Enghouse Systems Ltd

TSX:ENGH

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the Enghouse's Q2 2024 Conference Call.

[Operator Instructions]

This call is being recorded on Tuesday, June 11, 2024. We I would now like to turn the conference over to Stephen Sandler, Chairman and CEO. Please go ahead.

[Stephen Sadler, executive]

Good morning. I'm here today with Vince Mifsud, Global President, Rob Medved, VP, Finance; and Todd May, VP, Legal Counsel. Before we begin, I will have Todd read our forward disclaimer.

[Todd May, executive]

Certain statements made may be forward-looking by the nature of such forward-looking statements are subject to various risks and uncertainties, including those in Enghouse's continuous disclosure priorities such as its area, which could cause the company's actual 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.

[Stephen Sadler, executive]

Thanks, Todd. Rob will now give an overview of the financial results.

[Rob Medved, executive]

Thanks, Steve. I will take us through the financial results for the 3 and 6 months ended April 30, 2024, compared to the 3 and 6 months ended April 30, 2023, as follows: Revenue increased to $125.8 million and $246.3 million, respectively, compared to revenue of $113.5 million and $29.9 million, Results from operating activities were $33.5 million and $66.1 million, respectively, compared to $25.6 million from $55.5 million. Net income was $20 million and $38.1 million, respectively, compared to $12.5 million and $29.6 million.

Adjusted EBITDA was $35.7 million and $7.4 million, respectively, compared to $3.2 million and $62.5 million. Cash flow from operating activities, excluding changes in working capital, was $38.6 million and $74.2 million, respectively, compared to $28.9 million and $61.5 million, resulting in record cash and cash equivalents of $263.8 million. Our strong performance this quarter is demonstrated by double-digit growth in revenue profitability and operating cash flows. Our proficiency in executing and integrating acquisitions continues to be a crucial profit growth driver.

This quarter, we completed the acquisition of Mediasite which expanded our video technology into the education and the event market and increased our presence in Japan. Our business model continues to prioritize operational discipline as the demand for SaaS increases. Operational expenditures have shown improvement when compared to revenue, both for the quarter and period to date despite inflationary pressures and integrating acquisitions.

Continued discipline in our business activities has increased our cash and cash equivalents to the record level of $263.8 million with no external debt, while increasing our dividend, repurchasing shares and completing and integrating the Mediasite acquisition in the quarter. Subsequent to quarter end, on May 9, 2024, Enghouse completed its acquisition of substantially all of the assets of SeaChange International, Inc. related to its IPTV products and services business for a net purchase price of approximately USD 23 million, this acquisition increases the scale of our IPTV business, augments our product offering and furthers our expansion into the European market. SeaChange will be integrated within the Asset Management Group from the Data acquisition.

Yesterday, the Board of Directors approved the company's eligible quarterly dividend of $0.26 per common share, sustainable on August 30, 2024, to shareholders of record at the close of business on August 16, 2024. I'll now hand the call back to Mr. Sadler.

[Stephen Sadler, executive]

Vince will now give some operational highlights of the quarter.

[Vincent Mifsud, executive]

Thank you, Steve. As Rob has highlighted, we are pleased to report double-digit performance in the quarter across all our key financial metrics, with total revenue growth of 10.9% and recurring revenue growth of 18.9%, operating profitability growth of 31%, positive operating cash flows of $40.2 million and finishing with a record cash balance of $264 million with no debt.

Today, I'm going to talk about a few of the positive areas of growth and opportunity we have within our business which form part of the reasons we are achieving this financial success. A relatively new and interesting growth area in our business is called Enterprise mobile device management. Given the significant rise of mobile devices globally, the need to manage these mobile devices securely is growing in importance, especially for enterprises and governments. Our mobile device management technology is sold through our telecom partners who provide our software as part of a bundled offering of their cell phones and cell services that helps them differentiate their mobile offering.

