Q3 2022 Enghouse Systems Ltd Earnings Call
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Good morning, ladies and gentlemen, and welcome to <unk> Q3, 2022 conference call. At this time all participants are in a listen only mode, but following the presentation. We will conduct a question and answer session. If at any time. During this call you require immediate assistance. Please press star zero for an operator also note that this call is being <unk>.
Accorded Friday September 9th 2022, and I would like to turn the conference over to Mr. Stephen Sadler. Please go ahead.
Good morning, everybody I'm here today with Vince Masoud Global President, Rob Med bid VP Finance, Todd May VP legal counsel and Sam manager.
<unk> corporate development.
Before we begin I'll have Todd read our forward disclaimer.
Statements made in the forward looking by their nature such statements are subject.
Various risks and uncertainties, including those in our continuous disclosure colleagues.
We could cause the company's actual results and experience there.
Not materially.
Yes.
From anticipated results or 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 any new information future events or otherwise.
Thanks, Todd Rob will give an overview of the financial results.
Thank you, Steve and good morning, everyone.
I will be discussing the financial and operational highlights for the three and nine months ended July 31, 2022 compared to the three and nine months ended July 31, 2021 as follows revenue achieved was $102, one and $319 5 million respectively compared to revenue.
<unk> of $117, six and $354 1 million.
Results from operating activities was $29, eight and $96 5 million, respectively, compared to 38, 5% and $116 1 million net income was $18, one and 57 5 million, respectively compared to $21, two and $62 6 million <unk>.
<unk> EBITDA was $32, five and $104 8 million, respectively, compared to 41, 7% and $126 $4 million cash flows from operating activities. Excluding changes in working capital was $34, one and $107 3 million, respectively compared to $41.
And $125 4 million revenue for the third quarter of 2022 was $102 1 million, which results from operating activities of $29 8 million in cash flows from operating activities. Excluding changes in working capital of 31, $34 1 million.
As a result, we closed the quarter with $229 5 million in cash cash equivalents and short term investments with no external debt. This was accomplished while completing two acquisitions for $6 1 million paying quarterly dividends of $10 3 million and repurchasing 9 million of common stock from shareholders. We remain focused on operate.
Our profitable cash flow positive business generating the necessary capital to fund our acquisition strategy without the need for financing.
Revenue for the third quarter of 2022 was down from $117 6 million in the same period in the prior year and was negatively impacted by $3 6 million as a result of foreign exchange as European currencies continued to devalue as a result of the conflict in Ukraine, Our interactive management group.
News to experience some market shift from on premise license perpetual licensing towards software as a service cloud offerings. This has translated into a decrease in overall IMG revenue. Despite increased sales of our cloud products revenue in our asset management group on a constant currency basis remains consistent this fiscal year compared.
The prior year.
Net income for the quarter was $18 1 million or <unk> 33 per diluted share compared to $21 2 million or <unk> 38 per diluted share last year. The decrease is a result of lower revenue net of decreased operating expenses relative to the comparative period, adjusted EBITDA was $32 5 million.
Or <unk> 59 per diluted share compared to $41 7 million or <unk> 75 per diluted share in the third quarter of 2021.
<unk> completed two acquisitions late in the quarter purchasing <unk> on June 23rd and MPW software on July 6th Copper Tele offers a complete contact center platform focused on the Scandinavian and Swiss markets with both the SaaS and on premise solution and Tw software provides an attendant cost.
<unk> and contact center offering for organizations that have adopted the Cisco communications platform.
Both acquisitions augment our contact center offerings and broaden our cloud hosted solutions portfolio. We believe that acquisition valuations are becoming more favorable in this environment as rising interest rates increase as service debt servicing costs and reduces profitability for many companies in the technology segment.
Yesterday, the board of directors approved the company's eligible quarterly dividend of $18.05 per common share payable on November 32022 to shareholders of record at the close of business on November 16th 2022.
I'll now hand, the call back to Mr. Sadler.
Vince will now give some operational highlights of the quarter.
Thank you Steve.
Today Im going to point out some important trends that we're seeing and focus on how they are impacting our business.
