something else sort of decided they didnt needed anymore.
So when we say surge of was more current customers, adding more volume.
Initial the almost could say a bit of initial panic when they realize the everyone's going to work from home.
Good day assay and turning to AMG is on the of the revenue decline sequentially.
We continue the I think predominantly our hardware and professional services that drove that as opposed to.
Software is that the VAT correct.
Two things.
One remember I said some revenue was brought forward.
You always got to think about that but the big one over the last quarters, we dig hardware tick and it's not in networks. It's in the transportation side in that sort of low as we got into Q3, we were able to deploy hardware and if you notice too for the hardware is down about 5.2 mill.
Ian and it was all in that in that group and if you will an accurate in that AMG group. So the group overall was pretty flat, but its ones up in one's down and it came out pretty flat, but it's really hardware and just the comment.
For the other questions. The came out because it was hardware that is really brought the revenue down somewhat that's somewhat helped the margin because of the mix of the revenue hardware, we do not make.
Much margin on.
So again with that mix in revenue change it didn't impact the bottom line as much.
Because of at least 5.2 million down from Q3.
Related to the hardware.
And it was it was all of that group and the transportation side, we rolled out the hardware got it done.
And very little in Q4, there is a little bit in the day.
Video area as well and you see where will the use of rooms, you set up with hardware used for the rooms, where people are going in the office, though is using the rooms in the air and hurting the hardware. So there's some of that too. So there is there is a lot of moving parts, but yes, a lot of hardware it came down on hardware.
From Q3, if thats the question.
Okay. That's helpful and clarification on the comment about positive internal growth is average spring to the the quarter or the entire year or both.
Generally it's for the entire year.
We do have positive internal growth of the video side, but then you also have the transportation and some of those other things and when we look at it Theres. The hardware question, we we do our where because customers want us to be.
As it was say one throat to choke but.
But we don't really count that this activity up and down.
We are in their hardware business really redo of the facilitator solution sale, but.
But if you're looking at it's basically the year Paul.
Okay.
It certainly as we certainly as of Q4 over Q3 Q4 over Q3 and Q2.
Because we move things forward, we don't have internal growth over those previous sequentially. We don't have internal growth because one we took some things forward and showed great growth will that then.
We did say in the past, we pull something forward for that so yes.
It's been a letter of.
The Q4 compared to Q4 last year in terms of internal growth.
No actually remember our internal growth last year, but we had a big order last year the came in.
I believe in the of steel area of the end of the year.
So if you look at it overall.
Obviously, we do the comparisons were up 11 or $12 million, 10%.
Most of that growth is from acquisition.
So you go back to the model, yes, it changed a little bit. It's we've all known the two to three but our model is low single digits. That's what we do.
Nothing's really changed we are hoping to improve that we're putting things into improve it but we havent seen the benefit total benefit of that yet.
So again internal growth low single digits.
Okay and then the lots on from me I mean, when you think about internal growth next year and I'm sure in the planning process right now you're lapping quite a good year with the surge on video and whatnot. How do you think about internal growth the of the prospects Burns from our growth next year.
I keep repeating it low single digits, we expect that the happen and we hope we get some capital allocated to.
Also grow by.
Acquisition.
Yeah.
But thats, what we see.
Okay, Great and again people I just want to be clear because it can be confusing this year.
If you take the trend back before the pandemic and do the low single digits, you'll see that's basically the trend were on and then you'll see a surge in the middle or not low single digits off of Q2, which was very high and pull some things forward and related to a bit of a surge were single digits off our normal trend and the.
Before you have a bit of a surgeon, we're paying out of special dividend, recognizing we have that surgery or given some money back to shareholders.
Alright, that's understandable thank.
Thanks for taking my questions and on the good holiday.
Yes same to you Paul.
Thank you there are no further questions of this Thompson.
Okay roll off and just sort of very strong financial.
Year, good cash generation and growth of.
From internal operations for the year and from accretive acquisitions fiscal 2020.
It was an unusual year globally for everybody and has demonstrated its ability to operate successfully even isn't unusual environment.
We want to thank you all for your continued support and have a Merry Christmas Christmas and a happy holiday season.
This concludes today's call. Thank you for your participation you may now disconnect.