Q1 2021 Enghouse Systems Ltd Earnings Call
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I would now like to hand, the conference over to your speaker for today, Mr. Stephen Sadler, Chairman and CEO.
Mr. Sandler you may begin the call.
Good morning, everybody I'm here today with vis vis the president Doug Bryson VP Finance, Todd May VP legal counsel and Sam <unk> VP corporate development before we begin I'll have Todd read our former disclaimer certain statements made may be forward looking by their <unk>.
Such forward looking statements are subject to various risks and uncertainties, including those in chosen continuous disclosure policy.
Yes.
Could cause the company's actual results and experience to differ materially from anticipated results for other applications undue reliance should not be placed on forward looking information for the company has no obligation to update or revise any forward looking information whether as a result from new information future events or otherwise.
Thanks, Todd Doug will now give an overview of the financial results.
Thanks, Steve I'll now review the financial highlights from last Night's first quarter release, all the information is in Canadian dollars unless otherwise indicated.
Key financial and operational highlights for the three months ended January 31, 2021 are as follows revenue grew seven 6% to $119 1 million results from operating activities increased 32% to $40 7 million net income increased 27, 9% to $20 6 million.
Adjusted EBITDA increased 26% to $44 5 million in cash flows from operating activities. Excluding changes in working capital increased 18, 6% to $41 7 million closing the quarter with $230 4 million in cash cash equivalents and short term investments.
In the first quarter of 2021 hosted revenue increased 17, 3% to $19 3 million as a result of ongoing initiatives to transition new and existing customers to cloud based service agreements, notably in edge houses cloud contact center business. Meanwhile, seasonality that is typically experienced in the first quarter was further exacerbated.
<unk> as a result of the Covid related Lockdowns. This delayed some professional services and hardware deployments that require in person integration and customization.
And shows continues to realize cost savings from a remote work arrangements and reduced expenditure on its physical footprint as the pandemic persists with most countries experiencing a second waves.
The company's adjusted EBITDA margins increased from 31, 9% to 37, 4% as <unk> continues to realize efficiencies related to increased scale after quickly integrating acquisitions and reduced travel costs.
On December 30th.
And she has acquired 100 per cent of the issued and outstanding common shares of altitude software headquartered in Lisbon, Portugal altitude provides omnichannel contact center solutions for small and large organizations with a focus on the business process outsourcing market segment. It's modular software suite supports all media channels and has a strong inbound and out.
Pam capabilities for both on premise and hosted contact center activities the.
The acquisition of altitude extends our presence in Portugal, and further expands our operations in Spain, Brazil, and Mexico, enabling us to capture additional opportunities within these markets efforts to onboard the altitude team and align their processes with those of Ngos were almost completed by the end of the first quarter.
As previously announced on December 17th the board of Directors approved a special dividend of $1 50 per common share, which was paid on February 16, 2021 to shareholders of record at the close of business on January 15th.
Today yesterday actually the.
The board of directors approved the company's eligible quarterly dividend of <unk> 16 cents per common share an increase of 18% over the prior dividend payable on May 31, 2021 to shareholders of record at the close of business on May 17th. This represents the 13th consecutive year in which the company increased its dividend by over 10%.
With substantial cash balances no debt significant operating cash flow low interest rates and the ability to access additional capital as needed. We believe that we will continue to have sufficient funding available for operations and additional acquisitions.
I'll now turn the call back to Mr. Sadler Steve.
Thanks, Doug.
I will now give some operational highlights for the quarter.
Thank you, Steve and welcome everyone to our Q1 2021 conference call.
As Doug mentioned interest had a strong earnings quarter with adjusted EBITDA results of $44 5 million hitting 37, 4% of sales a meaningful improvement over Q1 of 2020.
This was driven primarily by our improved gross margins employee productivity as well as less travel related costs for.
Q1, we continue to operate the business globally in a work from home environment. It's been almost an entire year now that where we have been adjusted to selling and servicing our customers virtually as most countries. We operate in remain in various stages of lockdown.
Our team has adjusted well to this new working environment, and we continue to seek opportunities to reduce our facilities footprint.
I would like to turn now to our different business divisions and give some perspective on what we're seeing in each of our vertical markets.
On the interactive side of our business, we completed the acquisition of altitude on December 32020, and welcomed a new attitude team to our organization altitude brings us additional scale in Latam, Spain, and Portugal, as well as new channel partners customers and new team members and health.
One added benefit of this acquisition related for the strength of the altitude engineering team with strong domain knowledge in the contact center space.
We decided to set up a shared services engineering center in Portugal to.
