Earnings Call: Q3 2021

Sep 10, 2021

Ladies and gentlemen, thank you for standing by, and welcome to the Enghouse's Q3 2021 Conference Call. At this time, all participants' lines are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's call is being recorded. I would now like to hand the conference over to your speaker, Stephen Sadler, Chairman and CEO. Thank you. Please go ahead. Good morning, everybody. I'm here today with Vince Vifsud, Global President Doug Bryson, VP Finance Todd May, VP, Legal Counsel and Sam's manager, VP, Corporate Development. Before we begin, I will have Todd read our forward disclosure. Certain statements may be forward looking. By the nature of such statements are subject to various risks and uncertainties, including those in Enghouse's continuous disclosure filings such as its IF, forward looking information, and the company has no obligation to update or revise any forward looking statement, whether as a result of new information, future events or otherwise. Thanks, 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, 2021. All financial information is in Canadian dollars. Financial and operational highlights for the 3 9 months ended July 31, 2021 and the comparative period July 31, 2020 are as follows. Revenue achieved was $117,000,000 $354,100,000 respectively Compared to revenue of $131,300,000 $382,900,000 results from operating activities were $38,500,000 $116,100,000 respectively compared to $42,200,000 $119,300,000 Net income was $21,200,000 $62,600,000 respectively compared to $26,000,000 $69,200,000 adjusted EBITDA was $41,700,000 $126,000,000 respectively compared to $45,600,000 $130,200,000 adjusted EBITDA margins increased from 34% to 35.7% for the current year to date period. Cash flows from operating activities excluding changes in working capital was $41,100,000 $125,400,000 respectively compared to $45,300,000 $130,500,000 in the prior period. Revenue achieved for the quarter was $117,600,000 compared to revenue of $131,300,000 in the same period in the prior year. The decrease reflects exceptional revenue in the comparative period as a result of COVID-nineteen related demand. Similar to the Q2 of 2021, the comparatively revenue last year was driven primarily by the previous year's significant increase in our video business that has now returned to levels that are more consistent with pre COVID volumes. Revenue for the quarter was also negatively impacted by $6,200,000 as a result of foreign exchange as the Canadian dollar strengthened against both the U. S. Dollar and the euro. During the quarter, Enghouse completed 2 tuck in acquisitions adding Naboo BV on June 3, 2021 and Momindim SAS on July 7, 2021. Mabu is an Amsterdam based provider of market research and data analytics software solutions, which augments our existing market research and survey solutions. Momindim is an enterprise software provider of secure SaaS based platform for virtual events recording, editing and sharing interactive video presentations. Remindim is complementary to our video offering and broadens our video collaboration solutions. Enghouse closed the quarter with $187,800,000 in cash, cash equivalents and short term investments compared to $251,800,000 at October 31, 2020 $169,600,000 as of April 30, 2021. The cash balance was achieved after making payments of $36,300,000 for acquisitions and $106,900,000 for dividends this year. Enghouse continues to prioritize its long term growth strategy over quarter to quarter results, investing in products while ensuring continued profitability and operating cash flows. As a result, Enghouse continues to replenish its acquisition capital while returning $83,200,000 in special dividends to shareholders common share payable on November 30, 2021 to shareholders of record at the close of business on November 16, 2021. I'll now turn the call back to Mr. Sadler. Steve? Thanks, Doug. Vince will now give some operational highlights of the quarter. Thank you, Steve, and I appreciate those of you who are joining our Q3 2021 conference call. As Doug mentioned, Enghouse had another strong earnings quarter with adjusted EBITDA of $41,700,000 achieving 35.4 percent of sales and strong cash flow from operations. This represents our 6th consecutive quarter of exceeding $40,000,000 of EBITDA, Which speaks to our company's ability to generate strong profitability and cash flows and significantly varying market conditions. During the quarter, we faced a negative impact due to foreign exchange, which reduced our revenue by approximately $6,200,000 compared to Q3 of 2020 $2,400,000 compared to our previous Q2 of 2021. In the quarter, we completed 2 product centric tuck in acquisitions, Momindum and Nebu. Momindum brings to Enghouse a new SaaS application that extends our video capabilities. With the Momindum product, we are now able to address the large video meetings and virtual events market that can extend video meetings upwards of several 1,000 people. The largest event so far on the momentum platform exceeded 20,000 viewers concurrently. Nebu enhances our survey capabilities used in market research communities and the contact center space. Our video business has now returned to volume and demand that were consistent with pre COVID periods, And most of our revenue decline this quarter compared to last year is attributed to the video decline in addition to the foreign exchange I previously mentioned. Over the last several quarters, we believe that growth in the overall cloud contact centers market has accelerated, And we are expanding our focus on our cloud contact center offerings, driven by this growing market demand, And we also provide migration path to our existing on prem contact center customers that wish both through partners and through