Q3 2021 Enghouse Systems Ltd Earnings Call
Yeah.
Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily until that time your lines will again be placed on music hold thank you for your patience.
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Ladies and gentlemen, thank you for standing by and welcome to the inch houses Q3, 2021 conference call. At this time all participants lines are in a listen only mode.
After the speaker's presentation, there will be a question and answer session to ask a question. During this session you will need to press star one on your telephone to boot.
Draw your question press the pound key.
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I would now like to hand, the conference over to Europe Speaker, Stephen Sadler, Chairman and CEO. Thank you. Please go ahead.
Okay.
Good morning, everybody I'm here today with Vince.
Global President, Doug Bryson, VP Finance, Todd May VP legal counsel and Sam <unk> VP corporate development before we begin I will have Todd read our forward displacing certain.
Statements may be forward looking by their nature, such statements asserted various risks and uncertainties, including those mentioned continuous disclosure filings such as Europe.
Which could cause the companys actual results experienced sticker materially.
<unk> results or other expectations undue reliance should not be placed on such forward looking information and the company has no obligation to update or revise any forward looking statements, whether as a result of new information future events or otherwise.
Thanks, Todd Doug will now give an overview of the financial results.
Thanks, Steve yesterday, <unk> announced its third quarter unaudited financial results for the period ended July 31, 2021, all financial information is in Canadian dollars.
So and operational highlights for the three and nine months ended July 31, 2021, and the comparative period July 31, 2020 are as follows.
Revenue achieved was $472.0 million, respectively compared to three two compared to revenue of $134.0 million and $391.0 million.
<unk> from operating activities were $43.0 million and $117.0 million, respectively, compared to 42.2 million and $122.0 million net.
Net income was $23.0 million and 62.6 million, respectively, compared to $26 million and $71.0 million.
Adjusted EBITDA was $48.0 million and $126 million, respectively, compared to $51.0 million and $132.0 million, while adjusted EBITDA margins increased from 34% to 35, 7% for the current year to date period.
Cash flows from operating activities, excluding changes in working capital was $42.0 million and $129.0 million, respectively, compared to $48.0 million and 134.
$5 million in the prior period.
Revenue achieved for the quarter was $123.0 million compared to revenue of 131.
<unk> 3 million in the same period in the prior year. The decrease reflects exceptional revenue in the comparative period as a result of COVID-19 related demand similar to the second quarter of 2021, and a comparatively higher revenue last year was driven primarily.
By the previous year, a significant increase in our video business that has now returned to levels that are more consistent with pre COVID-19 volumes.
Revenue for the quarter was also negatively impacted by six 2 million as a result of foreign exchange as the Canadian dollar strengthened against both the U S dollar and the euro.
During the quarter and chose completed two tuck in acquisitions, adding W.
BV on June 3rd 'twenty, 'twenty, one and my mind them SaaS on July seven 2021 neighbour, who is an Amsterdam based provider of market research and data analytics software solutions, which augments our existing market research and survey solutions remind them as an enterprise software provider of secure SaaS base.
<unk> platform.
For virtual events recording editing and sharing interactive video presentations remind them as complementary to our video offering and broadens our video collaboration solutions.
<unk> closed the quarter with $195.0 million in cash cash equivalents and short term investments compared to $259.0 million at October 31, 2020, and $175.0 million as of April 32021.
Our cash balance was achieved after making payments of $39.0 million for acquisitions and $115.0 million for dividends this year.
And just continues to prioritize long term growth strategy over quarter over quarter results investing in products, while ensuring continued profitability and maximizing operating cash flows as a result and shows continues to replenish its acquisition capital, while returning $85.0 million in special dividends to shareholders at annually increasing it's eligible.
The dividend.
Yesterday, the board of directors approved the company's eligible quarterly dividend of <unk> 16 per common share payable on November 30th 2021 to shareholders of record at the close of business on November 16.2021.
I'll now turn the call back to Mr. Sadler States.
Thanks, Doug.
We'll now give some operational highlights of the quarter.
Thank you Stephen I appreciate those of you who are joining our Q3 2021 conference call.
