Q1 2024 Enghouse Systems Ltd Earnings Call
Okay.
[music].
Good morning, ladies and gentlemen, and welcome to the Angi houses Q1, 'twenty 'twenty four conference call.
At this time all lines are in listen only mode.
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 the operator.
This call is being recorded on Thursday March 14th 2024.
I would now like to turn the conference over to Stephen Sadler, Chairman and CEO. Please go ahead.
Good morning, everybody I'm.
I'm here today with Vince <unk> Global President, Rob <unk>, VP finance at Todd May VP legal counsel.
Before we begin I will 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 children's continuous disclosure filings such as its Aif, which could cause the company's actual results and experience to differ materially from anticipated results or other expectations undue reliance should not be placed on these forward looking statements.
The company has no obligation to update or revise any forward looking information, whether as a result of new information future events or otherwise.
Okay.
Thanks, Todd Rob will now give an overview of the financial results. Thanks.
Thanks, Steve Good morning, everyone I'll be walking through the highlights for the first quarter ended January 31, 2024 compared to the same period in the prior year rare.
Revenue increased 13, 2% to $120 5 million compared to revenue of $106 4 million recurring revenue, which includes SaaS and maintenance services grew 27, 2% to $84 6 million and now represents 72% of total revenue.
Results from operating activities improved to $32 6 million from $29 9 million, while achieving a 28, 8% EBITDA margin adjusted EBITDA was $34 7 million compared to $32 3 million.
Cash flows from operating activities, excluding changes in working capital were $35 6 million compared to $32 6 million net income was $18 1 million compared to $17 1 million.
As a softer market continues its transition towards SaaS offerings, we are generating an increasing proportion of recurring revenue streams within our overall revenue model, which now represents 72% of our total revenue in the first quarter of 2024.
Our operational expenditures declined as a percentage of revenue consistent with our objective of generating operational efficiencies. Despite the inflationary pressure on operating costs. This focus on efficiency is part of our broader objective of maintaining a lean operational model that supports our growth ambitions without compromising the bottom line.
Despite these challenges our cash position has increased in the quarter, providing the resources necessary to continue to pursue new acquisition opportunities that we believe will enhance our market position and offer long term shareholder value.
A key advantage Ngos has in this high interest rate operating environment as our debt free status in a closing cash cash equivalents and short term investments balance of $247 4 million affording us the flexibility and agility to make investments without the burden of external financial constraints. This positions us uniquely in the market.
The neighboring enabling us to pursue acquisitions and invest in further expanding our product suite.
Subsequent to quarter end on February 12, 2024, and <unk> completed the acquisition of media site assets, which offer a suite of SaaS video solutions as well as expanding and houses presence in the Japanese market. The acquisition was completed for a cash purchase price of U S $15 5 million.
Yesterday, the board of directors approved an increase in the company's eligible quarterly dividend to <unk> 26 per common share an increase of 18, 2% over the prior dividend payable on May 31, 2024 to shareholders of record at the close of business on May 17th 2024. This represents the sixth.
10th consecutive year in which the company increased its dividend by over 10% I will now hand, the call over to Mr. Sadler.
Thanks, Rob This will now give some operational highlights for the quarter.
Thank you Steve.
We are pleased to report growth in the quarter across our key financial metrics with double digit increase in total revenue of 13, 2% recurring revenue of 27, 2% and operating profit profitability growth of 9%.
Our recurring revenue expansion has been significant and now represents over 70% of our total revenue.
We finished the quarter with one of our highest deferred revenue balance, reaching 135 million up from $107 million last year, an increase of 26%.
Overall revenue mix is changing in line with shifts in customer demand customer demand moving from perpetual software towards software as a service which.
Which is translating into a change in gross margins.
Achieving 65, 5% compared to 67, 3% last Q1.
Even with these gross margin changes, we continue to grow our overall profitability by carefully managing operating costs.
This significant advancement in our generative artificial intelligence continues to generate a lot of awareness and the broader technology market and is prompting a lot of discussions with our customers around inch else's AI products and our future plans.
We understand that some people have a perception that AI may eliminate the need for businesses to have contact center agents. However.
However, what we are seeing in the market and hearing from our customers is not in line with that point of view.
Undoubtedly AI tools like chat bots.
Can handle some customer interactions and our effective in certain types of use cases.
However, AI productivity tools that may contact center agents more productive.
And free up their time to create better customer experiences is where we see a demand and where most of the interest from our customer lives.
This is in line with our AI product strategy and the products we have in our building.
Last quarter, we discussed the AI building blocks, we've put in place that started in 2019 as a reminder, these building blocks include our transcription engine, which translates phone calls and video recordings into taxed available in over 50 languages.
Our advanced linguistic search, enabling agents to query content knowledge basis, and generate relevant answers and our ngl's knowledge based technology that provides customers the ability to create their own proprietary dataset from consuming multiple sources of internal content.
We have built a suite of AI products and enhancements powered by these building blocks.
For example, quality assurance is an important area and contact centers, which is all about improving our contact centers agents and improving their ability to.
The address customer experiences.