our direct sales team. As an example, this quarter, one of our largest partners has decided to expand their cloud offering contact centers to 3 additional centers globally. And another partner We now have over 80,000 named agents on Enghouse Cloud Contact Center platform, which is We are seeing more migrations from on prem unified communication platforms to cloud based UCaaS platforms. And Enghouse continues to be one of the only companies in the contact center space that are agnostic to any UCaaS solution and provide integrations to industry leading UCaaS platforms, including Teams, RingCentral, Cisco and others. In the quarter, we also expanded our AI capabilities. And in addition to offering AI driven chatbots, We launched a new AI product that improves agent quality assurance, ultimately helping our customers improve their customer experience. This is a unique AI offering and its incremental functionality to our existing quality assurance products. Turning now to a few highlights in our Asset Management division. We are seeing good demand for our BSS solutions that enable any enterprise to become a mobile virtual network operator, offering mobile services that help monetize their customers. In the quarter, we signed a new large company to our MVNO offering and continue to expand our solution to many of our existing MVNO customers. IPTV demand also continues to be robust as we added 4 new customers in the quarter. Revenue for our IPTV solutions builds as IPTV subscribers come online. Our transit business just a quick update. Although ridership remains low, still down more than 50% compared to pre COVID. We added some new customers to our IoT product that remotely manages our AFC platform on transit vehicles. We also achieved in the quarter a Europay Mastercard Visa, also called EMD Certification of our Automated Fare Collection product. This EMV certification is an important milestone for our AFC solutions and our plans to expand offering into Americas and Rest of the World. Just to provide a brief update of our on our large public safety projects, Enghouse is implementing the 1st national security solution for the entire country of Norway, which is fully integrated across all regions. In the quarter, we achieved an important Phase 1 milestone for this project, And as planned, our application was installed and accepted. We are still in the early stages of this project In summary, we continue to achieve strong EBITDA results, while being committed to delivering great products to our customers, as illustrated by investing over $60,000,000 so far this year in FY 2020 in Engineering and Product Development, keeping in line with prior year spend. Let me turn the call now over to Mr. Steve Sadlist. Thanks, Vince. Just a little bit more on acquisitions. As Doug and Vince mentioned, we completed the acquisition of Naboo in June and Momentum in the 2nd week of July 2021. Both did not have a full quarter of revenue in our Q3 results. Naboo was combined with our Servox business, while momentum was added to our video business. Revenue for these acquisitions was about 500 financial results reported. Q4 will be the Q1 of their financial results LatAm business and achieved our normal EBITDA percentage in the quarter, slightly ahead of the initial expected integration timeframe. We continue to focus on capital deployment, doing our due diligence remotely. Although the acquisition pipeline remains strong opportunity values continue to remain high with strong public markets, low interest rates and Financial Stimulus. As noted last quarter, we are experiencing higher desired acquisition values from sellers, But many potential acquisitions are not getting completed at these higher values in our markets. Acquisitions are Also taking longer to be successfully completed. We continue to maintain our financial discipline when reviewing acquisition opportunities and accumulate cash for future capital deployment. I would now like to open the call for questions. Your first question comes from the line of Daniel Chan with TD Securities. Hi, good morning. Just want to dive into the Zoom 5 0.9 acquisition that was announced a few months ago. Do you see That transaction having any impact on the competitive landscape for you? It's hard to tell, But I think it has an impact both on Five9. If you looked at their last quarterly results, they had quite a large loss. Can Zoom take their product to their customer base? I don't know. I don't know the whole profile of their base, but they have a lot of things like schools, etcetera, Which probably don't tie to contact center. I think it's probably a reasonable combination or reasonable thing that Zoom did. It probably helps us a little bit in our contact center Because again, you've got another variable in there where Five9 was completely independent and now there's probably going to be some zoom influence on where they run their software, etcetera. I also think in any acquisition, there's some turmoil. So we expect There'll be turmoil as this acquisition gets completed. It doesn't hurt us. We have already what they have. We have video already incorporated into our offering. So, it may impact other contact centers who might want to use Zoom as the integration of video into their offerings, but it really doesn't impact us. And Zoom is a strong competitor with a strong sales and marketing group that will continue and we tend to be more in the healthcare and financial area, a little more focused. And so we'll continue to do that. So we'll wait and see. I don't see it hurts us, but It may or may not help. Okay. Thanks for that, Steve. You mentioned video is already integrated with your contact center platform. Are there any capabilities you see with the combination of Zoom and Five9, anything