As Doug mentioned <unk> had another strong earnings quarter with adjusted EBITDA of $48.0 million, achieving 35, 4% of sales and strong cash flow from operations.
This represents our sixth consecutive quarter of exceeding $40 million of EBITDA.
Which speaks to our companies have built the ability to generate strong profitability and cash flows and significantly varying market conditions.
During the quarter, we faced the negative impact due to foreign exchange, which reduced our revenue by approximately $8.0 million compared to Q3 of 'twenty 'twenty.
And $6.0 million compared to our previous quarter Q2, 2021.
In the quarter, we completed two product centric tuck in acquisitions momentum and need.
Momentum brings to edge has the new SaaS application that extends our video capabilities.
With the momentum product, we are now able to address the large video meetings and virtual events market.
That can extend video meetings upwards of several thousand people the.
The largest events so far on the momentum platform exceeded 20000 dealers concurrently.
Nebo enhances our survey capabilities used in market research communities in the contact center space.
Our video business has now returned to volume and demand that we're consistent with pre COVID-19 periods.
And most of our revenue to decline this quarter compared to last year is attributed to the video decline. In addition to the foreign exchange I previously mentioned.
Over the last several quarters, we believe that growth in the overall cloud contact center market has accelerated.
And we are expanding our focus on our cloud contact center offerings.
Driven by this growing market demand.
And we also priced provide migration path to our existing on premise contact center customers that wish to move their on prem offering to either a public or private cloud.
Our cloud contact center is expanding through both through partners and through our direct sales team.
As an example, this quarter one of our largest partners has decided to expand their cloud offering contact centers to three additional centers globally and another partner as they decided to start to offer video as part of their cloud contact center offerings integrated with <unk> cloud.
We now have over 80000 named agents on Intel's cloud contact center platform.
As a rep, which had any one time has about 50% concurrently concurrent users, making us one of the leading technology providers and the cloud contact center space.
We are seeing more migrations from on Prem unified communication platforms to cloud based ucas platforms.
<unk> continues to be one of the only companies in the contact center space.
There are agnostic to any ucas solution and provide integrations to industry, leading ucas platforms, including teams.
Ring Central Cisco and others.
In the quarter, we also expanded our AI capabilities and in addition to offering AI driven chatbot, we launched a new AI product that improves agent quality assurance ultimately.
Ultimately, helping our customers improve their customer experience.
This is a unique AI offering and its incremental functionality to our existing quality assurance products.
Turning now to a few highlights in our asset management Division.
We are seeing good demand for our BSS solutions that enable any enterprise to become a mobile virtual network operator.
Offering mobile services that help monetize their customers.
In the quarter, we signed a new large company to R. M. B N O offering and continue to expand our solution to many of our existing <unk> customers.
IP TV demand also continues to be robust as we added four new customers in the quarter.
Revenue for our IP television solutions builds as IP TV subscribers come online.
Our transit business.
Just a quick update although ridership remains low still down more than 50% compared to pre COVID-19. We added some new customers to our Iot product that remotely manages our AFC platform on transit vehicles.
We also achieved in the quarter, our Europe pay Mastercard visa.
Also called <unk> certification of our automated fair collection product. This ENB certification is an important milestone for our AFC solutions and our plans to expand this offering into Americas and rest of the world.
Just to provide a brief update of our on our large public safety projects.
And Chelsea is implementing the first national security solution for the entire country of Norway, which is fully integrated across all regions in the quarter. We achieved an important phase one milestone for this project and as planned our application was installed and accepted we are still in the early stage.
<unk> of this project as well as well as our other fire public safety fire project, but so far things are progressing positively.
In summary, we continue to achieve strong EBITDA results, while being committed to delivering great products to our customers.
As illustrated by investing over $60 million. So far this year in F. 'twenty 'twenty 'twenty in engineering and product development keeping in line with prior year spend.
Let me turn the call now over to Mr. Steve Atlas.
Thanks, Vince just a little bit more on acquisitions as Doug and Vince mentioned, we completed the acquisition of Nabucco in June.
