Good morning, ladies and gentlemen, and welcome to Enghouse Q1 2023 Conference Call. At this time, note that all participant lines are in a listen-only mode, but following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for an operator. Also note that call is being recorded on Friday, March 10th, 2023. Now I would like to turn the conference over to Mr. Stephen Sadler. Please go ahead, sir.
Good morning, everybody. Yesterday, we had a nice AGM. We probably are gonna be repetitive to some of the people who were at the AGM. I think we, there's more on this call than were at the thing, so we're gonna go through it. I'm here with Vince Mifsud, Vice, Global President; Rob Medved, VP Finance; Todd May, VP Legal Counsel; and Sam Anidjar, VP Corporate Development. Before I begin, I'll have Todd read our forward disclaimer.
Certain statements made may be forward-looking by their nature. Such forward-looking statements are subject to various risks and results and experience to differ materially from anticipated results or other expectations. Undue reliance should not be placed on forward-looking information, and the company has no obligation to update or revise any forward-looking information, whether as a result of new information, future events, or otherwise.
Thanks, Todd. Rob will now give an overview of the financial results.
Thanks, Steve. I'm just gonna take us through the financial and operational highlights for the three months ended January 31st, 2023, compared to the three months ended January 31st, 2022, as follows. Revenue achieved was CAD 106.4 million, compared to revenue of CAD 111.1 million. Results from operating activities were CAD 29.9 million, compared to CAD 35.7 million. Net income was CAD 17 million, compared to CAD 21.6 million. Adjusted EBITDA was CAD 32.3 million, compared to CAD 38.6 million. Cash flows from operating activities, excluding changes in working capital, were CAD 32.6 million, compared to CAD 38.7 million.
Over the last four quarters, revenue in both the Asset Management Group and Interactive Management Group has stabilized significantly, particularly in comparison to the revenue fluctuations that were driven by the changing demands throughout the COVID-19 pandemic. Despite the ongoing shift to the cloud, inflation, rising interest rates, economic uncertainty, and some competitors experiencing significant financial distress, announcing restructuring and employee layoffs, Enghouse continues to operate consistently with positive income and operating cash flows. Enghouse remains well-positioned to complete and fund future acquisitions. Subsequent to year-end, we announced the acquisitions of Qumu and Navita, with integrations progressing according to plan. Net income for the quarter was CAD 0.31 per diluted share, compared to CAD 0.39 per diluted share in the same period last year.
The decrease in net income is primarily as a result of a reduction in software licenses alongside lower gross margins from professional services relating to our large public transportation projects. Adjusted EBITDA was CAD 32.3 million or CAD 0.58 per diluted share, compared to CAD 38.6 million or CAD 0.69 per diluted share in the first quarter of 2022. Enghouse closed the quarter with CAD 250.7 million in cash equivalents and short-term investments, compared to CAD 228.1 million at October 31st, 2022, with no external debt financing. The cash balance was achieved after making payments of CAD 10.2 million for dividends in the quarter. Enghouse remains focused on its long-term growth strategy, investing in products while ensuring profitability and maximizing operating cash flows.
As a result, Enghouse continues to replenish its acquisition capital while annually increasing its eligible quarterly dividend. Yesterday, the board of directors approved the company's eligible quarterly dividend of CAD 0.22 per common share, an increase of 18.9% over the prior dividend, payable on May 31st, 2023 to shareholders of record at the close of business on May 17th, 2023. This represents the 15th consecutive year in which the company increased its dividend by over 10%. I'll now hand the call back to Mr. Sadler.
Thanks, Rob. Vince will now give a brief operational overview of the quarter. Again, we don't wanna repeat too much of what we said, at the AGM, but he'll give a good summary.
Thank you, Steve. Just a few comments to start on our overall financial performance. Revenue in Q1 of CAD 106.4 million highlights that over the last four quarters, our revenue's improving in terms of consistency, falling between the range of CAD 102 million and CAD 108 million. We are now past the revenue fluctuations that occurred in 2020 and 2021 due to COVID. In terms of revenue mix, we are seeing an improvement in our recurring revenue, in the quarter achieving CAD 66.5 million compared to CAD 64.6 million in Q4, which was up CAD 2 million or 3% sequentially. This is driven by our growing SaaS revenue.
