Earnings Call: Q3 2018

Sep 7, 2018

Good day, ladies and gentlemen, and welcome to the Enghouse Systems Limited 2018 Q3 Earnings 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, sir. Good morning, everybody. I'm here today with Vince Bessud, President Doug Bryson, VP, Finance Todd May, VP, Legal Counsel and Sam Manager, VP, Corporate Development. Before I begin, I will have Todd read the forward disclaimer. Certain statements made in this conference call may contain forward looking statements, which are not historical facts, but are based on certain assumptions and reflect Anchor's current expectations. These forward looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations. These risk factors or events are identified in Enghouse's AIF and other periodic reports filed with applicable regulatory authorities from time to time. Anchis disclaims any intention or obligation to update or revise any forward looking statements whether as a result of new information, future events or otherwise. Thank you, Todd. Doug will now give an overview of the financial results. Thanks, Steve. Yesterday, Enghouse announced its 3rd quarter unaudited financial results for the period ended July 31, 2018. 3rd quarter revenue increased to $86,700,000 compared to revenue of $82,800,000 in the 3rd quarter of the prior year. The revenue increase primarily reflects contributions from acquisitions. Income from operating activities was 20 $6,700,000 compared to $22,600,000 in the prior year's Q3, an increase of 18.1%. Net income for the quarter was $16,100,000 or $0.58 per diluted share compared to $11,200,000 or $0.41 per diluted share in the prior year's Q3, an increase of 43.6%. Adjusted EBITDA for the Q3 was $27,400,000 or $1 per diluted share compared to $23,400,000 or $0.86 per diluted share last year with the increase being attributable to contributions from acquisitions and operating cost synergies. On a year to date basis, revenue was $257,000,000 compared to revenue of $241,100,000 in the prior year, an increase of 6.6%. Income from operating activities was $75,900,000 compared to $66,600,000 in the prior year to date, an increase of 14%. Adjusted EBITDA for the year to date increased 13.1 percent to 78,100,000 dollars per diluted share compared to $69,000,000 or $2.53 per diluted share last year. Net income for the year to date was $38,200,000 or $1.40 per diluted share compared to $31,900,000 or $1.17 per diluted share last year. Operating expenses before special charges related to restructuring of acquired operations were $34,100,000 compared to $35,000,000 in the prior year's Q3 and reflect operating cost savings net of incremental operating costs related to acquisitions. Non cash amortization charges on acquired software relationships from acquired operations were $7,200,000 in the quarter compared to $7,400,000 in the prior year's Q3. On a year to date basis, operating expenses before special charges were $102,300,000 or 39.8 percent of revenue compared to $98,900,000 or 41 percent of revenue last year. Company generated strong cash flows from operating activities of 29 point $3,000,000 compared to $25,100,000 in the Q3 of fiscal 2017. On a year to date basis, cash flows from operating activities were 70 point $2,000,000 compared to $54,100,000 in the prior year, an increase of 37.1%. As a result, Enghouse closed the quarter with a record $178,400,000 in cash, cash equivalents and short term investments compared to $130,300,000 at October 31, 2017. The cash balance was achieved after year to date payments of $13,500,000 in cash dividends, dollars 9,700,000 net of cash acquired for acquisitions concluded in the current year and $6,900,000 for acquisitions closed in prior periods. Yesterday, the Board of Directors announced approved the company's quarterly dividend of $0.18 per common share payable on November 30, 2018 to shareholders of record at the close of business on November 16, 2018. I'll now turn the call back to Mr. Sadler. Thanks, Doug. As Doug noted, there is some good news and bad news with our cash position. We can continue to grow our cash and short term investments, which reached approximately 178,400,000 dollars but this means we did not deploy cash on accretive acquisitions as we would have liked in the quarter. Cash flow from operating activities $29,200,000 a record $74,200,000 year to date, a 37% increase over the prior year. You will note on the balance sheet, the foreign exchange impact was positive $659,000 versus a loss in the prior year of $806,000 Other notable items are software licenses increased by 7.1% over the prior year. Hosted and maintenance revenue increased over the prior year. Overall, revenue growth was about 5%, including acquisitions and low single digits excluding acquisitions. Adjusted EBITDA was 31.6% and 30.4% year to date. Ford Exchange was a negative headwind of about $1,000,000 in the quarter compared Q2 'eighteen on revenue. We continue to focus on improving internal revenue growth, which is showing progress, but takes time to improve. In terms of acquisitions, we did not complete any acquisitions in the quarter, but the economic and market factors remain favorable for acquisition opportunities. Sellers tend to want a little more value point through the public markets, but we maintain our financial discipline with a 5 to 6 year payback. I would now like to open the call for questions. We will now take our first question from Paul Steeb of Scotia Capital. Please go ahead. Good morning. Steve, maybe you or Sam could give us a little bit of an update on the M and A environment and how you've been building up the team and maybe the pipeline on that side of the business? Yes. The M and A environment hasn't changed that much. A little bit people are still there's a lot of opportunities. Some are asking more than we think give us a fair payback. We are finding that most of these opportunities then are not sold and they tend to come back to us to have