Q1 2022 Enghouse Systems Ltd Earnings Call
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Good day, and thank you for standing by and welcome to <unk> first quarter 2022 conference call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
A question during the session you will need to press star one on your telephone and if you require any further assistance. Please press star zero. Thank you I would now like to hand, the conference over to your Speaker today, Mr. Stephen Sadler Chairman and CEO . Please go ahead.
Good morning, everybody I'm here today with Vince.
Global President, Doug Bryson VP finance.
Todd May VP legal counsel.
San manager VP corporate development.
<unk> will begin I'll have Todd read our forward disclaimer.
Statements made may be forward looking by their nature, such forward looking statements are subject to various risks and uncertainties, including those in each of the continuous disclosure filings such as its Aif, which could cause the company's actual results and experiences to differ materially from anticipated results or other expectations.
Undue reliance should not be placed on forward looking information and the company has no obligation to update or revise any forward looking information, whether as a result of new information future events or otherwise.
Thank you Todd Doug will now give an overview of the financial results.
Thanks, Steve.
Financial and operational highlights in Canadian dollars for the three months ended January 31st 2022 compared to the three months ended January 31, 2021 are as follows.
Revenue achieved was $111 1 million compared to revenue of $119 1 million results from operating activities was $35 7 million compared to $40 7 million net income increased to $21 6 million compared to $20 6 million adjusted EBITDA was $38 6 million compared to 44.
$4 5 million cash.
Cash flows from operating activities, excluding changes in working capital was $38 7 million compared to $41 7 million.
Revenue for the first quarter of 2022 was $111 1 million compared to revenue of $119 1 million in the prior year, while revenue for the first quarter of the comparative year had mostly returned to pre COVID-19 volumes. It represents the tail end of it.
Period positively impacted by an influx of COVID-19 related demand for our remote work and visual computing solutions.
Revenue for the quarter was also negatively impacted by $4 4 million as a result of foreign exchange compared to the prior year. We also continue to experience a shift towards cloud offerings, particularly in the cloud contact center market.
Net income for the quarter was $21 6 million or <unk> 39 per diluted share compared to $20 6 million or <unk> 37 cents per diluted share last year the.
The increase in net income as a result of lower costs and higher other income despite lower revenues relative to the comparative period.
Adjusted EBITDA was $38 6 million or <unk> 69 per diluted share compared to $44 5 million or <unk> 80 per diluted share in the first quarter of 2021.
<unk> closed the quarter with $214 8 million in cash cash equivalents and short term investments compared to $198 8 million at October 31, 2021 with no external debt.
The cash balance was achieved after making payments of $8 9 million for dividends in the first quarter.
And just remains focused on its long term growth strategy investing in products, while ensuring profitability and maximizing operating cash flow.
As a result and shows continues to replenish its acquisition capital well and really increasing its eligible quarterly dividend.
Yesterday, the board of directors approved the company's eligible quarterly dividend of $18.05 per common share an increase of.
16% over the prior dividend payable on May 31, 2022 to shareholders of record at the close of business on May 17, 2022. This reserve represents the 14th consecutive year in which the company has increased its dividend by over 10% I will now turn the call back to Mr. Sadler.
Vince will now give some operational highlights of the quarter.
Thank you, Steve and I appreciate those of you that are making the time to listen into our Q1 conference call.
As Doug has communicated we continued to generate good operating income and positive cash flows.
This quarter's EBITDA was $38 6 million.
34, 7% of sales and we've been consistently around the 35% EBITDA Mark now for more than two years.
Both margins were once again above 70% and our revenue in Q1 was consistent with Q4 with overall revenue.
Being a $111 1 million, which was negatively impacted.
I, just still grew 1.1 million due to foreign exchange compared to Q4.
And we were negatively impacted by $4 4 million compared to Q1 of last year.
During the previous quarterly conference calls I I already covered the growing shift to.
To the cloud when it comes to the contact center market.
This shift is clearly occurring and we do expect this to continue into the foreseeable future.
Although we have responded to this move to the cloud by making several investments in product and engineering, we remain committed to our strategy of growing our highly profitable business by.
By running a lean and nimble sales and demand Gen organization.
Focusing on high margin business and managing our cost to be in line with revenue.
This outcome generates positive cash flow from operations that can be deployed.
On acquisitions.
A key differentiator for us in the market stems around providing our customers choice.
