Q3 2019 Earnings Call

Good day, ladies and gentlemen, welcome to the <unk>.

Systems limited.

2019 earnings call.

As a reminder, today's conference is being recorded.

I would like to turn the conference over to Steve Sadler, Chairman and CEO . Please go ahead Mr. Sadler.

Good morning.

I'm here today with Vince mistook global President, Doug Bryson, VP finance and Todd May VP legal counsel.

Before we begin I will have Paul I'd 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 Manchester continuous disclosure filings such as its <unk>.

Could cause the company's actual results and experience to differ materially from anticipated results or expectations undue reliance should not be placed on these forward looking looking statement 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 Doug will now give an overview of the financial results. Thanks, Steve.

Yesterday, and just announced its unaudited third quarter financial results for the period ended July 31st 2019.

Third quarter revenue was 101.3 million or 16.8% increase compared to revenue of 86.7 million in the third quarter of the prior here.

The revenue increase primarily reflects contributions from acquisitions.

Results from operating activities were 27 million compared to 26.7 million in the prior year's third quarter, which reflects the impact of changes in product mix on gross margin and as expected lower operating margin contributions from acquisitions in their initial period. After acquisition net income for the quarter was 14.7 million or 27 cents per diluted share.

With increased amortization and a foreign exchange loss.

Adjusted EBITDA for the third quarter was 28.1 million or 51 cents per diluted share compared to 27.4 million or 50 cents per diluted share last year, but the increase being attributable to incremental revenue contributions from acquisitions.

On a year to date basis revenue was 276.5 million compared to revenue of $257 million in the prior year.

Results from operating activities were $79.4 million compared to $75.9 million in the prior year to date, an increase of 4.7%.

On a year to date basis, adjusted EBITDA was $81.6 million or $1.48 per diluted share compared to 78.1 million or $1.43 per diluted share last year.

Operating expenses before special charges related to restructuring of acquired operations were $42 million compared to $34.1 million in the prior years third quarter and reflect incremental operating costs related to recent acquisitions.

Non cash amortization charges on acquired software and customer relationships from acquired operations were 8.5 million for the quarter compared to 7.2 million in the prior years third quarter.

The company generated cash flows from operating activities of 13.9 million compared to 29.3 million in the third quarter of fiscal 2018.

On a year to date basis cash flows from operating activities were 59.6 million.

This relates to unfavorable working capital adjustments from new acquisitions, which when acquired and severance obligations and significant payable balances that have since been settled.

And just closed the quarter with 141.3 million in cash cash equivalents and short term investments compared to $193.9 million at October 31st 22018.

The cash balance was achieved after payments of 15.8 million for cash dividends and 94.2 million net of cash acquired for acquisitions completed in the current fiscal year and 1.1 million for acquisitions closed in prior years.

During the quarter inch has completed the acquisitions of video Inc. and its peer group Inc.

For an aggregate purchase price of 68.7 million net of cash acquired.

These acquisitions reported revenue consistent with expectations that were accretive to earnings in the quarter.

Yesterday, the board of directors approved the company's eligible quarterly dividend of 11 cents per common share payable on November 29 220019.

To shareholders of record at the close of business on November 15th 2019, I'll now turn the call back to Mr. Sadler.

Thank you Doug as Doug noted, we closed the quarter with 141.3 million in cash cash equivalents and short term investments after spending 68.7 million net of cash acquired on acquisitions cash flow before changes in working capital was 28.5 million and 13.9 million from operating differences operating activities.

The difference is mainly working capital all which reflects payment of liabilities. The restructuring is as Doug mentioned, which was implemented just prior to our acquisition of video and if steel.

Revenue as expected other than for asset management Division.

Which had some revenue delayed to Q4, we expect revenue to increase in Q4 and to improve EBITDA profitability over Q3, as a result of recognizing the delayed A.M.G. revenue and recognition of a full quarter of revenue and EBITDA from recent acquisitions.

It's also noted that foreign exchange negatively impact revenue compared to Q2 by 1.1 million and cost was positively impacted by 500000 and compared to last year.

