Enghouse Systems Ltd
TSX:ENGH
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Enghouse Systems Ltd
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Good day, ladies and gentlemen. And welcome to the Enghouse's Fourth Quarter 2020 Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Steve Sadler, Chairman and CEO. Please go ahead, Mr. Sadler.
Good morning, everybody. In this era of social distancing, I'm here today with Todd May, VP, Legal Counsel; Sam Anidjar, VP Corporate Development; Doug Bryson, VP Finance; and Vince Mifsud, Global President. So we're all here. Before I begin, I will have Todd read the forward disclaimer.
Certain statements made may be forward-looking. By their nature, such forward-looking statements are subject to various risks and uncertainties, including those in Enghouse's continuous disclosure filings such as its AIF, 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 these forward-looking statements, 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. Doug will now give an overview of the financial results.
Thank you, Steve. I'll now give a brief overview of the quarter. Yesterday, Enghouse announced its fourth quarter unaudited and year-end financial results for the period ended October 31, 2020. Key financial and operational highlights for the 3 months ended October 31, 2020, compared to the same period in 2019 are as follows. Revenue grew 10.6% to $120.9 million. Results from operating activities increased 31.2% to $42.7 million. Net income increased 19% to $29.4 million. Adjusted EBITDA increased 37.1% to $46.6 million. And cash flows from operating activities, excluding changes in working capital, increased 41.8% to $48 million. Key financial and operational highlights for the year ended October 31, 2020, compared to the same period in 2019 are as follows: Revenue grew 30.6% to $503.8 million. Results from operating activities increased 44.7% to $162 million. Net income increased 39.2% to $98.6 million or $1.77 per diluted share. Adjusted EBITDA increased 53% to $176.8 million and cash flow from operating activities, excluding changes in working capital increased 50.6% to $178.5 million.Cash, cash equivalents and short-term investments were $251.8 million, an increase from $150.3 million at October 31, 2019, which was achieved after making payments of $27 million for dividends and $43.9 million for acquisitions. Yesterday, the Board approved the company's eligible quarterly dividend of $0.135 per common share payable on February 26, 2021, to shareholders of record at the close of business on February 12, 2021. I'd also like to highlight another key announcement from yesterday's meeting. With our substantial cash balance, no debt and significant operating cash flow, the Board of Directors also approved a special dividend of $1.50 per common share payable on February 16, 2021, to shareholders of record at the close of business on January 15, 2021.With low interest rates and the ability to acquire additional funding as needed, the company believes that after returning these funds to shareholders, it continues to have the necessary funding available for its acquisition activities. I'd now like to turn the call back to Mr. Sadler. Steve?
Thank you, Doug. As Doug highlighted -- Doug has highlighted some of the key financial and operational items of the company. He noted our strong operating results and cash flow in the quarter and for the year, which resulted in cash and short-term investments being nearly $252 million with no bank debt. As we noted in prior quarters, some of the revenue was brought forward due to the pandemic from Q4 and starting Q4 now, because of the second wave has been delayed. So it's an interesting dynamic in that, initially, they brought it forward, they got up to speed, and now with the second wave, a bit of revenue has been delayed.Transit was hardest hit, but we did improve our future transportation business with a $55 million contract award over 12 years in our Nordic operation. This will help offset the decline in the transit sector this fiscal year being 2021, did not really have any impact on last year fiscal 2020.EBITDA margins improved in Q4 due to lower hardware revenue and minimal acquisition cost restructuring. Hardware revenue, which has lower margin, was down $5.2 million in Q4 compared to Q3, and $1.4 million lower than the prior year. As I said, also, some of our customers continue to be impacted by the pandemic, delaying some new orders due to the second wave.In Q4, no acquisitions were completed. Prior acquisitions have been integrated into our operations and are operating as expected. We continue to focus on capital deployment, doing our acquisition work remotely, but completing transactions are taking longer than they have historically due to the pandemic. The acquisition pipeline remains consistent with historic levels. With our high cash balance, as Doug said, no bank debt and strong cash flow, the Board of Directors concluded that it was prudent to return some capital to our shareholders. With historic low interest rates and capital available to Enghouse, it was decided a special dividend could be paid without impacting our funding for future acquisitions. I would now like to open the call for questions.
