Q4 2024 Enghouse Systems Ltd Earnings Call
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Speaker Change: Good morning, ladies and gentlemen, and welcome to the edge houses Q4 2000.
Speaker Change: Once you for a conference call at this some lunch you know listen only mode.
Speaker Change: One of the presentation, we will conduct a question and answer session. If at any time. During this call. We require immediate assistance piece by stores and you know it's like you all but he gets his call is being recorded on Friday, just somebody taking 2024 I would now like to turn the conference over it.
Speaker Change: Stephen Sadler. Please go ahead.
Stephen Sadler: Good morning, everybody I'm here today with Rob that bid VP Finance, Todd May VP legal counsel before we begin.
Stephen Sadler: I'll have Todd read our forward disclaimer.
Speaker Change: Certain statements made may be forward looking by their nature such forward looking statements are subject to various risks and uncertainties, including those just chosen continues to steadily climb as such.
Speaker Change: Which could cause the company's actual results and experience to differ materially from anticipated results or other expectations undue.
Speaker Change: 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.
Speaker Change: Thanks, Todd Rob will now give an overview of the financial results and a brief comment on operations.
Speaker Change: Steve let.
Rob: Let me first take us through the fourth quarter and annual financial highlights revenue increased two 1% to $125 7 million from $123 1 million in the fourth quarter and 10, 7% for the fiscal year to $502 5 million from 454 million last year.
<unk> revenue, which includes SaaS and maintenance services grew one 1% to $88 2 million compared to $87 2 million in Q4, 2023 and represents 72% of total revenue for the fiscal year recurring revenue increased to $346 6 million from $297 6 million.
Rob: Higher year, an increase of 16, 4% as we continue to see increased demand for SaaS results from operating activities decreased to $33 4 million compared to $35 7 million in Q4 2023, an increase from the fiscal year to $133 8 million from $122 1 million the prior year.
Rob: Net income was $2 6 million compared to 25 1 million in Q4, 2000, Twenty's grief and $81 3 million in the fiscal year compared to $72 2 million last year as we continue to grow our business with a focus on profitability.
Adjusted EBITDA decreased to $35 6 million compared to $37 9 million, while achieving a 28, 3% of merchants in the quarter annual adjusted EBITDA was 143 8 million compared to $133 8 million in the prior year, an increase of seven 5%.
Rob: Cash flow from operating activities, excluding changes in working capital was $40 3 million compared to 43 5 million.
Rob: <unk> fourth quarter, and $151 8 million for the fiscal year compared to $140 5 million in the prior year cash and cash equivalents increased to record levels of $274 2 million as at October 31, 2024.
Rob: Fiscal 2024 yielded a third year of consecutive revenue growth as we achieved a significant milestone with revenue for the city gear exceeding $500 million, representing double digit balanced growth and just a little bit below our all time high achieved during COVID-19.
Rob: We're also pleased to announce record annual SaaS and maintenance services revenue of $346 6 billion, an increase of 16, 4% compared to the prior year SaaS and maintenance services continue to be an important predictable source of revenue and now represent 69% of total revenues for the year growing from the prior year.
Rob: In addition to the SaaS and maintenance growths were pleased our professional services and hardware revenue have showed marked increases for the year. However in the current business environment demand for on premise perpetual software licenses has declined as more customers choose SaaS solutions that require less capital investment.
Rob: Our commitment to providing customers with choice across our product suite to a range of deployment options, including multi tenant SaaS private SaaS and on premise solutions differentiates us in the marketplace.
Rob: Through this market transition, we continue to focus on maintaining profitability as we see competitors spend unprofitably in pursuit of growth our disciplined approach to revenue investments has not changed a good example is with artificial intelligence, where we are implementing gradually in our internal processes and our software practical profitable ways. This.
Rob: Structured approach to our business has provided benefit as demonstrated by the 12, 6% increase in our net income to $81 3 million from $72 2 million in the prior year.
During the year, we deployed cash of $43 4 million in acquisitions purchasing the assets of Mediasite in sea change.
Rob: These have been successfully integrated into our operations and are provided the intended payback acquisitions remain a cornerstone of our strategy as we continue to investigate opportunities that meet our criteria and we have the resources to execute we also returned $53 1 billion to our shareholders through dividends an increase of 18, 7% from the.
Rob: Prior period at the same time, we increased our cash reserves to $274 2 million with no external debt, which positions the company well for future growth.
Rob: In summary, we closed the year with a double digit increase in revenue and net income significant expansion of our recurring revenue record cash reserves and no external debt positioning us to pursue opportunities that meet our acquisition criteria, while continuing to pay dividends to our shareholders. The growth in revenue was achieved through our ability to acquire.
Rob: And effectively integrate new acquisitions into our business model.