Foreign exchange, which negatively impacted our revenue for approximately two years, turned favorable in the quarter, creating approximately a CAD 1 million improvement in revenue compared to Q1 of last year. We continue to manage our operating expenses, dropping our total operating costs compared to Q4, despite global inflationary pressures. Gross margin on professional services are being impacted due to the short-term use of third-party external contractors for our large public safety projects. Turning now to what we are experiencing in the overall markets we operate in. There are quite different industry dynamics occurring when we compare our Asset Management to our Interactive Group. Asset Management, which is mostly focused on telecom companies, is operating in a growing overall market environment.
The sector is characterized by larger enterprise customers, predominantly demanding on-prem or private cloud. Customers prefer technology providers like Enghouse that have a large breadth of integrated products. Competitors in the space are generally large on-prem tech companies that also run profitable businesses. Therefore, we don't experience significant price pressures or any significant SaaS competition. There are some interesting growth opportunities in this segment, particularly as mobile networks expand, more mobile virtual network operators emerge, IPTV demand grows, and fiber optic networks proliferate globally. In the customer experience contact center market, the biggest segment of this market are mid-sized companies. Competition is coming primarily from mid to large SaaS providers. We are seeing many competitors facing significant turmoil, with one large competitor in the contact center market filing for bankruptcy protection in Q1 and several others announcing significant restructuring.
Competitors are mostly horizontal SaaS providers, often competing on price with less emphasis on their profitability. Despite these market dynamics, we maintain our profitable growth business model by continuing our strategy around microvertical products and go-to-market and offering customers deployment choices. Subsequent to Q1, we announced the completion of the acquisitions of Qumu and Navita. During the due diligence process, we did a lot of post-acquisition planning, enabling us to execute our acquisition integration plans in a timely manner during the month of February. We have a comprehensive M&A integration process, which we implement and onboard new businesses efficiently. Thus far, the integration for Qumu and Navita plans are going well. Qumu products enhance our video solutions for large businesses that utilize their product for large-scale virtual events. The Qumu product and team now form part of our video group within the interactive division.
Our video product suite continues to expand through a variety of internally developed products, Qumu's products in last year's acquisition of Momindum, with a focus on very specific enterprise use cases. We are seeing expanding opportunities for our video suite of products. Navita provides mobile device and expense management sold into large enterprises directly or through telecom providers in the Brazil market. This augments our current mobile device management business, which is a growing market segment. As a reminder, the acquisitions happened after the quarter. There's no revenue from these acquisitions in Q1. Let me turn the call over to Mr. Stephen Sadler.
Thanks, Vince. With respect to acquisitions, the actionable pipeline remains strong. Valuations continue to decline in this environment of increasing global interest rates and the possibility of a recession. As Vince noted, we did not complete any acquisitions in Q1, and therefore, no acquisitions impacted revenue or profitability. Shortly after the quarter, we completed two acquisitions, Qumu and Navita. Vince has already outlined the basics of those two acquisitions. As Vince noted, we are in the process of integrating these acquisitions into our operations and expect them to increase our revenue and EBITDA in future quarters. At the end of Q1, our cash on hand improved to over CAD 250 million after paying our quarterly dividend. With our cash on hand, no debt, and our continued strong positive cash flow, we have the financial resources for further acquisitions.
We do not need anything from the public markets. I would now like to open the call for questions.
Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your touchtone phone. You will then hear a three-tone prompt acknowledging your request. If you would like to withdraw from the question queue, please press star followed by two. If using your speaker phone, we ask that you please lift the handset first before pressing any keys. Please go ahead and press star one now if you have any questions. Your first question will be from Daniel Chan at TD Cowen. Please go ahead.
Hi, good morning. Are you able to quantify or share some color with us to what extent you'd attribute the weak licenses revenue to come from customers migrating to the cloud versus video?
I don't think we said anything about that. No.
Okay. You did highlight, that video continued to exhibit some weakness. Can you just give some color on where you're seeing that weakness? Some of your competitors are seeing good activity in enterprise. Just wondering if there's anything specific you can point to.