that they could have that you don't currently have? There's always some things that they may have that we don't have, and there's also things we have that they don't have. I think the biggest issue and I don't know what's well known. For example, in Germany and other places, Zoom was found not to be in compliance with GDPR, which is the security part. That could help us. So that's just from the Zoom side. They're a strong group. They got a lot of R and D. Five9 is a strong group. I don't think it impacts That much though in where we're at versus where they're at in the marketplace. Okay, thanks. And then Vince, you mentioned you have about 80,000 names in the cloud contact center, 50,000 concurrent users at any time. Can you just give us some context on that? How has that metric trended over time? And maybe if you can kind of give us if you know any how that compares to some of your large competitors? Thank you. Yes. I mean, it's trended positively. I mentioned it as a point of reference because I know sometimes we're not known for our size and scale in the cloud contact center space, so it's more of a reference point, but it has been growing. Thanks guys. Your next question comes from the line of Paul Steep with Scotia Capital. Good morning. Steve, could you talk a little bit about capital deployment and just how you're thinking about it in terms of the context of Your earlier comments, obviously, we had the special dividend in February and you've already started to stockpile cash again. Maybe how are you thinking about it at management, maybe the Board level, what level of cash you're sort of comfortable holding versus using debt that I think talked about now, I guess it was around the fall timeframe of last year. Just getting your take on that would be helpful. Yes. As you know from my history, I'm comfortable with holding cash. That's not really a problem because Bad things can happen quickly and when you have cash, you can take advantage of them. So we continue that. The reason why we did the special dividend, which I've mentioned before is We've made what I would call excess profits because of the pandemic in that everyone went to video, Which was virtually all profit for us as they signed up more software. So rather than hold that cash, we decided to pay that out as a special dividend. So we're sort of on a normal trend now, having paid that out. We still see good opportunities. It's nice to have the cash and of course because we're profitable we can the banks and financial institutions are quick to want to lend us more cash, but unless we absolutely need it, I don't see helping their profits by paying them fees. So It's sort of the same as we've always done, kind of boring group. We just do what we've done in the past and we continue to do it. Got it. That helps with context. If we just zero in, getting your thoughts on the fact that with Momindum, it was a SaaS based deal. How you maybe approach that deal? Not that there's a lot different there. I know the financial standards would be the same, but the metrics are a little different. How are you finding the ability to do those deals maybe? The second question. Well, remember, It ties to video, which is also a SaaS offering. So it ties in. It isn't like it's different. It's a slightly different market for us. It was smaller. We do find some smaller SaaS companies struggle a little bit. Everyone talks about the big ones and they're So we see some opportunity there. This is one that fits nicely with us. It is small. It's in Europe, but we're tying it in and We see opportunity to grow it. It will take a little time to get there, but we've already started that process. Yes, sorry, Steve. I should We're clear. On the SaaS deals, on that one in particular, are they hitting valuation metrics that over time it'd be similar to sort of your targeted returns or the assumption is to get to the targeted returns. They're integrated with other things in the platform and you're going to pick up The returns on maybe higher synergies on some of those products was how I should have phrased that. Okay. We always get some of our returns through synergies, be it revenue or costs, no change. We expected to meet our returns. We aren't changing our discipline or what we look at for our performance. So we always take the 1st 90 days don't make much money, then we breakeven, then we make half our margin in the full amount. We expect that will happen there too. It might come even better if we get some revenue growth from it by tying it in, but there's no change to our model. We're not paying more for SaaS Chasing something that the market likes that loses money potentially. We're trying to stick to our normal discipline. We may have to wait a little longer, but we still think in the end it's the right thing to do. Great. Last one for me to whoever I guess On the contact center, Vince had talked about growth you're experiencing there. Can you talk a little bit about maybe the willingness to Margins have kept creeping up as Todd highlighted earlier. Can you maybe sort of highlight whether or not you'd Be more willing to sort of lean heavier on the gas pedal in terms of investment, maybe in distribution is what I'm thinking of because Vince obviously highlighted the R and D investment. Thanks. I'll do a little bit and then Vince can take it afterwards. Our margin, it's tough In the contact center business because there's a lot of people chasing revenue and willing to lose money to do it. We aren't. So our growth is not quite as strong as theirs, but our profit is, and that continues. Will that stop? Well, the market will sort out in the end. Either they won't get funding, because if they aren't making money, they got to go to the market or the fact is prices will