Good day, ladies and gentlemen, welcome to the Enghouse Q3 2020 conference call. As a reminder, today's conference is being recorded. At this time, I would like to turn the conference over to Steve Sadler, Chairman and CEO. Please go ahead, Mr. Sadler.
Good morning, everybody. In this era of social distancing, I'm here today with Todd May, VP of Legal Counsel, Doug Bryson, VP Finance, and Vince Mifsud, Global President. 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 Enghouse's continuous disclosure filings, such as its AIF, which could cause the company's actual results and experiences to differ materially from anticipated results or other expectations. Undue reliance should not be placed on these forward-looking statements and information. 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, Enghouse announced its third quarter unaudited financial results for the period ending July 31st, 2020. All the financial information is in Canadian dollars unless otherwise indicated. Key financial and operational highlights for the three months ended July 31st compared to the same period in 2019 are as follows. Revenue grew 29.7% to CAD 131.3 million. Results from operating activities increased 56.2% to CAD 42.2 million. Net income increased 77.3% to CAD 26 million, or CAD 0.46 per diluted share. Adjusted EBITDA increased 62.4% to CAD 45.6 million. Cash flows from operating activities, excluding changes in working capital, increased 58.8% to CAD 45.3 million. Cash, cash equivalents, and short-term investments were CAD 228.9 million, an increase from CAD 150.3 million at October 31st, 2019, which was achieved after making payments of CAD 19.5 million for dividends and CAD 43.9 million for acquisitions this year.
The company has no long-term debt other than a nominal amount that is non-interest-bearing. In the quarter, the company experienced growth from both internal sources and from acquisitions. Internal growth includes the expansion of the acquired businesses, particularly video, since acquisition. To date, COVID-19 continues to have an overall positive impact on revenue. Although the initial surge of customers requiring immediate remote work and visual computing solutions upon the initial outbreak of the pandemic was primarily served in the second quarter of 2020, demand for these solutions remains above historic averages. The pandemic has tested Enghouse's ability and capacity to respond to significantly altered circumstances. Enghouse's results continue to demonstrate the resiliency of its business model, which is based on significant recurring revenue streams, positive operating cash flows, large cash reserves with nominal debt, and a disciplined cost management and value-for-money philosophy.
Yesterday, the board of directors approved the company's eligible quarterly dividend of CAD 0.135 per common share, payable on November 30th, 2020, to shareholders of record at the close of business on November 16th. I'll now turn the call back to Mr. Sadler to provide his comments. Steve?
Thank you, Doug. As Doug noted, we had another good financial quarter from our operations during these challenging times. Strong cash flow from operations of over CAD 45 million increased our cash and short-term investments to CAD 229 million approximately from CAD 168 million in Q2, despite paying our quarterly dividend of CAD 7.4 million. Considering our changes in working capital and income tax installments paid, net cash provided by our operating activities was CAD 55.7 million. Compared to prior year's Q3, foreign exchange increased revenue by CAD 1.4 million and increased operating costs by CAD 1.1 million, with a small positive impact on operating income. Some of our revenue is being delayed by COVID-19, and the business environment remains challenging for new customers, although one of our significant transit customers proceeded to roll out its hardware purchase on a commitment related to a contract completed before the COVID-19 impact.
This increased our hardware revenue in the quarter, but at a lower margin. Video revenue once again exceeded our original expectations. What was reduced from the high Q2 customer demand. As stated last quarter, some of our customers have been significantly impacted by the pandemic and continue to be cautious in committing to new projects, although we have seen some improvements. In terms of acquisitions, in Q3, we completed no new acquisitions, although our Dialogic acquisition, which we did at the end of December, has been integrated into our operations and is progressing as anticipated. We continue to focus on capital deployment doing most of our acquisition work remotely. But as indicated last quarter, several opportunities continue to focus on their own business issues, delaying acquisition processes. The acquisition pipeline remains consistent with historic levels. I would now like to open the call for questions.
Thank you. At this time, we will open the floor for questions. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We will pause for just a moment to allow everyone an opportunity to signal. Our first question comes from Stephanie Price with CIBC. Please go ahead.
Good morning. Just looking at.
Hey, Stephanie.
Hey, just wondering if you could talk about what you've seen with video so far in fiscal Q4 in terms of demand, and just curious about whether the Q3 run rate is something you'd expect through the pandemic here?
Okay. You asked about Q4, I think you meant Q3. We did see an initial demand, mostly from current customers, but some new, in Q2. That lowered down in Q3 as they bought a lot of the requirements in Q2. We still see more than we anticipated at the beginning of the year for video, but our international rollout of video has been slower than we expected, and so we're still pushing to improve in that area.
Okay, thanks. The M&A mentioned the possibility of facilities reduction and other cost savings. Just curious around the margins and how we should think about the impact of those opportunities.
It's pretty similar to the past. When we don't do acquisitions in a quarter, which we always try and fix over one or two quarters, our margins tend to increase to about 35%. If we do acquisitions, I still maintain you've got to think of it and model it at about 30%. 25%-30%, depending how big and how much restructuring has to be done. But it's pretty much the same model that it's been for the last 10 years.
Okay. I'll flip one more on the M&A environment since you mentioned it. You mentioned that some of the opportunities are kind of focused on internal operations here. Can you give us a bit more color there and how you think about M&A in the back half of the year here?
We're pretty set up to do M&A, you got to remember, opportunities that we see, they're having their people work from home, and they're a little slower gathering data for us and doing the due diligence process. If an issue or something comes up, they tend to delay things for a week or two. Some have delayed it into next year, because they just have other things that they're focusing on that are more urgent than doing a transaction with their company at this time. Again, that's also freeing up a little bit, but it's still an issue today.