Yeah. I've Vince could answer some detail, but I disagree that our competitors are showing great activity. Maybe some of the larger ones you looked at are doing a little better, but if you look at a lot of their stock performance, you can see the real results. Also there's a lot of medium and small size who get hurt faster first, and that's the market we're in. We're not in the market against Zoom, as an example, which is really in the public market, not the enterprise market. Yeah. In terms of video, we're seeing, you know, a bit of improvement in terms of our pipeline on video, on our video side, mainly in the healthcare, as I've mentioned previously, which is our key vertical there. With Qumu, we're getting into larger enterprises.
Qumu sold into the bigger, enterprise market for virtual events, so we'll see how that goes. Yeah, we're seeing a bit of a pickup in that particular use case.
Sounds good. Thanks. I'll pass the line.
Thank you. Next question will be from Deepak Kaushal at the BMO Capital Markets. Please go ahead.
Thanks. Good morning, guys. Thanks for taking my questions. I've got two, if I may. Steve, haven't seen 30% EBITDA margins for about four years, and you guys have yet to absorb Qumu. I know that you mentioned the professional services. How long do you expect that to last? If you have your typical margin drawdown in the first quarter, you make an acquisition. Are we expecting you guys to dip below 30% until Qumu becomes profitable? How should we think about the margin dynamics near-term?
I guess it depends how fast we get Qumu profitable. It's something you could watch. Remember, they were doing about $20 million US in revenue, that's public, and losing $9 million. Our task is to get it onto our profile for EBITDA. It will take a few quarters, but how quick it gets there, it depends how successful we are with our plans this quarter. Remember, we just started a couple weeks ago. We're pretty good at it, so we'll have to wait and see, but we don't have any expectations that we're putting out there right now other than we will get it consistent with our profitability going forward. The 30%, I've always told everyone it's 30%. We had a little bit higher for various reasons: travel, sales. It's come down a bit. Mix has changed a bit.
30% is a pretty normal thing for us. 35%, for quarters, I was saying we are doing better than normal. We're now at normal. Hopefully we'll do better again, but with acquisitions now picking up, 30% is pretty normal.
Okay. Then in terms of the lower gross margins with the third-party contractors on professional services, is that a two-quarter thing or a one-year thing? How long should we think about the tenure of that in those projects?
That's mainly with the two big projects. Look, it's pretty easy. It happens all the time. When you have a big project, you go along great and you get towards the end, there's all these little things that the last 10% to get cleaned up takes more effort than 10%. We're in that mode right now. It's probably expected in the next two quarters, we will finish some of those projects and go into our, what we call support mode, which has huge margins, 'cause that's where we tend to make the money. Again, I would think two quarters, I think that project will be done. I think it will impact our PS revenue being down a little bit, and it'll make our profitability higher.
Got it. My last question, just on the M&A environment, you know, thanks for the additional color there. You know, in the past, you guys seem to be capped at about CAD 50 million in terms of transactions to get your target valuation and payback. Is that still the case in this environment? Are you seeing the opportunity to do larger deals and still get your five-year cash on cash payback without, you know, competing against private equity firms? How's that dynamic changed?
First, we never really had a cap. We just have a discipline of what we've told our shareholders the return we try and get is five to six years. Valuations have come down, larger companies are again falling into that range. Private equity is struggling. They used to get their return by borrowing money at low rates and not putting much in. They no longer can borrow at low rates. The rates are going up. I'm not gonna try and predict interest rates as well, but I expect they will still go up in spite of everyone think they're gonna stop and go down. I believe that we're looking at a pretty good future for our strategy, where we use cash. We don't use debt. We have the cash on hand. Is there larger ones? Potentially.
I think there's all sides we looked at. We never had a cap. We just had what made sense with our financial discipline and what we've told shareholders, this is the type of return we want to get when we do acquisitions.
Got it. Okay. That's a helpful reminder. I appreciate you taking my questions. I'll jump back in the queue.
Thank you. Next question will be from Stephanie Price at CIBC. Please go ahead.
