Good day, ladies and gentlemen, and welcome to the Enghouse Systems Limited 2018 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 we begin, I'll have Todd read our 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 Enghouse'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 are identified in Enghouse's AIF and other periodic reports filed with applicable regulatory authorities from time to time. Enghouse 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 first quarter financial results for the period ending January 31st, 2018. First quarter revenue increased to CAD 85.1 million, compared to revenue of CAD 78.8 million in the first quarter last year. Income from operating activities was CAD 22 million, which includes a foreign exchange balance sheet loss of CAD 2.5 million, compared to CAD 22.4 million in the prior year's first quarter, which had a foreign exchange gain of CAD 200,000. Net income for the quarter was CAD 6.8 million or CAD 0.25 per diluted share compared to CAD 11.7 million or CAD 0.43 per diluted share in the prior year's first quarter, with the decrease being attributable to tax charges related to the enactment of the U.S. Tax Cuts and Jobs Act on December 22nd, 2017, as well as foreign exchange balance sheet loss.
adjusted EBITDA for the quarter was CAD 25.3 million or CAD 0.93 per diluted share compared to CAD 22.8 million or CAD 0.84 per diluted share last year, with the increase being attributable to contributions from acquisitions and stronger license sales in certain regions. To normalize results for the significant volatility in foreign exchange rates over the past couple of years, the definition of adjusted EBITDA has been revised this quarter to exclude foreign exchange balance sheet gains and losses. Both current quarter and prior period comparative figures have been restated accordingly. Operating expenses before special charges related to restructuring of acquired operations were CAD 36.3 million, compared to CAD 31 million in the prior year's first quarter, and reflect incremental operating costs related to acquisitions and foreign exchange losses on assets and liabilities, including intercompany accounts.
Non-cash amortizations in the quarter were CAD 7.2 million, compared to CAD 7.5 million in the prior year's first quarter. The company generated strong cash flows from operating activities of CAD 23.1 million, compared to CAD 10.7 million in the first quarter of 2017, an increase of 116%. As a result, Enghouse closed the quarter with CAD 145 million in cash equivalents, and short-term investments, compared to CAD 130 million at October 31st, 2017. The cash balance was achieved after payment of CAD 4.3 million in cash dividends and CAD 4.9 million for acquisitions. In January, Enghouse named Vince Mifsud as president with responsibility for the company's worldwide sales, operating, and finance units. Mr. Mifsud has established an impressive track record in the SaaS and enterprise software industry, helping grow technology companies in Canada.
Yesterday, the board of directors approved the increase to the company's eligible quarterly dividend to CAD 0.18 per common share, payable on May 31st, 2018, to shareholders of record at the close of business on May 17, 2018. Enghouse has now increased its dividend in each of the past 10 years by over 10% each year. I'll now turn the call back to Mr. Sadler.
Thank you, Doug. First, you'll probably note a new management participant on the call. January 15th, 2018, Vince Mifsud was hired as President. He will take on responsibility for worldwide sales, operations, and finance to give a renewed focus on organic sales growth while allowing us to spend more time on acquisitions. Welcome, Vince. As Doug noted, we continue to grow our cash with cash and short-term investments of approximately CAD 145 million. Cash flow from operating activities was CAD 23.1 million in Q1, compared to CAD 10.7 million in the prior year. You'll notice that due to continued fluctuation of exchange rates, we have separated the balance sheet impact, generally not cash or foreign exchange gains and losses that were previously included in sales, general, and administration expenses. These are primarily a result of a weaker US dollar just before the end of the quarter when the exchange dropped to approximately 1.23.
This since recovered, converting balance sheet amounts at this lower value resulted in a loss of CAD 2.5 million, compared to a gain last year of CAD 200,000. We believe that separating this item gives shareholders a better understanding of our operation activities. Another usual accounting item is taxes. You'll notice a significant accounting provision of CAD 8.8 million. This is a result of changes to the U.S. tax regulation implemented on December 22nd, 2017. Federal tax rates declined from 35% to 21% January 1st, 2018. This will be a positive to our U.S. business going forward, but requires a negative accounting estimate in Q1. It impacts our tax asset, which was set up in accounting at a higher tax rate and caused us to true up some of our tax balances, which we usually do in Q4.
The main accounting item impacting the tax provision was an estimate of the U.S. repatriation tax imposed on foreign U.S. subsidiaries for deemed repatriation of foreign profits. A CAD 8.8 million one-time accounting charge was recorded, allowing dividends to be paid tax-free to the U.S. from its subsidiaries. This is a tax cost estimate and not a cash tax cost, as it's to be paid over eight years, so it does not impact the current year by that amount. Overall, adjusted for balance sheet foreign exchange, adjusted EBITDA was CAD 25.3 million versus CAD 22.8 million last year. Adjusted EBITDA margin was 29.8% compared to 29% last year, and CAD 0.93 per fully diluted share compared to CAD 0.84 last year.