One of our AI features which is integrated into our quality management suite includes real time coaching which guides the agent while they're speaking to a customer giving them coaching tips such as you're speaking to quickly are talking over customers.
We also have a fully integrated coaching scorecard that provides coaching points. The agents once the call is completed.
We are also seeing interest for our conversational summarization feature that creates automated call some race and action items that eliminate the need to do this manually.
This is an example of how we are eliminating tasks that takeaway the time away from agents interacting with customers.
An example of how we leveraged our transcription engine is our automated translation chat capability.
Where a customer can go to a website chat with an agent in their native language and the agent receives the real time translation of their chat in their preferred language responds in their preferred preferred language and it converts the response back to the customer in their native language all in real time.
And we're also using AI within our operations to enhance efficiency.
We start we started using AI and demand generation in 'twenty three driving more inbound leads at a lower cost.
And in Q1, we expanded using AI to a pilot group.
Within our engineering team assisting with several software development tasks.
Using both Microsoft co pilot and open AI. The initial engineering feedback was these tools in their current form can improve engineering productivity in the range of 10% to 30% depending on the activity.
So we're expanding the program to a larger engineering pilot group in Q2.
And we continue to plan to use AI across all areas of our company with the goal of improving overall profitability.
Turning to our recent participation at the mobile World Congress trade show in Barcelona, where we had very successful event with productive meetings with over 180 of our telecom customers and partners.
It was great to hear a consistent theme from our customers commenting on our exceptional customer service.
Providing several examples of our team's responsiveness and how our choice strategy is highly valued and makes us a partner they consider easy to do business with.
The other common theme from the customers at the event was that business and personal travel have returned to normal levels.
Resulting in improved mobile revenue for our telecom customers.
This is translating into growth in revenue and demand for some of our mobile products, such as mobile billing and our mobile device management software.
Our mobile.
Device management software product is sold by our telecom customers to their enterprise customers.
And it provides the ability to manage mobile phones.
Limit the applications on their phones secured them if they are lost and manage telecom expenses.
Our asset management business unit has good pipeline low customer churn and generally larger deals that can impact any given quarter.
We have completed several acquisitions in the video market over the last 12 months with the acquisition of Jim You Lifesize and now media site, which closed in early February.
Part of our video solution is video meeting and collaboration software that plays in a highly competitive market.
Which has some large players who dominate the market.
Our video strategy is about providing technology into unique use cases with less competition from larger providers.
For example, using our video product <unk>.
One of our customers, who is a large global pharmaceutical company recently powered and 18000 employee town Hall, which they commented went flawlessly.
We also sold our video solution this quarter into the government Department of health in the Middle East that will use our video product to provide virtual health care in their country. This.
This customer wanted to secure video product on their government cloud infrastructure in their country.
And now with media site, we have a new solution for the education and event market, which captures video content from educators and presenters at events, which has then pushed into an integrated learning management system for later consumption.
These are just some examples of our unique video use cases and products, where we see less competition from large providers.
Our strong performance this quarter reflects the hard work and dedication of our team and our ability to operate in a dynamic and always changing market and economic conditions.
Let me turn the call over to Mr. Steve Sadler.
Thanks Vince.
With respect to our recent acquisitions the Lifesize acquisition that we completed August one 2023 at the beginning of Q4 2023 is performing as expected revenue and operating income from acquisitions declined slightly in Q1 over Q4, but achieve.
<unk> their financial objective.
Acquisitions are operating at our standard financial model in Q1.
The assets of media site were acquired in February of Q2, and work continues to integrate this business into our operations in Q2.
We expect this acquisition to add to profitability this quarter in Q2.
<unk> financial results for Mediasite business was included in the first quarter I would now like to open the call for questions.
Ladies and gentlemen, we will now begin the question and answer session.
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Your first question comes from the line of Daniel Chan with TD Cohen.
Please go ahead.
Hi, good morning.
SaaS and maintenance revenue decline quarter over quarter, Steve you talked about Lifesize.
Performed to expectations and down slightly quarter over quarter I think that was expected just wondering if there's anything else to call out other than the lifesize.
Performance that could have accounted for that SaaS and maintenance sequential decline.
Well.
I think it's probably because some of the converted over to <unk>.
Our more recurring revenue in the SaaS business again, we supply both on Prem and in the cloud and in the private cloud.
Customers a choice.
However, they choose we do and we follow their lead we don't have a strategy of forcing them to one of those areas.
Right now it's more in the cloud mainly because its very competitive if you look at our competition Youll see most of them don't make any money.
So it's a little tougher in that area margins are a little lighter, but it's good for customers. So it's just the.
Shifting to the marketplace.
Maybe I'll ask it differently.
The SaaS and maintenance revenue declined sequentially was that all from Lifesize. The expected decline in Lifesize or was there anything else that could have caused the SaaS maintenance revenue declined sequentially.
It was mainly lifesize.
As you know we bought it out of receivership.
Our bankruptcy actually they were in that.
Process, probably for about three months four months. Some customers then got worried no would come in and so look for other.
Opportunities to move.
