Enghouse Systems Limited

Good morning, everybody. I’m here today with Vince Mifsud, Global President; Doug Bryson, VP Finance; Todd May, VP, Legal Counsel; and Sam Anidjar, VP, Corporate Development.

Before we begin, I will have Todd read our forward disclaimer.

Certain statements made may be forward-looking. By their nature, such 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 such 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 third 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 and 9 months ended July 31, 2021 and the comparative period July 31, 2020 are as follows: Revenue achieved was $117 million and $354.1 million, respectively, compared to revenue of $131.3 million and $382.9 million.

Results from operating activities were $38.5 million and $116.1 million, respectively, compared to $42.2 million and $119.3 million. Net income was $21.2 million and $62.6 million, respectively, compared to $26 million and $69.2 million.

Adjusted EBITDA was $41.7 million and $126 million, respectively, compared to $45.6 million and $130.2 million, while 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 $41.1 million and $125.4 million, respectively, compared to $45.3 million and $130.5 million in the prior period.

Revenue achieved for the quarter was $117.6 million, compared to revenue of $131.3 million in the same period in the prior year, a decrease reflects exceptional revenue in the comparative period as a result of COVID-19 related demand. Similar to the second quarter of 2021, the comparatively higher revenue last year was driven primarily by the previous year's significant increase in our Vidyo business that has now returned to levels that are more consistent with pre-COVID volumes.

Revenue for the quarter was also negatively impacted by $6.2 million 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 to tuck-in acquisition, adding Nebu BV on June 3, 2021, and Momindum SAS on July 7, 2021.

Nebu is an Amsterdam based provider of market research and data analytics software solutions, which augments our existing market research and survey solutions. Momindum is an enterprise software provider of secure SaaS based platform for virtual events, recording, editing and sharing interactive video presentations.

Momindum is complementary to our Vidyo offering and broadens our Vidyo collaboration solutions. Enghouse close the quarter with $187.8 million in cash, cash equivalents and short-term investments compared to $251.8 million at October 31, 2020 and $169.6 million as of April 30, 2021.

The cash balance was achieved after making payments of $36.3 million for acquisitions, and $106.9 million 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 maximizing operating cash flows.

As a result, Enghouse continues to replenish its acquisition capital, while returning $83.2 million in special dividends to shareholders at annually increasing its eligible quarterly dividend. Yesterday the Board of Directors approved the company's eligible quarterly dividend of $0.16 per 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 $41.7 million, achieving 35.4% of sales and strong cash flow from operations.

This represents our 6th consecutive quarter of exceeding $40 million of EBITDA, which speaks to our company's ability to generate strong profitability and cash flows in significantly varying market conditions. During the quarter, we faced a negative impact due to foreign exchange which reduced our revenue by approximately $6.2 million compared to Q3 of 2020 and $2.4 million compared to our previous quarter Q2 of 2021.

In the quarter, we completed two product centric tuck-in acquisitions, Momindum and Nebu. Momindum brings to Enghouse new SaaS application that extends our Vidyo capabilities.

With the Momindum product, we are now able to address the large Vidyo meetings and virtual events market that can extend Vidyo meetings upwards of several thousand people. The largest event so far on the Momindum platform exceeded 20,000 viewers concurrently.

Nebu enhances our survey capabilities used in market research communities and the contact centre space. Our Vidyo business has now returned to volume and demand that were consistent with pre-COVID periods.

And most of our revenues declined this quarter compared to last year is attributed to the Vidyo 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 to move their on-prem offering to either a public or private cloud. Our cloud contact center is expanding through -- 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 three additional centers globally, and another partner has decided to start to offer video as part of their cloud contact center offerings integrated with Enghouse cloud. We now have over 80,000 named agents on Enghouse cloud contact center platform, which is a -- which at any one-time has about 50% concurrent users, making us one of the leading technology providers in the cloud contact center space.

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 it's 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 four 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 [ph] our Europay, MasterCard, Visa, also called EMV certification of our automated fare collection product. This EMV certification is an important milestone for our AFC solutions in our plans to expand this 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 first 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're still in the early stages of this project, as well as our other fire -- public safety fire project, but so far things are progressing positively. 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 million so far this year in FY 2020 in engineering and product development, keeping in line with prior years spent. Let me turn the call now over to Mr.

Steve Sadler.

Thanks, Vince. Just a little bit more on acquisitions.

As Doug and Vince mentioned, we completed the acquisition of Nebu in June and Momindum in the second week of July 2021. Both did not have a full quarter of revenue in our Q3 results.

Nebu was combined with our Survox business, while Momindum was added to our Vidyo business. Revenue for these acquisitions was about $500,000 for their partial time as part of Enghouse in Q3, with a small EBITDA loss in the financial results reported.

Q4 will be the first quarter of their financial results being fully included, and we expect their EBITDA to be positive. Altitude acquired at the end of December 2020 is now fully integrated into our 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.

Hi. Good morning.

Just want to dive into the Zoom Five9 acquisition announced a few months ago. Do you see that transaction having any impact on the company -- on the competitive landscape for you?

It's hard to tell, but I think it has an impact both on Five9, if you look at their last quarterly results, they incurred 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 Vidyo 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.

Zoom is a strong competitor with a strong sales and marketing group that will continue and we tend to be more in the health care and financial area, a little more focused. And so we'll can 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 Vidyo 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 are a strong group.

They got a lot of R&D. Five9 is a strong group.

I don't think it impacts us 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.