We also announced yesterday at our annual general meeting that the board of directors authorized a dividend increase to CAD 0.18 per quarter per share from CAD 0.16 per quarter per share, effective with the next dividend payment in May 2018. Looking at acquisitions, two acquisitions were completed in the first quarter, one in Germany for our networks business unit and the other in our transportation unit in Denmark. Both these were completed partway through the quarter and added approximately CAD 800,000 in revenue at about CAD 200,000 in EBITDA, with minimal restructuring. The economic and market factors remain favorable for acquisition opportunities. I would now like to open the call for questions.
Thank you. If you would like to ask a question, please signal by pressing *1 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, if you would like to ask a question, please press *1 on your telephone keypad. We will pause for just a moment to allow everyone an opportunity to signal. Our first question comes from Daniel Chan of TD Securities. Please go ahead.
Hi. My first question is for Vince. Just wondering in your first 60 days, any changes or thoughts in those first 60 days?
Thanks, Daniel. I mentioned this a little bit yesterday at our AGM. Good thoughts around the product. I looked at a lot of our products. We've got, as you know, a suite of products that help customer experience and help telcos in the transportation industry. The products, based on my review, look really strong, and I'm very happy with that part of the business. The area that we want to put some effort in and look to improve going forward is our go-to-market. Our sales execution, demand gen side of the business is really the area that I want to put some effort in and try to get some more organic growth out of this business because the products and the size of the addressable market is there for us to execute on. That's going to be one of my big focuses in the upcoming quarters.
Steve, yesterday you mentioned that you're going to be focused more on organic growth going forward. Should we expect any increases in OpEx as you do this and some of the changes that Vince are proposing to the sales organization?
It's hard to say right now if it's some replacement costs or new costs, I do think we probably have to add in to improve our demand generation, a bit more expertise and costs. You might not notice, because it's not a huge amount, you can expect us to do that. Our margins are pretty good at 29.8% at the high end of what we talk about from 25%-30%. We can afford to put a little bit of money to see if we can get our sales growth improving.
Okay. Last one from me. I think you've mentioned in the past about the U.S. service providers as an opportunity. Just wondering if there's any progress in winning them over. What do you think the challenge is there, and what will let you win those carriers over?
The U.S. we talk about, the carriers in the U.S., of course, are huge. They're both three or four that dominate it. They tend to work with lots of people, so it's hard to get our CCSP, our contact center product in there, but we do a business with each of them. I think the key into the U.S. is to continue to train and get more business, generally not necessarily from the carriers. As you probably heard from many other of the companies in the area, carriers have tightened up their spending in the last year or so. We've done fine by it, but they are more cautious in taking on new products and new activities. The U.S., it's steady she goes. We hope to get the internal growth slightly better. Again, it won't come right away. It'll be over the year.
Great. Thank you.
Well, at least we'll give it a try.
We will now take our next question from Paul Steep of Scotia Capital. Please go ahead.
Great. Morning. Could you maybe talk a little bit about in the quarter, Steve, SG&A obviously trended down a little bit. Which side did you trim from? I guess that sort of teased to the question earlier, the point Vince had made about investing back into the sales force. If it was on the sales side, how should we think about that ramp in terms of you rebuilding extra capacity to go drive growth?
I think if you remember, if you look at it, we didn't do as many acquisitions last year as we hoped because we spent a lot of time working with the finance area and centralizing accounting. When you look at sales G&A, I think we're getting a little bit of the benefit of that centralization coming through now. We didn't trim any sales or marketing area really. Maybe a little bit of marketing because we now are trying to refocus on demand generation versus general marketing, no real expense reduction there. It was really on the administration side and other areas.
If that's the case, how should we think about the plan and the timeline to invest? Obviously, in fairness to Vince, he just got there in middle of January. This could take you a little time, presumably, to spin this up. How should we think about it, like investment through 2018 with hopeful results in 2019? Or what's the thought, guys?
We don't take that long to do stuff. Vince hit the ground running, and he's already got some ideas, and we've already made some moves. We've started now, and we hope you won't get the results necessarily that quickly because you got to get the people in place, and then you have your lead time for making sales. We've started already.
Okay. The final one, I guess, from me today. On the M&A side, Steve, has there been any change? I know we've had a relatively static environment, clearly a lot more focus and discussion today on organic growth. What's your view on the M&A world? Thanks.