Let me start by highlighting our cash position ending the quarter with approximately $230 million in cash with no debt.
Which was up $42 million from the same quarter a year ago.
We also essentially maintained our overall cash position compared to our compared to Q2 2022, well during this quarter purchasing $9 million in NGL shares as part of our share buyback.
Issuing $10 3 million in dividends to our shareholders and spending $6 $1 million on two acquisitions, which generated about 500 K in revenue as they were completed late in the quarter.
We continue to run our business generating positive operating income and cash flows, giving us the ability to do acquisitions make continued investments in product and execute on other initiatives such as our share buyback without depleting our cash are incurring debt.
Having no debt and a narrow with rising interest rates provides us the financial stability that is becoming increasingly more important to our customers.
Foreign exchange has continued to have a large negative impact on revenue decreasing revenue by $3 6 million compared to Q3, 2021, and $11 $7 million on a year to date basis. This is caused mostly because of the declining euro UK power.
<unk> and Nordic currencies relative to the Canadian dollar.
Looking at this quarters results, we are seeing a change in revenue mix.
Compared to Q2 2022, we had a sequential revenue decline of $4 million.
Two two of this decline was due to foreign exchange.
And the rest of the decline was related to lower hardware.
On premise product licenses and professional services, which is expected to be a bit lower given the vacations that occurred during the summer months.
However, on a constant currency basis, we had an increase in recurring revenue generated from our SaaS and maintenance and support services.
This shift in mix is moving towards more recurring revenue.
And less onetime revenue generated from hardware and perpetual software licenses, particularly in the customer experience and contact center market.
Product development and ongoing innovation continues to be at the core of what we do and our single biggest area of investment and it's not an area of the business that we are scaling back to achieve short term profits.
The markets, we are serving our expanding particularly in the areas of customer experience and contact center, improving public safety virtual health care, helping telecom companies expand and improve their networks and moving transit to cashless safe environments. These are all examples of growing market segments.
That we are in an areas of continued product innovation and investments.
Enabling our products to up to be optimized in the cloud represents a large phase of engineering investment, which we will continue.
That have gone beyond this introducing a number of new products and enhancements and are expanding our rate of product innovation.
We are achieving this through improved engineering velocity through the redesign of our products with micro services cloud architecture, enabling us to build integrate and adapt quickly to customer needs.
Many of our innovations are aimed both at the cloud.
And the needs of micro verticals, we serve creating differentiation in these segments against the large horizontal players.
Recurring revenue improvements are occurring as a result of our continued product innovation and some new go to market initiatives.
Building, a compelling cloud contact center product offering has enabled us to launch a new cloud uplift program.
Over the last several quarters. After we completed standing up our own multi tenanted software as a service offering which we call <unk>.
Short form for Ngls contact center as a service.
We commenced the proactive campaign to our existing.
Base of on premise customers, providing them with a migration path to move either to <unk>.
Chelsea Cas or to a private cloud.
This program is aimed primarily at our large existing base of on premise contact center customers and is starting to pick up momentum.
Driving improved customer retention and expansion of our SaaS offering and increasing recurring revenue on a constant currency basis.
The other program that's generating momentum is through our channel partners.
In a market where SaaS demand is growing channel partners generally have a smaller role to play as there is less hardware and services work required when compared to the on Prem solutions. However, we are one of the few companies that have enabled our channels partners to remain relevant.
As the shift to SaaS is occurring by allowing them to either sell our SaaS solution.
Or provide them an opportunity to stand up their own cloud manage it and sell their own SaaS offering to the market based on <unk> technologies.
These deals are structured in a way where we share in the success with our channel partners. We had similar programs historically in the past with our telecom partners, but have now expanded this globally to our other channel partners.
And the customer experience market the demand for on Prem perpetual license continues to decline, but demand for SaaS is increasing.
For the asset management business, we are not experiencing the same trend so the demand for on Prem perpetual license remains consistent.
We are pleased with the continued.
Profitability and the progress we are making with our products and go to market initiatives addressed the growing the growth happening in the overall cloud market.