Foreign exchange negatively impacted revenue by 1.5 million and 1 million positive for operating costs compared again to Q3 of 218.

Thanks.

In terms of acquisitions as noted on our last quarterly call. We purchased in May video and his spiel with an objective to be EBITDA positive on these acquisitions, but not achieve our normal EBITDA margins in the first two quarters. We are happy to report excluding purchase price adjustments both acquisitions were profitable in Q3 as Bill had limited profitability as we need to continue to invest in IP TV, where a low we have interested customers. We do not anticipate revenue until Q2 2020 video high profitable results in Q3 due to restructuring done just before the acquisition was completed and some additional restructuring has been done since acquisition.

We expect both revenue and operating income will improve further in Q4, when a full quarter's recognized in our financial results for video we intend to invest in improving revenue on a global basis next fiscal year 2020, and therefore will our.

Acquire some investment from our increased profitability.

It is very satisfying that both these businesses were brought to a positive EBITDA position in Q3 since since as a business. They had substantial losses for many years prior to their acquisition, we hope to build on this success.

Economic and market conditions in our service industries continue to be favorable for acquisition strategy and meeting our acquisition financial payback criteria with a strong return on invested capital. We continue to focus on our capital deployment activities as well as positioning to improve internal growth in future years, our integration of both video and US feel is substantially complete I would now like to open the call for questions.

Ladies and gentlemen, if you wish to ask a question at this time please.

Pressing star one on your telephone keypad.

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Our first question comes from Stephanie price of.

Please go ahead.

Good morning.

A stunning.

I Wonder if you could.

Expand a little bit on the asset management division in the quarter you mentioned some delayed revenue wondering if this.

Close.

Yes, I mean, I and we expected to close soon as I've stated in the past, sometimes the asset management group, which is larger deals can be a little lumpy from one quarter to another we tend to look at it on a yearly basis and it's done pretty good year to date.

But there was a couple of deals that have moved to Q4.

So when you look at our asset management group you will find its revenue in my opinion isn't as good as it should have been but its not from the acquisitions. It's from it's basically from these delayed.

Revenue being recognized.

Great and then in terms of SBO can you talk a little bit about this RTT opportunity that you see going into next year.

Yes, I'd be Tvs, an up and coming.

Item they are very good on the cable side, but they didnt really have a completed IP TV fall off.

Software package to provide so we're working on that and that will really no revenue from it yet, but we do expect or by early next year that we will have some revenue and we already have interested customers I.E. theyve committed that they would like to take it but of course, you can't recognize revenue until you give it to us.

Fair enough. Thank you very much.

Our next question comes from Paul steep of Scotia capital. Please go ahead.

Good morning, Steve or Vince, maybe you could talk a little bit about the demand Gen initiatives I guess, we've been a year into it no we're not looking for.

Forward forecasts, but talk about some of the trends you've seen in the lead flow and I know you invested more in going Mark to market directly what have you seen in terms of the conversion there and maybe what are some of the future opportunities.

I'll, let Vince take that one okay.

At different divisions are at different stages on the demand genzyme, but generally speaking the interactive group is progressing well on demand Gen. We've seen good bookings and.

So you're seeing it translate into results.

And then on the network side again, that's pretty new on on demand Gen. We have more opportunity. There I think it's it's in the area of cross selling and we've got a lot of products a great customer base. So.

We hope to see more progress there in the next few quarters.

Okay.

And I guess, Steve on the M&A side, it looks like you're trying to hire some additional resources, maybe talk about where you're at in terms of his team size as well as what the pipeline looks like in terms of just coverage and growth now that you've had I guess now two or three quarters of having some extra resources on that file.

Yes, I'm not sure we are adding a lot of resources I think we're looking to hire one person to do outbound calling.

And otherwise, it's a pretty stable group.

A good group that means a lot of the time on acquisitions. Some is also integrating them into our current operation.

But other than looking for one person really no change there, it's a pretty solid group.

Great and then just one last clarification for me how much revenue was from acquisitions in the quarter Steve.

14 million.

Perfect. Thanks, guys again, the acquisitions were okay.

I was hoping for a little more revenue, but the asset management side is down a little bit from our networks delayed revenue.

