Earnings Call: Q4 2018

Dec 14, 2018

Good day, ladies and gentlemen, and welcome to the Inge Health Systems Limited 20 Q4 Earnings Call. As a reminder, this conference is being recorded. At this time, I would like to turn the conference over to Steven Sadler, Chairman and CEO. Please go ahead, Mr. Sadler. Good morning. I'm here today with Vince Massoud, President Doug Bryson, VP, Finance Todd May, VP, Legal Counsel and Sam Anninger, VP, Corporate Development. Before we begin, I'll have Todd read our forward disclaimer. Certain statements made may be forward looking statements. By their nature, such forward looking statements are subject to various risks and uncertainties, including those disclosed in Enghouse's AIF and other continuous disclosure documents, could cause the company's actual results and experience to differ materially from anticipated results or 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, Todd. Doug will now give an overview of the financial results. Thank you, Steve. Good morning, everyone. Yesterday, Enghouse announced its unaudited 4th quarter and audited year end financial results for the period ended October 31, 2018. Revenue increased to $342,800,000 for the fiscal year compared to revenue of $325,400,000 in the previous fiscal year, resulting in another record year for the company. Revenue includes $176,400,000 from hosted and maintenance services, an increase of 6.4%. Operating expenses were $136,200,000 for the fiscal year compared to $134,400,000 in the prior fiscal year as savings related to operating cost synergies offset incremental costs related to acquired operations. Results from operating activities were $103,200,000 compared to $90,600,000 last year, an increase of 14%. Net income for the fiscal year was $57,700,000 or $2.11 per diluted share compared to $50,800,000 or $1.87 per diluted share in the prior year. Adjusted EBITDA for the fiscal year was $106,000,000 or $3.88 per diluted share compared to $94,000,000 or $3.45 per diluted share last year, an increase of 12.8%. 4th quarter revenue was $85,800,000 an increase of 1.9 percent over revenue of $84,200,000 in the 4th quarter last year. Operating expenses were $33,600,000 compared to $34,900,000 in the prior year's 4th quarter and include incremental operating costs related to acquisitions. Non cash amortization charges related to acquired software and customer relationships in the quarter were $6,400,000 compared to $7,000,000 in the prior year's 4th quarter. Results from operating activities for the quarter were $27,300,000 compared to $24,000,000 in the prior year's 4th quarter, an increase of 14%. Net income before tax for the quarter was $22,300,000 compared to $19,900,000 in the prior year's 4th quarter. Income tax expense was $2,700,000 in the current quarter versus an income tax expense of $1,000,000 recorded in comparative quarter last year. As a result, net income for the quarter was $19,600,000 or $0.71 per diluted share compared to the prior year's 4th quarter net income of $18,900,000 or 0 $0.69 per diluted share. Adjusted EBITDA for the quarter was $27,900,000 or 1 point dollars or $0.92 per diluted share in last year's Q4. Enghouse generated cash flow from operations of $24,000,000 in the quarter compared to $29,100,000 in the prior year's 4th quarter. Cash flows generated from operations for the fiscal year were $98,300,000 compared to $83,200,000 in the prior fiscal year, an increase of 18%. Enghouse closed the year with a record $193,900,000 in cash, cash equivalents and short term investments compared to $130,300,000 at October 31, 2017. The cash balance was achieved after payment of $16,800,000 for acquisitions net of cash acquired and $18,400,000 for dividends. Shortly after year end, Enghouse acquired Telexis Solutions BV and Telexis BV of the Netherlands and Capana Sweden AB. The acquisitions will expand the suite of solutions and geographic reach of the company's asset management group in the coming year. Finally, yesterday, the Board of Directors approved an eligible quarterly dividend of $0.18 per common share payable on February 28, 2019 to shareholders of record at the close of business on February 14, 2019. I'll now turn the call back to Mr. Sadler. Thank you, Doug. As Doug noted, we continue to grow our cash and short term investments and now have over $193,000,000 from $130,000,000 last year. This is after spending $18,400,000 on dividends, dollars 16,800,000 on acquisitions and over $2,000,000 on capital expenditures. Cash flow from operating activities was $24,000,000 and over $98,200,000 for the year, an 18% increase over the prior year. Revenue in Q4 was up modestly from the prior year as we restructure our sales organization and demand generation activities. Adjusted EBITDA was a strong 32.6 percent, a record up from 29.6% in the prior year Q4 and 30.9% for the year compared to 28.9% in the prior year. Foreign exchange negatively impacted Q4 revenue compared Q3 by about $1,300,000 but also reduced our cost by about $800,000 dollars negatively impacting operating income slightly. In terms of acquisitions, we did not complete any acquisitions in the quarter, but we did complete 2 early in November to Lexus and Capana. Both these acquisitions are in the asset management group, a good start to the year. Economic and market factors are favorable for acquisition opportunities that meet our acquisition criteria. I would now like to open