Q4 2022 Enghouse Systems Ltd Earnings Call
Ladies and gentlemen, thank you for your patience. Please do not disconnect. The Ngl's conference call will begin momentarily. Thank you for your patience.
[music].
Good morning, ladies and gentlemen, and welcome to in House Q4, 2022 conference call. At this time all participant lines are in a listen only mode. Following the presentation. We will conduct a question and answer session and if at any time. During this call you require immediate assistance. Please press star zero for the operator also note.
The call is being recorded Friday December 16, 2022, and I would like to turn the conference over to Stephen Sadler. Please go ahead Sir.
Good morning, everybody I'm here today with vis vis global President, Rob <unk>, VP Finance, Todd May VP legal counsel and Sam <unk> VP corporate development before we begin I'll have Todd read our forward disclaimer.
Certain statements made may be forward looking by their nature such forward looking statements are subject to various risks and uncertainties, including those in <unk> continuous disclosure filings I am.
It could cause the company's actual results and experience to differ materially from anticipated results or other applications.
New 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.
Thanks, Todd Rob will now give an overview of the financial results.
Thanks, Steve Good morning, I'll be taking you through the financial and operational highlights for the three and 12 months ended October 31, 2022 compared to the three and 12 months ended October 31, 2021 as follows revenue achieved was $108 1 million and $427 6 million respectively.
Actively compared to revenue up $113 1 million and $467 2 million results from operating activities were $33 1 million and $129 7 million, respectively, compared to $39 1 million and $155 2 million net income was $36 nine.
And $94 5 million, respectively, compared to $30 2 million and $92 8 million.
Adjusted EBITDA was $35 8 million and $140 6 million compared to $42 1 million and 168 5 million, while adjusted EBITDA margins were 33, 1% and 32, 9%, respectively compared to 37, 2% and $36 one person.
<unk> COO.
Cash flows from operating activities, excluding changes in working capital were $37 1 million and $145 1 million, respectively, compared to $42 4 million and $167 8 million cash cash equivalents and short term investments were $228 1 million as at October 30 <unk>.
2022, compared to $198 8 million at the end of the prior year.
Turbulent global markets rising interest rates high inflation and aggressive competition in the technology sector, particularly from vendors offering software as a service or SaaS highly.
Highlighted the environment in which we operated during fiscal 2022. Despite these factors consistent with our operating approach and strategy. We continued to manage our business with financial discipline. Once again generating positive operating income and cash flows while increasing quarterly dividends to shareholders for the 14th consecutive year during <unk>.
Fiscal 2022, we invested $72 3 million in research and development activities aimed at ongoing product improvements and innovation, we continue with our strategy of offering customers and partners of choice, providing various deployment options with private cloud multi tenant cloud or on premise solutions we.
Believe offering choice differentiates us in the vertically focused enterprise software markets in which we operate and addresses the varying needs of our customers.
In fiscal 2022, we achieved adjusted EBITDA of $140 6 million or 32, 9% of revenue and cash flows from operations. Excluding changes in working capital of $145 1 million closing the year with $228 1 million in cash cash.
And short term investments with no external debt or capital allocation focused on deploying $20 2 million for acquisitions repurchasing $9 3 million of <unk> common stock and paying dividends to our shareholders up $38 3 million revs.
Revenue for the year was $427 6 million compared to $467 2 million in the prior year revenue was negatively impacted by the decline in our video revenue post Covid. In addition to $15 7 million of unfavorable foreign exchange and the growing shift from on premise solutions to SaaS.
Distant with our strategy of offering choice, we continued to expand the availability of our SaaS offerings globally, primarily for our customer experience and contact or contact center technologies, where demand for SaaS is rapidly growing.
Operating income for the year was $129 7 million compared to $155 2 million in the prior year, resulting from lower revenue levels net income for the year increased to $94 5 million compared to $92 8 million in fiscal 2021, as a result of lower nonoperating.
<unk> expenses and taxes.
During the year, we completed the acquisitions of comp, a tele and TWU and voice port broadening our geographic reach and product portfolio, including SaaS offerings. We continue to expand our acquisition pipeline and actively pursue acquisition opportunities valuations are generally decreasing in the enterprise software market that we believe are.
