Enghouse Systems Ltd

TSX:ENGH

Good morning, ladies and gentlemen, and welcome to Enghouse's First Quarter 2025 Conference Call. [Operator Instructions] I would now like to turn the conference call over to Mr. Stephen Sadler. Please go ahead.

Good morning, everybody. I'm here today with Rob Medved, Chief Financial Officer; and Todd May, VP, Legal Counsel. Before we 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 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 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.

Thank you, Steve. I'll now take us through the first quarter financial highlights. Revenue increased 2.9% to $124 million from $120.5 million in Q1 2024. Recurring revenue, which includes SaaS and maintenance services, grew 4% to $87.9 million compared to $84.6 million in Q1 2024 and represents 70.9% of total revenue as we continue to prioritize this revenue stream.

Results from operating activities decreased to $31 million compared to $32.6 million in Q1 2024. Net income was $21.9 million compared to $18.1 million in Q1 2024 as we grow our business with a focus on profitability.

Adjusted EBITDA decreased to $33.1 million compared to $34.7 million, while achieving a 26.7% margin. Cash flow from operating activities, excluding changes in working capital, was $37.7 million compared to $35.6 million in the comparable period.

Cash, cash equivalents and short-term investments were $271.1 million as at January 31, 2025. The most recent quarter has brought about events that have created a great deal of uncertainty across the globe. There are new questions around trade flows, interest rates, commodity prices and other factors which point to increased instability.

Throughout this period, our first quarter operating performance continued its consistent positive trend and reflects our steady and disciplined approach to the business. In the quarter, we achieved revenue of $124 million, a 2.9% increase compared to the prior year, while net income increased to $21.9 million or $0.40 per diluted share from $18.1 million or $0.33 per diluted share in the comparative quarter.

We remain focused on predictable recurring revenue streams with SaaS and maintenance services revenue increasing by 4% in the quarter. While transitioning from exclusively offering traditional on-premise solutions, we are strategically committed to offering customers a choice between on-premise and cloud solutions, which has allowed us to preserve both onetime and recurring revenue streams. In turn, this has ensured that we keep an eye on the bottom line when many of our competitors face operating losses in their cloud operations. This focus on profitability ensures that we continue to augment our cash reserves while keeping our year's long streak of reporting quarterly net income.

Our focus on profitability is reaffirmed by our ability to generate cash. Cash flows from operating activities, excluding changes in working capital, were $37.7 million compared to $35.6 million in the prior year. During the first quarter, we returned $14.4 million to shareholders through dividends and repurchased $6 million of our common shares.

In addition, on December 16, 2024, Enghouse completed the acquisition of Aculab PLC. Aculab offers a cutting-edge suite of solutions designed to elevate communication and security experiences. These include communications Platform as a Service and state-of-the-art AI-driven answering machine detection, advanced voice and face biometrics technology, which will be added to our product offering. These products are sold directly to enterprises and indirectly through some of the leading health care and emergency management systems integrators in the U.S. and Europe.

Aculab has been integrated into our Enghouse's Interactive Management Group. Even with these outflows, Enghouse closed the quarter with $271.1 million in cash, cash equivalents and short-term investments, down only marginally from our record of $274.7 million at October 31, 2024. We continue to have no outstanding external debt financing. We are also pleased that on March 4, 2025, Enghouse acquired Margento R&D d.o.o., a European provider of transit fare collection, account-based ticketing, automatic vehicle tracking and payment solutions based in Slovenia. Margento expands our European fare collection business and has a scalable and easy to deploy Mobility as-a-Service Platform, providing a unique user-centric mobile transit experience that will fit well within the asset management group.

Our strategic direction remains consistent and focused on long-term profitability and sustainability. We will continue to balance market demand by offering both SaaS and on-premise solutions and will not sacrifice profitability for revenue growth, which is reaffirmed by our ability to generate positive cash flows. Our robust cash position continues to allow us to capitalize on strategic acquisitions that meet our thresholds and provide continued returns to our shareholders, enabling us to increase our annual dividend for the 17th consecutive year. Yesterday, the Board of Directors approved an increase of 15.4% in the Company's eligible quarterly dividend to $0.30 per common share, payable on May 30, 2025, to shareholders of record at the close of business on May 16, 2025.