Okay. Thank you.

Our next question comes from Deepak Kaushal of GMP Securities. Please go ahead.

Oh, Hey, guys. Good morning, Thanks for taking my questions I have a couple of follow ups and a couple of minor ones.

Steve just on the AMG delay have you guys started delivering the product can you just can't Bill for revenues is this some sort of unbilled revenue here. This is everything kind of on hold.

Generally you deliver it with larger account, sometimes it takes a little longer than we would expect to get all the sign offs and therefore get the PEO too to record the revenue.

So we do it isn't like we're looking for the revenue we have some.

Interested.

Prospects.

Ready to go but it takes time to get all the approvals done and we haven't got them done yet so there's still some risk in that quarter to get them done but.

I expect that we will improve the revenue there.

Okay and on the cash drag.

I know you said the integration is done on the on the acquisitions, but on the cash back from that is that now complete or you should you get back to normal run rate going forward here.

Yes, we should be hopefully better than normal run rate.

So again the two companies.

Had a lot of losses and.

Had some financial issues, we had to pay a lot of.

Fees and straight some step up that's all been done so we should be back to a normal run rate in Q4, Okay. And then I think I saw I mention of a higher hardware mix.

Is that.

Temporary thing is there a trend going on or is this from the acquisitions, maybe you can shed some light on that and how that should trend.

And then I've got a more yet perhaps.

Yes, I do I do expect the hardware sides picked up a little bit of video had some hardware come in with it because the to do video you Theres hardware involved as well and the like one stop shopping so the hardware.

Mix, there will be a little bit more hardware. If you start doing a percentage, though I would think the other parts of our revenue mix will also improve so at night.

I don't think the percentage will go up but you know as an absolute dollar thing I do think you'll have a little higher hardware mix.

Okay, Great Thats helpful. Thanks, and then just on I think earlier in your comments you mentioned investing in global revenue with video.

I was just wondering if you could talk a little bit.

The go to market strategy for video globally.

And if you might be able to get synergies between video on the enterprise side with your with your contact center side of your business and just a bit more on the strategy and how you. How you how you grow that business. There's a couple of questions. There our objective in the quarter was let's get it to profitability are much generate cash flow and once we got it stabilize that how do we invest some of that cash flow on to build the business. If you look at our current contact center, we do service some of our competitors because the products are very secure and good in that area. So again, yes, we hope to build that into our own systems as well.

But outside that remember one of the great advantages. We have is we have a global structure with people in many countries. So we want to take the product again, we want to get some of the issues cleaned up first but we want to take the product, adding a few people in those countries to each of those countries and therefore expand the product globally, which they did not really have that many people in other countries, where we have 50 plus in many countries. As you know so we're going to try and use our global structure to see if we can sell more the video in those countries.

If you look at what's happening today everyone's putting a bubble over themselves and countries. The Best example is the U.S. So again once we can show we have people in the country supporting the software in the country. We believe that's an advantage that we can.

We should see results from in the future. So thats our intention, but we want the software really solid and before we do that expansion and we're working on that now okay and so the investments for both video and.

Ill.

Should they be done by Q2 next year or would they just be ongoing as part of normal course of business.

Wes SPL, it's that's where we're going to handle yes, but you're investing in both of them right. You as you mentioned by the appeals going now in R&D to actually get the product ready and for market by early next year for video we would have to add what I'll say coal demand Gen sales and marketing in our other countries probably that will start November to December with results next calendar year.

Okay. So it's all good and where that whole budget process now to see how to do this and now probably gets sorted out but you do have to hire people you do have to set up. So my guess is that will be done not by the end of October but by the end of December and end results starting in next year, if it's successful, which we hope it will be.

Okay, and so put in a different way than the target to get back to corporate average margins for both of these companies.

Can we say that's the end of 2020 or is does it stretches beyond that.

I'd sales are going to start first quarter of 2020, starting November one because all these things remember if I'm doing the video shouldn't cost that much more maybe we can use some of our current resources to do it.

So that's OK and the.

IP TV should be bringing in some more revenue again in the.