[Operator Instructions] We'll take our first question from Deepak Kaushal from Stifel GMP.
Steve, I'm just curious about your commentary on the M&A environment. Last quarter, you were pretty confident that you're still seeing attractive valuations. And initial read last night in the filing was that you're seeing some challenges in M&A. I guess what you're saying this morning, it's not related to valuations, but it's related to the ability to close transactions through the pandemic. Maybe you can just give us some clarity on that.
Yes, that's correct. We still have items in the pipeline. They're taking longer to do the due diligence, and we have to be more careful because anyone who had some decline in revenue, they all blame the pandemic, and that may or may not be true. It just may be a decline in revenue. So it takes a little bit longer, plus that all the legal work, the due diligence, and mostly from the seller side, like we can do video -- a lot of our work using video. But it does take longer to get done. And companies, they've got a lot of things to focus on. There's a lot of unusual things happening initially with the pandemic, it picked up. And now the second wave has caused them again to wonder and can they get their staff in, can they provide the material? So it's just taking longer to get done. But I don't see any different. I don't see it picking up. I don't see it down. Yes, there are some companies that are more highly valued because the public markets are highly valued, but they tend to be larger ones. We tend to be at $50 million and less. And yes, but it's been the same. In the past, we've had people who wanted more than we thought their companies were worth, and they're still out there. So don't see much changing, except we have to do our work a little bit differently. We don't really do any on-site visits.
Got it. And so with your growth by M&A model and your, I guess, is 15% to 20% EBITDA growth targets, as you get bigger, you have to generally either look at larger acquisitions or more tuck-in acquisitions, more smaller acquisitions. Now you're giving back half -- almost half your cash in a special dividend. Are you signaling more smaller tuck-in acquisitions, fewer larger acquisitions? Or is it just going to get harder and harder as you move the needle here on growth?
Not really. I mean we looked at it. We always say money saved, there could be a bigger acquisition. I don't like bank debt because I don't like paying bankers' fees. I don't like paying interest. But right now, it's free. I mean interest rates are virtually at 0. You can borrow money easily. So why am I holding cash that I'm earning no interest on when I can actually get it pretty readily with our cash flow. And again, it's not a matter of here's so much cash we have after we give -- do the special dividend. We also generate cash. I mean, we're generating cash right now while I'm talking to you. It's quite nice. So we thought let's give some back, some of the money to our loyal shareholders and who've supported us for a long time. And they may have greater use for that cash than just sitting on our balance sheet. We don't need it to do our strategy, and we have cash available at low rates now to do the acquisition strategy. As we go forward, we're generating more. I'm not saying that we, again, will do another special dividend, but we do generate cash every day.
Yes. Generating cash is always nice. And one last question for me on the organic growth. So back of the envelope, we're either calculating flat organic growth or that Dialogic shrank. Which of the 2 is it? And what can you tell us about Dialogic, and how it's performing versus your expectations?
So I missed that. I can tell you, Dialogic is performing exactly as we thought. Remember, a couple of quarters ago, I said we brought revenue forward. We had a large Q2 and some in Q3 because a large deal, $6 million, was brought forward from Q3 and a lot from Q4. If you look at the year in total, it's done exactly what we thought, profitable, good results, no problem with Dialogic. And I missed the other part of your question, so ask again, and I can see what I can do to help you.
Yes. No, it was just on organic growth. So if Dialogic grew, then organic growth shrank, or organic growth grew then Dialogic shrank. So I'm just wondering which of the 2 it was.