go up. We're in the game. We do well. We don't lose money on it. We don't intend to play the other game. Maybe we're not good at it, But it works well for us the way we've done it in the past. So we've sort of stuck to that discipline Rather than let's sell something at $1 that costs us $1.20 It's not sort of our nature. So we're sticking pretty much to the way we've done it in the past. It does make growth a little tougher, but we think it will end up being the right thing to do. Maybe Just to add to that, so the only thing we did modify is a little bit on our go to market for our cloud contact center product. We were historically going through channels only. So companies were standing up our cloud and white labeling it and selling it to the market. We stood up our own clouds. So we stood up instances in Europe and in the U. S. And have some of our direct sales team selling directly to the market in addition to continuing with our channel partners. So that's a bit of a change we made early this year and that we're still Early in that execution, but that's a slight modification really on the cloud side. Yes. And just so you understand what Vince is We do that through partners, so it does not change our capital expenditure profile. A lot of those companies that do SaaS also have a lot of capital expenditures. You can see it on their financials. Ours isn't changed because it's all operating costs for us. In other words, we have someone who We do that process, but we do it with partners. Like Amazon does, Google, IBM, there's lots of people out there Who handle the processing side. So again, you won't see our capital expenditures change that much. It's all in our numbers. Perfect. Thanks, guys. Your next question comes from the line of Stephanie Price with CISBC. Hi, good morning. Good morning. On the cloud contact center, and the acceleration there, can you talk a little bit about the percentage of on premise customers that you Back to move to the cloud and maybe a bit more about how you plan on transitioning these customers and whether you expect them to move into the RFPs? I'll take it. It's hard to know. The cloud is very much in the market today and a lot of new people going to, especially pandemic because you don't you can't go in and set up on prem systems that easily. We certainly will do what our customer wants. We can give them the cloud. We can keep them on prem. Some of the on prem customers, I believe, will stay on prem if they know they can go to the cloud when they want to. So we had to do that, integrating with teams if they want, have our own cloud. So we're trying just to give customers choice and let them decide. But how many are going to do it? I have no idea. It's not a guess I would like to make. Yes, and just to add to that. So we definitely give customers choice and our whole model is You can do a you can stay on prem, you can move to a private cloud instance. So some larger companies focus a lot on security and data privacy. So they'll want a private cloud, which we're happy to do. They want or they may want to leverage our public cloud. So we offer optionality there. And essentially, like Steve said, there's no rush to move there. We just tell customers when you're ready, We're here to provide you that migration path. Okay, that's helpful. Thanks. And then last quarter, you mentioned some delayed projects and implementation. Given the increase in professional services revenue this quarter, it looks like maybe some of the implementations are now been running. Just curious if you can give us an update on that and if you've seen anything post quarter just given the delta variance. Well, I'll let Vince talk to it. But like I said, I don't think we delayed The professional service, I think what you see is some of the 2 big projects we got stuck The professional services started to be done. So both the fire kicked in probably started this quarter Last quarter and the AMK started the quarter before. Those have a lot of professional services in them And we announced the size of the contract, but we're also getting change requests on those. So I think that's helping our professional services side. And they knew it and signed it and the COVID is not impacting that much because they want to get the project done. So I think you'll see the increase probably coming from there. And then last quarter, you got holiday periods in Europe and you got other things that can impact it. I don't see a big change, but Vince you might. Yes. The only thing to add on that is As I talked to earlier, you're getting some movement from on the unified communication side. So when a customer had, for example, Skype, on prem Skype and want to move to Teams. So their services work for us to integrate our cloud our contact center, whether it's cloud or on prem to Teams. So there's more PS being driven by that migration to UCaaS platforms. That's also driving some additional PS in addition to what Steve said. That makes sense. Great. And then just finally for me, the MD and A mentioned some restructuring initiatives. Just wondering if you could elaborate on this a bit and whether they're outside kind of that normal course of business? Restructuring, I think it's pretty normal what we've done with the acquisition side. So I don't think it's referenced there and there wasn't a big restructuring cost. But what we are doing is from a tax side, we are changing some of our legal structures to reduce fee costs, that's number 1. It also will help our cash flow because our tax rate that we pay should be reduced, And we've got a pretty big project going to do that. And we also have taken the opportunity, like I've mentioned in the past, We've saved money on travel and entertainment, that kind of thing. That will come back a