Maintaining our companys financial stability.
Let me turn the call over to Mr. Steve Sadler.
Thanks Vince.
With respect to acquisitions. The actionable pipeline is significant valuations continue to decline in this challenging environment of increasing global interest rates. We completed two tuck in acquisitions late in Q3 and only about one month of revenue was included in the quarter.
These businesses had slightly negative EBITDA after special charges in the quarter, which should add to EBITDA in the fourth quarter.
At the end of Q3, our cash on hand remained at approximately the same as the end of Q2 at $230 million after purchasing over 330 shares of <unk> stock for approximately $9 million.
Paying for the two acquisitions and paying the regular quarterly dividend. This is a result of our strong positive cash flow. We completed the acquisition of voice point earlier this week and expect to be EBITDA positive for the two months that are part of Q4.
Part of the Q4 quarter I would now like to open the call to questions. Thank.
Thank you, Sir ladies and gentlemen, if you would like to ask a question. Please slowly press star followed by one on your telephone Keypad. You will then hear a prompt acknowledging your request and if you would like to remove yourself from the question queue. Please press star followed by two and if you're using a speaker phone. We ask that you. Please lift the handset before.
Thank you.
Yeah.
Please go ahead and press Star one now if you have a question.
And your first question will be from Daniel Chan at TD Securities. Please go ahead.
Hi, Good morning, just had some questions about the IMG decline.
Just wondering whether that is largely a result of the migration of customers from on Prem perpetual license models to the SaaS model looks like hosted maintenance was relatively flat year over year. So.
Maybe maybe just can you comment on your logo retention rates, whether that has been stabilizing and whether thats, whether thats still flat or is it are you still on a net basis still losing logos.
So a few questions I'll start Daniel.
So so theres two factors right foreign exchange, we talked about is causing a decline, but yes. There is a shift happening in the mix there is less perpetual.
We have existing customers that are moving to either a cloud or multi tenant cloud.
Or.
Private cloud.
We are seeing after we've stood up our own cloud and are pushing.
This in the market we are seeing.
A reduction in any customer churn and better retention of our existing customers.
David.
Gibbs.
Some color on.
Our churn as you look at it from the premise side without that movement is about 8% to 10%, which is pretty much what it has been over the years.
Thanks for that Steven is that on a gross basis is that on a net basis.
I keep them the same so I would hope distinguish that much between the two we didnt do much price increases last year, although we're doing more now with the inflation picking up.
Okay. Thanks, and then Steve.
Share buybacks.
I don't think Thats, something you've typically done in the past.
Can you just some color on how you think about share buybacks versus dividends and M&A. It sounds like the M&A pipeline still is pretty strong right now so just your thoughts on capital allocation. Thank you.
Yes, our pipeline is strong on M&A, but we always look at our stock and when it gets to a price that we believe is below fair value. We take some action we've always had the buyback program in place.
Didn't use it when the markets were pretty frothy with high multiples, but now the markets have come down and we've come down in our opinion too much. So we use some of our funds or our cash flow to buy some stock back we still have lots of cash to do acquisitions.
Pay our dividends are growing dividends and to buy some stock back. So we're using the capital allocation of added buybacks, which have always been in our plan, but we've never implemented until the market came down to a level we believe.
Was.
Too low so we decided that we should do some of the funds there and we have plenty of funds for all the other activities.
You can see that in the fact that our cash really after doing all that hasnt gone down this quarter from last quarter.
In spite of the acquisitions in spite of the regular dividend and in spite of the <unk>.
Buyback that we did.
Great. Thank you.
Thank you next question will be from Stephanie price at CIBC. Please go ahead.
Hi, good morning.
The M&A environment is getting a bit more attracted here for you just curious around the acquisition strategy and whether you're shifting more of an M&A focus towards cloud applications.
Our acquisition strategy to say, but it always has been we got to have a payback five to six years cash flow.
It is shifting a bit to the cloud because all the cloud guys are selling.
Most don't make money and their values are dropping and unless.
Investors give them more money some of them are hitting some trouble. So it's shifting but not our strategy is shifting its just that the opportunities are shifting a bit more to the cloud.
