Good day, ladies and gentlemen, and welcome to the Enghouse Systems Limited 2019 Q1 earnings call. As a reminder, today's conference is being recorded. At this time, I would like to turn the conference over to Stephen Sadler, Chairman and CEO. Please go ahead, Mr. Sadler.
Good morning, everybody. I'm here today with Vince Mifsud, President, Doug Bryson, VP Finance, Todd May, VP Legal Counsel, and Sam Anidjar, VP Corporate Development. Before I begin, I'll have Todd read the forward disclaimer.
Certain statements may be forward-looking statements by their nature. Such forward-looking statements are subject to various risks and uncertainties, including those discussed in Enghouse's AIF and other continuous disclosure documents, which could cause the company's actual results and experience to differ materially from anticipated results of expectations. Readers should not place undue reliance on this forward-looking information, and the company shall have no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
Thanks. Doug will now give an overview of the financial results.
Yesterday, Enghouse announced its unaudited first quarter financial results for the period ended January 31st, 2019. First quarter revenue increased to CAD 86 million compared to revenue of CAD 85.1 million in the first quarter of the prior year. The revenue increase primarily reflects contributions from acquisitions, which were offset by a decline in license revenue in the Interactive Management Group. Income from operating activities was CAD 25.8 million compared to CAD 24.5 million in the prior year's first quarter, an increase of 5.2%. Net income for the quarter was CAD 15 million, or CAD 0.27 per diluted share, compared to CAD 6.8 million or CAD 0.12 per diluted share in the prior year's first quarter. Last year's first quarter included a one-time charge of $6.2 million to reflect the impact of the United States tax reform.
Adjusted EBITDA for the first quarter was CAD 26.3 million, or CAD 0.48 per diluted share, compared to CAD 25.3 million or CAD 0.46 per diluted share last year, with the increase being attributable to contributions from acquisitions and operating cost synergies. Operating expenses before special charges related to restructuring of acquired operations were CAD 33 million, compared to CAD 33.9 million in the prior year's first quarter and reflect incremental operating costs related to acquisitions, net of operating cost synergies. Non-cash amortization charges on acquired software and customer relationships from acquired operations were CAD 7.1 million for the quarter, compared to CAD 7.2 million in the prior year's first quarter. The company generated cash flows from operating activities of CAD 24.2 million, compared to CAD 23.1 million in the first quarter of fiscal 2018, a 4.5% increase.
As a result, Enghouse closed the quarter with CAD 190.5 million in cash equivalents, and short-term investments, compared to CAD 193.9 million at October 31st. The cash balance was achieved after payments of CAD 4.9 million for cash dividends and CAD 22.4 million net of cash acquired for acquisitions concluded in the current fiscal year and CAD 1.1 million for acquisitions closed in prior years. On December 21st, the company declared a stock dividend payable on the basis of one common share for each common share held as at January 22nd, 2019, which was paid on January 25th, 2019. This dividend doubled the number of shares outstanding to 54,638,000 as of January 31st, 2019, and effectively achieved a two-for-one stock split.
Yesterday, the board of directors approved a 22% increase to the company's eligible quarterly dividend from CAD 0.09 per common share to CAD 0.11 per common share, payable on May 31st to shareholders of record at the close of business on May 17th. Enghouse has now increased its dividend in each of the past 11 years by over 10% each year. I'll now turn the call back to Mr. Sadler.
Thanks, Doug. As Doug noted, we continue to have a strong cash position of over CAD 190 million after paying over CAD 4.9 million in dividends and over CAD 23.5 million related to acquisitions in the quarter. Cash flow before changes in working capital and taxes was CAD 27.1 million, an increase of 17% over last year's Q1. IFRS 15 was implemented in the quarter, resulting in a reclassification of software licensed to hosted and maintenance to some degree, and as we in the past had recurring revenue in our license number. This reflects the new accounting rules. Adjusted EBITDA remains strong at over 30%. I want to point out a couple of items. Deferred revenue increased to CAD 80.8 million in Q1 2019, an increase of CAD 14.6 million or 22% over Q4 2018, and CAD 12 million or 17.4% over Q1 of 2018. This bodes well for our future.
The board of directors, as Doug mentioned, after reviewing the cash position and projected operating cash flows, increased the quarterly dividend by over 22%, from CAD 0.09 to CAD 0.11 per share, effective May 17th, 2019. We completed two acquisitions in Q1, deploying more capital, CAD 22.4 million, than we did in all fiscal 2018. We acquired a small tuck-in company in February, which is not reflected in the Q1 results. Deploying an additional CAD 3.3 million of capital. Telexis and Capana had minimal restructuring Q1, performed as anticipated, and provided approximately just over CAD 4.5 million in revenue in the quarter. These acquisitions are now part of the Asset Management Group. Economic and market factors are favorable for acquisition opportunities meeting our acquisition criteria. We intend to provide more focus to capital deployment in fiscal 2019. I would now like to open the call for questions.