Morning. I was hoping you could talk a little bit about the competitive environment in the cloud CX market. The MD&A, and I think your prepared remarks as well, mentioned significant competitor turmoil. Just curious if cloud competitors are becoming a little more rational here.
I'll answer briefly, and I'll pass it to Vince. I'm not sure the cloud competitors are more rational. They're losing money. Some have money and some don't. The ones that don't are in some difficulty. You saw it with Avaya. There's others. They're hoping that investors will give them money, but they don't make money and really haven't ever made money. I think it's unless they raise their prices, and they aren't right now 'cause they're fighting each other, not really us, 'cause we don't get into that game. I think you'll see more difficulty in that market in our space. I'm not saying it's in every space, but in the contact center space. You know, the biggest company in that area, Avaya, $2.5 billion, they're now in receivership.
They stopped trading. You know, they're trying to They'll recapitalize, investors will get zero, and the guys who own the secure debt will come away owning a lot of the company, and then they gotta figure out how to make money going forward. There are others in that space. Our competitors. Any ones that are public, you can see what they're doing, and you can see the news on Google, and people are concerned about it because you can't sell below cost and make it up on volume. It just doesn't work. The more you sell, the more you lose if that's your strategy. Our strategy is to get profitable growth. We don't get as much growth as they do, of course, because we don't want growth at a loss. We're gonna continue that strategy.
If it continues for a long time, the marketplace that it is, a lot of those bigger players, I guess, will have to talk to us about combining or getting financed. We'll just have to wait and see. We're patient.
Yeah. Just to add to that, Stephanie, in terms of recent behavior changing or improving, I would say I mentioned it last quarter as well, they're still doing the things that they were doing, if not even more aggressive on discounting and giving away free things.
Okay, thanks. Thanks for the color. Then I wanted to discuss the recurring revenue. It looks like it was up 3% sequentially, which is great to see. Just, can you just give us any color on the maintenance renewal rates and how you kinda think about the maintenance line and the ability of cloud growth to offset some of the shift from on-premise?
Yeah. On the question on renewal rates. In the Asset Management division, it's mostly still on-prem, and the renewal rates are really strong. It's a really good customer retention in that side. On the Interactive side, there's more customer churn, but we have a cloud option now that we stood up our own multi-tenant cloud. We are also getting some success in moving customers from our on-prem to our cloud. The support revenue would drop, but the SaaS revenue would go up to offset it more than the decline in that particular example. That's how we're getting the recurring revenue to improve.
The one thing, Stephanie, you also realize, and we mentioned the video before. Video had a fair bit of that recurring revenue. Again, it's in decline. It's declined less now. I think we're at a stable rate. I think you'll see improvement. I think a lot of the analysts predict improvement this quarter. I think they're a quarter early.
Thanks for the color.
Thank you. As a reminder, ladies and gentlemen, if you would like to ask a question, please press star followed by one on your touchtone phone. Your next question will be from Paul Treiber at RBC Capital Markets. Please go ahead.
Well, thanks very much, and good morning. Just a housekeeping item. Just on the contribution from VoicePort, NTW and Competella in the quarter. You know what, how much revenue they contribute or what was the contribution from a sequential point of view?
We haven't really looked at and published that, but I can give you some general guidelines. I think a lot of the analysts, I don't know which one, are predicted around CAD 5.96 million, and they're about twice the amount of the contribution. It wasn't near there. I don't know how they got that number, basically, but it's much less than that. Again, people got to remember, when you do an acquisition, the first quarter, a lot of customers hold back. They wanna see what you're gonna do, how does it combine with other things.
Again, it's pretty normal to see that first quarter or two afterwards until you get it sorted out where you're going, that revenue doesn't always increase or even stay at the rate that you when you bought it. That's why we take that into account when we price the acquisition. Again, it did add to the quarter. It was profitable in the quarter. It was at our margins in the quarter. All those things are good, but it didn't do the revenue that I think most people estimated to be in the quarter.
That's helpful. If you look out, like, for the year, do you expect it to get to the run rate that people expect? Or is it a— is it, like, a permanent haircutter or is it temporary?