But otherwise our programs the statement as it always has been where the multiples were high last year, we didn't do many acquisitions because theyre disciplined said too high now, let's coming down to a part where there's a lot more opportunities that meet our criteria.
But it hasnt really changed Stephanie.
Okay. Thanks, and your answer to that question leads into my next one I was just curious around the competitive environment in the MD&A noted some cloud contact center competitors, reducing prices in an effort to retain revenue growth just curious on the economics of the cloud contact center sale versus on premise and how you think about the competitive environment here.
I think the.
The overall.
We look at it is what customers want we can provide we can provide it on prem we can provide it in the cloud.
The in cloud competitors.
If you look at most lose money.
And that's okay, if they have money, but it's going to be a little more difficult potentially to get money in the next couple of years a lot more than it has in the last couple, especially with interest rates going up.
For us it's just a matter of the numbers. So we're we're filing doing both we have product to do both many of them do not.
And we're continuing on with our normal plan in that regard whatever the customers want.
We will offer to them margins are lower certainly in the cloud.
And we compete in that market, but we won't lose money to play in the cloud.
Yeah, just to follow up on that definitely we look at every deal.
Kind of on a deal by deal profitability basis, we don't take deals.
That are <unk>.
Losses are low margin deals, we don't do that.
The way we run the business. So if a competitor is dropping their prices to a point, where there's no money no profit in a deal we won't take it.
That makes sense and then Vince you mentioned partnerships.
And the cloud strategy just curious if you could expand on that a little bit I think that's a bit of that.
From what we heard in the past.
Curious how the uptake has been yes, and how you're thinking about that.
Yes.
We have generally been going a bit more direct on the interactive side of our business.
Asset management has always been a direct sale, but we have.
We have a good.
Channel program at Ngls generally we drive a good amount of revenue through channel.
When the market was on Prem <unk>.
<unk> is quite useful because they implemented hardware. They there was a lot for them to do and in the cloud.
There is a little less hardware business theres less kind of field work to do right. So what we did is we we created some new initiatives for them, allowing them to sell our SaaS offering which by the way our understanding of our competitors. They don't let them sell SaaS. They basically have a referral program.
Where they have to refer deals to the SaaS provider, we are different in that regard, we let them sell our SaaS offering.
And then secondly, we're seeing that some of them want to stand up our cloud offering.
For their customers and move their on Prem customers to the cloud and we've enabled them to do that so we've trained them. We've been we let them stand up a cloud on any cloud platform. They want Azure, Google AWS whoever IBM, because we are agnostic to the cloud providers.
Our solution works on any cloud platform.
We've given them a a spot to do that.
To market and sell in the SaaS World, which I think is different so that's a new initiative that we've done in the last six months.
Gaining some traction.
Great. Thank you very much.
Thank you next question will be from Deepak Kaushal at BMO capital markets. Please go ahead.
Hi, Good morning, guys. It's good to be back on this call.
Okay.
I just wanted to dig in can you guys hear me okay.
Yes, yes good.
I just wanted to dig in more on the M&A pipeline Steve.
Steve can.
Can you give us kind of a sense qualitatively if not quantitatively.
The mix between smaller versus larger opportunities.
It seems like the first couple tuck ins is that just the nature of houses.
<unk> profile to hop into the smaller ones first and larger ones later on maybe some color on that Kevin.
Yes, I think you've hit it right on some of those smaller ones, if youre going to pay a little bit more you're only paying a little bit more because they are smaller, but we have large opportunities medium and small right now there's a lot of companies.
Trying to sell their businesses.
Either they are worried about a recession that may or may not becoming or we may or may not already be in it.
But they are sort of taking advantage of that especially if they have that with rising interest rates.
Got it and from a buyers perspective.
You're obviously buying and youre seeing more.
In a falling.
Rates continue to rise and valuations continue to fall.
Are you ready to pull the trigger on these things now or do you kind of wait a quarter or two.
How do you kind of think about pacing yourselves through this.
Trend.
When the floodgates open.
Just like last year, when they meet our disciplined financial return.