the call for questions. Thank We'll now move to the first question from Paul Steep from Scotia Capital. Please go ahead. Good morning. Steve, can you talk a little bit on Interactive just in terms of how you want to think about the targets in the next year for the team. We know we've seen declines over the past couple of years. Is there been a specific product or market segment that's been driving some of those declines? And are we near a point where hopefully some of the lead gen and the other activities start to reverse things in the other direction? Well, you've got a market whereby there's a lot more what they call SaaS type competitors. And we've gone a bit more to that SaaS area as well as subscription. So of course that changes the revenue profile. Again, it's a tough market, but I don't see it really changing that much for us. Again, pretty steady, I think low single digits and we are taking some demand gen activities, which take time to show results that hopefully will show some results in the next year. Okay. Fair enough. On the asset management side of the business, if we think about what drove growth there, you called out, I guess, CD Rater and Locus on a full year, well CD Rater on a full year basis and then you talked about Locus and Transit on the other side on the PS side. How is demand and where are you seeing the most success I guess on the licensed side on the asset management business? Yes. If you look at our competitors, they seem to be struggling because again, it's a tough market, but we're doing pretty well because we generally provide software that makes telcos money. So from our point of view, it's no particular area. It's really the whole business is doing okay. Okay. And then M and A team, how are you progressing on building out that team? You've been putting some efforts there in the last bit. You've obviously closed a couple of deals post quarter. How are you feeling about buildup of the team, Steve? Yes. The team is pretty well built. We're not building it up anymore. We just got to get some more deals done. Okay. Last one, IFRS 15, any thoughts on how we should think about the impact of that into next year just on the numbers? It will have some impact. Some of our revenue, I think it's about 1.8 or so would that we'd normally get in the next year or 2 that we will take through retained earnings in Q4. But we'll I think make that up with the new rules, some of our revenue that would push out years will come into next year. So I wouldn't think it's going to have a major impact. Okay. Thanks. We'll now take the next question from Deepak Kaushal from GMP Securities. Thanks for taking my questions. So first of all, I just got a quick follow-up on Paul's earlier question. Just in general then, Steve, commentaries on organic growth. So you've put a lot of efforts this year into improving demand generation. So you're saying that you expect to see some benefit in 2019 from those strategies? That's correct. And again, we put a lot of effort into it and continue to do so. We're not finished. Okay, great. And then I think in the past related to organic growth, you embarked on a strategy to sell hosted services via telco partners. I wonder if you could give us an update on that effort and if you're starting to see any traction or they're starting to see any traction with their end markets? I think it's going okay, but a little slow, mainly because telco partners aren't that aggressive in moving it forward. So we have to help them to move a little bit faster. And is that something you might see move faster in 2019 in the coming year, calendar year or beyond that? We hope so. Okay. Okay, excellent. So Steve, just stepping back, when I think of the last 10 years and when I first met you, the economy has been on an incredible run here and south of the border. I was just wondering what you think of in terms of like how you think of the business cycles over the longer term? And how you shift or change the way you manage your business through these cycles and where you think we are currently in that? Yes. The biggest cycle right now is going to this recurring revenue, call it SaaS or subscription model. We've been living through that for many years now. Some of those guys have actually been acquired, but that continues to be the thing we have to address. We're a little surprised that people in doing that model for a long time continue to lose money, but we've got to be more active in that space because it seems to be still popular and growing with customers and we want to do and offer solutions that the customers want. Okay. And in terms of the telcos as they look to start investing in things like 5 gs, how do you see that creating opportunities or challenges for your business units? It's pretty steady. We're ready for that. I'm not sure how fast they're going to invest in it. But again, I don't see any positives or negatives from it. Okay. And then the last macro question on Brexit. Any kind of outlook or things we should consider for the UK business in the coming year? The only thing I would watch is the exchange. I don't know what's going to happen. Is it going to be higher or lower? Again, it does a lot compared to the U. S. Not sure what it will do compared to Canada, but the impact on the business, I don't see any major impact for us, but exchange, of course, impacts the numbers that we report and you guys see. Okay. And are you looking to put a hedge