Momentum in the second week of July 2021.
Both did not have a full quarter of revenue in our Q3 results.
<unk> was combined with our <unk> business, while momentum was added to our video business.
Revenue for these acquisitions was about 500000.
For their partial time as part of <unk>.
<unk> in Q3 with a small EBITDA loss in the financial results reported.
Q4 will be the first quarter of their of their financial results being fully included and we expect their EBITDAR to be positive also.
Altitude acquired at the end of December 'twenty 'twenty is now fully integrated into our Latam business and achieved our normal EBITDA percentage in the quarter slightly ahead of the initial expected integration timeframe.
We continue to focus on capital deployment doing our due diligence remotely although the acquisition pipeline remains strong opportunity values continue to remain high with strong public markets low interest rates.
And financial stimulus as noted last quarter, we are experiencing higher desired acquisition.
Acquisition values from sellers, but many potential acquisitions are not getting completed at these higher values in our markets.
Acquisitions are also taking longer to be successfully completed.
We continue to maintain our financial discipline, when reviewing acquisition opportunities and accumulate cash for future capital deployment I would now like to open the call for questions.
At this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad to withdraw your question press the pound key.
Well pause for just a moment to compile the Q&A roster.
Your first question comes from the line of Daniel Chan with TD Securities.
Hey, good morning, just wanted to dive into the zoom fiber line acquisition as announced a few months ago do you see that.
That transaction, having any impact on the company is on the competitive landscape for you.
You know, it's hard to tell but I think it has an impact both on five Don if you looked at their last quarterly results gave quite a large loss consumed take their product to their customer base I don't know I don't know the whole profile with a base, but they have a law.
Things like schools et cetera, which probably don't tied to contact center I think is probably a reasonable combination of reasonable thing that zoom dead.
It probably.
Helps us a little bit in our call our Tech center, because they're getting you got another variable in there were five nine was completely independent and now theres, probably going to be some zoom him influence on where they run their software et cetera. I also think in any acquisition there is some turmoil.
So we expect there'll be turmoil as this acquisition gets completed.
It doesn't hurt us.
We have already what they have we have video were already incorporated into our offering so.
It may impact other.
Contact centers, who might want to use zoom is the integration of video into their offerings, but it really doesn't impact us and zoom to strong competitive there with a strong sales and marketing group that will continue and we tend to be more in the health care and financial area, a little more focused.
And so we'll continue to do that so we'll wait and see I don't see it hurts us, but it may or may not help.
Okay. Thanks for that Steve you.
You mentioned video is already integrated with your with your contact center.
Platform are there any capabilities you see with the combination of zoom and five nine.
Anything that they could have that you don't currently have.
There's always some things that they may have that we don't have but there's also things we have that they don't have I think the biggest issue and I don't know if it's well known for example in Germany and other places zoom was found not to be in compliance with G. D. P. R, which is the security part.
That could help us.
So that's just from the zoom side you know there are strong group. They got a lot of R&D five nines of strong group.
I don't think it impacts us that much, though and where we're at versus where they're at in the marketplace.
Okay. Thanks, and then Vince you mentioned you have about 80000 names in the cloud contact center at 50000 concurrent users at any time.
Could you just give us some context on that how has that metric trended over time and maybe if you can kind of give us if you know any how.
How that compares to some of your large competitors. Thank you.
Yeah, I mean, it's trended positively I've mentioned it as a point of reference because they know.
Sometimes we're not known for our size and scale in the cloud contact center space. So it's more of a reference point, but it has been growing.
Thanks, guys.
Your next question comes from the line of Paul steep with Scotia capital.
Hey, good morning, Steve could you talk a little bit about capital deployment, just how youre thinking about it in terms of the context of your earlier comments, obviously, we had the special dividend in February and you've already started to stockpile cash again.
How are you thinking about it management, maybe at the board level, what level of cash you sort of comfortable holding versus using debt.
Now I guess it was rented the fall time frame of last year.
And your take on that would be helpful.
Yes.
As you know from my guess three I'm comfortable with holding cash.
It's not really a problem because you know.