Well, I don't know -- I've always said we're low single digits organic growth. We had a surge in Q2, especially, and a bit in Q3. A lot of Q3, though, was hardware, which ranked a lot in Q4. So I'm still on that model. I mean we look at -- we don't look at it quarter-to-quarter necessarily. Sometimes things get delayed some -- this time, some came in early, but we believe our model is still low single-digit growth. And capital allocation and growing the bottom line 15% to 20%. So that's what we do.
We're taking our next question from Daniel Chan from TD Securities.
Steve, just looking at the hosting and maintenance revenue. It declined by about 6% sequentially. Given that's recurring revenue, we usually expect that to be flat to up. Just -- can you give us any color on why that recurring revenue declined sequentially?
Sure. First of all, it declined because it went up. Remember, a lot of the people ordered and when hosted and they needed extra, especially video. After Q2, not all of Q2, but as it got into Q2 and then so Q3 went higher, well, some of those things got under control and it went down. Plus, we had 2 major recurring revenue customers who had financial difficulty. They're one's an airline, where they did -- used our knowledge management system. And another one was in the travel industry and one was a hotel. They also, basically, reduced their volumes. When hosted it doesn't mean that it's set up like maintenance upfront, if you don't use the system as much, your revenue goes lower. So they actually added to -- the video went down a bit, again, because people got organized on it when they used to -- you almost could say there was a surge and then it came back to a normal level. And in a couple of larger customers in the travel and hospitality side had difficulties and their volumes dropped virtually like basically to 0.So if you look at last -- if you do a trend, look at last year, take away the surge in that -- a little bit in Q2, then Q3, but everyone talks about, "Hey, you're down." Really, we were up, and we're back to normal.
Yes, that makes sense. Okay. And then in the filings, you mentioned that your OpEx was lower than expected, and you benefited from COVID-related grants in the quarter. Can you quantify that for us?
We have -- we're all over the world. So I don't go in and check all that. Some of the grants were some free loans that you get. Some were delayed payments for VAT and some in Canada, I think, there was some -- I'm pretty sure we published something up because we didn't lay any staff off. So we kept them all. And yet some of our revenue dropped in some of the businesses in Canada. So we got some grants for that. So it's a few million dollars for sure. I'm not sure that's the quarter or the year, maybe 1 for the quarter. And it's that type of number.
Okay. I guess what I was getting at was the margin...
I know. That's what we publish. Yes, we publish it. So when you go through the results, you'll see the exact number. I just don't have -- it's not something I track.
Okay. I'll take a look at it. I was just wondering because the margins were pretty good this quarter. Just how much was it without the grants, but I'll look it up. And then...
I could talk to that a bit, if you want. I mean part of it travel way down, that was positive. We have a rule that we -- people should be taking their vacations. They weren't for a while there. So vacation came down a bit, travels down a bit. You have a little bit on the new rules and IFRS 16. So it's at 38%, but that's not our norm. I always tell people with acquisitions at a normal rate, it should be around 30%. I think if you take some of the unusual items out, you'll be closer to 34% million, 35% this quarter like it was before. So that's how you can think about it because there's more than just grants to cause that. There's other items as well.So it's the same model. We haven't changed anything. And so...
Yes. Final question. The delays that you're seeing in some of the orders from your customers, can you kind of drill down to that a little bit? Where are you seeing that, which business lines? And how long do you think that delay will go on for?
Don't know. I mean it's generally newer customers like in video got -- had at least one order I know that was delayed. In our Networks division, we had won. We also had, of course, that whole deal that we did in the Nordics, which is...
Ladies and gentlemen, please stand by as we are experiencing a temporary interruption in today's conference. Thank you for your patience. Please continue to hold.[Technical Difficulty]Please go ahead.
It's 2020, what can I say everybody, I don't know why that we got cut off, but we seem to be back. I hope we are. So maybe we can go to the next question or the last question, if you didn't hear the answer.