Hard to say. From a profitability point of view, it's already at the run rate. I expect it will stay there. I think from the revenue side, remember, we've got many different products. Do we emphasize the products we just bought or do we emphasize that we bought a customer base that we're gonna take our products into that customer base? Just looking at the acquisitions in isolation, it's too difficult a question to answer, but it won't substantially change.
That's, that's helpful. Looking at cash, you know, all-time high in the company's cash. The last time you had cash this high, you did do a special dividend. Is that, you know, a consideration now? Or are you looking to hold on to that cash and maybe let that cash grow if you can't find acquisition targets because, you know, potentially the environment is gonna be quite attractive for the next couple of years?
Well, as we went through at the AGM yesterday, we showed a little chart showing how that we're basically on the standard model. The special dividend was basically the money we earned from the video deal. The video deal, we made 100% profitability in 15 months from the sense of cash flow. We paid that cash out as a special dividend. We don't do special dividends, but because we had that unusual, good or bad, you know, we had a pandemic that caused a lot of that volume to come in. Since then, most of the decline, as you know, came from also that volume going down. The money we made in the first 50 months, the cash flow, is what we paid out in the special dividend.
If that happens again in one of our verticals, we'll consider a special dividend. Otherwise, we generally use our funds for acquisitions.
Okay. That's helpful. Just in terms of, like, the license revenue, and this is the last question. On the license revenue, you do about CAD 80 million-CAD 90 million a year. You know, what proportion of that do you see as potentially migrating over to SaaS over time, you know, relative to where it is now?
I'll answer in general terms, and I'll pass it to Vince. You know, we can't predict what moves over. We offer both on-prem and license. All the SaaS guys, if you heard what Vince said up front, they're not doing very well, so they've got to probably increase their prices in time. Customers want deals, SaaS guys are giving it to them and losing money. How long is that gonna last? We'll have to wait and see. We don't have a prediction. We go to our customers. If they wanna go to our cloud offering, we have that offering. If they wanna stay on-prem, which many still do, we will do that as well.
SaaS is in the news, it's about 20-25% of the volume of the revenue that's out there, but a lot of that revenue on-prem is sticky and on-prem and not moving. We have both offerings. If they wanna go to SaaS, we offer them SaaS. If they wanna go to stay on-prem, we stay on-prem, and we don't try and guess how many of them wanna go one to the other. It might be interesting to see if some of the SaaS players have financial difficulty and maybe don't make it. Maybe some of those that marketplace changes a little bit, especially in our contact center business. I don't try and predict that.
We just sort of take the hand we're dealt and use it the best we can. We're very flexible. We can handle SaaS, we can handle on-prem, we can handle OEM through others. We have a pretty flexible position compared to a lot of them. We don't try and pick the right one. We just make sure whatever the customer wants, we deliver. Maybe I throw it to you.
Yeah, I think, Steve, you covered most of it. The Asset Management side, very little demand for SaaS other than in our IPTV product is a SaaS product. But we get some requests for private cloud, but very little. It's mostly in Interactive that the SaaS, you know, demand is there. But like Stephen Sadler said, this whole idea of choice that we provide is quite a differentiator actually in the market because we're one of the only companies that does that. We're continuing with that strategy.
It is true, both of the competitors are going straight SaaS. That's not so bad because it leave all the premise guys for us, and we can do the SaaS as well. They're saying they're only gonna go one way. I think it was mostly because investors, analysts, et cetera, give higher value to that even though they lose money. I don't know if that will be the case in the future. The markets seem to be changing a little bit. We can do both. We wanna satisfy whatever the customer wants, and that's what we try to do.
Thanks for taking the question.
Thank you. At this time, gentlemen, we have no other questions registered. Please proceed with any closing remarks.
Thank you everyone for attending the call today and those who attended the AGM meeting yesterday. We continued with our long-term capital allocation strategy and to invest in our operations and improve our internal growth. Thank you again for attending, and we look forward to talking to you again next quarter.
Thank you, sir. Ladies and gentlemen, this does indeed conclude the conference call for today. Once again, thank you for attending. At this time, we ask that you please disconnect your lines. Have a good weekend.