It catches our interest.
And we look at them when there are too high we don't and it seems a lot of others. Some were bought last year, but most didn't get done so theres a bit of demand out there right now.
And we still have the financial discipline, we've always had.
And it's done well we're in a very good position now we've got good cash we got good cash flow and opportunities are coming up and many of our competitors do not have that.
Everyone talks to SaaS model very few of them make money they all need investors to keep pouring money and to make their model work. We don't have that problem and we're starting to see even with the come tell us SaaS smaller SaaS companies selling and meeting our model.
Okay.
Well so.
I would just add to what Steve was saying too when it comes to post acquisition integration.
Got that.
Down too.
Pretty efficient model I would say, we put in a lot of money on systems consistent systems, whether it's CRM or ERP or.
Professional services management systems et cetera, so when it comes to absorbing acquisitions, we're in a pretty good spot there too we're ready and we're we're quite efficient at it.
Thanks Patricia.
Maybe just to follow up with you.
On the perpetual and the SaaS conversion.
IMG.
When you convert a perpetual license to SaaS, how long does it take to breakeven on the economics, there and are you seeing a pick up and add on features when you convert to SaaS.
So two questions. So.
Said initially like we won't take any deal unless they're profitable right away. So what generally happens if there are if they are an on prem customer they are paying us a support maintenance fee.
When they move to SaaS, we have to increase that fee.
We've got the cloud infrastructure and the Dev ops team, we got to manage so we get a lift in the recurring revenue.
When it moves from a support contract to SaaS contract.
In order to absorb the cost of running a SaaS platform.
How we think about it.
And then the.
The profitability is there immediately.
There is a little bit of it professionals.
I'm sorry.
Yes got it.
The perpetual renewal.
How long does it take up the anecdote that you need like two years of SaaS or one five years and fast.
Oh, yes, I see what youre, saying, so if somebody came to us and they were going to buy a perpetual and rather pick SaaS, it's about a three year.
Per year Okay.
Okay and can you give us a sense then what.
What percentage of IMG today's on perpetual.
Does soften.
And when we might I.
I guess.
Do you have any targets for an inflection point on one thing you might have.
The halfway point.
On conversions, it's hard to say the majority is still on Prem, but remember we have a large SaaS program.
Through the telcos.
People tend to ignore it because they do the SaaS they hosted they bring the customers in.
So some people don't look at that as well.
It is a hybrid SaaS and its not under our name.
But I still think most of it still is on prem converting over as the industry as the industry is still mostly on prem, but is converting over to SaaS.
Okay. That's helpful and since it's been so long acting on the call if.
If I may ask one more question.
You guys are in lots of various international markets.
Are there any notable areas of relative resilience relative weakness internationally is that does that.
It might be worth understanding are flagging.
Well the only thing I would say is in the foreign exchange sort of tells the story euro.
Europe is weaker.
High inflation in the U K, so the pound's down from like $1 38 to $1 15, the euro is down from about $1 2022 to one or just under one.
Usually if you watch the exchange you can.
It answers that question for you.
Got it what about Latin America.
You have some operations in Mexico, Brazil.
Any any notable hedge it.
It's not very large, but they're all having the same problems, some higher or lower depending on which country, you're in and which week year end.
Okay, and then they turn bad some are having trouble now but will improve.
So it just depends but if you watch the exchange rate Youll get a good flavor probably for what's happening in the country.
Got it okay well. Thank you again for taking my question.
Help us.
Thank you.
As a reminder, ladies and gentlemen, if you would like to ask a question. Please slowly press star followed by one on your Touchtone phone and your next question will be from Paul Treiber RBC. Please go ahead.
Okay, Thanks, very much and good morning.
Couple of follow up questions, just first on M&A and the ability to integrate acquisitions.
I was just looking back in the past and I think the most of the acquisitions you've done in a single years ago. Six now how do you think about you've done these three smaller ones.
And your ability to integrate acquisitions is higher than what it has been in the past like does it does.
They're doing small ones.
Ultimately preclude you from doing larger ones, if theres a flurry of them or is it are you now at the point, where you see that you can do many more acquisitions in a time period versus previously.