The result of higher debt servicing costs reduced ability to raise capital and a broader focus on profitability and cash flow in response to economic uncertainty. We are closely monitoring acquisition opportunities as valuations become more aligned with our financial and operating criteria.
We have consistently demonstrated even during adverse economic conditions that we can generate positive operating cash flows and augment our cash reserves to be deployed for acquisitions and further investment in our business. We believe that our financial discipline product approach and commitment to customers partners and employees will continue to drive long term shared.
Holder value.
Yesterday, the board of directors approved the company's eligible quarterly dividend of <unk> 18, and a half cents per common share payable on February 28, 2023 to shareholders of record at the close of business on February 14th 2023.
I will now hand, the call back to Mr. Sadler.
Rob This will now give some operational highlights of the quarter.
Thank you, Steve and to those of you that made time to join our final calls from fiscal 2022.
Today, I'm going to take a few minutes to provide some highlights around Q4 financial performance and commentary relating to the aggressive competitive landscape. We are operating in.
Our strategy around choice and micro verticals is helping our overall performance and summarize where we are making key product investments.
In Q4 total revenue grew sequentially compared to Q3 2022 by 6 million to $108 1 million up from 102.1 million a 5.9% revenue improvement.
Our recurring revenue generated from our SaaS and support arrangements hit $64 6 million, which was also up one 6% sequentially.
Software license revenue was up $5 8 million and our video product also slightly increased compared to Q3.
Now comparing to Q4 of 2021 overall revenue was down 5 million. However.
However, foreign exchange represented it represented a negative impact of 4 million.
Our asset management Division increased revenue on a constant currency basis. However, actual revenue was flat at 46 million absorbing the negative impact of FX.
Our video revenue was still down compared to last year's Q4.
Turning now to what we're seeing in our markets over the course of fiscal 2022, and especially in the last two quarters. The overall economic and business environment has changed quite significantly with rising interest rates global and inflation and general economic uncertainty.
Our observation is that this environment appears to be creating differences in the way some of our competitors are operating.
Specifically in the customer experience market.
Although the CX market is growing we are coming up against some of our SaaS vendors, becoming more aggressive in terms of product and service pricing, which makes it more difficult for us at times to retain customers or sign new projects new customers at our target gross profit margins.
During Q4, our number of our competitors in the CX market announced the discontinuation of their on premise products.
Large personnel layoffs.
His and leaderships and other restructuring measures.
We believe <unk> has advantages that may serve us well during these economic times.
Given we have no debt rising interest rates doesn't impact our operating profitability or create a need for us to change the way we manage the business.
Having a cash position of 238 million in positive operating cash flow business.
Gives customers the level of comfort they seek from mission critical technology provider.
We also continue to execute our strategy and make investments where needed.
One important element of our strategy worth reiterating is around offering customers choice.
Though offering choice might sound relatively straightforward there are a number of engineering product and operational complexities around being able to offer choice and implement on premise private cloud and multi tenant cloud products as well as a number of investments we have and will continue to make to enable.
US to offer choice.
During Q4, we won a number of new customers as a result of providing the deployment options they preferred the preferred.
And we also were successful in converting some of our large on premise customers to our private cloud and multi tenant cloud products, thereby mitigating churn and improving recurring revenue.
Offering choice this quarter and managing this complexity complexity did translate positively to our revenue results in the quarter.
The second important aspect of our strategy is around our go to market focus on what we call micro vertical business segments.
In order to produce an efficient sales and demand Gen organization.
Where the spend relative to the business generate continues to drive a profitable business model.
We focus our sales and demand Gen team on micro verticals.
Other than on a horizontal strategy.
This is key to sales efficiency efficiency and ultimately our overall profitability.
The acquisition of voice supported in the quarter as an example of a micro vertically focused company in the CX space, specifically aimed in the print media sector.
Product development and ongoing innovation continues to be our single biggest area of investment in.
In the quarter, we spent $18 2 million on research and development, which was up from $16 9 million a year ago.
Considerable engineering investments are being made across all our business units around optimizing our products for the cloud.
And the customer experience market the demand for SaaS is increasing while the demand for on premise declines.
However, in our asset management Division, we are not experiencing the same trend. So the demand for on premise continues to be the same.
Remains consistent with previous periods.