further discussions. But it's really not changed that much from the past. Okay. And then I guess maybe talk a little bit about how you're thinking about the margins. Obviously, you're still focused on driving deals. But theoretically, if we didn't do any more M and A, where do you think you could actually take the margins in the business in a steady state? Yes. That's a good point. I mean, the margins are a little higher in this quarter, but it's based because we haven't done acquisitions. As I mentioned, when we do an acquisition, the Q1 generally either doesn't make money or both breakeven, the next quarter then makes positive contribution. The 3rd quarter we try and make sure it's half our margins and by the 4th quarter it's a full margin. Having not really done very much in acquisitions in the last two quarters, you'll see our margins creep up. I think they would creep up even higher, but I do believe we will have acquisitions in the future. So I wouldn't say it's a steady state, where it's at today, except if we don't do acquisitions, then we should be able to achieve these margins and maybe even a little bit higher. We still expense all our acquisition team in our numbers, like we don't break it out, we don't capitalize anything. So that's unchanged whether we do deals or not. Okay, great. And then the last one on my end would be, I guess, just an update on some of the lead gen activities that you were working around? And I know, I guess, in the past, Steve, you've talked about being excited about some of the opportunities around Skype for Business. If you could give us an update on that, that'd be great. Thanks. Yes. We always Skype for Business is something that we always had a lot great hope for, but Microsoft seems to struggle with how to position it in the marketplace. So it has actually slowed down a little bit. DemandGen, I know Vince is actually bringing in some more DemandGen talent and we're changing the focus of the company a little bit away from what you'd call traditional marketing to more demand gen instead. We believe if we get into more opportunities, our revenue will grow faster. So we're trying to take a different tact really to emphasize marketing on generating more opportunities for us to get involved in. It takes time. You got to get some people in. You got to change it. It's a process. You just got to keep making headway on. And I believe we're doing that. Okay, great. Thanks, guys. Thank you. We will now take our next question from Daniel Chan of TD Securities. Please go ahead. Hi, thanks guys. Just a follow-up on the sales team changes. What should we expect in terms of lead time for some of these demand gen initiatives? And on the cross sell opportunities, I mean, what kind of metrics are you guys tracking to follow those opportunities? I think there's a lot of interest and we've got a lot of potential in the area, but we're hiring some new staff. We're taking a new approach. Some of that staff is in, but we're still looking for some others. If I was looking at it, I see it as a next year benefit. It will show up, if it's going to show up, because there's all those risks that it doesn't, it would be next year. I don't see it really showing up immediately, although we're seeing some signs that there is more we're attracting more interest, let's say. But it's not something that will show up immediately in the next quarter or anything like that. Sounds good. And then any update on the competitive landscape? Are you seeing Amazon or Twilio in any of the engagements you're having with customers? None. Okay. Sounds good. And then final one for me. Cash is at all time highs. Just want to check if there's any changes in your thoughts on capital deployment? No. I mean, I still think it's nice to have the cash. If everyone's concerned a little bit about markets, the Democrats in the U. S, Korea, there's all kinds of things out there that might cause the markets to change quite quickly. If it does, we have the cash to take advantage of it. We see that as a positive and we continue to look for deals. So we have a disciplined acquisition strategy. We're disciplined in how we look at our dividend, paying it as a percentage of cash flow. It seems to work well for us, so we see no reason to change it. Great. Thank you. We will now take our next question from Deepak Kaushal of GMP Securities. Please go ahead. Hey, good morning guys. So just in Q3, no significant FX impacts, low single digit overall growth and sorry, mid single digit overall growth and low single digit organic growth. Steve, would this suggest that the recent acquisitions aren't bringing in as much revenue as you guys anticipate or expected? Or how do you characterize that? Absolutely normal. If you're following the company, it's what everyone would probably expect. Okay. So in terms of Mobile Think, I think in the last quarter you said it contributed $300,000 and there was some commentary about it having done $13,000,000 dollars annually in past years. How is that performing? And what is your sense of what that business could contribute to Enghouse over the next year? Well, we never mentioned $13,000,000 in past years. I think another analyst put that out and they were incorrect. It would have added about $1,000,000 in this quarter. And then we that's what we expected when we did the deal. Okay. Excellent. So Mobilethink on track? Yes. The other thing people should realize in the Mobilethink when the analysts put out that, Mobilethink was a much larger business and we only bought part of it. So that's maybe where the confusion came from. So it was bought by another company and then we bought a part of it out, they kept part of it as well. So you've got to think in terms of $4,000,000,000 $5,000,000,000 in revenue, not 13 dollars Okay. That's important clarification. Thank you. And then, on the M and A environment, you mentioned higher expectations, companies asking for more, they don't get sold, they come