I will now hand the call over to Mr. Sadler.

Thanks, Rob. Just to add a little bit, we -- as you probably know from our last call, our new business unit strategy, which was implemented January 1, 2025, with functional global departments is working well with a team approach to the business. With respect to acquisitions, in the quarter, we acquired Aculab, which was integrated into our IMG business group. Revenue was approximately $1 million, and the business was EBITDA positive for the 6 weeks that was included in our overall results although below historic profitability percentages. We expect improvement in profitability in future quarters.

After the quarter, in early March, as Rob indicated, we acquired Margento, which will be integrated into our Transportation segment within our Asset Management Group. We continue to see substantial capital allocation opportunities in our industry sectors. Enghouse is financially strong with resources to enhance its cloud and on-prem products with new features, including using AI to improve efficiencies in a practical manner.

I would now like to open the call for questions.

[Operator Instructions] Your first question is from Erin Kyle from CIBC.

My first question, I want to start on recent M&A. So you discussed the acquisition of Margento and AMG Group. Is there any additional detail you can share there around the size of the acquisition, the process? And then is the revenue there primarily SaaS and maintenance with a bit of hardware?

In the Transportation sector, they like, as they say, one throat to choke. So there is hardware that will be going in there as well. It's around $10 million plus in revenue. And I think that's all we're prepared to say right now. Other than it wasn't in the quarter, there's no financial results in the quarter that we just announced.

Right. And then I just wanted to turn to maybe the IMG Division. So we saw revenue decline there again in that segment. Was that decline related to the ongoing churn at Lifesize -- or is there other factors there?

I think there's a lot of factors there. That whole industry is kind of tough right now, if you look at the competition, we're holding our own. And again, we focus on profitability, not getting revenue at a loss. So it's going okay. I think compared to Q4, you'll notice professional services is down a bit. That's generally because Christmas and just the time of year. There's uncertainty in the market. That's probably impacted it a little bit as well. And overall results, our hardware is down a little bit, and that can be lumpy. It can be up and down in the quarter. So it's pretty steady. I would call it steady.

Okay. And so then the churn at Lifesize, has that stabilized in the quarter compared to the prior quarter then?

Yes. We -- I would say it's pretty much -- was down a little bit, not very much. But more importantly, the product there, we are still trying to get out some third-party products to make it more profitable. And then that's going to be our product going forward, mainly in the IMG group. So it is a newer front end. It's quite a good product, and we're going to be actually promoting that more. But until we get it nicely profitable and with getting out some third-party content from that product, we haven't pushed it yet, but that's going to begin next quarter. So we're hoping to see improvements there and expect Lifesize, which you've asked about, we hope that product that's in that group will increase revenue, not decline it anymore.

Your next question is from Kevin McVeigh from UBS.

I think in the press release, you had highlighted kind of global uncertainty from trade, obviously, interest rates, commodity prices, things like that. Have you started to see that yet in the business? Or is that something you're kind of positioning for? And does that factor into kind of the pacing of the current M&A? Just any thoughts around that? Just it seems like the uncertainty maybe create some opportunity, but it feels a little subdued in terms of M&A relative to history. So just any thoughts around that? And I guess, with our federal government, I guess, maybe triangulate any comments around that as well, if you could.

Yes. I don't really want to talk about our federal government. I mean other than I think we're going to have an election coming up if you're in Canada. And in the U.S., just listen more to stay and you'll make your own opinion. But in general, I think from our point of view, if you look at our industry, especially contact center, it slowed a little bit because everyone is trying to figure out what AI means to us. Some people think it's going to eliminate contact centers. Others think it's going to have no impact.

We think it's going to make the contact centers more important, give people up to speed faster and use AI to help answer or help them answering questions as they come in. So it's a little bit of a hole now. It's slowed a little bit, again, because of AI. I don't think it's because of any of the other things you talked about. That could have an impact, but we haven't seen that yet. That might still -- that still could come in the future. So that's the IMG side.

The network side, 4G to 5G is going a little slower from the telcos point of view. They're not getting the return they expected from 5G. So they slowed a little bit down some of their spending. And again, that slowed things down a little bit there, too. So the environment, again, a little slower than we hoped for, but we also see improvements potentially coming as these things sort out. It is not our business causing it. It's sort of the environment we're in that's causing it.