Thank you. If you would like to ask a question, be signaled 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. Press star one to ask a question. We will now take our first question from Daniel Chan of TD Securities. Go ahead.
Hi, good morning, guys. Steve, I was just wondering if you could get some color on the competitive dynamics in the IMG space. This is the second quarter that we've seen significant declines. Last quarter, you highlighted that it was due to some competitive pressure from the cloud providers. Is that still the case?
That's been the case for a long time, I don't think that's anything extra or new. That's still the case. We're going through a bit of a transition in our sales performance. We're emphasizing a little bit more and focusing on direct as well as indirect. That transition takes a little bit of time. That's continuing. The other aspect, again, which has been here for several quarters, and it affects generally only the IMG division, is that Microsoft, where we were very strong and tied directly into the Microsoft software, they have now decided that they're going to move from Skype for Business to Teams. They don't have all the APIs ready for Teams, this has slowed and caused customers to hold back a little bit on implementing, so we can't tie the contact center software in.
Of course, the Skype for Business is still continuing on for at least another three years, but it does give the market a bit of a hold, especially in the U.S. and Sweden, where it was more advanced than in other places. There's a couple factors that went into it. The SaaS is always a factor. I don't think it was an extra factor. It continues to be a factor.
Okay. That's helpful. Do you expect some of these APIs to come out within the next year, and that should help you create a product to address some of those issues?
Well, we're addressing it now. They have some now, but they're not very good. Again, we were sort of a leader in tying directly into their system. Most people did it through an API connection. We were directly in. We've got to change our software around a little bit to do that, which we've been doing for six months now. But on the other side of the equation, Microsoft really hasn't got all the API connections done well enough into Teams. The idea is the customer should sell or continue to buy Skype for Business, but they got to be confident there's a conversion over to Teams because that's the future direction of Microsoft. It'll continue on for a few more quarters? Yep, for sure. The year might be right. Depends how fast Microsoft moves. I can't influence that, actually.
Okay, great. Thanks. Vince, just want to get an update from you. It has been a year since you have been here. Just get an update on any progress that you have had over the last year and maybe what you have planned for the next year.
Just as we discussed previously, we did a lot on the go-to-market team. As Steve mentioned, we have added more direct sales. We added demand generation. We have got demand generation teams globally, and those are starting to generate leads and get our lead flow increased. Those are some of the major things. We are doing more in the cloud. As you know, we can offer on-prem private cloud and public cloud. We are seeing more traction in our cloud-hosted offerings. The building blocks are there, and we hope to see some results in 2019 in the future.
Great. Thank you.
Thank you. We will now take our next question from Paul Steep of Scotia Capital. Please go ahead.
Great. Morning. Steve, could you talk a little bit more, you or Vince, I guess, on the sales transition you alluded to a minute ago? What specifically has gone on in terms of maybe comp plan changes or more significant reorganization, or is it more smaller moves that you've made, as Vince outlined?
I'm not sure it's smaller moves. We've gone from what I would call a marketing organization to a demand generation organization. We believe we have some of the best products, but we've got to get in more deals. In doing that, sometimes you have to take a more direct approach because when you go through channels like we mainly do in the U.S. and in the Nordics, you're really in their hands in how they do it. That transition takes a bit of time. It means hiring some of the people who sell to channels are not the best direct salespeople. We're making that transition. It always takes time to hire the people. It takes time, some people changed over a little bit. We got to cover the channels. There's a lot of moving parts there, but it has to be done for the future.
Where would we be at, just to close off on that timing-wise, in terms of when you would have made the majority of the staff or headcount changes? That way we can think about it, because obviously none of this is going to happen overnight or even in a quarter or two.
Well, we started the process last summer. I think we mentioned there, Vince would be in for a quarter. We wanted to take some new approaches, we started then. We've been at it now pretty solidly for six to nine months. Again, it takes time to organize it. There's a lot of changes going on. It's about nine months we've been on it now.
Got it. Just maybe as well on the license side, not to dwell on that or bring that up too much, but there was a negative impact in the quarter. Was there anything deal related? Obviously, we had the IFRS changes, but that sort of moved quarter-to-quarter on you in a more specific way related to deals we might not have thought about that sort of skewed the number. I know you called out the deferred growth in your commentary, but is there anything else one-time in nature we should just be thinking about there as well?