Could you just give us some context on that? How has that metric trended over time?

And maybe 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.

Hey, good morning. Steve, could you talk a little bit about capital deployment?

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, management maybe the Board level, what level of cash you're sort of comfortable holding versus using debt that I think you talked about now, I guess it was random, the fall timeframe of last year. Just getting your take on that would be helpful.

Yes. I -- as you know from my history, I'm comfortable in 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 continued 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 [technical difficulty], which was virtually all profit for us as they signed up more software. So rather than hold that cash, we decide 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 needed, 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 if we continue to do it.

Got it. That helps with context.

If we just zero in getting your thoughts on the fact I think with Momindum, it was a SaaS based deal. How you may be approached 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, the ability to do those deals maybe, it's the second question.

Well, remember, it ties to Vidyo, which is also a SaaS offering. So what it ties in.

It isn't like it's different. It's slightly different market for us.

It was smaller. We do find some smaller SaaS companies struggle a little bit.

But everyone talks about the big ones and they're growing revenue and losing money, but they're getting money mostly from the public markets, but the smaller ones are not. So we see some opportunity there.

This was 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'll take a little time to get there.

But we've already started that process.

Yes. Sorry, Steve, I should have been more clear.

On the SaaS deals, on that one in particular, are they hidden valuation metrics that over time would 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 could have pick up the returns on maybe higher synergies on some of those products was how I should have phrased that.

Okay. We always give some of our returns through synergies, be it revenue or costs and no change.

We expect it to meet our returns. We aren't changing our discipline or our -- but we look at for our performance.

So we always take the first 90 days don't make much money, then we break even, then we make half our margin and 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 and chasing something that the market likes, that loses money potentially. We're trying to stick to our normal discipline.

And we may have to wait a little longer. But we still think in the end, we -- it's the right thing to do.

Great. Last one for me to whoever I guess wants to field it.

On the contact center, Vince have 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 [ph] pedal in terms of investment, maybe in distribution is what I'm thinking of, because Vince obviously highlighted the R&D investment. Thanks.

I'll do a little bit 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 in the past.

It does make growth a little tougher, but we think it will end up being the right thing to do. Maybe Vince can …

Yes, just to just 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've 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 earlier this year, and that we're still early in that execution.

But that's a slight modification really on the cloud side.

Yes, just so you understand what Vince is saying, we do that through partners. So it does not change our capital expenditure profile along those companies that do SaaS also have a lot of capital expenditures, you can see it on their financials.

Ours is unchanged because it's all operating costs for us. In other words, we have [indiscernible], 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.

Hi. Good morning.

Good morning, Stephanie.

On the cloud -- 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 expect to move to the cloud and maybe a bit more about how you plan on transitioning these customers and whether you expect them to [multiple speakers]?

So I will take it. It's hard to know.

The cloud is very much in the market today, and a lot of new people go into especially the 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 to 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.

Okay.

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 [ph] 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 implementations, given the increase in professional services revenue this quarter it looks like maybe some of these implementations are now up and running. Just curious, can you give us an update on that?

And if you've seen anything post-quarter just given the Delta variants?

Well, let Vince talk to it, but I can tell, I don't think we delayed the professional services. I think what you see is some of the two big projects we got stuck, the professional services have started to be done.

So both the fire kicked in probably started this quarter, or last quarter, and the AMK started the quarter before, those have a lot of professional services [technical difficulty]. 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.

Now the COVID is not impacting that, 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 holidays 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 there's 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&A mentioned some restructuring initiatives. Just wonder if you could elaborate on this a bit, and whether they're outside 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 professional fee costs. That's number one.

It also won't help our cash flow, because the 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 we're -- whatever it might cost in the future for travel and entertainment, we're probably going to save on-premise costs. So we started looking at some of the smaller ones.

And even some are larger ones, we've surveyed our staff who wants to work-from-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 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 the offset a bit from the premise side. We intend to do a hybrid model.

You'll have offices smaller that people can come into, some people want to come to the office and probably have them come in a day or two 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.

Thanks very much and good morning. Just want 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 Vince you also put that in perspective in terms of the number of seats that you may have for on-premise.

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 for helping. 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 of or I guess retention of on-premise customers have 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.

So what was your second question?

Just in terms of the customer churn, or retention of on-premise customers of 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 Vidyo side, we had the big spike in cloud users that came way down, post-COVID.

Okay. That’s helpful.

On the asset -- yes, so -- and then on the asset management side, basically the churn has not changed at all in the last 3 years and pretty flat.

Okay. And then one for Steve, just on high level in terms of M&A, 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 than 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 two parts there, not to mislead. Look at Zoom share price and yes, the valuations have come down, but they're still high.

So they still want to see what the opportunity everyone is trying to guess what's going to happen. If the pandemic is over, the vaccinations work, will there be less need.

So, yes, valuations have come down, but we still see them high. That doesn't mean there was an opportunity for us but they're usually at the lower end like the Momindum.

There are opportunities out there. We see a lot of them and because a lot with Zoom has done well and good for them, but a lot of the smaller ones don't make much money and their future of making money is questionable.

So we see those opportunities will probably get greater as depending on what this market does. And on the [multiple speakers] but you also have Five -- 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 if the goings good, you got to get going. So that's what they did.

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 increasingly get more into providing your own unified communication solution?

Yes, it'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, Vidyo is the start of the UCaaS system as you know. So, Vidyo 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 to considering that.

Okay. Thank you.

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 will 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.