Rob: Yesterday, the board of directors approved the company's eligible quarterly dividend of 26 per common share payable on February 28, 2025 to shareholders of record at the close of business on February 14th 2025.
Speaker Change: I'll now hand, the call back to Mr. Sadler.
Stephen Sadler: Thanks, Rob.
Stephen Sadler: Pitches departure, we have reorganized the business from a global functional unit global business units building selling and supporting enterprises is a team activity, we are maintaining our global focus but with a functional approach to our main business units. This was.
Stephen Sadler: Just in developing each business, while making said capital deployment, a more focused and streamlined activity. Our strong management strength has allowed promotion of two of our internal senior executives, who have substantial experience in the business units to take on the new management.
Stephen Sadler: <unk>.
Stephen Sadler: With respect to acquisitions in the quarter, we continue to integrate the assets of sea change, which we expect to be operating at their normal EBITDA profitability within the next quarter, we continue to see substantial opportunities in our industry sectors with some larger.
Stephen Sadler: <unk>, having debt problems staff reductions interest costs, which are not supported by their cash flow and slowing growth operations.
And chose is financially strong and continues to enhance both its cloud and on Prem products with new features including using AI technologies to improve efficiencies in a practical manner.
And Kyle this is it.
Speaker Change: Is very well positioned for the future and also to add shareholder value I would now like to open the call to questions.
Speaker Change: Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by the one on your telephone keypad, you'll hear a prompt that Johanna amazed and should you wish to cancel your request. Please press star followed by nature.
Speaker Change: If youre using a speakerphone please.
Speaker Change: Handset before pressing any piece one moment. Please for your first question.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: Your first question comes from the line of Daniel Chan from TD Kelvin. Please go ahead.
Hey, good morning, Steve.
I understand that the licenses revenue decline may be a result of the cloud transition, but shouldn't we see a resulting growth in the SaaS revenues with the transition as well if we look at total SaaS revenue that was somewhat flat year over year and sequentially. It was actually down year over year in the <unk> segment. So any color on that would be appreciated.
Speaker Change: Okay, Yes, you got to realize the product revenue comes in all at once SaaS revenue over time, and we have a lot of moving parts in that area.
Speaker Change: An example would be our Lifesize, which we bought as you know a year ago out of basically bankruptcy.
Speaker Change: They had many customers, mostly SaaS and an older product and some difficult SaaS.
Speaker Change: Software issues that we took on and that revenue has been declining it's still.
Speaker Change: Well above.
Speaker Change: Some of what we expected I E. The revenues higher than we expected.
But it has been a substantial decline and it declined again from Q3 to Q4 and almost 5 billion from last year to this year. So that's part of why that SaaS revenues down. We also have our of course our.
Speaker Change:
Speaker Change: In the cloud.
Let me go ahead, and we think it's in the cloud and what should we call. It the.
Speaker Change: The boys the <unk> yeah.
The big cash revenue.
Speaker Change: Which is still declining I E. The video revenue, which we had in the IMG division as well and it's declining again not as much. So it sort of turned the corner, but that was also in life size as well as our own <unk> and we bought some.
Speaker Change: Businesses in that area because the.
Speaker Change: Market, it's tough when you got competitors like Zoom, you got micro Microsoft really picking up so again, it's a lot of moving parts, that's causing that shift, but what Rob says is correct. Our SaaS is improving.
Speaker Change: And it is coming from our perpetual or on Prem revenue. Its just theres a lot of components that go into it.
Speaker Change: Yes, I appreciate that that's very helpful color, Steve So if I just look at the.
Speaker Change: The the customer call center.
Speaker Change: Transition from on Prem to cloud if I was just looking at that SaaS that is growing right the customer call Center.
Speaker Change: The call center to cloud is still not growing because you have the lifesize part, which had both they have on Prem and cloud and a lot of customers had made the decision to move off.
Speaker Change: Because a they have they went into bankruptcy. So of course, they didn't know what we were going to do are we going to continue their product or we can make them change. So there has been at least $5 million.
Speaker Change: Dollars from last year that is not in our numbers this year for that product and it comes both for on Prem and in the cloud they're older product was on Prem.
When you buy I guess the.
Speaker Change: Learning there is when you buy a bankrupt company.
Speaker Change:
Speaker Change: Youre going to have some problems, but I will point out from a return on investment point of view, we expect we.
Speaker Change: The return on that investment will probably be less than two years.
Speaker Change: We're very close to already making back all the money we paid on it. So that's with the revenue decline. The other side is we expect that to happen. This is not a surprise. So we took action on costs on the life size as well early and that's why we're going to make the returned back still very quickly.
Speaker Change: But it doesn't mean a decline in revenue.