I'm not sure. I'm not sure it's one-time, the movement of [IBM] from Skype for Business to Teams, that does have an impact. It will change over time as that transition happens. That would be the other item. It has been there for a while, probably since last summer as well. People now, it's holding up because Skype for Business is not just for contact centers, it's for communication. So sometimes it's delaying people making decisions. They got to decide which way they're going in communications. Teams actually works to do that, but it doesn't work for contact centers in tying in right now. Although they're working on it, and of course, Microsoft wants to do that. I guess they wanted to get Teams out as fast as they could with not all the APIs completed.
Fair enough. Then the last one from me. Stephen, I guess, six months ago, you made some changes to increase staffing in the M&A area and some, I don't know if we'd call them big process changes. Maybe talk a little bit about how you've seen the build in the pipeline and how you're feeling. You obviously sounded more bullish about the opportunity set out there. Just in terms of how you're running the process with Sam and the rest of the team.
You saw in Q1, we deployed more capital than all of last year and all the year before as well, actually. We're emphasizing and putting more focus on that now. Vince is looking after the operations, taking that forward. I'm going to go back and help Sam out a little bit and see if we can get some deals done and deploy more capital this year. As you know, we have lots of capital to deploy. We don't need to raise money in the markets. I guess we'll just have to see how we do.
Great. Thanks, guys.
Our next question comes from Paul Treiber of RBC Capital Markets. Please go ahead.
Thanks very much, and good morning. Just on IFRS 15, do you have apples-to-apples numbers in terms of the impact on Q1 in revenue and EBITDA?
You really can't do that easily. I think we disclosed before, CAD 2.2 million of revenue went to retained earnings and is not reflected in our revenue now and future revenue. We got some revenue because IFRS 15 brings it forward a little bit, and I think that was about CAD 700,000 or so in the quarter. As time goes on, it will impact revenue positively, but you've got the retained earnings part there now that you're going through, and those will roll off, and then the new ones will come in, and you'll recognize revenue earlier. There's a lot of moving parts there, but that's okay. It is what it is. It doesn't impact cash flow, and as you know, I like the cash flow. That's what I keep watching and let the accountants. They'll change rules again.
I think next year they're going to want us to capitalize all our leases, which will make EBITDA go up, but it's not cash. We continue just to run the business like we have in the past.
In terms of the cost impact related to IFRS 15 with the commissions, I think that was when you mean, I think you mentioned that nominal. There's no real impact on cost in the quarter.
We still expense it all because we don't think it's material, and again, it ties to my thinking. We do it as we pay it. A lot of people capitalize that up front, depending with the revenue. We're not doing that right now because we don't think it's material.
And then-
From the cost side, just to be clear, no impact. We're expensing everything through like we have in the past.
Okay.
Some might think it's a negative, but for us, it's how we do the cash.
Okay. How do you think about margins and profitability here? You mentioned that the two acquisitions that you did, you didn't need any restructuring. Was that still an initial drag on your margins and there's still a ramp-up as you take costs out of those businesses and bring them into your operating model?
Yeah. I don't see them as a significant drag on the margins in the quarter. The last quarter, I think, was when it got up to 32 or so. I think was a little higher than normal because we hadn't had acquisitions for a while. Remember, there's still other costs related to acquisitions in the quarter. They're not restructuring costs. I wouldn't think there's anything there really. We can keep it 30. It's still pretty good. I wouldn't want to say, yeah, we're going to go back up to higher than that. Although with some of our revenue, once we get it going, yet that might happen, but I wouldn't put it in a model today.
Okay. Thank you. I'll pass the line.
As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Our next question comes from Stephen Li of GS Securities. Please go ahead.
Morning. You talked about the larger M&A opportunities last night at the AGM. I was wondering if you could talk about what's driving these opportunities. Are entrepreneurs more willing to sell? Is private equity backing off, or is it strictly a pullback in valuation? Thanks.
I think it's just the general environment out there. Everyone watches the news. There's lots of things happening in the U.S. There's lots of things happening in Europe. There's Brexit. Interest rates were going up. Yeah, I just see people think it might be a good time to sell the business. I don't think it's anything more than the outside environment. I don't have any particular item, any more than you would, but I just see an environment in which there's a little more concern and some people want to take money off the table, I guess. The public markets aren't any better. There's none of these companies trying to go public or that right now it's about the same. Their only exit is really to sell the business.
That's really helpful. That's it for me, so I'll pass the line. Thanks.
As a final reminder, ladies and gentlemen, please press star one if you would like to ask a question. It appears there are no further questions at this time.
Thank you, everyone, for attending the call. We appreciate your continued support.
This concludes today's call. Thank you for your participation. You may now disconnect.