Bad things can happen quickly.
And when you have cash you can take advantage of them. So we.
That the reason why we did the special dividend, which I've mentioned before is we've made what I would call excess profit because of the pandemic in that everyone went to visit deal, which was virtually all profit for us as they signed up more software so rather than hold back cash we decided to pay that out as a special dividend. So.
Sort of on a normal trend now having paid that out.
We still see good opportunities, it's nice to have the cash and of course, because we're profitable weaken.
The banks and financial institutions are quick to want to lend us more cash.
But unless we absolutely needed I don't see helping their profit by paying them fees.
So it's sort of the same as we've always done kind of boring group. We just do what we've done in the past we continue to do it.
Got it that helps with context, if we just zero in getting your thoughts on.
The fact that with momentum it was say a SaaS based deal how you maybe approach that deal not that there is a lot different there I know the financial standards would be the same but the metrics are a little different.
How are you finding the ability the ability to do those deals maybe.
The second question well remember it ties to video, which is also a SaaS offering so it ties it isn't like it's it's different slightly different market for us. It was smaller we do find some smaller SaaS companies struggle a little bit everyone talks about the big ones and you know, they're growing revenue and losing more.
But theyre getting money, mostly from public markets.
But the smaller ones are not so we see some opportunity. There. This is one that fits nicely with us. It is small it's in Europe, but we're tying it in and we see opportunity to grow it will take a little time to get there, but we've already started that process.
Yeah, sorry, Steve I should've been more clear on the SaaS deals on that one in particular are the hidden valuation metrics that over time, it would be similar to sort of your targeted returns or you know the assumption is to get to the targeted returns.
They're integrated with other things in the platform and you can pick up the returns on on maybe higher synergies on some of those products was how I should have phrased that.
Okay, we always get some of our returns through synergies be it revenue or cost no change.
We expect it to meet our returns we arent changing our discipline or our are but we look at for our performance. So we always take the first 90 days don't make much money then we breakeven than we make half our margin in the full amount, we expect that will happen there too might come even better if we get some revenue growth from it.
By tying it in but there's no change to our motto, we're not paying more for SaaS and chasing something that the market likes that loses money potentially.
We're trying to stick to our normal discipline.
You may have to wait a little longer but we still think in the end we it's the right thing to do.
Great last one for me to whoever I guess wants to field it.
On the contact center, Vince had talked a bit growth youre experiencing there can you talk a little bit about maybe the willingness to margins have kept creeping up as Todd highlighted earlier.
Can you maybe sort of highlight.
They're not U C.
Eat more willing digital lean heavier on the gas pedal in terms of investment maybe distribution is what I'm thinking of Covid, obviously highlighted the R&D investment.
Yeah, I'll do a little bit and Vince can take it afterwards or.
Margin its tough in the contact center business, because there's a lot of people chasing revenue and willing to lose money to do it we arent. So our growth is not quite as strong as theirs, but our profit is.
And that continues.
Will that stop will the market will sort out in the end either they won't get funding because if they aren't making money they've got to go to the market or the fact as prices will go up.
We're in the game, we do well, we don't lose money on it we don't intend to play the other game, maybe we're not good at it.
But it works well for us the way we've done it in the past so we've sort of stuck to that discipline.
Rather than you know, let's sell something at a dollar that cost us a $21.0, its not sort of our nature. So we're sticking pretty much to the way we've done it in the past it does make growth a little tougher, but we think it will end up being the right thing to do maybe.
Just add to that so the only thing we did modify a little bit on our go to market for our cloud contact center product.
We were historically going through channels only so companies were standing up our cloud and white labeling it and selling it to the market we stood up our own clouds. So we stood up instances in Europe and in the U S and have some of our direct sales team selling directly to the market in <unk>.
Additionally to continuing with our channel partners So thats.
Bit of a change we made earlier this year and that we're still early in that execution, but.
That's a slight modification really on the cloud side, yes. It just so you understand what Vince was saying, we do that through partners. So it does not change our capital expenditure profile a lot of those companies that do SaaS also have a lot of capital expenditures you can see it on their financials.