<unk> remains one of the only companies in the contact center market and video market.
It offers choice between private SaaS multi tenant SaaS and on Prem.
This offers our existing customers the opportunity to upgrade to the cloud when they are ready and has also attracted to certain segments of enterprise customers.
We are seeing growing orders being signed for our Sal SaaS cloud offering for contact center in.
In Q1, we signed three and a half million dollars a SaaS contact center orders, which was one of our largest orders in terms of orders signed in the contact center space.
Revenue of these deals are recorded over the term of the SaaS agreement and therefore, all this revenue is deferred into future periods.
Video remains an important part of our business and he needs to be focused on the telehealth and enterprise verticals that are looking for security such as defense cords legal and finance.
Our video Engineering group has recently developed three new products, including unified communication as a service or cloud PBX and video patient monitoring.
With these new developments in the growing intersection of contact center as a service and unified communication as a service.
We believe the outlook for video looks positive.
Video product revenue was down from Q1, 2021 due to the remaining orders driven by Covid, but was consistent with Q4 2022.
This quarter the asset management division improved relative to Q4, increasing revenue from 46 million 49 million, which was up 6% and this group continues to focus on telecom government.
And transit companies.
And these these sectors are not experiencing a significant increase in demand for cloud or SaaS.
However, we do expect that this cloud shift could occur in the future. So we've made investments in preparing our software for cloud adoption in anticipation of this shift and.
And a number of our SaaS applications have completed their cloud readiness requirements over the last 12 months I.
<unk> is one example that we've done we've already done the cloud lift and we've been selling it for several quarters.
And now have signed over $3 $2 million in staff, IPD orders, which Iraq will be recognized in future quarters.
Our transit business has started its engine into the Americas market and during Q1, we signed a master framework agreement with the California State Department of Transportation, which.
Which provides us access to 300 plus transit operators.
And they now have the ability to purchase our automated fair collection solution under the terms of the framework agreement with.
We hope this will materialize into revenue for us in the automated fare collection market and spark for further expansions into other states.
Just on a final few points Q1 represent over 100 consecutive quarters of positive operating income and cash flows for Ngls.
We have a track record that demonstrates our ability to adapt to continually changing market trends product lifecycle and economic conditions, while remaining profitable.
As we have announced Doug Bryson has decided to retire from inches.
He has been here for 93 of these 100 plus quarters, which is an amazing accomplishment and I wanted to thank Doug for all all that he's done for the company.
It's been great working with Doug over the last four years since I've been here at Entellus, and I wish him well in the future.
Let me turn the call over to Mr. Steve Sadler.
Thanks Vince.
A little bit and acquisitions, we are actively reviewing opportunities and continue to search the marketplace for opportunities that meet our financial criteria.
We continue to focus on capital deployment doing our due diligence remotely.
The acquisition pipeline continues to improve and with the decline in tech values in the public markets. We are seeing more opportunities that meet our financial payback criteria.
As interest rates increase taxes rise and government stimulus is eliminated our ability to deploy capital is expected to improve remain committed to executing our historic strategic business model and discipline, which we believe will add shareholder holder value I would now like to own.
On the call for questions.
Thank you speakers, ladies and gentlemen, as a reminder, if you would like to ask a question you May Press Star then the number one on your telephone keypad. Once again, you May press Star one to ask a question. Your first question is from the line of Daniel Chan of TD Securities. Your line is open.
Oh, Hi, good morning, I, just wanted to dig into the IMG segments, a little bit revenue. This quarter is now below what it was pre pandemic in Q1 fiscal 'twenty.
And I think you had a number of acquisitions over the last two years as well. So can you just provide some color on whether organic growth and IMG is declining relative to your pre pandemic levels and if so what may be causing that.
Okay, all outlets aren't there Daniel.
It's primarily related build the video now.
Video.
In Q1 of last year still had some COVID-19 related orders. So most of the decline is in on the video side.
What about when you compare it to two years ago before the pandemic started.
Before you got that bumps, but it's still below like RMG general still below that level.
You also have a guess on top of that what Vince has talked about moving to SaaS, which means rather than take your revenue up front, you're spreading it over three years or so we are basically in that second year of that so that also adds to.
Another major factor is the exchange a U S dollar and Canadian dollar has moved a lot and the euro as well. So you got to factor in exchange I think last year that was $13 million.