Very helpful. I guess -- and then I'll get back in the queue. You've already got a pretty enviable dividend yield, and it was good to see the increase. But I guess what drove that, particularly given I think the indicated yield was almost 4.75%, so pretty high. Just any thoughts around the dividend and what drove that increase. It was already pretty impressive.

Yes. We basically look at our cash flow and look at what we expect to do in the next year. It is actually after the first quarter. So we've got some visibility, not total. And we believe what we think an increase in cash flow could be, we try and add some of that into dividends and of course, some into capital allocation. So we look at both. Again, if you look at from a stock point of view, it looks like a higher dividend. And that's just maybe because the stock is too low. It's not because of what we're doing internally, which means you'd have to ask investors, not us, if that's the case.

[Operator Instructions] Your next question is from Paul Treiber from RBC Capital Markets.

Just a question on deferred revenue. Deferred revenue has been fairly steadily increasing. I think this quarter, it's an all-time high. Is there anything unusual that has been lifting deferred revenue? Any change in terms? Or is it just normal course that it's increasing here?

I think it's probably normal course increasing. You've got acquisitions that come in, they add to the deferred revenue. Q1 at this time of the year, it's really the highest or it has tended to be the highest because a lot of renewals come in, in January. So you don't expect that to go up every quarter unless, of course, we do other capital allocation acquisitions, which would add to it. So it's pretty normal. We don't see anything unusual there. A little bit of exchange helps that, too. You've got U.S. dollar where we have about 40% of the revenue that when you get the revenue in and it's deferred revenue, it improves the deferred revenue a little bit as well. But nothing significant there, Paul.

In terms of renewal rates, I mean, you've been seeing a shift to the cloud. Are cloud renewal rates similar to what you've seen on on-premise or maintenance?

Cloud renewal rates are better. The reason why is because people are shifting from on-prem to cloud. So the renewal rates on the on-prem are down. Some of that moves to the cloud, some of it moves elsewhere. But the cloud renewal rates are a little bit better. But I will point out, and again, I know investors like in the cloud and renewals and processes there. Cloud business is not as profitable as on-prem business. It's just not. The platform guys are taking a big chunk of the revenue and their cost in doing the cloud, and we're generally in the public cloud.

So although you see consistent and you'll see that we're over 70% now in recurring revenue, the cloud revenue is not as profitable as on-prem, which generally is paid upfront and cloud is paid as you go. So on that with a lot of people. I mean, a lot of companies, it's not just us.

And just on service margins, they have been trending down, as you mentioned, with the cloud going up. Is the strategy to drive up margins there primarily through taking out some third-party software?

You're right. When you buy companies that -- like Lifesize, for example, they had a lot -- high cost. They still have a high cost of their cloud business. As I said, we're trying to take out third-party software there and prove that. That's a big factor in the cloud. You've got a lot more impact by third-party software and how they're charged out by especially the public cloud guys. So it takes a little longer to get to our profitability level we like, but we're working on that, and it's coming soon because we're just about there right now. So we're hoping in the future that will be better. It also helps revenue because you don't want to sell a product that has those third-party costs and after you sell to somebody tell them now you got to take some stuff out. So it slowed us down a little bit in our revenue as well.

But in general, we've got to get the products more efficient because the market is still tough. Margins are tight. A lot of our competitors are struggling and they just can't afford to lose any revenue. So they tend to, in a way, sell below cost to make sure they keep the revenue. We don't like to do that.

And just lastly, on capital allocation, share buybacks continue to tick up. Is this a sustainable run rate? Do you see more room for share buybacks to increase here?

You know what we do a share buyback, not for the sake of doing it or for any financial engineering. We do it when we think the price is a good buy because we have alternative uses of the capital being acquisitions, et cetera. So again, if the shares stay at a good buying price compared to our alternatives, then we would do share buyback.

Yes.

There are no further questions at this time. Please proceed.

Well, thank you, everyone, for attending the call and your continued support. Enghouse continues to operate profitably while deploying capital to grow its business without any dilution to shareholders. See you next quarter.

Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect your lines.

Thank you.