Ours has been changed because it's all operating cost for us.
In other words, we have someone who we do that process, but we do it with partners.
You know Amazon does Google IBM theirs.
Lots of people out there, who who handled the processing side, So again and you won't see our capital expenditures changed that much.
It's all in our numbers.
Perfect. Thanks, guys.
Your next question comes from the line of Stephanie price with D. I B C.
Hi, good morning.
Morning, seven morning cloud contact center.
And the acceleration there can you talk a little bit about the percentage of on premise customers that you can move to the cloud and maybe a bit more about how you can change.
Hum.
What do you expect them to work.
I'll take it it's hard to know on the call.
Cloud is very much in the market today, and a lot of new people going to especially the pandemic. Because you don't you can't go in and set up on Prem systems that easily.
We certainly will do what our customer wants we can give them. The cloud we can keep them on prem some of the on Prem customers I believe we will stay on Prem if they know they can go to the cloud when they want to so we had to do that integrating with teams if they want to have our own cloud. So we're trying just to give customers choice and.
Let them decide.
But how many are going to do it I I have no idea.
It's not a guess I would like to make.
Yeah, and just to add to that so.
We definitely give customers choice.
Our whole model is you can do you can stay on Prem you can move to a private cloud instances some larger companies.
Focus a lot on security and data privacy, so they'll want to either cloud, which we're happy to do.
They want or they may want to leverage our public cloud. So we are we offer optionality, there and essentially like Steve said, there's no rush to move there. We just tell customers. When you are ready we're here to provide you that migration path.
Okay. That's helpful. Thanks, and then you mentioned some delayed projects and implementation getting increased professional services revenue this quarter. It looks like maybe some of the implementations are now up and running.
Can you give us an update on that and if you've seen anything post quarter.
Yeah.
Well I'll, let Vince.
Talk to her but I can tell I don't think we delayed the professional services I think what you'll see is some of the two big projects. We got stuck the professional services have started to be done.
So both the fire kicked in probably started this quarter or last quarter and the a M. K started the quarter before those have a lot of professional services than them.
And we announced the size of the contract, but we're also getting change requests on those so I think that's helping our professional services side.
And they do it and signed it in the Covid is not impacting that that much because they want to get the project done So I think youll see the increase.
Probably coming from there and then last quarter, you got holiday periods in Europe, and you've got other things that can impact it I don't see a big change, but which you might have to the only thing to add on that is that as I talked to earlier youre getting some movement from.
On the unified communications side, so when a customer had for example, Skype.
On Prem Skype and want to move to teams. So theres services work for us to integrate our cloud our contact center, whether it's cloud or on Prem.
Teams.
Theres more PFS being driven by that migration to Ucas platforms. That's also driving some additional PFS. In addition to what Steve said.
That makes sense, great and then just finally for me the MD&A mentioned some restructuring initiatives. Just wondering if you could elaborate on this a bit whether they're outside that normal course of business.
Restructuring.
I think it's pretty normal what we've done with the acquisition side. So I don't think it's reference there and it wasn't a big restructuring cost.
But what we are doing is from a tax side.
Your.
Changing some of our legal structures to reduced professional fee costs. That's number one it also will help our cash flow because our tax rate that we pay should be reduced and we've got a pretty big project going to do that and we also have taken the opportunity like I've mentioned in the past we've saved money.
On on travel and entertainment that kind of thing that will come back a bit but we've also started to look at our premises and whatever it might cost in the future for travel and entertainment, we're probably going to save on premise costs. So we start to look at some of the smaller ones.
Some are larger ones. We've surveyed are staff, who wants to work from home who wants to come back to the office. So we're actually saving on some of our overheads basically on the premise side as well so there's a lot of moving parts, but overall.
We're trying to match up to make sure that if travel entertainment comes back which will increase costs that we have things to offset it right.
Right now travel and entertainment has not come back and we're already getting offset a bit from the premise side.
We intend to do a hybrid model, you'll have offices smaller that people could come into some people want to come to the office.
And probably have them come in.