To help drive the development not only of the existing altitude products, but also to expand our engineering team.
For other in Shell's global products, specifically, our multi tenant and private cloud contact center product offerings.
With regards to video our video business, we continue to focus primarily on the B to B mid and large enterprise sector and the general collaboration face Telehealth and technology vertical.
During the quarter, we saw some good expansion of video outside the Americas market.
Although we are still early in our video business development in these geographies.
In the Americas market.
The initial burst we experienced at the beginning of Covid in Q2, and Q3 of 2020, we have seen customers, who initially purchased significant capacity continue to right size their capacity as a better determine their needs and volume requirements.
The other trend we're seeing in video as a drop in the demand for video rooms, and the related support for video rooms, as many enterprises continue to have their employees work from home and therefore have less need for video rooms required in office environments.
Okay.
One of the other common use cases for video video is offering our product to technology companies, enabling them to embed video in their software and hardware applications.
This continues to be a key market for us. However, these opportunities. These generally take time to build momentum and have longer sales cycles.
For the contact center business, our differentiation continues to be focused around offering choice to our customers, providing a multi tenant cloud private cloud or on Prem solutions.
And for a multi tenant cloud solution, which we call and sales cloud contact center. We have recently started to offer this directly to our market standing up our own SaaS solution.
While continuing to focus on service provider channel partners that have white labeled in sales cloud as their contact center.
Our approach to standing up our own cloud solution is to leverage large large existing cloud infrastructure providers and ensure we're agnostic to any of these providers in the market.
We are seeing more customers request, our multi tenant cloud solution as well as our private cloud solutions driven partly by more agents working from home.
One of the other focus areas in the contact center market continues to be an enterprise customers that select Microsoft teams as their unified communication platform.
We are seeing more of our existing Skype for business customers migrating the teams as well as some new customers that have picked teams.
As their ucas offering.
The migration of existing customers from Skype to teams generates additional professional services demand and also contribute to customer retention.
Turning now to a few highlights in our asset management group.
This division continues to focus primarily on enterprise companies in the Telecom defense transit and public safety verticals.
As we had previously stated this business unit can be impacted by large deals that fall into one quarter over another last year. In Q1 2020, we won a large contract in the defense market, which impacts the comparative quarter as we didn't see it see a similar large order in Q1 2021.
In late 2020, and health announced the signing of a large <unk>.
$55 million multiyear transaction within Norwegian government and the public safety vertical specifically focused on medical related emergency emergencies. This project is progressing as we expected.
We have previously spoken about our IP TV initiative, which we launched in 2020.
Things are progressing as we expected in this area also as we have signed six new customers over the last few quarters.
These customers are at various stages of rollout and based on the way we structure our deals we generate most of our SaaS revenue in future periods. When IP TV subscribers are deployed on the platform the.
The rest of our telecom market has progressed as expected in Q1.
With the global rollout of <unk> in many markets and the expansion of Iot devices globally opportunities continue to emerge for that our vast Oss and BSS solutions.
The one area of our business that has been negatively impacted by Covid as the transit market as ridership is down significantly when compared to pre COVID-19 periods.
However, having said that we still believe there is demand for our automated fair collection solutions in the transit market driven by the need for less more cashless contactless payments as such we plan to expand our automated fair collection offering into new geographies later in calendar 2021, let.
Let me turn the call now over to Mr. Steve Sadler. Thanks.
Thanks vis vis about acquisitions as doesn't Vince noted we completed the acquisition of altitude on December 32020. So there was one month of financial results in the quarter.
We did a review of staffing at altitude in the month of February and did some restructuring at the end of January. This resulted in some restructuring costs in Q1, but these costs were minimized as we redeployed some of the altitude staff to other age hosts operation.
<unk>, especially their cloud experienced R&D staff.
Altitude had an EBITDA loss in the month due to restructuring being done at the end of January but we expect to be EBITDA positive in Q2, thereby adding to our overall EBITDA performance. It should be at full EBITA percentage in Q3, we continued.
To focus on capital deployment.
Doing our due diligence remotely as noted last quarter completing acquisition transactions are taking longer than they did historically due to the pandemic.
The acquisition pipeline remains consistent with historic levels low valuations have increased slightly due to a public due to public market influences and low interest rates. We continue to maintain our discipline in terms of financial objectives on valuations when reviewing <unk>.
Acquisition opportunities I would now like to open the call for questions.
Thank you at this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad once again Thats star one on your telephone keypad to withdraw your question. Please press the pound key.
Q.
Our first question comes from the line of Stephanie price of CIBC. Your line is open.
Good morning.