Mr. Daniel, your line is till open. Do you have any more questions?
That's it for me.
We'll be taking our next question from Paul Steep from Scotia Capital.
Steve, can you talk just a little bit about within Interactive, how you're thinking about the performance of the contact center business relatively within the mix? And maybe as a one-off, just sort of what the size of video is these days on a revenue basis, I think it help us track to where the business is at on that side.
Yes. I don't think we do buy that because we've integrated it in with our IMG group, as we call it. Contact center business, I think, is dynamic out there. We were one of the first to get certified with Teams, but we haven't seen much revenue from that yet because it is still difficult with many people to change systems right now. A little easier if you just want to go into a hosted system or a SaaS system to sign up. Our's a little more complicated than that. But business is doing okay. I'm hoping it does better in the future, which -- because we positioned it to do so. Don't know what else you were looking for, but there's nothing special other than the Teams that we announced 3, 4 months ago. We really haven't seen the full benefit or much benefit from that yet. We're hoping, again, as the pandemic gets resolved with the vaccine that, that will pick up because Teams is doing well, but they didn't have all the connections for contact centers. And again, we were the first to be certified by Microsoft in that. So we are still hopeful.
Okay. Maybe on AMG, you flag in the document a little bit of -- or the MD&A, a little bit of a shift to hosted revenue, just checking that there's no trend there, if that's just some of the normal quarterly fluctuations. Just since you called it out, that was all.
No. I think everyone is going a little bit more to hosted revenue, which is recurring. Of course, that makes -- revenue is recognized over a period of time, it's not recognized like licenses upfront. That trend still continues. For the asset management group, they still tend to be on-premise for the most part. For the contact center, IMG Group, that tends to be more hosted. I hope that answered your question? If not, ask another one.
No, that's good. Two last clarifications. One on setting and maybe the decision around the special dividend. Maybe talk us through the alternatives you thought about as a Board. And then maybe just considerations for the sum and the amount. Obviously, it's -- there's no perfect science here and then one fast sort of clarification.
Yes. The alternative was to keep the cash or do a special dividend. We're not big on the share buyback side of things. It's a bit of a gain, especially where markets are these days, the public markets are somewhat, say, barely or aggressively valued. So the choice was that we just keep it and use it for acquisitions. In discussions, we said we can borrow, why are we holding this money and not earning anything on it? Our shareholders might put it to better use in the sense that we don't have a problem with having the funding for acquisitions or strategy. If we do a larger deal, we can get the funding and the rates are low. Banks are -- everyone is still trying to lend you money, even though they're not charging much interest on it. So why not give some capital back. We have generally patient value shareholders. Let's give them some money back. They probably can use it in some other areas, or they want to buy other things in the overpriced market so be it.
Fair enough. Last one for me, Steve, is just on the government grants. Just to clarify, so we don't end up maybe in the wrong direction here. MD&A talks about $3.8 million for the year. Just maybe what the loading was, or how we should think about it Q2, Q3, Q4 in terms of which one that was impacted? And is it all actually a reduction of operating costs because when you talked earlier, you mentioned free loans. Just that would be helpful.
Well, there's some -- those aren't reductions of operating costs because they're low. The other ones generally have been. I mean we've kept all the staff added more. I would say you take it in 2, 3 and 4, probably impacted equally in each quarter. Depends what happens going forward. If the government keeps giving out free money, then, if we qualify, we will certainly look to take our share. But we are not cutting back staff so we qualify pretty well for that. And again, it's by country sometimes. So you've got to -- it's not only -- well, your revenue is up, but it could be up. But if you're not up, for example, in Canada, then these things apply. It doesn't apply on a consolidated basis.
We are taking next question from Stephanie Price from CIBC.
Just wondering if you could talk a little bit more about video. And what you saw in terms of Q4 demand and how the international rollout and sales team rollout is going? And just a little bit more in video, please.