Speaker Change: Okay. That's helpful. Thanks, Steve.
Speaker Change: And then maybe a question on AI in the past you've stated that fears of adoption of AI in the contact center are overblown. Many of your competitors are touting high attach rates of Jennie O I and our conversations with executives imply a broader adoption of Jenny I for customer support next year or so.
Does this quick adoption of Jenny I changed your view on that technologies market appeal.
Speaker Change: No.
Speaker Change: And if you looked at the competitors that are saying that look at their financial results and get the real assessment of what's happening versus the promotional stuff. They tell you.
Speaker Change: You do have to have a large language model to do it and some of the companies that service just large contact centers. They are more inclined to do it and I can see a return there were generally in the medium to smaller size. We don't have that large language model, but we do a lot of practical AI based on the information that we.
Speaker Change: Have currently for example calls coming in if someone raises her voice cuts theyre upset we pass it to a supervisor you hear a lot of that on our disclaimers on people when you call into them, we do a lot of that AI, which doesn't need that large language model. We're progressing ahead and we use it internally to help.
Speaker Change: I'll help our own people answer questions on our contact center.
Speaker Change: But again, it's we don't see the uptake as great as the promotion of the uptake.
Speaker Change: Great. Thanks, Steve.
Speaker Change: Thank you and your next question comes from the line of Kyle <unk> from CIBC. Please go ahead.
Speaker Change: Hi, good morning, its Aaron Kyle on for Stephanie.
Speaker Change: Right.
Speaker Change: I just have a question on profitability and the margin profile.
Speaker Change: So on profitability in light of the current demand environment.
Speaker Change: But EBITDA margins are down year over year.
Speaker Change: Do you expect to be able to drive that margin back up into the 30% range in the near term.
Speaker Change: And if so what levers do you have to achieve that or are you expecting that margin profile remains at this level.
Speaker Change: Hi, this is <unk>.
Speaker Change: A lot of factors go in.
Speaker Change: But we really don't like making forecasts, but we have a large project in the nordics that has been losing money, which is now going to turn to maintenance because we're finishing that project. That's been the main reason for the decline in that margin and so we expect it to improve in the near future.
Speaker Change: Okay. Thank you that's helpful. There and I think I also wanted to ask one question just a clarifying question on that.
Speaker Change: Yes, the organization that you commented on earlier.
Speaker Change: He reorganizing into two business units.
Speaker Change: Staff internally I just want to clarify are you still conduct an external search to replace the president role or have you reorganized.
Speaker Change: Then that rolls that longer than necessary.
So we're always searching for good people.
Speaker Change: And yes, I would say if we find such a person for the President's role, we would certainly hire them.
Speaker Change: However, we're not doing an active search at this time, because we want the organization to stabilize and I can look after until then until its get put in place rather than have a new person to come in when it's really just it's actually been reorganized to start January one so we see bringing another parameter in right now.
Speaker Change: Now probably wouldn't be the best move.
Other thing I would say is there are larger acquisitions out there that we've talked about and potentially.
Speaker Change: Having a little room for management coming in from those acquisitions.
Speaker Change: Could be.
Speaker Change: Interesting.
Speaker Change: Activity. So again, we're not in a rush right now.
Speaker Change: If we do find a good candidate, we certainly have a position to hire them into.
Speaker Change: But we're looking at various alternatives right now.
Okay. Thank you very much.
Speaker Change: Thank you once again should you have a question. Please press star followed by the one on your telephone Keypad. Your next question comes from the line of Paul <unk> from RBC capital markets. Please go ahead.
Speaker Change: Thanks, very much and good morning, just a question on the.
Speaker Change: Underlying business when you mentioned the number of moving parts can you speak to renewal rates and customer churn and how that's been trending and what I mean by renewal rates. If you couldnt include.
Speaker Change: When you see.
Upgrade from our switch from on premise to SaaS.
Speaker Change: <unk> churn is completely migration away from.
<unk>.
Yes, Theres a lot of parts there too of course, because as you say some of the churn on the maintenance goes into the cloud and SaaS.
Speaker Change: And as you know that comes in over time, they don't like in the past did buy new software now they just convert over.
Speaker Change: We are seeing some of that.
Speaker Change: Certainly I think the maintenance renewal, you're probably looking at still about 90%, there's still a lot of on Prem customers, everyone talks about the cloud, which really benefits all the platform players the video et cetera, but there's a lot of customers who still want to be.
Speaker Change: On Prem we do both we give them choice.
Speaker Change: We make a little more money on the on Prem than we do in the cloud because you have those third party platform providers, which we generally use we don't use our own centers.
They've been raising cost to all of the suppliers and if you look at the competition in our market you'll find we're one of the most profitable ones as a percentage and in total again some of them don't.