Second quarter of next year, but also have those delayed.

Results our margin should have been better this quarter.

So I expect Q4 will be better never mind next year.

Okay. Thank you I appreciate the color thanks, very much I'll pass the line.

Again, Please press Star one question. Our next question comes from Paul Treiber of RBC capital markets. Please go ahead.

Okay. Thanks, very much and good morning, just in regards to the video in terms of their product portfolio. My understanding is that they have several different platforms is the strategy to support all of them going forward or will you prioritize some over the others.

Well they actually have.

Three main areas that they're in they do hospitals and financial institutions, which are vertical markets that enterprise, which is a more general and they have a sort of a platform I owe to let people write programs on and use the basic fundamentals of the platform. They were doing a new system as well.

And weve actually curtailed that and decided to improve their current one rather than keep developing the new ones. So we're trying to put more resource on the current one to build faster versus splitting the platforms up so not really.

A wide variety of platforms right now the way we positioned it.

Okay, and I assume based on your prior comment about taking globally. The ones that you are investing and I assume you believe would be scalable into other geographic markets.

Yes, I believe that to be true and the lumber investing and you should also understand is both in the cloud and on premise. They were trying to just build a norm in the cloud type system.

The one we have with some improvements can do both so we think thats an advantage and.

We just got to clean it up a bit put a little more investment in it because they had stopped investment for a couple of years and we have to catch that back up if we're going to go that route. So we're working on that now and probably will have some more more resource working on that rather than dividing the resource up into two parts.

And then just broadly in terms of the R&D strategy and also the competitive environment and in the past couple of years ago, you characterize your R&D spending as an industry leading.

And then since then it's come down a bit it sounds like you may be going through a little bit more of a cycle here, where the R&D spending maybe a bit higher and how do you see what's in priority for R&D do you see that as a competitive differentiator at this point and then related to that the competitive environment Theres been concerns for last couple of years, but the cloud competitors and what not and could you provide an update on the competitive environment and how you see on these new acquisitions fitting in there.

Okay. So you have a couple of questions there that aren't all related but let me do the R. and D. site first if you look at this quarter and look at the R&D spend to revenue generally we were running previously around 14% you'll notice has jumped up to 16, plus so that R&D spend is already in the quarter with the two new acquisitions, which already explained by its there.

Overtime that percentage should come down hopefully because we have more revenue Sofia. The costs are okay, maybe up a little bit, but hopefully revenues up more so we've already done that part from the competitive side, it's pretty much the same.

Different divisions have different competitors, but the the SaaS side on the contact center still there.

Has been for a while are the part that we hope to bring out soon as well is our teams integration and again, we see that coming by lets say the end of the calendar year, we're making good progress there that should improve some of our issues. We've had over the last 18 months with our Microsoft Skype for business.

Operation. So yes, a lot of things are being positioned and hopefully coming together for a good next year.

And maybe tie in my mind.

Couple of questions together is from a competitive perspective do you see the investments that you're making in the product would either.

Close that competitive gap.

Or extend your lead versus versus competitors.

Giving more is needed there or do you think is sufficient where it is.

We think that you know they are all pretty much a commodity in some ways, some and do some things better than others. So you can't do everything for everybody.

Right now in the two products the IP TV, it's important to get that done that would be new in the video side, they're pretty good with there.

The system that they have but we have to clean it up we want to make it more stable.

Clean up any issues that might have and make it really robust so anyone using it can do it without any issues. So thats more of a.

I'll call it a bug cleanup versus trying to do a lot of new things in there.

Because it's pretty competitive as it as it is today, it's secure it does some interesting things compared to competitors, who are getting better traction in the market like zoom. We believe our software is more secure than theirs and we are quite competitive already but we have to catch up a little bit from the getting the software more robust and cleaned up because it.

They fall in a little bit behind in the last couple of years.

Hi, Thanks for taking my questions.

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Okay. Thank you everyone for your continued interest in Santos, we look forward to completing our October 31st 219 fiscal year and reporting our Q4 and annual progress.

Ladies and gentlemen. This concludes the end of Q3 2019 conference call. Thank you for your participation you may now disconnect.