Our software enables our telecom partners enterprise end customers to manage the cellphones of their employees with key security features and controls over the times and types of applications that are used. Controlling cell phone usage is also becoming an increasingly important issue within the education sector as governments try to minimize distraction during classes. We help solve this problem. As an example, one of our large government end customers that provided tablets to their hundreds of thousands of students are using our Enghouse MDM product to control both the times and types of applications that the children use during -- to minimize disruption during class hours.

In the contact center market, what we are still seeing is contrary to the opinion that some people have who believe that AI will eliminate the need for businesses and governments that have contact center agents. We are not experiencing or hearing this from our customers. Similar to what happened when IVR technology was introduced to the contact center market several years ago, which didn't eliminate the need for agents. Our review on AI is similar. The primary use case of AI and where we are continually seeing growing interest from our customers is about AI to help make a contact center agent more productive, freeing up their time so they can spend more time with customers, create better experiences and reduce wait times, which is why we are seeing interest for our Enghouse smart quality and summarization technologies, which help make agents better and save time.

In short, we don't believe nor hear from our customers the view that AI will be eliminating the need for contact center agents. During the quarter, we made some positive progress with our expansion efforts into the Middle East for both our video and contact center products. We believe there are good growth opportunities in the Middle East especially in markets like the UAE and Saudi Arabia that are making significant investments in their region. Given our choice strategy, we are one of the only companies in our market that provide partners with the option of standing up their own cloud offering based on Enghouse's contact center products.

We are seeing a growing trend of our partners, standing up their own cloud with our products, and one example is our partner, Voxtron, that stood up a Contact Center as a Service in Q2, powered by inches technology sitting on a local UAE government cloud provider. In the health care market, we are continually hearing about a global shortage of nurses and doctors. The World Health Organization estimates that there will be a shortage of 10 million doctors and nurses by 2030. We help solve this problem with our video products, which are being used in several ways to address this issue.

During the quarter, our video technology has been adopted in the UAE to drive a national rollout of their telehealth application across Abu Dhabi. At the start of the quarter, we completed the acquisition of Mediasite which brings some new video products for the education and event market, which capture video content from educators and presenters and then pushes it into learning management systems for later consumption. This technology is also used in health care. For example, we have a health care customer that captures complex lung transplant operations with the Mediasite video capture software and then uses it to train other surgeons to perform these complex operations.

IPTV is another growth area of Enghouse. Over the last several years, since our IPTV launched, we have continually signed a number of new IPTV customers across North America. The growth in IPTV is driven by several factors, including the shift in consumer behavior towards on-demand content as opposed to traditional cable TV rigid programming schedules. Subsequent to the quarter, we completed the purchase of SeaChange, which enhances our IPTV offering and expands us into Europe. SeaChange results will start in Q3. Across many of our products, there is rising demand in Software as a Service. We invested for several years in training and enabling our go-to-market teams, developing and acquiring SaaS products as well as standing up our own SaaS offering and now are seeing far more SaaS deals being signed than we did a few years ago.

Hopefully, this provides you some visibility and examples of the diverse markets we operate in and the growth opportunities they provide. Let me turn the call over to Mr. Steve Sadler.

[Stephen Sadler, executive]

Thanks, Vince. In the quarter, as previously mentioned, we completed the acquisition of the assets of Mediasite. After acquisition, Mediasite went into bankruptcy as their major creditor requested payment of its secured loan. This has made integration of the purchase assets a little more difficult with respect to assistance from the company. But financial results added to revenue and profitability in the quarter, the first quarter after acquisition.

We expect some further improvement in Q3. We completed the acquisition of SeaChange, again, as mentioned, May 9, which is being integrated into our IPTV business unit of our AMG Group segment. The asset integration is proceeding as expected, and it is -- it will add to revenue and profitability in Q3. No financial results from this acquisition are included in Q2 as a result of the acquisition date after Q1. We continue to see capital allocation opportunities in our industry sectors. I would now like to open the call for questions.

[Operator]

Thank you. And ladies and gentlemen, we will now begin the question-and-answer session.