However, we've decided to continue to invest our engineering resources and product cloud readiness as we expect the market may move in that direction in the future.
In summary, we finished fiscal 'twenty, two with sequential revenue quarterly growth EBITDA of 145 million and a healthy cash position.
This puts us in a comfortable position to continue to make product investments cope with the economic conditions conclude future acquisitions, and keep our strategy focused around choice and micro verticals.
Let me turn the call over to Mr. Steve Sadler.
Thanks Vince.
With respect to acquisitions, the actionable pipeline remains significant valuations continue to decline in this challenging environment.
<unk> global interest rates and the possibility of a recession in 2023 weeks.
We completed two tuck in acquisitions late in Q3 and another acquisition in Q4. These businesses had a positive EBITDA in the fourth quarter, including voice Port which was for a partial period.
This port was included since its acquisition in early September at the end of Q4 cash on hand remained approximately the same at the end of Q3 at 228 million. We purchased 13000 shares of N chose in Q4 at an average price of $28 23 and paid.
$14 1 million in acquisitions in Q4.
With our continued strong positive cash flow and cash on hand, we have the financial resources for further acquisitions and the possible buyback of edge out stock I would now like to open the call for questions.
Thank you, Sir ladies and gentlemen, if you would like to ask a question. Please press star followed by one on your Touchtone phone you will then hear a suite on prompt acknowledging your request and if you would like to withdraw from the question queue. Please press star followed by two.
Using a speaker phone, we do ask that you. Please lift the handset before pressing any keys. Please go ahead and slowly 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.
Wondering if you can give any color around the license wins in the <unk> segment, whether that's coming from new customers coming onto the platform or whether it's from like Upselling cross selling your existing customer base.
Yes, Daniel so.
It's a combination of as I mentioned theres, some customers existing customers as well as new customers. We won in the quarter. So it's a combination of both.
Great. Thanks for that and then how much of the maintenance revenue associated with these new wins are in the Q4 maintenance SaaS numbers.
Oh not.
Not much because normally the maintenance starts after we implement the projects. So when you do a larger project.
In a larger deal it takes a bit of time to implement and then the maintenance kicks in so you wouldn't see any maintenance and similarly, when we do a SaaS uplift deal, where we take an existing customer from on Prem to a private cloud or multi tenant cloud SaaS uplift peace kicks in after the implementation so not much.
In the quarter in terms of that recurring revenue uplift.
Okay. So it sounds like you might see some uplift in the future quarters and then maybe just a final question on that revenue livestock and maintenance.
Got it.
Declining by about $1 3 million year over year.
Yeah.
How should we interpret that is that a sign that you're losing.
More customers from here from your platform that you're gaining.
So a couple of things one is overall FX did impact our recurring revenue.
Video.
Still declined in Q4 2022 compared to Q4 of 2021, so there was still that some.
Kind of drop in video volumes.
But when we moved from a customer from on Prem disaster, we normally get more recurring revenue because we got a handle the whole Dev ops and cloud infrastructure. So that normally is an expansion of recurring revenue.
Okay. Thanks.
Thank you next question will be from Deepak Kaushal at BMO capital markets. Please go ahead.
Hi, Good morning, guys. Thanks for taking my questions I've got a couple.
First on the.
Resilience and AMG.
Pretty diverse segment saw some transportation stuff in there and telecom software in there can you kind of parse out where you're seeing that resilience and what are you seeing relative strength between perpetual versus SaaS.
Yep, so across the board in asset management, it's pretty much business as usual, there's not a lot of SaaS competition there.
Plus our products are pretty sticky in that market, they're running telco networks doing customer billings, so they're quite integrated technologies.
And it's in both sides and in public safety in the transit side as well as in the telecom.
Sector, some SaaS growth in IP TV, one of our products is internet TV and we're seeing some SaaS growth in that segment, but that's really the only SaaS piece within that are part of our business.
Okay, and just a follow up to that and then I've got a second question on the transportation side in particular.
You guys had made some wins recently in the U S market any comments on how that's changed momentum or opportunities in that part of the world for that business.
Yeah, I would say.
You know, we we were selected by.
The California transit authorities as a one of the three preferred vendors for the whole contactless payments area. We've just been building pipeline at this up to this point Havent signed any deals yet, but we've got some positive <unk>.