Congrats on the on the hosting revenue growth in the quarter. Just curious if you could talk a little bit about what's driving that growth is it a direct sales force increased customer demand or orange has implemented new programs kicking in from people Smith.
Hi, Stephanie yeah, so a little bit a little bit of all of the above we have as I mentioned, we stood up our own cloud contact center and are going more direct there.
We also have our cloud contact center product.
Being hosted by our channel partners and Theyre, having more customers.
On their platform as well so it's a combination of our direct and our channel partners and just generally in the market, we're seeing more demand for both private and public multi tenant cloud.
Yeah.
Okay, great. Thanks, and then and then hosting and maintenance revenue line. It looks like it's been down sequentially over the past three quarters should we think about video here and it may be video hosting of the reason for that and maybe you can give us some color on what you're seeing in that line.
Yes, so as I mentioned, it's a lot of it is related to video.
Both in the video rooms area, where there is less.
Leading video rooms, and basically they don't need the hardware support for the rooms. So that's one area and then.
There's a bunch of customers sort of adjusting their capacity from their initial sort of surge in Q2, and Q3 of last year, they've essentially right sized what they need as they figure out where the demand is going to land post debt.
The initial surge.
Okay, that's helpful and limited.
Finally on <unk> it seems like you're integrating this one pretty quickly just curious if there's anything unique about the <unk>.
Acquisitions are or how we should kind of think about the integration abilities here.
Yeah, we were probably integrating it a little bit like we did dialogic a year ago. The same thing. The only difference here is they had a lot of expertise and a lot of staff and R&D trying to write a new omni channel a software solution in the cloud, which we already have.
So we took some of their staff and rather than reducing the staff added them to our R&D development and they also at other pretty good expertise at a reasonable cost in Portugal. So we added it to some of our other divisions as well so rather than doing a restructuring where the cost would it be much larger we actually too.
The opportunity to fill vacancies, we had an increase R.
R&D people in the.
In the what we call the cloud contact center area. So, it's a little different that way.
What they had was a system that they were just been working on for a year and a half with no customers and it wasn't finished so we just continue that as we move these people over so we integrated the R&D and much faster than usual, usually we keep running it but they had a group just doing a new system.
<unk> was well supporting there are other systems, we kept all of that and the people working on the new cloud system, we moved to basically our cloud system to move it along faster.
Great. Thank you very much.
Thank you next question comes from the line of Deepak Kaushal of Stifle GMP. Your line is open.
Oh, Hi, good morning, everyone. Thanks for taking my question.
A couple for me first on the bulk of companies on the altitude can you guys talk a little bit about the geographic strategy. There I think you alluded to it in the prepared remarks.
In the past you guys had a local presence.
Places like Brazil, and Mexico are you now sort of assume that all through true.
Portugal or.
Do you still have a local presence in Latin America, South America, and what's the strategy there.
So it was interesting in this area because they were.
A pretty big competitor in Spain.
Portugal, we weren't in so we opened up Portugal for us they have a large operation in mean over 30 people in Brazil, we had like three so we put our three people into their operations in Brazil, Mexico, We combined the two so actually we've expanded scale in all areas expanded in Spain.
<unk> set up in Portugal serve as a new area for us.
Expanded our Brazil operations in fact put our Brazil operations into their operations put.
Put back sooner together in Colombia, which we also have we.
We increased presence there as well so it was actually a good fit all where we increased scale in all the areas we were reading added Portugal.
Two to the areas. So I guess your question was did we expanded South America or Latam. The answer is absolutely they had.
They had about 35 40 people in Brazil.
So we added are by their operations in Brazil, and they are going to be taking our products into that geographical area.
Okay excellent and then just.
Stepping back in terms of other cloud contact center, you guys put up your own solution.
In addition to your channel partners White label solution.
How do you think about potential for conflict there with your channel partners.
What are your channel partners, how they reacted to you guys.
In other words have you kind of segment that those two parts of the markets.
Yes, when you talk about channel partners, our channel partners generally sold on premise they have not set up their own solution.
Well, so we by setting up our solution have given our channel partners the opportunity to sell and put it on our solution. So they are channel partners never really had their own solution. They were actually looking for when they had customers who are interested in the cloud they had the.
Looking for a place where they could direct them too. So there is no conflict there.
Okay. Okay. That's helpful and just on that for that.
So I would just add to that we're constantly direct and channel across our business that are used to coexisting with our channel partners.
The way, we do things, we break it up by vertical or by for.
Micro segments et cetera, So it's kind of a common way for us to coexist with partners.
Thank you and then my last question.