[Operator Instructions]

And your first question comes from the line of Daniel Chan with TD Cowen.

[Daniel Chan, analyst]

Two parts of my first question. On the SaaS opportunity, are you seeing mostly new customers choosing the SaaS solution? Or are you seeing a migration of existing customers. And then part 2 is, how much of your customer base is now on SaaS? And what proportion do you think will move over?

[Vincent Mifsud, executive]

So let me start on that question. So I think we're seeing it both. So we're seeing our existing customers moving from their on-prem to either a private cloud, dedicated for them or our multi-tenant cloud products. So we have a cloud uplift program that is getting good traction, as well as we're seeing new logos.

In terms of percentage of our customer base that moved over, it's -- we won't disclose exactly that amount, but it's not a majority yet.

[Daniel Chan, analyst]

And then Steve, you did a bit of share repurchases in the quarter. Can you talk about how you think about doing more of that. Given where your share price is relative to the M&A targets you have in your pipeline?

[Stephen Sadler, executive]

Yes. I mean we look at how we allocate our capital out and the price of our stock has come down a little bit, making it good buying opportunity for us as well as others. We do not -- we do like others, not taking their positions in it, but we are looking at that buyback program. And we can only do so, of course, we're not in a blackout period.

[Operator]

And your next question comes from the line of Stephanie Price with CIBC.

[Erin Kyle, analyst]

It's Erin Kyle on for Stephanie Price. So I wanted to ask on the SaaS and maintenance revenue this quarter. So last quarter, there was some sequential decline in the maintenance, which was mainly attributed to Lifesize. Just wondering on this quarter with the SaaS and maintenance flat quarter-over-quarter, did you see some more churn in life size in the second quarter? And would you say things have stabilized there now?

[Vincent Mifsud, executive]

Yes. Hi Erin, it's Vince. Yes, so Lifesize did see some decline in Q3. That was mainly attributed to customers that churned prior to the acquisition who had already kind of given notice, because Lifesize went into receivership and some customers knew they were in financial trouble. So we had the kind of tail end of that. So we don't expect to see as significant as a drop next quarter. We think we're through most of that. And that was mainly in their SaaS products, by the way, not their -- they didn't really have as much on-prem.

[Erin Kyle, analyst]

Okay. That's helpful color there. And then maybe if I could just ask one more on the demand environment. So we've been hearing from some companies that IT spending is flowing as enterprises think about their AI strategy. So just curious from what you're seeing. How much would you say that AI is having an impact on decision making?

[Vincent Mifsud, executive]

Yes, I can take that one. I mean we -- like I mentioned in my earlier, we don't see AI taking a dent in contact center purchases. We see interest in using AI to try to make the agents better and more productive. And remember, in our market, we're focused on sort of mid- to lower upper segment of the market, so somewhere between 50 agents and 1,000. So that's the market we play in. And we're not seeing any kind of trend towards getting rid of agents and using AI.

[Stephen Sadler, executive]

You have to realize, to do AI, it really just goes in and looks at a large database and it helps the agents answer questions or answer your questions. So that really impacts the large contact centers a lot more, and we're in the midsize. So we haven't seen really any impact of AI other than helping us reduce costs and maybe get a little bit more revenue by using it, but it hasn't impacted anything in our customer.

[Operator]

And your next question comes from the line of Paul Treiber with RBC Capital Markets.

[Paul Treiber, analyst]

Just to start, can you elaborate on the integration challenges with the Mediasite just in light of the bankruptcy there? And then do you think it will have the bankruptcy will have an impact on the long-term revenue that you expect out of that business?

[Stephen Sadler, executive]

The challenges are, we thought we'd have a team there that would help because they kept a couple of products, [ Lenovo ] and GLX, which we did not buy. Therefore, they still had staff left that we thought would help with the integration and moving systems over. When it hit the bankruptcy side, that staff, of course, left or some of them left.