We've always tried to do a two-pronged approach. We tried the organic growth three years ago in a different method by adding sales resource. That didn't work so well. Two years ago, we took it out. The environment wasn't such that maybe we were a little early in thinking the economy would improve. With interest rates going up, what we see in the U.S., the tax cuts in the U.S., and the U.S. being a very large market, we're back to believing that it will improve, and we've got a position for our internal growth now. That won't impact the acquisitions. Again, with interest rates also trending up, and a lot of people still talking SaaS, the acquisition environment, especially in the area we're looking at, let's say under CAD 50 million in revenue, is still as it was, very good. Baby boomers are still getting older.
People still want to get some cash for their retirement. Private equity has gone higher. There's been no real change that we've seen. We now have a two-pronged approach with more emphasis on organic growth because we think the environment's changed. It has no impact on our acquisition activity other than we'd like to do more than we did last year. Remember, last year, we purposely held back because we're changing the accounting, and it's very tough to bring acquisitions in while you're changing a lot of the finance and accounting backbone. The interesting part of that, and I've mentioned it a couple of times, which is quite interesting, companies we're looking at, which we didn't do, they're still there. No one else bought them.
Great. Thank you.
We will now take our next question from Deepak Kaushal of GMP Securities. Please go ahead.
Hi. Good morning. Thanks, guys, for taking my questions. Steve, I just wanted to dig in more on changes to the corporate team. You've introduced Vince and given us a sense of his role. I was wondering if you could reveal a bit more of the chessboard. You've made a couple changes, looking over the past year. How do you think of your corporate team overall and what pieces you need or might change? What's your thinking on that in general?
Yeah, we're pretty established now in where we need to be. Last year, we added in a corporate controller to help with the centralization of the accounting side. We beefed up that team a little bit. We also added in with new systems, a new budgeting system, a new analytics system, and a rev rec, because there's going to be revenue accounting changes coming up that will confuse you guys to no end, but we have to prepare for it at least a year in advance. We've done that. From the corporate side, about two years ago, I believe now, time flies, we added in a chief accounting officer, administration officer who handles HR. She's done a lot of changes already. That was Lynette Corbett, and she's got some things already positioned for us going forward.
We're better today to integrate in the acquisitions faster, and I think we have the right team going forward. I don't see any further changes.
Okay, thank you. That's helpful. I just wanted to ask you more of your thoughts on the technology and the opportunity environment. I guess, can you say that we're kind of seeing a resurgence in voice with all these voice assistants coming out? Do you see any opportunities to bring back some growth in that side of the business there? Do you have any IP that you've accumulated over the past couple of years that might be valuable in this context? I've got a follow-up to that.
Yeah, we've always been strong in voice. That's where we started. People are using more SMS messaging. They're using more chat. They're using more online email. You could say voice is picking up a little bit, but it's nothing to write home about, as they say. We're still continuing to trend. We have a strong development group continuing to upgrade our IVR system and our voice systems. They continue to do that, so we're well-positioned there. Again, I still see the marketplace and contact centers, which they now call communication centers because they have outbound and inbound. The outbound part's a little tricky because there's more regulation coming about calling numbers that you shouldn't. In general, there hasn't been much change.
Okay. Any technologies under the hood or any thoughts on the e-commerce acceleration and opportunities that that might bring about for some of your products or services, just from a high level?
There's always changes that help us, and then there's some that hurt us. I would say net, no change. There's some things, of course, that yes, analyzing voice when people are mad on the phone and things like that, but we're keeping up in that area. There's other areas with less people using IVR over the years that has caused some declines in some area. As I said, the outbound communications, there's lots of countries saying, you can't keep calling cell phones, et cetera, with ads. There's a pretty big worldwide regulation that impacts that slightly negatively. Overall, plus and minuses, we come out at least even.
Okay, thanks. Just one final question, if I may. Unfortunately, I wasn't able to attend the AGM. Any updates on Canadian dollar debt and to help with the foreign exchange translations and things like that and your dividend? I know you've talked about that in the last couple of quarters as a potential.
Yeah, it was an emphasis. We haven't done the debt yet. We're prepared to do that. You might hear something on that soon. The problem is, while we're waiting to get the debt done, we increased our cash by more than the debt we were looking for- which makes it an interesting parameter. As you know, our cash went up to CAD 145 million. It was about CAD 100 million last year, and we aren't looking for that much debt. I do think it's important that we have that facility in place. It's taken nearly a year to get something done, so we don't end up that if we need some extra money to do something with it, like an acquisition, we aren't limited in our ability to do it. We have it already available.