Impact on our revenue law, and so theres a lot of factors going into it I think the I M. G side, certainly we're looking to improve it.
Right now.
There's a lot of factors that are showing up in the numbers.
Okay. Thanks for that Steve and then if we dig into the hosted and maintenance revenue you mentioned in your filings that you continue to see some attrition in your existing customer base, particularly around video as they continue to rightsize.
Discussions now moved towards reopening of moving back into the office. How are your discussions with customers going is there is there a line of sight to wear this levels out.
That's a hard question to know what's going to happen and what's the reaction. After people don't totally worked from home come back to the office.
So it's difficult to say where that is again theres a lot of factors that go into it.
I I think.
Now one of the factors is we still do on Prem as Vince talked about as well as in the cloud.
In the cloud picked up during the pandemic because people are going into offices, you're not even going into to set up the systems is on prem going to come back a little bit because it is.
In many ways more economical theres there are several factors there so.
We're preparing for whatever happens because we do both.
So, we'll just have to wait and see I know a good forecast for you on that.
Okay, that's fair.
And then good to see that you are getting traction on the on the cloud you mentioned you had the strongest bookings in the most recent quarter.
Can you just remind us what is the uplift in revenue per seat, we would see as customers migrate from an on Prem maintenance license to a SaaS subscription I recognize that license revenue will decline, but just wondering what we could see in the hosted a maintenance segment has as you make that migration.
Yeah as you mentioned, Daniel so when we sign it and on Prem D. L. Hughley, you get the software recognition upfront.
And then you get a bunch of services revenue to implement and integrate it.
When it comes to SaaS, it's the other way around we we implement do all the integrations and then the SaaS revenue kicks in on a per user per month basis. So that's the way the Rev Rec happens.
And you end up with more long term revenue under SaaS.
Margins are around the kind of 70% range. So we can keep our margins at that target level, where we're at the high Sixty's at this point.
So that's that's essentially how it works relative to on Prem.
Okay. Thanks.
Your next question is from the line of Paul steep of Scotia Capital. Your line is open.
A morning folks.
Vince maybe just continue where you were going there just remind us on the contact center side are you typically signing three year contracts with the clients because it just I guess I'm looking at the deferred revenue would you you called out a couple of places in contact center and in think in networks.
Signing some cloud or sorry, yeah, I P. T V. Some cloud based deals just trying to see how that's being recognized maybe into deferred so we can sort of get a vibe of the transition to the business over time.
Yeah sure. So we normally do sign.
Three year deals.
For our SaaS, whether its I P T D SaaS or contact center staff.
And it's normally billed annually in advance.
The billing typically starts when we finish the implementation and integration work.
And then we bill for the year.
Annually in advance.
And then when it comes on anniversary built rebuilt it again for the next year and the year. After so you don't get three years of deferred you get one year and then it renews again in the following years.
Does that answer that.
Yeah, No that does I was just looking to sort of get a sense of we know we get RP OS from other people and wanting to see how that would sort of building or how we should start thinking about that over time. It sounds like you know, it's still early days, but the comments help us sort of figure that out.
Maybe the other point digital content the other sorry go ahead.
Realize it doesn't show up necessarily always a deferred revenue sometimes its quarterly sometimes in advance sometimes afterwards, but you really can't tie it to deferred revenue for that well.
Perfect and then maybe on the cloud transition.
Do we have a sense and I know you tried to answer with Daniel Big We tried a different way if we think about that cloud transition.
How have you thought about sort of modeling out your base, maybe you know shifting over over the next five years in five years should we think that you know you're you've made the full move to cloud or.
No we're gonna let.
And sort of beaten brocade.
Yeah.
I mentioned, so we are we offer three.
<unk> solutions to the customers. So you can purchase from us a private cloud, which is dedicated for one company. We have multi tenant cloud we've stood up for cloud nodes around the world.
And then on print.
So when it comes to you know how the whole customer base will transition.
We'll see but we're seeing definitely more.
Opportunities for both multi tenant and private cloud relative to on Prem So our opportunity pipeline.
Is now heavier weighted getting much heavier weighted towards cloud.
For the contact center business relative to on Prem.
And then we have a fairly big existing customer base.
And for them, we have a program, where we can migrate them to the cloud.
So they can use the scene if they want the same products, they're using today with us just in the cloud. So we do have a cloud migration program for existing customers.