back. Is this to suggest that the cycle time or the turnaround time on closing some of these deals has lengthened versus a year ago? Is it taking longer to close I wouldn't say that because we do value pretty quick. So if the value is not right, we move on to the next one. So I don't think the cycle time to close it is any different than it has been in the past. I do think we have to have more discussions going on to make sure that we are successful in doing accretive acquisitions that meet our financial requirements. So we have we've got I've added one of my operational people who used to run one of our divisions. We restructured a little bit and he's going to be he's been added to the acquisition team like a week or so ago. So he's transitioning his operational rollout And as of basically right now, but the transition will be done before the end of the fiscal year, He will be on the team too and helping to look at acquisitions, because we have got enough opportunities to look at. So I just want that a little more capacity in the looking. And then if we close them, it depends on if they meet our criteria. If they do, great. If they don't, we don't do them. Okay. So in terms of the pipeline, the opportunity set, the geographic and business segment reach, there's no issues. It's a matter of going through the deals and opportunities quickly enough and finding the right price. Is that a fair takeaway? Yes. I would say the opportunities are better or worse. I see it as very similar to what it's been over the last couple of years. So it isn't like it's improved and it isn't it hasn't really gone down. It's pretty steady would be how I see. I don't want to make it look like there's a ton more opportunities or anything like that. It's pretty steady like it has been in the past. It's just we got to do due diligence and make sure that we can achieve our objectives that we've set for doing the acquisitions. Okay, excellent. And you did mention some of the concern in the markets and all sorts of things. I think you said all sorts of things that could change things quickly. Have you seen any of these change or impact customer thinking at this stage, changes in Europe or in emerging markets like Latin America on the present side? What's your kind of thought on that? Not really. I mean Not really, but the SaaS players are still out there strong. Again, some of them, they don't really make much money and I'm surprised that they still continue to get the investment, but they do. But that's been there for 5 years. So I would say there's no real change that I've seen, to answer your question. Okay. Any kind of goals you're willing to share for the next for the balance of this calendar year that you'd be hopeful to achieve or either on M and A or organically? Not really. I think as Doug pointed out, well, Doug pointed out, there was about $74,000,000 we made in cash year to date, dollars 74,000,000 a bit. It'd be nice to get that to $100,000,000 but who knows. Okay. Excellent. Well, thank you for taking my questions. Appreciate your time. Thank you. We will now We will now move to our next question from Paul Treiber from RBC Capital Markets. Please go ahead. Thanks very much and good morning. I just wanted to ask about license revenue and you obviously are strong in the quarter. I think you called out in the M and A that it was in the Asset Management segment. Can you just speak to what drove the strength this quarter? And then how sustainable you see that going forward? I'd love to give you a hey, here's a big plan we did. It's a lumpier business. Some quarters are up and some are down. We had a bit better quarter. There's nothing magic about it. So I don't think Jason put it in as a high growth aspect there. We're hoping to have growth and it was a good quarter, but I can't say there is any dynamics that really have changed. We'd like to see better value for both of them. Was it a large deal like a multimillion dollar deal or was there several smaller ones that came in together this quarter? That business tend to have larger deals over $1,000,000 So let's say we got one more than we did in the past and last quarter. And that generally can make that number or no like it does. So it isn't I wouldn't say it's hopeful that it's a trend, but I can't say it's necessarily a trend. But we always they're doing a lot of work. We are building up and trying to improve internal growth. But I would say I'm not prepared to say it's a trend at this stage. That's understandable. Just on your new ERP system or financial system that you put in place, I think 6, 9 months ago, Could you what's been the benefit of that system that you've had it in place operationally in terms of either cost savings or just other sort of operational improvements? It's interesting. If you look at our cash flow, part of that the new system is providing more information, so we can act faster in a lot of areas. Part of our cash flow, if you look at our receivables, they've come down substantially. Again, that was when part when the system was going in place. And now that's in place, we're using the information to do better things there. We're also using the system to improve the foreign exchange impact that's been had. So we're starting to see some benefits and we hope to see more. The key benefit for that was when we're organized was as we do acquisitions that we should be able to integrate them in faster. I can't say that's a benefit yet because we didn't do any acquisitions in the quarter. But certainly, I expect that's still going to be the case as we move forward. Okay. Thank you. I'll pass the line. Thank you. As there are no further questions in the queue, I would like to turn the call back to Steve Sandler for any additional or closing remarks. Well, thank you everyone for attending the call. I just want to make sure you understand Enghouse continues to be well positioned for future success. Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.