bit, but we've also Started to look at our premises and whatever it might cost in the future for travel and entertainment, we're probably going to save on premise costs. So we started to look at some of the smaller ones and even some of the larger ones. We've surveyed our staff who wants to work home who wants to come back to the office. So we're actually saving on some of our overheads basically on the premise side as well. So there's a lot of moving parts, but Overall, we're trying to match up to make sure that if travel and entertainment comes back, which will increase costs, that we have things that will offset it. Right now travel and entertainment has not come back and we're already getting these offset a bit from the premise side. We intend to do a hybrid model. We'll have offices smaller that people could come into. Some people want to come to the office and probably have them come in a day or 2 a week anyways because we think that's good for The social relationship and for training and for having discussions and trading experiences with each other. So we've already started that. The travel and entertainment has not started. Got you. Thank you. Your next question comes from the line of Paul Treiber with RBC Capital Markets. Thanks very much and good morning. Just wanted to follow-up on the comment about the 80,000 agents in the cloud. Is that, what you call your own cloud or does that include the white label channel partners as well? And then could you also Yes. So on your second part of that question, the on premise number, no, I didn't talk about that number. I was just giving the cloud contact center, our multi tenant cloud contact centers product specifically, and that includes our partners and our own cloud, the number of named agents on those platforms. Thanks. That's helpful. And then in terms of like The growth in that, has that predominantly been from migrations or from new customers? And how has the churn or I guess retention of on premise customers been tracking over the last couple of quarters. Yes. So on your first question, it's both new logos as well as customers that are on prem that want to move to the cloud. So that's essentially what's included in those named agents and concurrent agents. Sorry, what was your second question? Just in terms of the customer churn or retention of on premise customers over the last few quarters. Yes. So on the contact center side, The on prem churn numbers are relatively in line with what they've been, slight acceleration this year because of the COVID. On the video side, we had the big spike In cloud users that came way down post COVID. On the Yes. So and then on the asset management side, basically the churn has not changed at all in the last 3 years, Been pretty flat. Okay. And then one for Steve, just on a high level in terms of MA. You've made a couple of acquisitions in the video conferencing space. We've seen the video conferencing space go through a boom and then now Slowing down. Specifically, are you seeing valuations in that segment become more attractive And what they have been in the past, and you think you'll continue to build out your video conferencing business through acquisitions in the near term? I think there's 2 parts there, not to mislead. Look at Zoom's share price and yes, the valuations have come down, But they're still hot. So they still want to see what the opportunity everyone's trying to guess what's going to happen. If the pandemic is over, the vaccinations work, will there be less need? So yes, value agents have come down, but we still see them high. That doesn't mean there isn't opportunities for us, but they're usually at the lower end, like the momentum. We'll mind them. There are opportunities out there. We see a lot of them and because a lot Zoom has done well and good for them, But a lot of the smaller ones don't make money and their future of making money is questionable. So we see those opportunities will probably get greater as depending what this market does. And also we talked about you also have Cisco, you also have teams like There are several players here and they've all tried to grab share in this market. While the going is good, you got to get going. So That's what they do. And strategically, do you see the convergence of UCaaS and contact center, obviously continuing and how does that create an opportunity for Enghouse? I mean do you want to be agnostic to UCaaS or would you want to increase or get more into providing your own unified communication solution? Yes. That's a good question. So there's definitely a convergence happening as things especially as things move to the cloud both on the unified communication moving to the cloud and the contact center moving to the cloud. So we're getting more and more requests to connect with multiple UCaaS products. And as I mentioned, we've extended beyond just doing Teams to RingCentral, Cisco and others. And to your question on will we ever do our own UCaaS product, I mean video is the start of a UCaaS system as you know. So video can evolve over time to add more functionality and become much more of a UCaaS type product. So it's definitely in some of our product roadmaps considering that. Okay. Thank you. And at this time, there are no further questions. I will now turn the call back over to management for any closing remarks. Well, Enghouse continues to have a very strong financial position, increasing cash and no bank debt to execute on our capital allocation and business strategy. We'll deploy our capital on opportunities that we believe will return long term value to shareholders. We look forward to completing Q4 and our fiscal year. Thanks for attending the call and hopefully we'll be able to have our fiscal 2021 Annual General Meeting in person.