We can do more today not only.
Integrate them, but we can do them because we increased our acquisition team doubled its size that another analyst added a couple of people doing outbound calls we've been positioning over the last six months because we believe the next two to three years will be very good for acquisitions in our strategy so doing them we've.
Increase the staff to do them and we have a lot more people that have done acquisitions in various geographies. So they will now have experience in integrating them. So we should be able to do better than that as well I would say currently we have extra capacity to do acquisitions today.
Thanks Thats helpful.
So as I mentioned earlier.
You made a lot of investments in systems so that.
The acquisitions get integrated quite smoothly like they come onto our CRM they come onto our marketing automation systems.
From a system perspective in addition to the people side.
Things are are in goods in good shape to absorb acquisitions small or medium or large.
And just to answer the question a little more directly it doesn't matter to us really small medium or large we are capable of doing small medium or large as long as they meet our financial discipline as you get larger sometimes you get more private equity players because they don't like small and medium.
I tend to look only at large and they can drive up prices, which.
Don't always meet our criteria and they do it with using debt we tend not to do that.
And just in regards to the large acquisitions.
I think there has been talk over the years or possibly adding another.
Market or segment.
Is that.
E opportunity a desire for the company at the moment are you just looking to continue to building out the existing segments.
So I've heard that question a lot and for 10 years I said, we're a three legged stool and.
And we could go to a fourth leg because that's all was.
What we're looking to put actually do but we're not targeting any particular vertical it would be an opportunistic buy of a larger group that would be sort of the foundation for developing that new area, but we could do that.
But I've said it for 10 years, and we haven't so far we'll have to wait and see if we.
If that changes, but investors should know that we could do that.
Paul.
Hello, Ron on that so like we just did this voice port acquisition and it's focused on the micro vertical of media companies right. So even within the customer experience market theirs micro verticals within that that we're not in.
Even though it's the same kind of product suite and same use case, but it's in micro verticals that are new so within the contact center market. We have many verticals that we're in so sometimes we buy something in a new micro vertical within within an existing segment.
Like voice Port for example that we just bought.
Okay. That's helpful. Just one last one for me on the M&A is.
With the other.
Other opportunities are there any in your pipeline like the fourth leg of the stool are there any in your pipeline at the moment.
Yes.
Okay, we'll leave it at that turning.
Shifting gears just on the organic side.
In regards to IMG.
Is video is still a drag on year over year growth or has it started to stabilize at least on a sequential basis.
On a sequential basis from Q2 to Q3 was still down a little like about $1 million. So we still had a drag from Q2 'twenty two to Q3 dollars 22.
And in a year on year was down quite a bit but yes, we still had a little drag we think it's totally bottomed out at this point, but it was still a marginal drag from last quarter.
And just the other thing I would say Paul the peak.
Other thing I would say that sometimes everyone doesn't understand.
That type of a market.
It is.
<unk> said down a bit but it's also an area where there are acquisition opportunities as a result.
So it could actually build up more again through it through acquisitions.
That makes sense, just putting some more granularity around the year over year in what proportion of the year over year decline in IMG relates to video.
I mean, we don't we didn't disclose it specifically, but it is significant its a big.
A big portion of that that and foreign exchange is a lot of it.
If I look at last year to this year.
So video is still quite a drag on a year to year basis. When I was talking about the $1 million last quarter Q2 to this quarter, but it gives you some idea.
Of year over year, because we're not look at what were down year over year, and we'll look what were down over last quarter and when you take out exchange. It shows you that most of its video from last year.
Okay. That's helpful.
Thanks, very much I'll pipeline.
Thank you and at this time gentlemen, we have no further questions. Please proceed with closing remarks.
Okay. Thank you everyone for listening to the call. We continue with our long term capital allocation strategy and to invest in our operations to improve our internal growth. Thank.
Thank you for your continued support and we look forward to talking to you. After we complete our October fiscal 2022 year end.
Thank you, Sir ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending and at this time, we ask that you. Please disconnect your lines have a good weekend.