Pipeline growth there so we're hopeful to get some deals in the upcoming quarters.
Okay. Thanks, that's helpful. And then my second question My third question.
Vince you mentioned.
Some of the micro verticals you guys are targeting well you mentioned that youre targeting micro vertical can you kind of give us a sense of.
Which verticals, you're seeing the most profit opportunity or the most growth opportunity maybe a handful of you're targeting or is that something you keep it close to your chest.
Yeah, I was going to say I like to keep it close to her chest, because we don't really want to.
Let our competitors know because there are segments that we're in that I think are below the radar so to speak and so we you know we'd like to keep it that way.
<unk>.
I guess, that's all I can really say and I'd, rather I'd, rather keep that close to our chest.
But just know we're talking about like.
510, 2030 micro verticals is the total opportunity you guys are focusing on 2030% of all or any kind of context, you can get it yet.
Yes, there's probably about 10 ones that we've got good traction in good visibility customer reference ability and numerous customers within the same micro vertical it's about 10 I would say.
Okay. Okay fantastic well, you know I'm sure there'll be a lot of questions about M&A for Steve.
So I'll pass the line and let those volumes.
Thank you next question will be from Stephanie price at CIBC. Please go ahead.
Hi, good morning, I'll jump in here with the M&A question.
So I'm, hoping you can talk a little bit about the M&A environment and how you think about your acquisition criteria just given the environment are you shifting more of a focus towards the cloud.
We're sticking to our financial discipline and acquisitions be it in the cloud or on Prem.
The environment today as you can imagine there's a lot of companies that are having some difficulty which is making them as we call. It motivated sellers our backlog is high higher than it has been in the past.
And we think it will last for a couple of years. So we're pretty optimistic on the acquisition front and we'll just have to wait and see how we do over the next couple of years.
Sounds good thanks, and then just wanted to touch on R&D as well Vince you mentioned a couple of times in your prepared remarks can you talk a bit about where the biggest investments you're expecting you're going to be in fiscal 'twenty three and how you think about R&D spending in the year.
Yeah.
Going to be somewhat similar like we've done a lot to get our products cloud ready optimized for the cloud because there's more demand there.
In the asset management Division, where we are making investments in what we call product cloud readiness as well, even though we don't see demand. So we're we're knocking off our key products and ensuring that they work and are optimized for.
For the cloud and we continue that into 2023 in asset management ahead of.
Where the market is today, so we're going to continue that.
We're doing a lot around UI UX modernizing.
Optimizing for mobile working in the at home environment, continuing doing that type of investment in.
In the video side, we're really laser focused in telehealth and health care.
We're doing a lot around virtual health care monitoring.
Video health care type features that our customers want so that's what we're doing on video.
Great. Thanks, so much.
Thank you once again as a reminder, ladies and gentlemen, if you would like to ask a question. Please press star followed by one on your Touchtone phone and your next question will be from Paul Treiber RBC capital markets. Please go ahead.
Hello, Thanks, very much and good morning.
Couple of questions here just on video you mentioned it increased sequentially.
What's driving the increased uptake.
Video and then do you see continued sequential growth in video going forward from here.
Yes, so I mean, it increased slightly from Q3 to Q4.
And in the area that we're really focused on is in virtual health care telehealth.
That's the market that we're going after with video.
First as being kind of like a general collaboration type platform.
We havent couple of other micro verticals were trying out that we're getting some traction again I'd like to kind of keep them closer to our chest, but you can probably see it if you look at our content that were out there producing.
But yes, so we're just staying micro vertical focused in video and.
And we think that's the best approach.
In order to kind of keep video moving forward positively.
And maybe another way to ask the same question is I mean do you see the churn in the general collaboration piece of video pretty much.
Dan at this point and then.
Assuming that stable growth would come from uptake from these these micro verticals.
Yeah, I mean, we had a we did have part of the video business in the general collaboration side.
But it was a lot of it was always at the beginning in in health care and when we when we when Covid hit.
We had a big spike in volumes in the telehealth area. So that's what caused that theyre kind of spike up and come down, but yeah. The general collaboration market we're not.
Heavily focused on because it's very competitive.
And there are some big players there that are.
Dropped prices to a point, where we don't think it's a good market for us.