So in the U.S., where we had a pretty large presence, it's going pretty well. It continues on. It's not as much as it was in Q2 and Q3, but we have a good product. And we don't have a product for like the public necessarily, we tie into hospitals, financial institutions, et cetera. Geographically, we have a great opportunity there, but it's really -- they didn't have a large presence, a big customer base. They had some. And we now have got the people hired in place. We've hired dedicated salespeople. But we weren't ready at the start of the pandemic with all that in place. So it took a little longer than usual. That's in place now. We haven't seen significant results from it yet, but we're hopeful that we will in the future. But remember, our product is not a matter of signing up to talk to your kids at University, ours tying into hospitals and things. It's a little bit longer sales cycle. But we're still hopeful that our geographic expansion of the product will prove to help us with revenue in the future.
Great. And then in terms of the transportation division, the MD&A, you mentioned some delays there. And I think you mentioned a new contract win in your script. Just wondering if you could give us a bit more of an outlook for that division in 2021.
So that's -- it's struggling, of course, being -- we talk transportation because we have a wider net, but most of our stuff is transit or 911, for example, in the Nordics. So that division actually didn't do -- was down in Q, basically 2, 3 and 4, 2 not so bad. Because, again, we're in the middle of doing things. They finish them off, but 3 and 4, transit agencies are struggling a little bit. So yes, down. But we were fortunate enough that a large contract, $55 million, probably our largest for a long time. We used to have a larger one, but only people who've backed 10, 15 years know about that. And that was in a different sector, actually. And so we have that as a 12-year contract. A lot of work upfront and maintenance for probably the last 6 years. So that basically will allow us -- that division, which would be down and continue to be down, that will help us get back to even on that, maybe a little bit ahead as we implement those systems in the Nordics. It also gives us a good system to take elsewhere but it's still a difficult marketplace, so I wouldn't count too much on that but it will -- what would normally be telling you transportation and transits down, that's weak. It has been, but that deal makes us back to be okay, let's just put it that way. I don't think it will be down. You'll have the normal down, but this is a big project that they decided in Nordics to do now, and they chose us. It actually was delayed because of the pandemic. We were going to do it in May or earlier in starts, so would have been partly in this year. It got delayed with people off getting signings, et cetera. So it's basically started now with some work. And next year, you should see some benefit from it, which will help negate the decline that we would see in transit generally.
[Operator Instructions] We'll take our next question from Paul Treiber from RBC Capital Markets.
Just wanted to follow-up on your comment on surge -- just want to follow-up to your comment on the surge in video. Can you remind us again of the pricing model for video? Is it predominantly on-premise like license? Or is it the hosted subscription?
We do both. We're one of the few who are willing to do on-prem still. Most of the competition does only hosted. We do both. So they're -- we do both. A lot of people initially did hosted because it varies with how much you use it. But we do have customers who would rather be on-prem with their own system rather than being in the public domain. So we do both.
No, you mentioned the surge. That would -- and then it lessened in subsequent quarters. Does that imply there's a lower revenue base for video now? And did anyone turn off their subscription or hosted subsequent to the surge?
I don't think it's really the hosted part where the surge came. Some people didn't and it helped when you get into the maintenance going forward. But most of it was people adding and current customers adding more people to their hosted system. And then actually, as a lot of people, especially in the U.S., decided that maybe the pandemic wasn't so bad. They may not have been right. But -- so then they did -- they stopped some of the hosted work. Hosted isn't just sort of, hey, a standard model, there's probably a minimum volume that we try and do. Some people signed up for 3 and 6 months. And as they sorted themselves out, and then they've -- either taking less or decided to do something else or decided they didn't need it anymore. So when we say surge, it was more current customers adding more volume, initial -- you almost could say a bit of an initial panic when they realize that everyone's going to work from home.
Great. I see. And turning to AMG, just on the revenue decline sequentially. I was a little bit confused. I think it's predominantly hardware, I mean, professional services that drove that as opposed to software. Is that correct?