Speaker Change: Have enough debt that they don't create enough cash flow even did cover that so the market is interesting right now.
Speaker Change: I think there may be some changes to that as platform.
Speaker Change: Players, who don't have unlimited demand start competing against each other maybe those rates don't keep going up but we do both we want.
Speaker Change: Whatever the customer wants we're willing to do on Prem we're willing to do in the cloud. We're one of the few that do that as most of the competitors moved to the cloud.
Speaker Change: It's quite a competitive situation right now.
Speaker Change: And.
Speaker Change: You mentioned you are seeing growth in your in your SaaS business can you are there any metrics or is there any way that you can quantify that.
Speaker Change: Due to the growth that that would help investors understand that business better.
Speaker Change: It's very hard to do in some ways because as you know, we're really a capital allocation company.
Speaker Change: Most of the questions everyone.
Speaker Change: For an ongoing company, but when youre doing capital allocation and Youre buying companies. It changes that every time you do it.
Speaker Change: So I can tell you its growth I can tell you it's more than double digits that we've done.
Speaker Change: If we take out for example, the Lifesize decline, which again had some product issues. When we bought them again out of bankruptcy, we fixed those and in fact, it's probably a premier product right now that we're going to go forward with but it took about a year to get that product more stable.
Speaker Change: For both the current customers and future customers, but it is one for enterprises will be leading with.
Speaker Change: While for the telcos were leading with our Ccs product, which we've always had in.
Speaker Change: In the telco side, it's a difficult one to do in your capital Allocator.
Speaker Change: Really define that for you.
Speaker Change: So we do the best we can.
Speaker Change: We've showed you the numbers, but there is ups and downs.
Speaker Change: Continue to be.
Speaker Change: So.
Speaker Change: I really don't have any more color on that right now if I knew exactly what you wanted maybe call and I can go do some research on it but theres a lot of moving parts.
Speaker Change: Yeah.
Speaker Change: And switching gears to capital allocation.
When you look at the the capital deployed on acquisitions over the last couple of years and it's always been below what.
Speaker Change: Most investors would have expected.
Speaker Change: Is that primarily a gap between pricing expectations in the market versus versus what you are willing to pay and then.
The cash is built up.
Speaker Change: Yeah.
Speaker Change: At what point do you start returning that cash to shareholders, perhaps more aggressively than what you've done with share buybacks.
There's a bunch of questions there I hope I get them, all if not ask it again.
Speaker Change: The expectation for me on acquisitions is a little light, but not a lot.
Speaker Change: And it's not a matter of a pricing for the most part because some of our markets. We don't see other bidders interested especially in the.
Speaker Change: Communications Center contact center space.
What we see is continuing declining revenue from some of the competitors and they've got a little bit of financial stress.
Speaker Change: You can do your analysis on them and make your own conclusions.
Speaker Change: As paying back more cash.
Speaker Change: <unk>, what I just said, it's nice to have that cash available in case, a larger opportunity comes up we don't have to go to the bank, we don't have to do.
Speaker Change: A lot of hoops that financial institutions want us to do so right now we think the cash that we have is best maintained we gave a good special dividend because of our the money. We made on video a couple of years ago. That's unusual we don't intend to really do that again, but we do intend to keep our dividend.
Speaker Change: Consistent and growing like we have for the last 10 years.
Speaker Change: And in terms of potential acquisition candidates you mentioned there are some larger companies out. There are you are you looking at larger ones or would the profile will be similar to the ones that you've done pretty much in the past.
Speaker Change: We look at anything that gives us our return, which we have on our website as we try and get a cash on cash payback in.
Speaker Change: Let's say five to six years and if we have to go a little higher we can do that so it's not a matter of if we look at larger smaller we look at both.
Speaker Change: But there are larger ones out there that.
Speaker Change: Whose values have declined quite significantly and whose shareholders. So happy with the <unk>.
Speaker Change: Some cases, so again.
Speaker Change: We are watching that situation carefully.
Speaker Change: Okay. Thanks for taking the questions.
Speaker Change: Thank you.
Speaker Change: There are no further questions at this time I will now hand, the call back to Mr. Stephen Sadler for any closing remarks.
Stephen Sadler: There's a lot of moving parts as I know, it's hard to keep track of but if you look over the last three years. The bottomline, we grow every year and we generate more cash every year, we have cash and we don't really need anything from the market or from the banks to do our strategy. So we.
Stephen Sadler: Continue to move forward at.
Stephen Sadler: A nice steady pace.
Stephen Sadler: Thank you all for attending the call and have a happy Chris a Merry Christmas and a happy holiday season.
Speaker Change: Thank you and this concludes today's call. Thank you for participating you may all disconnect.
Speaker Change: Yes.
Speaker Change: Okay.