And in your prepared remarks had a couple of comments on the competitive environment I just in regards the IMG in general and I think you mentioned in your competitive pricing is making it harder to sign and retain customers is that.
Is that.
New comment Mike relative to Q4 or do you see the competitive environment intensifying and then related to that like are you seeing any change in your retention rates relative to history and it looks like the strength in license revenue.
You did do a good job winning new customers in this quarter. So you can you sort of tie that back to that competitive environment.
You had.
Yeah, Yeah, I mean, I would say that our the SaaS vendors.
Or sometimes we're seeing them in deals get pretty aggressive.
Relative you know, especially in the last couple of quarters, I would say I'd characterize a little bit of increase in discounting that we're seeing in the market primarily in interactive and mainly the SaaS vendors.
I don't know if that answers that question, but you had the last couple of quarters a bit of an uptick there.
And just sorry on the retention rates any any material change there.
Yeah, so on the retention rates.
Our team has gotten a lot better at.
You know our whole strategy around choice.
And in moving customers.
From on Prem to either private or multi tenant cloud so I would say we're improving.
Our ability to retain their mainly because of the kind of getting all of our cloud.
Nodes up around the world and getting our team more comfortable selling cloud so.
I would characterize that as an improvement.
And then just one last one for me in and I don't know if you'll disclose it but I'll ask is like just with the increased pricing competition have you been more willing to price discount perhaps than what you've done in the past.
I mean, where we're not really the kind of company that will take a deal that you know.
Really low margins or negative margins as you know.
Are we do we will we discount we will of course discount if it makes sense and we will still make money off after project in the multi tenant world, it's a little bit easier because he's got one cloud infrastructure and when you add customers incremental cost is nominal.
But we wouldn't do we wouldn't discount much in a private cloud scenario and so.
I think overall our margin discipline is pretty much consistent.
Okay. Thank you I'll pass the line.
Thanks, Paul just added comment there you.
You might look at our competition. It's in the cloud you will see that most of them do not make money.
And there are some might say, they're starting to get into financial difficulty, especially if you don't get more funding and with rising interest rates because they tend to have base the growth on that so the environment is changing a lot right now.
And Theres a lot in that area you can check the competition out see how theyre doing we tend to want to have profitable growth, where they often have gone for any growth and I think it's coming home to hurt them a little bit now so just what's going to happen in that market for the next year or two you will just have.
Have to wait and see.
Thank you.
Next question is a follow up from Deepak Kaushal. Please go ahead.
Oh, Hi, guys, Yeah, sorry, I do have a follow up on the M&A side I couldn't I couldn't resist.
Two questions.
[laughter]. Thank you I appreciate it.
Steve I think you mentioned earlier.
That youre looking to add some more bench strength to the M&A team I know you've added a lot. This year and you said last quarter that your capacity is the highest it.
It has ever been any updates on that and and.
What kind of target you have to deploy over the next 12 months.
I've got a follow up.
Oh, yes.
Yeah, we don't have a really a target whatever makes sense.
And with that we're capable of doing we will do our bench strength, we're still looking for the best strength, we want to find the right.
People when we're looking for a couple of people in that that regard, but we have a pretty good group already it's just that I think it's going to pick up in the next year and so I wanted to get some extra resources to handle the.
Possible extra volume.
Okay, and then a follow up.
And that was helpful. Thank you.
Seen a couple of large private equity transactions on the large side.
Pretty healthy valuations.
I assume this isn't this isn't hurting valuation expectations on the low side, but.
There's been an anticipation here.
When sellers might break and and and start selling it especially in your snack bracket you have a sense of timing on that I know you keep saying over the next few years, but.
Hi.
Could could something change in the near term that could accelerate things are sloping down or how do you look at that timing or is it just you know.
As it comes.
Generally I don't like to predict the future. So when I say I expect it. The next two years I can tell you it's already started.
Okay, well I'll leave it at that and then it's.
It's a tough one again thanks.
Thank you and at this time, Mr. Sadler, we have no other questions registered.
Please proceed.
Well. Thank you everybody, we continue with our long term capital allocation strategy and to invest in our operations to improve our internal growth. Thanks.
Thank you for thank you for attending the call and your continued support have a Merry Christmas and a happy holiday season.
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 do ask you to please disconnect your lines.
Yes.
Okay.