Good day, ladies and gentlemen, and welcome to the Enghouse Systems Limited 2018 Q4 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. I'm here today with Vince Mifsud, President, Doug Bryson, VP Finance, Todd May, VP, Legal Counsel, and Sam Anidjar, 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, 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 fourth quarter and audited year-end financial results for the period ended October 31, 2018. Revenue increased to CAD 342.8 million for the fiscal year compared to revenue of CAD 325.4 million in the previous fiscal year, resulting in another record year for the company. Revenue includes CAD 176.4 million from hosted and maintenance services, an increase of 6.4%. Operating expenses were CAD 136.2 million for the fiscal year compared to CAD 134.4 million in the prior fiscal year, as savings related to operating cost synergies offset incremental costs related to acquired operations. Results from operating activities were CAD 103.2 million compared to CAD 90.6 million last year, an increase of 14%. Net income for the fiscal year was CAD 57.7 million, or CAD 2.11 per diluted share, compared to CAD 50.8 million or CAD 1.87 per diluted share in the prior year.
Adjusted EBITDA for the fiscal year was CAD 106 million, or CAD 3.88 per diluted share, compared to CAD 94 million or CAD 3.45 per diluted share last year, an increase of 12.8%. Fourth quarter revenue was CAD 85.8 million, an increase of 1.9% over revenue of CAD 84.2 million in the fourth quarter last year. Operating expenses were CAD 33.6 million compared to CAD 34.9 million in the prior year's fourth quarter and include incremental operating costs related to acquisitions. Non-cash amortization charges related to acquired software and customer relationships in the quarter were CAD 6.4 million compared to CAD 7 million in the prior year's fourth quarter. Results from operating activities for the quarter were CAD 27.3 million compared to CAD 24 million in the prior year's fourth quarter, an increase of 14%. Net income before tax for the quarter was CAD 22.3 million compared to CAD 19.9 million in the prior year's fourth quarter.
Income tax expense was CAD 2.7 million in the current quarter versus an income tax expense of CAD 1 million recorded in the comparative quarter last year. As a result, net income for the quarter was CAD 19.6 million, or CAD 0.71 per diluted share, compared to the prior year's fourth quarter net income of CAD 18.9 million or CAD 0.69 per diluted share. Adjusted EBITDA for the quarter was CAD 27.9 million, or CAD 1.02 per diluted share, compared to CAD 25 million or CAD 0.92 per diluted share in last year's fourth quarter. Enghouse generated cash flow from operations of CAD 24 million in the quarter, compared to CAD 29.1 million in the prior year's fourth quarter. Cash flows generated from operations for the fiscal year were CAD 98.3 million compared to CAD 83.2 million in the prior fiscal year, an increase of 18%.
Enghouse closed the year with a record CAD 193.9 million in cash equivalents, and short-term investments, compared to CAD 130.3 million at October 31st, 2017. The cash balance was achieved after payment of CAD 16.8 million for acquisitions net of cash acquired and CAD 18.4 million for dividends. Shortly after year-end, Enghouse acquired Telexis Solutions B.V. and Telexis B.V. 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 CAD 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 CAD 193 million from CAD 130 million last year. This is after spending CAD 18.4 million on dividends, CAD 16.8 million on acquisitions, and over CAD 2 million on capital expenditures. Cash flow from operating activities was CAD 24 million and over CAD 98.3 million 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%, 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 to Q3 by about CAD 1.3 million, also reduced our cost by about CAD 800,000, negatively impacting operating income slightly. In terms of acquisitions, we did not complete any acquisitions in the quarter, we did complete two early in November, Telexis 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 you. If you'd like to ask a question, please press star one on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find your question has been answered, you may remove yourself from the queue by pressing star two. Again, please press star one to ask a question. We now move to the first question from Paul Steep from Scotia Capital. Please go ahead.
Morning. Steve, can you talk a little bit on I nteractive just in terms of how you want to think about the targets in the next year for the team? We've seen declines over the past couple of years. Has there been a specific product or market segment that's been driving some of those declines? 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. Of course, that changes the revenue profile. Again, it's a tough market, 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.