You mentioned no COVID-19 impacting implementation second wave across multiple countries, where what's the kind of geographies, where you're seeing the most impact or is it equal across the board.
Without going into detail I'd say, its pretty EBIT across the board.
Again, you've got many factor of seasonality because some professional services you are coming into the holiday period, you had a lot of people again during the year, hoping the pandemic would maybe end earlier than they could take their holidays at the end of the year.
We encourage them to take their holidays each year. So there was a lot of factors that came into that and it's slowed yes professional services, obviously and some hardware.
Hardware sales that we could not deploy because our customers people were home vacation.
Okay. So theres no particular, geography that you want to call out or any geography for you should look out for for rebound.
No.
Impact of mall, maybe the U S a little bit more.
Because in Europe, they generally take the holidays in the summer.
But they also go skiing, a lot of the resorts were shut down I think it did we.
We didn't assess word impacted more or less we think.
It was pretty.
Even across the board of.
Depending on the customers in the region.
Okay. Okay, great. Thanks, that's it for me for now and ill hop off line.
Thank you next question comes from the line of Paul steep Scotia capital. Your line is open.
Good morning.
Could you maybe just go over what the plant or the strategy sounds like in terms of the new cloud solution on the contact center are you actively sort of encouraging clients to migrate it sounds like they've got the option, but is there sort of a plan put in place now to sort of shift more of that base to the cloud.
You know we've always taken the approach we do what the customers want if they want to move to the cloud we have that available tool I wouldn't call. It a new system. It's the systems, we've had for a while we're just enhancing it.
It's up to them, we will support them in the cloud we will support them on premise and we have software to do both.
We are an encouraging one way or the other let them make the choice.
Okay that helps.
Maybe on asset management is there anything we should think of gas interest in terms of year on year volatility there over the next couple that you want to point out obviously.
Region contract will contribute.
That'll help offset but is there anything else in terms of <unk>.
Pressure, you're seeing in that part of the business. So just maybe.
Cause things to ebb and flow a little more in the last couple of quarters.
You know the only thing is on the transportation side net large contracts pretty steady each quarter professional services every now and then we'll get there.
You'll have to pay milestones on software, but on the network side. It can be lumpy as Vince mentioned in Q1 last year, we had a very large deal with a very large deal mid year last year with one of our customers for nearly $6 billion. So it can be a little lumpy.
So yes, you do have that but that's pretty normal it's been like debt for a while.
It will probably continue like that going forward.
Okay.
Just maybe on that same topic, Steve not to we normally want to spend much time on quarters, but you know last year, obviously the start of Covid yet.
Home run quarter with video there.
How should we think of the Q1 to Q2 seasonality like in the last few years it stepped up a little bit driven in part by acquisitions and this year, we've got all tattooed but.
But should we think that that's maybe more muted at this point due to Lockdowns and where were all out I guess in March at this point.
Yes, I wouldn't say the altitudes.
More I mean.
As usual, we take on an acquisition, we do eliminate some revenue, which we found to be either not high quality ore.
Not profitable so will can impact it a little bit, but we announced what we thought the revenue would be were pretty confident what I will say is in the first months, usually the first quarter, but in this case. The first month, just like dialogic a year ago customers tend to slow buying because they want to see what we're going to do or are we going to keep there.
The old system Whats what actions are we taking so we went through January so I would say January as a month was a little lighter in altitude and what we expect going forward now because we've made or changes we've talked to the customers.
It's getting back to more what I'll call normal rather than wait and see type of approach.
Okay and then.
Last one for me.
Clarification and it may just be how much reading the press release last night, you talked about facilities reduction and we've talked about that for a couple of quarters, but it sounded like maybe you've made more of a substantive decision there is there.
Sub leasing is likely great right now, but is there a move to sort of permanently actually strip out some of that facility's cost I guess, how I would maybe reading it last night thanks for that.
As a as their facilities come up to be renewed we either reduced space or eliminate them, depending how many people were in there. We found our people now are more.
Can I say.
Used to working from home before it was like all we can do it now it's not so bad so yes, we will continue to reduce our facilities cost as it makes sense and we do it in conjunction and talking to the people all day thinks the best for them to do.
And a good portion of them would like to work continue to work from home. So our facilities costs. We look at them every time they come up.
For renewal and yes.
We're starting to reduce debt administrative costs, yes.
Okay.
Maybe a clarification on that without having looked at the annual is there a big bump in terms of you know one of the larger facilities coming up in the next year, Steve or is it sort of pushed out a couple of years into the future, where we'll see the full benefit of the reduction.
<unk>.