on for those things or do you just naturally hedge through your business? We're pretty naturally hedged. We've got a large group in the UK, including R and D. So we're naturally hedged, we believe at least well enough for that. Okay, great. And then one final housekeeping question and then I'll pass the line. In the past, you've talked to or you've considered adding some debt to facilitate the dividend payments. We've had a rising interest rate environment. Have your thoughts on that changed and how you might deal with those things going forward? Let's just say we're implementing some things that we'll be able to get cash into Canada and probably we have a lot of cash, but it's not all in Canada and we probably are not looking at doing any debt at this time. Okay, great. Thank you very much. Appreciate the updates. And hope you guys have a good end of the year and happy holiday. Thanks. Thank you. We'll now take the next question from Paul Treiber from RBC Capital Markets. Thanks very much and good morning. Just hoping you can elaborate on your last comment in prepared remarks on economic and market factors being favorable to M and A? Okay. I mean, as we all know, if you just turn on the news every day, there's issues between countries, with the U. S, in Europe, with Brexit. So there's a lot of lot people to wonder and people who use debt to do deals, makes it a little more difficult if they have to borrow money to do it. So for us, it looks a little bit like 207, 208 environment again and we did very good in acquisitions after in that environment. I guess the summary would be the environment has more motivated sellers than it has had in the last couple of years. Okay. And then just elaborate a little bit further on that. Are you seeing sellers begin to rise down their valuation expectations? Are you expecting to do so going forward? We are comfortable that the valuations will meet our criteria. They recently, they've been a little higher. And if we passed on the deal, no one bought them. So maybe that's a wake up call a little bit, but with rising interest rates and aging population and the news you read every day, I think we'll be fine with the criteria that we've always used and we'll continue to use. And then with cash building up on the balance sheet, it's a record high, it's been building up for the last couple of years now. What are your thoughts on larger acquisitions and then you potentially adding a new vertical? How do you think about that in terms of the big picture? Two questions there. Thoughts on acquisitions and larger ones. If they meet our criteria, we have the cash to do it. Don't really need much help from the markets or anything. So we're in a pretty good position. A new vertical, if it's more opportunistic, we're not searching a new one because we've got plenty of opportunities in the verticals we're in. But if one comes along, and I've been saying that for a long time, we'd be willing to do it. But we haven't seen the attractive one that's come along. It has to be a little bit bigger if it's going to be the first one in a new vertical. And shifting gears to margins, obviously the profitability is quite high this quarter. To me, it seems like it's because the you've integrated the acquisitions over the last few quarters. There hasn't been any new acquisitions to offset those margins. But is it where do you typically see the efficiencies in your business? And then going forward, previously you'd commented that you expect margins between 25% 30 percent. Is that still a reasonable outlook going forward with the normalized mix of acquisitions? I think it's probably at the high end of that now. It depends on the acquisitions we do. The ones that we did early November had very little restructuring. And you got to remember with restructuring, severances or premise things we have to get out of. When there is very little special charges or restructuring it means we get to those higher margins and EBITDA faster. So I expect our margins still to stay pretty good in Q1, unless of course we do other acquisitions, which might drag it down in the quarter. Okay. Thank you. I'll pass the line. We will now take the next question from Daniel Chan from TD Securities. Hi, good morning. Just a follow-up question on Paul's question on the margins. So we've seen a couple of quarters now where you haven't done the acquisitions and margins continue to move higher. So in a steady state where you're not doing acquisitions, where do you think your margins would peak out at? We don't really forecast that. We're always doing continuous improvement. But I will point out that the exchange in Q4 took down revenue by $1,300,000 took down cost by $800,000 So if it was the same as Q3, we would have been $500,000 higher on the bottom line and our margins would have also been higher. So it depends a little bit on that exchange rates but and acquisitions, but we continue to look for ways to keep our profitability at a reasonable level while investing to grow our revenue with some new demand generation techniques. Okay, great. Thank you. As there are no further questions, I would like to hand the call back over to Mr. Sadler for any additional or closing remarks. Well, thank you for your continued support. We continue to take actions to better the company for an improved future. Have a Merry Christmas and a Happy Holiday season. Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.