Fair enough. On the Asset Management side of the business, if we think about what drove growth there, you called out, I guess, CDRator and Locus on a full year. Well, CDRator on a full year basis, you talked about Locus and Transit on the other side, on the PS side. How's demand and where are you seeing the most success, I guess, on the licensed side on the Asset Management business?
If you look at our competitors, they seem to be struggling because, again, it's a tough market. We're doing pretty well because we generally provide software that makes telcos money. From our point of view, it's no particular area. It's really the whole business is doing okay.
Okay. M&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 deals post-quarter. How are you feeling about buildup of the team, Steve?
Yeah, the team's 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'll have some impact. Some of our revenue, I think it's about CAD 1.8 or so, that we'd normally get in the next year or two that we will take to 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. 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 question. First of all, I just got a quick follow-up on Paul's earlier question. Just in general then, Steve, commentaries on organic growth. You've put a lot of efforts this year into improving demand generation. You're saying that you expect to see some benefit in 2019 from those strategies?
That's correct. Again, we put a lot of effort into it and continue to do so. We're not finished.
Okay, great. 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 own markets, for you guys.
I think it's going okay, a little slow, mainly because telco partners aren't that aggressive in moving it forward, we have to help them to move a little bit faster.
Is that something you might see move faster in 2019, in the coming year, calendar year, or beyond that?
We hope so.
Okay. Excellent. Steve, just stepping back, when I think of the last 10 years and when I first met you, the economy's been on an incredible run here and south of the border. I was just wondering 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.
Yeah, the biggest cycle right now is going through 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, 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. 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. In terms of the telcos, as they look to start investing in things like 5G, 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. The last macro question on Brexit. Any kind of outlook or things we should consider for the U.K. 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? It does a lot compared to the U.S. Not sure what it'll do compared to Canada, the impact on the business, I don't see any major impact for us. Exchange, of course, impacts the numbers that we report and you guys see.
Okay. 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 U.K., including R&D. We're naturally hedged, we believe at least well enough for that.
Okay, great. One final housekeeping question, and then I'll pass the line. In the past, you've talked 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 will be able to get cash into Canada. Probably we have a lot of cash, it's not all in Canada, we probably are not looking at doing any debt at this time.
Okay, great. Thank you very much. Appreciate the updates. Hope you guys have a good end of the year and a happy holiday.
Thanks.
Thank you.
As a reminder, to ask a question, please press star one. We'll now take the next question from Paul Treiber from RBC Capital Markets.
Oh, 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&A.
Okay. 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. There's a lot of uncertainty. Again, if anyone running a business, that weighs on them a little bit. On the other side, you got raising interest rates, which also gets 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. For us, it looks a little bit like 2007, 2008 environment again, and we did very good in acquisitions 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. Just elaborate a little bit further on that. Are you seeing sellers begin to revise down their valuation expectations, or you expect them to do so going forward?
We're comfortable that the valuations will meet our criteria. Recently, they've been a little higher, and if we passed on the deal, no one bought them. Maybe that's a wake-up call a little bit, but with rising interest rates, an aging population, and the news you read every day, I think we'll be fine with the criteria that we've always used and will continue to use.
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 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 and don't really need much help from the markets or anything. 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. 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 an 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.
Shifting gears to margins. Obviously, the profitability is quite high this quarter. To me, it seems like it's because you've integrated the acquisitions over the last few quarters. There hasn't been any new acquisitions to offset those margins. Where do you typically see the efficiencies in your business? Going forward, previously you commented that you expect margins between 25%-30%. Is that still a reasonable outlook going forward with a 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. You got to remember, with restructuring, we only put in severances or premise things that we have to get out of. When there's very little special charges or restructuring, it means we get to those higher margins and EBITDA faster. 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. We've seen a couple quarters now where you haven't done the acquisitions and margins continue to move higher. 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. I will point out that the exchange in Q4 took down revenue by CAD 1.3 million, took down cost by CAD 800,000. If it was the same as Q3, we would have been CAD 500,000 higher on the bottom line, and our margins would have also been higher. It depends a little bit on that exchange rate 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.
Great. Thank you.
As a reminder, to ask a question, please press star one. Star one to ask a question. 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.