Or they can move to a multi tenant cloud products. So we give all this optionality, which is fairly unique it sounds like it's it's a.
Kind of a trivial differentiation, but it's actually quite important to customers to give them the choice.
How it ends up at the end you know like I guess, we'll see but we're offering all three at this point.
The other impact you had that people. If you look at competition et cetera is a lot of the cloud players are trying to.
Call It a land grab in other words, they don't actually make much money.
So again, that's another thing to factor in why people are moving more to the cloud right now will that be to save in five years or will they.
Prices be going up after they got their land grab and it changes the dynamics a little bit right now, it's a pretty good for customers in the cloud and the SaaS type model.
But over time, they may not be the case because to be good for customers.
How long can companies lose money and do that as they try and do that land graph.
Yeah, we do and we don't do that so.
So our our approaches and less our deals are are good economically we don't we don't take them.
So we don't do the land grab and lose money model.
Got it actually may be to take the next one would.
Be directly for Steve on the M&A side.
Steve.
Where are you standing these days in terms of we've seen other folks who might have more traditionally just bought on prem.
Is there a shift or a focus on your side is there a bias maybe now to just buy more recurring revenue cloud operations or no open for business as always on both sides.
We tend to look.
For both sides the major factor for US is getting a return on investment for our shareholders.
Over time.
Now you can guess on premise probably better and if we can buy on premise convert them over that's a pretty successful model. So again, we look at both some of the in the cloud and SaaS type.
Opportunities they are being crazy I E and you see them coming down if you look at companies like $5 and you look at zoom Theyre all in half.
And they still aren't making money so as long as they can get financing for the losses. It makes it tough.
I always find that day of reckoning comps. So we do both but we're looking for opportunities in both areas and we always compare what's the value for money, we're getting for the price we pay and then we also if we get customers on Prem as Vince talked about we can move them over to the cloud when they want to move there.
Oh, it's two factors when you do acquisitions price you pay as well as the business, you're getting and we have to always look at both.
Last last one I think I know, what the answer but I'll ask it anyway.
Steve is there any thought to maybe lowering the hurdle rates to strategically pick up more SaaS business.
Versus what you'd look at a for a hurdle rate on on Prem or I think I know what that answers get a beep at all I'll leave it there. Thanks.
It really doesn't matter I mean, a SaaS is going to make some money over a period of time you discounted back discounted cash flow you guys do this all the time and if it makes sense, we do that if it's prem we do prep and then we figure out how we can add value on top of that.
So we're not going to pay up for SaaS. It doesn't make sense, we are seeing SaaS companies smaller ones that do meet our financial criteria, because it's not quite as healthy as it was let's say six months ago.
So yes, we look at both are we going to pay up.
It's just a matter of getting a return as long as the profits at our cash flow are up.
If the heart, we will again over time.
Fair enough thanks, guys.
Your next question is from Scott Fletcher CIBC. Your line is open.
Hey, good morning.
Wanted to ask about the pace of M&A with the with your comment that the pipeline seems to be expanding in some valuations coming down their desire to sort of really accelerate M&A and maybe jay or.
Or would you prefer to sort of avoid multiple concurrent integrations.
Based on what we've done I would say, we wanted to accelerate M&A, because we haven't done as much as I would like.
But we want to do them at the at the right return to shareholders over time, we're not going to rush to do we don't have a mandate to spend a certain amount of M&A did do M&A in a year, what we try and do is do the right deals and over time, we found that it works out.
But we have added some resources to our M&A group and certainly we would like to see more M&A or capital allocation done that value for shareholders, which we're working on doing.
And Scott just on your questions answered them doing multiple multiple integrations. It if we get two deals done we have to.
Ability to do that we.
We have invested a lot of systems and integration approaches so we can handle.
Okay that helps and then second question and I'm sorry.
Just the way the way that that answer to that is a lot of financial work's done on M&A and we do a financial team separate once in Europe , North America, and APAC, So and they've all now done a deal.
So they know how to do this it's not like the first one theyre doing so we've got a bit of experience.
To do the integration.
If we get a bunch in one area. We just have to manage that and you can spread it out you can have closing dates that are different et cetera.
I don't see that as the problem I see getting more good deals done.
As a bolt on opportunity early and a challenge it has been a challenge and I think it's going to be quite an opportunity.
Okay.
Good to know.