So that made it difficult to move some of the systems over. So we basically had to do it ourselves and could rely on the transfer agreement that we did with that. In the future, for that, we don't think we -- in fact, we think it might be positive for us once we are organized. We're larger. We service customers better. We don't see a big issue with the future. Vince, do you want to...

[Vincent Mifsud, executive]

Yes, just to add on it, the Mediasite customers, obviously, we spoke to a lot of their customers subsequent to the quarter. And there's no real concern. They're actually happy that it's landed on in inches with a strong financial situation. And the products there, Paul, are really sticky products, like they're in schools, they're embedded in the education system. So a very stable product, some really interesting use cases in health care. So I think it's positive from the customer side.

[Paul Treiber, analyst]

And then shifting gears to the contact center space. I'm sure you saw the announcement from Microsoft and their contact center offering. How do you think about the increasing or sustained competition within the contact center space. It seems like AI has been a catalyst for companies to -- or vendors to make more investments in contact centers. Do you see the competition? How do you see that AI impacting competition, increasing competition? Do you think there'll be more switching, more churn potential as a result of that?

[Stephen Sadler, executive]

Paul, I think the contact center has been going through a transition for some time. We sort of see it the same way as we see AWS. I think if you remember a year or 2 ago, you thought they announced they're getting into the business, and we really haven't seen them. They all come in, but you have to have a resource to go out there and it's not as easy as just doing in order, you have to implement them. So again, we're always watching our competition.

We think AI from Microsoft is great, haven't seen them, but we deal with them now in the contact center. We tie into their teams. And so we have a working relationship there anyway. So we only can take the future as the future comes. But we're pretty knowledgeable and we watch it fairly closely to find out what the real impact is versus what the news says it is. Lots of people make news, but they don't do very much.

[Paul Treiber, analyst]

And then just lastly for me, just on the M&A environment, I mean M&A has for Enghouse, it has picked up. What are your thoughts on the environment here? Are you seeing sellers more willing to sell? Or are there still hopes that they would find other buyers or higher prices?

[Stephen Sadler, executive]

I think you find if you look at our major competition, which you know, some are public, you can see their results in private. Some of them took the approach many years ago that they were going to spend lots of money, take loans to do it, and scale by basically getting revenue below its cost. And there are substantial larger companies that are in financial difficulty to some degree.

And as I said before, unless I say you guys, but unless investors give them money, they will have a challenge in the next 18 months to survive. So the market is quite good, even for larger contact center companies. And so we see the capital allocation is quite positive. And again, as long as the taxes go up, that's just another issue. But with debt and higher interest rates, again, you can look up our competition and see how they're doing compared to us. So we do see a positive future from the acquisition side.

[Paul Treiber, analyst]

Just a quick follow-up on that, most of your acquisitions have been fairly small. Would you consider larger acquisitions? Or are they still not quite meeting your return metrics?

[Stephen Sadler, executive]

We would, of course, if they give our return metrics. The problem with some of the larger ones, they have huge debt. And so you do one, you don't do more because we'd have to somehow sort out their huge debt. So we figured just letting them run a little bit longer. You've seen a couple. We're buying asset deals now you've noticed, that's because the companies are having some financial difficulty.

And even when we bought the Mediasite asset deal, they didn't survive for 6 weeks afterwards with our money, which we paid them. So it's an interesting environment but a challenging one today. In some ways, it's difficult to get rapid sales growth. Some companies in that industry, especially contact center, have gone that way, and most of them are hurting by doing it. We've taken a more prudent approach. Don't have the same sales growth, but at least our sales are profitable, not just sales from making top line revenue that investors could be fooled by sometimes.

[Operator]

[Operator Instructions]

I'm showing no further questions at this time. I would like to turn it back to Stephen Sandler for closing remarks.

[Stephen Sadler, executive]

Well, everyone, thank you for attending the call. Enghouse continues to be a strong financial company with growth, no financial debt and opportunities in a changing business environment. Look forward to seeing you on the next call.

[Operator]

Thank you. And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.