For the full benefit probably has a few years, but theres facilities coming up every year some of them larger yes.
So it's a continuous process.
Over the next couple of years, we expect our facilities costs declined.
Okay. Thank you.
Thank you.
And if you would like have a question. Please press Star then the number one on your telephone Keypad next question comes from the line of Paul Treiber of RBC capital markets. Your line is open.
Thanks, very much and good morning.
The last question in the MDA mentioned, a renewed focus on profitability.
I would think for Amgen is it wouldn't be a renewed focus.
Ongoing so beyond.
<unk>.
Do you see other opportunities.
Further state costs, perhaps things like you know it is permanently reduced travel for marketing spend.
Maybe using more for video conferencing.
And do you think cat.
A long term structural improvement in the in the cost base for the company.
Yeah.
The short answer is yes, we agree with what you've just said, we do see opportunity to reduce costs, we have our own video system, which we can use.
Of course, it also depends what customers want some customers when travel comes back wants to see.
Sales people and see people.
Right now they don't so it'll be a bit of a hybrid model both on the premises we won't get rid of all the premises, but we will have less premise cost I expect we will have a bit more travel costs, but we probably will not go back to where we were.
And just to put.
Some numbers around it other than the magnitude like in the past you've called out.
Your EBITDA margin targets from the 30% range.
Do you want to throw out like where do you think that could perhaps go in time.
It's really.
A lot depends on acquisitions.
But it's very interesting to note that with other acquisition a fairly reasonable sized one in Q1, we did 37% yeah.
Usually you would see a drop in that first month.
No.
And you can also.
We also told you that altitude did not make money in that first month, so as we get it towards normal margins debt percentage should improve.
Okay.
Okay.
Shifting shifting to be delayed.
<unk> project from implementation.
The timeframe for when you think the revenue for these deals may start to flow to revenue I guess it is it just is it predominantly vacations for.
Or is it the travel restrictions related to Covid and obviously you know it's more than just one quarter.
Delay.
It may take until the summer until the fall.
Okay.
Yes, I would say.
It's a combination of both of those things, but I don't think the delay.
I will call it temporary I think will pick up in Q2.
So it's picking up now.
Okay, because the seasonality from the period has gone to travel parts still there, but it wasn't a huge impact for us last summer in the pandemic.
So most of it I would think relating to customers being off or our staff taking vacation, but it's also customer staff not available because of that time period.
So I think.
I think we're seeing a pickup already.
Okay, that's great to hear thanks for taking my questions.
Thank you once again, if you would like ask a question. Please press star one.
Comes from the line of Daniel Chan of TD Securities. Your line is open.
Oh, Hi, good morning, just wanted to talk about the cloud contact center.
Are you guys hosting that in a public hyperscale cloud and as a result, you should see minimal impact on capital intensity.
Related to that how should we be thinking about the margin impact as more workloads move to cloud solution.
Yes, so exactly right we are using one of the public cloud offerings. So there's no capital at all.
It's pure variable cost as we get more tenants on the platform more customers on the platform the cost scale.
And we do video like that already we do IP TV like that already so it's common for us to use multi tenant cloud environments public cloud offering and the margins are really healthy.
Okay, and then Vince you commented on the hosted maintenance revenue coming off sequentially largely because it was right sizing.
The video deployments can you remind us what the contract structures are for some of these video.
The average contract is it annual as a monthly.
And to what extent can they change these agreements.
Relatively quickly.
Yes.
Yes, we did.
Something during COVID-19 to help our customers and we will let them signed 369 and 12 month agreements typically theyre all 12, but we made an exception in COVID-19 because of the scenario we were in.
We let them because there was so much uncertainty and nobody knew what level of volumes were going to actually happen.
We made an exception, but typically our deals are 12 months.
Okay that makes sense. So are there any renewals maybe large renewals that are maybe coming up soon debt.
That people may want to right size as well.
We do have a lot of renewals that happened on January one every year a majority actually.
So.
That's our common renewal period, having said that theres renewals that happen every quarter.
With video the only kind of anomaly was what I said, which was we gave some people some shorter term.
Flexibility just given the scenario that we're in.
Okay. Thank you.
Thank you once again, if you would like to ask a question. Please press star one.
There are no further question at this time for centers you May proceed.
<unk> continues to have a strong financial position with $230 million in cash minimal bank debt and good cash flow.
I want to thank the engineer the <unk> team, who performed well in fiscal 2020 in spite of the pandemic.
I also I. Thank you our shareholders for your confidence and continued support.
<unk> continues its journey to build.
Into fiscal 19 to 2021 and beyond.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect have a great day.
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