Just another maybe more minor question sales and marketing costs as a percentage of revenue have sort of been around 20% for a few quarters now should we be expecting a ramp up as economies open up and you can sort of start doing more in person selling activity.
So I mean, I'm not sure where you get to 20% from I think you got S. G&A in there. So that's not just sales.
N. Gen. So it's all all of that.
And then on your question is there more face to face meetings happening there is a bit more happening happened started in.
This quarter a bit so there are more face to face meetings.
So there is a bit more travel costs, but not.
It's not significant yet.
Okay. Thanks.
And just to add to that as we said on the last call. We expect any increase in costs for travel et cetera.
Again in that line that S. G&A, we think.
A reduction in premise costs will offset it so I wouldn't expect you'll see costs going up I think with the change in premise, we're going still a hybrid work from home I think youll see savings are offset any extra costs in sales and marketing.
Thank you presenters once again, if you would like to ask a question you May press star one on your telephone.
You have a next question from the line of Paul Treiber of RBC capital markets. Your line is open.
Well, thanks, very much and good morning, just in terms of the product portfolio and contact center are you.
Now at the point, where you basically have 100% parity with the features and offerings in the cloud versus your on premise offering.
Yeah. So.
There's two answers to that one Paul so we can take your existing on prem product that you're using.
And we've made a lot of investments in the last 12 18 months to be able to move that to the cloud. So youre at exact feature parity or using the exact product. If you are an agent you wouldn't you wouldn't see any change other than using it through a browser.
So that's one model if you go to our multi tenant cloud product.
Depending on what you are using the features may not be exactly the same they might be stronger in some areas or others, but we have a whole team getting our multi tenant cloud product.
So much further ahead so.
So you can at least.
Keep feature parity, but it depends on which products you're currently using whether you're at parity or not.
Okay, so that makes it.
Yeah, Yeah, Yeah, I think I was referring to the multi tenant offering do you see I mean, you mentioned a whole team getting that the product had you see eventually in time, the multi tenant version.
Being that the one where you lead with new features.
In becoming a more innovative offering over time.
Yeah. So the way we're organized on our engineering group is.
Around building components.
Cloud based components that all of the products can use.
So you don't end up with a component like an AI component as an example, that's different in the on Prem product versus the multi tenant product versus the private cloud. So we have these shareable components that we're sharing across all the products.
And having the engineering teams more kind of in parallel working in parallel.
Okay makes sense.
Just a couple of finance questions around the impact of.
Cloud.
And it just starting there the you called out the three and a half million in new cloud orders is that equivalent to two new RP O and then you know it.
You did disclose RP, Oh, you know what sort of the cumulative.
Cloud backlog or our appeal that you currently have.
So the $3 5 million was down.
The orders just in the contact center fast piece of it didn't include SaaS orders in other areas like.
In our video for example.
In terms of that's the value of this of the contracts that are typically like I said somewhere between one and three years in duration. So that's the contract value.
Does that answer that question.
And yes it is.
You look at cumulatively over like since you launched in contact center.
You know, what's the cumulative orders that you've that you've seen.
Oh I haven't disclosed that.
Number.
But it doesn't mean that the $3 5 million.
A record high and you expect that trajectory to continue is that a fair up yet.
Yeah, that's a quarterly record high yet exactly for the for the contact center side.
Okay, and then just lastly.
A question on Ukraine, and Russia, you know I think there was a disclosure.
I think one of the acquisitions that you've made that there was a there was a you might have had an office in the region can you just provide an update on that.
Region. If you have any you know still employs there any revenue or any transactions.
Yeah, so in the Ukraine.
We have.
Fifty-seven engineers that are external contractors. So they don't they're not employees. They are working for a large systems integrator that we partner with.
Focused primarily on engineering.
All of them are safe.
Some of them are no longer in the Ukraine.
And you know.
We wish their families well obviously in in.
Russia, we have a very small amount of business in Russia.
Okay.
Thank you for that and all of the platform.
Thank you speakers.
Speakers I'm no longer seeing any other questions on the queue you may continue.
Okay shows continues to have a very strong financial position as Doug has outlined to execute both our capital allocation strategy and our internal growth business strategy.
I want to thank you for your patience and we look forward to talking to you next quarter.
Thank you presenters, ladies and gentlemen. This concludes today's conference call. Thank you all for joining you may now disconnect.
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