We're still working on it, but we have not done anything on that yet. We've got to work harder on the intercompany accounts and the foreign exchange on the balance sheet, which we do, but it's really hard when exchanges just fluctuate all over the place. Like someone before last quarter had came out and made some comment about the US dollar. It dropped down to 12293, and then our quarter happened, and then 3 days later, Trump came out and said, "No, that's not the case," and it went back up. That's not real money for us, but it does cost us on our balance sheet foreign exchange numbers. We decided to separate that out, but we intend to minimize that number.
Okay. Thank you. Thanks for taking my questions and giving me all that detail. It's very, very helpful. I guess generating cash is always the best problem to have. Appreciate you taking my questions. Thank you.
Yeah. I made a comment yesterday, and I'd like to emphasize it. Cash is very important to watch as investors. You are going to get some accounting changes. Some companies will start it this year. It's IFRS 15. It's going to confuse you. It doesn't tie to cash that well. Even the provision we made on our taxes, the CAD 8 million, is not cash now. It's over 8 years, and yet we will get cash benefit from the lower tax rate. I advise all shareholders, you can, of course, do whatever you want, but watch cash when you're analyzing, especially tech companies.
Very helpful. Thank you, Steve. Appreciate your thoughts.
We will now take our next question from Paul Treiber of RBC Capital Markets. Please go ahead.
Thanks so much, and good morning. Steve, in the past, you've talked about how you allocate time between M&A or operations and investors. Now that you have Vince, how do you see that mix changing?
I'm going to be spending more time on acquisitions and making sure they get integrated properly, and Vince is going to spend time on the operations, especially demand gen and the revenue area where I really didn't spend much time. I think the two of us have a good two-pronged approach now, and hopefully it will benefit the overall results.
It's obvious that your cash is building up on the balance sheet. Looking at the flip side of acquisitions, if the pace of acquisitions doesn't pick up, is there any point where you consider returning cash to shareholders?
We always look at all those things, I'm not too worried about the pace of acquisitions not picking up.
Okay. That's good to hear. On the interactive side of the business, in the past, you've talked about aggressive pricing from some of the SaaS players. There has been some consolidation in the market with Cisco and BroadSoft coming together, and then also Avaya coming out of bankruptcy. Are you seeing just more discipline in regards to pricing than maybe you saw in the past?
It's hard to tell. I don't think the pressure is there like it was before. Some of the SaaS players realize that they have to make money, I don't think they're aggressively reducing prices more. It's still an issue. It's still there, it's not getting worse. It's maybe improving a little bit. I haven't seen much of that improvement to really make a comment at this stage.
Related to interactive, going into the telco service provider channel, is one of the strategies potentially using the asset management or the networks business to help cross-sell interactive better into that channel?
Absolutely. We're adding some sales resource into the asset management group primarily just to do that. We've already started that process. Not sure if we've hired the couple of salespeople yet, but we're certainly looking, and that is absolutely our objective.
Great. Thank you. I'll pass it on.
As a reminder, if you would like to ask a question at this time, please press star one on your telephone keypad. We will now take our next question from Ralph Garcea of Echelon Wealth Partners. Please go ahead.
Good morning. If I may, a question first for Vince. You've run some pretty good playbooks over your career for 50 million run rate companies and 500 million run rate companies. On the growth side, are you looking more direct or to do more with channel partners? Where do you see the biggest leverage from the products that you've seen to get the organic growth going again?
Good question, Ralph. It's a little bit different for each division, but the big part of our business, the whole interactive customer experience side of it, we got to do a little bit of both better. We're definitely launching a direct sales piece to that puzzle, which we currently do all channels. We're improving our channel enablement as well in parallel to that. In order to drive both of those, we've added some demand gen resources to help in that area. I think we got to do a two-pronged channel and direct. In the interactive side of it, we haven't done enough in direct, so that we're dialing up immediately.
Okay. I guess for Steve, now that you're free to do more M&A, are you going to stick to your two buckets, or do you see the opportunity to grow the transportation side or start an adjacent vertical if the possibilities are there?
We do want to grow the transportation side. It's part of our two buckets. As I said, on a new area, that would be an opportunistic type acquisition where we find a company in a fragmented market that's large enough to be the foundation for starting a new area. We continue to look at that, opportunistic. We don't have a strategy or plan, we do see opportunities in other areas that we often look at to see if it's the right company for us to do a third area. A third group, I would say. We have three areas now, transportation and networks are in one group, and interactive management, of course, is the other group. We could do a third group. However, as you know, I've said that for 10 years and haven't done it yet.
Okay. Thank you.
As a reminder, if you would like to ask a question at this time, please press star one on your telephone keypad. No further telephone questions at this time.
Okay. Thank you everyone for attending the call. We appreciate your support and look forward to talking to you next quarter.
Thank you. This does conclude the Enghouse Systems Limited 2018 Q1 earnings call. Thank you for your participation. You may now disconnect.