A day or two a week anyways, because we think that's good for the the social relationship and for training and for having discussions and trading experiences with each other.
We've already started that.
The travel and entertainment has not started.
Got you. Thank you.
Again, if you would like to ask a question. Please press Star then the number one on your telephone keypad. Your next question comes from the line of Paul Traver with RBC capital markets.
Oh, thanks, very much and good morning, everyone.
Follow up on the comment at the 80000 agents in the cloud.
Is that what you call your own cloud or does that include the white label Channel partners as well and then could you also put that in perspective in terms of the number of seats you may have.
For on premise.
Yeah. So.
On your second part of that question the on premise number no I didn't.
I didn't talk about that number I was just giving D. The cloud contact center, our multi tenant cloud contact centers product specific late and that includes our partners and our own cloud.
<unk> named agents on those platforms.
In terms of like the.
The growth in that how is that predominantly from migrations or from.
New customers and how has the churn.
Our guest retention of on premise customers being tracking over the last couple of quarters.
Yes. So on your first question, it's both new logos as well as customers that are on Prem that want to move to the cloud. So that's.
That's essentially what's included in those those named agents and concurrent agents.
Sorry, what was your second question.
Europe. Besides just in terms of the customer churn.
Our retention.
On premise customers with last few quarters.
Yes, so on the contact center side.
<unk>.
The on Prem churn numbers are relatively in line with what they have been.
Slight acceleration this year because of the Covid.
On the video side, we had the big Spike in <unk> and cloud users that came way down post COVID-19.
Okay.
Yeah.
So and then on the asset management side.
Equally the churn has not changed at all in the last three years.
Been pretty flat.
Okay and then.
One for Steve just a high level in terms of M&A.
You've made a couple of acquisitions.
Video conferencing space, we've seen the video conferencing space go through a boom and then now slowing down.
Specifically are you seeing valuation.
That segment.
Some more attractive than what they have been in the past and do you think you'll continue to build out your video conferencing business.
Through acquisitions in the near term.
You know I think there's two parts there not to mislead you know look at zoom share price and yes, the valuations have come down.
But there is still high.
So there is still want to see what the opportunity everyone's trying to guess what's going to happen.
If the pandemic is over the vaccinations work will there be less need.
So, yes valuations have come down, but we still see them high.
That doesn't mean, there is an opportunities for us, but they are used at the lower end like the momentum well mine them.
You know there are opportunities out there, we see a lot of them and.
Because a lot <unk>.
<unk> done well and good for them, but a lot of the smaller ones don't make money.
And there are future, making money is questionable.
So we'd see those opportunities.
We'll probably get greater as depending on what this market does.
And also we've talked about do but Europe.
You also have you also have Cisco you also have teams like there are several players here and they are all trying to grab share in this market.
While the going is good you got to get going so.
That's what they do.
And strategically do you see the convergence of new car and.
Contact center.
Odyssey, continuing and how does that create opportunity for entellus I mean, do you want to be agnostic to you.
Or would you.
Want to increasingly get more into providing your own unified communications solution.
Yes.
Yeah. Good question, so there's definitely a convergence.
Happening.
As things, especially as things move to the cloud both on the unified communication moving to the cloud and the contact center moving to that so we're getting more and more request to connect with multiple ucas products and as I mentioned, we've extended beyond just doing teams.
To ring Central Cisco and others and to your question on.
Will we ever do our own Ucas product I mean video into the start of a ucas system as you know.
So video can evolve over time to.
To add more functionality and become much more of that.
Ucas.
Type product so it's definitely in some of our product roadmap to considering that.
Okay. Thank you.
And at this time there are no further questions.
I will now turn the call back over to management for any closing remarks.
Well <unk> continues to have a very strong financial.
Position, increasing cash and no bank debt to execute to execute on our capital allocation and business strategy.
We will deploy our capital on opportunities that we believe will return long term value to shareholders.
We look forward to completing Q4 and our fiscal year.
If you're attending the call and hopefully we will be able to have our fiscal 2021 annual general meeting in person.
Ladies and gentlemen that does conclude today's conference. We thank you for participating you may now disconnect.
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