It takes a little while to move so you didn't see it in Q4 last year, but you saw a bit of it in Q1, yes.
Okay. That's helpful and do you expect that to continue into the next quarter or is that pretty much done.
We hope not but you never know what customers have planned or what pad plan from before they don't always tell you.
So it might be a little bit.
But hard to say, we don't see it increasing in Q2 for sure but the decline it might be it might have stabilized or may decline a little bit still.
Okay. That's helpful. Thank you.
And then on the R&D line as a percentage of revenue, it's been volatile, but generally been ticking higher over the last year. What are your key areas of focus and investment there.
We're still focusing in all the areas, we don't tend to make our profitability by cutting back on R&D, which is our future.
So we do.
Have a percentage of R&D to revenue a little higher than we would probably I would say like but that's probably the wrong word because we like it because we are still integrating things in remember we buy companies you do have to integrate their platform into our platform. So as we do that our R&D will be a little bit higher.
Then we would normally do if we werent doing any acquisitions, but I'll, let Vince comment a bit on that yes in some some of the additional investment areas I touched on with artificial intelligence.
And then as more customers move to SaaS.
We also had to do some investments to optimize for the cloud.
Our incremental investments I would say.
Great. Thanks ill pass the line.
Ladies and gentlemen, as a reminder, should you have a question. Please press the star followed by the one on you touched on phones.
Your next question comes from the line of Paul Treiber with RBC capital markets.
Please go ahead.
Thanks, very much and good morning.
First question just on media site.
Sonic foundry disclose some financial forecasts for media site I'm, calling for about 20 $25 million in revenue in their fiscal 'twenty four.
What's your view on that.
Sustainability or the stickiness of that that revenue forecast.
And what are you looking for.
That business to do going forward.
Yes, I think.
As an estimate and it's always an estimate we think it'll be pretty stable. We may have a slight reduction in revenue, but I'll say slight because it's their profitability is not too bad Paul as you know in most of our acquisitions. So how we get to profitability is taking out.
Bad revenue or low quality revenue, but doesn't make money.
I know the street, sometimes gets concerned because of our revenue change, but that's why our profit growth a lot of companies who are on the road, especially public companies. They take on all revenue sometimes revenue that's not very profitable because they believe the street just looks at revenue rather than cash flow profitability there.
Comes a time when that game ends and then we show up Okay. So then.
That's basically what happened here they sold off those assets to us.
We take it will be on our model would be profitable in Q2, so we're getting to profitability there a little faster as you generally do with asset deals.
Okay.
Just on Paul on your comment of the stickiness of the product obviously, we have to experience the company inside of Ngl's, but generally based on the data we looked at it as fairly sticky because it's integrated into a lot of universities.
The rooms are outfitted with their software that capture the content that the professors deliver.
So it's fairly sticky software it is not in the video collaboration space that is highly competitive it.
It is very very focused on education and events.
Okay, that's really helpful.
And that business.
Just in terms of like the M&A environment. Overall, we are quite positive on the environment itself, but when you look back over the last year and I was wondering two deals that have closed now what's the disconnect between getting deals closed.
And if the healthy environment or the opportunities that are out there.
It's hard to say, but there still is some I'll call. It overhang from a year ago. When people saw much higher prices are much higher valuations because of low interest rates I think.
Some of the companies look at it and are surprised that some we've talked to before that our price goes down not up with time.
So again I think it's a little bit.
A recovering from that still but the opportunities and the number of conversations are much higher than they had been in the past.
And then just just lastly, just on the transition to SaaS or cloud in general.
It seems like you're.
Emphasis to it.
Our prioritization.
Adopting your product for size.
<unk> has actually increased over the last.
Year, or so what's been what's been driving that.
I imagine it's feedback from customers, but what specifically are you are you hearing from them.
You sort of answered your own question, yes. It is.
Is basically customers.
That's driving it and again the competition are racing to the bottom again, if you do a little study on our competition you realize they don't make money because they are still in the game of they.
They don't they want revenue, whether it's profitable or not so again that puts a little pressure on that side I'll also say in our industry right now with that competition you make less on SaaS than we do on on premise.
Yes investors like SaaS more.
But theyre going to have to get used to a little bit lower profitability for the SaaS.
Okay, we just want to make sure that the customer gets what theyre looking for.
Maybe <unk> you could think of it and maybe just add Paul in terms of customer feedback.
There are a lot of the customers are saying, let's just leverage all of the investment that companies like Azure and Amazon and Google are making in the cloud leveraging that infrastructure versus buying their own hardware and maintaining their own hardware. So.
They're also moving stuff to the cloud because of less capital required to do that and.
And there is so much competition with the cloud providers, they can make more money by moving and leveraging their cloud infrastructures.
Okay. Thanks, Thanks for taking the questions.
And gentlemen, there are no further questions at this time I will now turn the conference back over to Stephen Sadler for closing remarks. Please go ahead.
Okay. Thank you everybody for attending the call and your continued support.
<unk> continues to build this business with a strong balance sheet, including no bank debt and a tough economic and challenging business environment.
Yeah.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating perhaps that you. Please disconnect your lines.
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