Two things. One, remember, I said some revenue was brought forward. So you always got to think about that. But the big one over the last quarters, we -- I think hardware, and it's not in networks, it's in the transportation side. In that sort of low, as we got into Q3, we were able to deploy hardware. And if you notice, Q4, the hardware is down about $5.2 million, and it was all in that group. And if you -- and that group is in that AMG group. So the group overall looked pretty flat, but it's -- ones up and ones down, and it came out pretty flat, but it's really hardware. And just to comment for the other questions that came out. Because it was hardware that has really brought the revenue down somewhat, that somewhat helped the margins because of the mix of the revenue. Hardware, we do not make much margin on it. So again, with that mix and revenue change, it didn't impact the bottom line as much because of at least $5.2 million dow from Q3 related to hardware. And it was all in that group in the transportation side. We rolled out the hardware, got it done and very little in Q4. There's a little bit in the video area as well. And you see, where, well, they used to have rooms you set up with hardware used for the rooms, well, people aren't going in the office, no one is using the rooms and they are hoarding the hardware. So there's some of that, too. So there's a lot of moving parts. But yes, a lot of hardware, it came down on hardware from Q3, if that's the question.
Okay. That's helpful. And a clarification on the comment about positive internal growth. Is that referring to the quarter or the entire year or both?
Generally, it's for the entire year. We do have positive internal growth on the video side, but then you also have the transportation and some of those other things. And when we look at it, there's the hardware question. We do hardware because customers want us to be, as they would say, one throat to choke. But we don't really count that because that can be up and down. We aren't in the hardware business, really. We do it to facilitate our solution sale. But if you're looking at it, it's basically the year, Paul.It's certainly isn't Q4 over Q3 -- Q4 over Q3 and Q2 because we move things forward, we don't have internal growth over those -- sequentially, we don't have internal growth because; one, we took some things forward and showed great growth. Well, that then -- and we did say in the past, we pulled something forward for that. So yes, I hope that clarified that a little bit.
That's understandable. So -- Q4 compared to Q4 last year in terms of internal growth?
I don't actually remember our internal growth last year, but we had a big order last year that came in, I believe, in this field area at the end of the year. So if you look at it overall, obviously, we do the comparison, we are up $11 million or $12 million or 10%. Most of that growth is from acquisition. So you go back to the model, yes, it changed a little bit. It's -- you've all noted, in Q2 and 3, but our model is low single digits. That's what we do. Nothing's really changed. We're hoping to improve that. We're putting things into improve it. But we haven't seen the benefit -- total benefit of that yet. So again, internal growth, low single digits.
Okay. And then last one for me. I mean, when you think about internal growth next year, and I'm sure you're in the planning process right now. You're lapping quite a good year with a surge on video and whatnot. And how do you think about internal growth? The prospects for internal growth next year.
I keep repeating it low single digits. We expect that to happen, and we hope we get some capital allocated to also grow by acquisition. But that's what we see. And again people -- I just want to be clear because it can be confusing this year. If you take the trend back before the pandemic and do the low single digits, you'll see that's basically the trend we're on, and then you'll see a surge in the middle. We're not low single digits off of Q2, which was very high and pulled some things forward and related to a bit of a surge. We're single digits off our normal trend, and therefore, you have a bit of a surge, and we're paying out a special dividend recognizing we have that surge, we're giving some money back to shareholders.
Thank you. There are no further questions at this time, sir.
Okay. Well, Enghouse had a very strong financial year, good cash generation and growth from internal operations for the year and from accretive acquisitions. Fiscal 2020 was an unusual year globally for everybody. Enghouse demonstrated its ability to operate successfully even in this unusual environment. I want to thank you all for your continued support. And have Merry Christmas and a happy holiday season.
This concludes today's call. Thank you for your participation. You may now disconnect.