Okay. Thank you very much.
Everything's remote. Yeah, everything's remote, except we're kind of lucky because we have people who've done acquisitions virtually in every geographical area. When we look at acquisitions, we tend to still send somebody in on premise to have a look at the environment, culture, and some other factors.
Great. Thank you.
We will go to our next question, coming from Deepak Kaushal with Stifel GMP. Please go ahead.
Thanks for taking my questions. Good morning, everyone. Just a couple follow-ups on Stephanie's questions to start. Just on video, Steve, are you able to quantify or even give a qualitative sense of the pace of acceleration for that business and how much it's exceeding your expectations?
Of course, then you'd have to know my expectations, too. It's hard to answer that. Let me say that in Q2, it far exceeded it. There's a lot of the current customers who already were using the product, ordered more license revenue and some hosting revenue. That was mostly in Q2. We saw still some in Q3, but it has slowed down in Q3.
Okay.
I don't really predict Q4, but it's still the work from home environment. There's a lot of moving parts. It's still an important area for us going forward.
Got it. For the non-video part of the interactive business, any color on that, the call center, contact center side?
If you remember at the beginning of the quarter, we talked about how we got certified by Teams, which is the Microsoft product, which we've been working on for about 18 months. We've had several of our products certified now. That's positive. Again, new customers buying new contact centers in this environment where it takes work and people coming in to set it up, it's been slower, but the opportunity's still there.
Okay. Got it. Then just on the M&A side, I'm just curious, we've heard a couple companies report in as many days signaling valuation expectations of targets has risen quite substantially. We see it in the public markets for tech stocks. What are you seeing in terms of valuation expectations? Is that a hurdle for you guys to get acquisitions done over and above what you're seeing on the work from home side?
No real change. Our parameters haven't changed. Certainly, if you're going to the public markets and looking at very large deals there's a lot of money virtually, it's free, no interest rates that private equity has. I suspect that those valuations are higher. We are not seeing that in what we're looking at.
Okay. Is that because you're seeing more companies with problems or because they're just smaller and private, they haven't really seen that kind of.
They're basically not public.
Gotcha.
Although money's cheap, you still have to get money. Some of these companies have difficulties getting money even though it's cheap. We aren't seeing really any difference there. In fact, if I was going to make any comment, we probably see a little better valuations in what we're looking at.
Oh, okay. That's interesting. My last question.
Where your comments are coming from, M&A is probably in the public markets. That's what you generally look after. We find the public markets are a little expensive based on the criteria that we usually look for.
Yeah. No, it's also the private markets I'm surprised because these companies typically acquire private companies, and they're signaling higher valuation expectations. I guess you're finding them in certain pockets. Are there any particular segments that are showing better value than others that?
No, we've always had some companies that want higher valuations. If it doesn't meet our criteria, we just pass. Many of those companies are still available. Often when people say, "Yeah, the numbers are higher," et cetera, either they're justifying paying more or justifying not doing stuff. We're not finding that in the areas that we're looking at.
Okay. That's very helpful. Thank you for taking my questions, and I'll talk to you again soon.
Thank you. Once again, if you would like to ask a question, you may press star one now. We will go to our next caller, Paul Treiber with RBC Capital Markets. Please go ahead.
Hi, good morning. It's Paul Treiber. Just follow up on M&A. The MD&A mentioned other income increased by about CAD two and a half million because of unrealized gains in investments in equity positions. Are those trading positions, or are you considering acquisitions of public companies?
We're always considering acquisitions of both public and private. When you say trading positions, if we see a company that is a potential acquisition, sometimes we take a foothold in it. Often when they do that, for some magic reason, the stock runs up, and then if we make some money and it's above our valuation expectations, we sell it.
Okay, nothing to disclose.
We're not out trading, but they are potential companies we would buy the whole company. Sometimes when you talk to them, magically, all of a sudden their stock goes higher. We're not interested in paying up. We're very disciplined. We may just sell our positions at that point.
Okay. In regards to M&A, you mentioned that you have people on the ground that can visit targets in all your regions. From your perspective, though, you tend to be hands-on with M&A. How are you adapting to the challenge of travel restrictions in this environment and also doing M&A on a remote basis? Is it something you're finding comfortable adapting to, or would you prefer going back to the old world of travel and in-person meetings?
Okay, about 80%+ of our M&A work is done remote and always has been. We tend to go to the site to finish off and just have the talk with people. We now have video. We do that through video and online. We really just have someone remotely go there, just sort of get the layout and get another view. We never just do it with one view. We always have several people maybe ask the same questions to make sure we get the same answers.
Okay, thanks for that perspective. One more from me. In regards to professional services, it was flat quarter-over-quarter. Are you still seeing challenges in terms of travel restrictions and the inability to travel to customer locations as just restraining the ability to do professional services? More recently, as we enter the fall, are you seeing that beginning to lift, or is it still a challenging environment?
It's still pretty challenging there, but a lot of our professional services is not done on a customer site. It's done on our site or done even from people working at home. Sometimes there's implementation that has to be done on a customer site. There is some limitations there, but it's not a big factor.
Okay. Thanks for taking my questions.
Thank you. There are no additional questions at this time. Mr. Sadler, at this time, I'll turn the call back to you for any additional remarks.
Okay. Thank you. Enghouse is well-positioned both operationally and financially for this unusual business environment. We look forward to finishing our fiscal year 2020 and preparing for whatever business environment develops for next year.
Thank you. Thank you all for your attention. This concludes today's conference. You may now disconnect.