Enghouse Sys Ltd

Good day, ladies and gentlemen, and welcome to the Eng Houses Q2 2020 conference call. As a reminder, today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. 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 Bay, VP Legal Counsel, and Sam Aniger, VP Corporate Development. Doug Bryson and Vince Massoud are on the phone remotely, but are also available to answer questions. Before I begin, I'll 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 Enshouse's continuous disclosure filing, such as its AIF, which could cause the company's actual results and experience to differ materially from anticipated results or other expectations. Under-reliance should not be placed on these forward-looking information 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. Thanks, Steve.

Yesterday, NCHOS announced its unordered second quarter financial results. for the period ended April 30, 2020. All the financial information is in Canadian dollars unless otherwise indicated. Key financial and operating highlights for the three months ended April 30, 2020 compared to the three months ended April 30, 2019 are as follows. Revenue grew 58% to $140.9 million. Results from operating activities increased 73.8% to $46.3 million. Net income increased 53.8% to 27.1 million or 49 cents per delivered share. Adjusted EBITDA increased 81.3% to 49.3 million. Cash flows from operating activities excluding changes in working capital increased 72.5% to 50 million. Cash equivalents and short-term investments were 168.1 million, an increase of 150.3 million from 150.3 million at October 1st. 31st, 2019, despite making payments of $12.1 million for dividends and $48.2 million for acquisitions year-to-date. The company has no long-term debt other than a nominal amount that is non-interest-bearing. In the quarter, the company experienced growth from both internal sources and from the acquisitions of video and SBO, both acquired in Q3 of 2019, as well as biologic acquired in Q1 of 2020. Internal growth includes the expansion of the acquired businesses, particularly video and dialogic, since acquisition. To date, COVID-19 has had an overall positive financial impact on Finch House as sales of solutions that support remote work, including working from home, increased to meet heightened demand. Sales of video, a remote conferencing and telehealth financial services video platform, and a remote computing solutions were particularly strong this quarter. Although the overall impact to revenue so far has been positive, sales of hardware, professional services, and certain business units have been tempered as a result of procurement delays, deferral of on-site installations, and customers postponing upgrades and implementations. While the pandemic continues to have a significant impact on the economy, our team has reacted quickly and successfully, transitioned to a remote work environment. We are pleased that our team has remained safe, productive, and is continuing to deliver high-quality results. Critical to this success has been our previous investment in upgrading our financial systems, combined with the internal deployment of NHS products, such as video, that support remote work. During the quarter, we substantially completed the integration of Dialogic, which was EBITDA positive, as expected following acquisition on December 31st, 2019. Dialogic was accretive to both earnings and margins due to a significant perpetual license deal recognized in the quarter, which allowed the customer to respond to increased demand resulting from COVID-19. I'll now turn the call back to Mr. Sadler. Steve?

Thanks, Doug. As Doug noted, we had significant revenue growth both from internal sources and from recent acquisitions. In the current environment, when collection of cash could be a concern for companies, we had strong collections and net cash flow from operations of over $57.5 million. Our dividend was increased 22.7% in May, which you've received, and our cash and short-term investment balance at the end of the quarter was $168 million. Compared to prior years Q2, foreign exchange was an estimated headwind of a minor amount, $0.2 million on revenues. But foreign exchange over the prior period, Q1, was a tailwind, improving revenue by $3.3 million. I should point out in Q1, foreign exchange had a negative impact in revenue of about $2 million over the prior year's Q1. Q2, ending April 30th, had over 50% of the business in the pandemic's lockdown. As many of you know, we plan and operate the business for longer terms. but I thought I should give some data and comment on our revenue and profitability in the quarter. As already noted, foreign exchange rates added $3.3 million in revenue over Q1, but when compared to Q2 last year, had a small headwind, reducing revenue. Most of Q2 foreign exchange tailwind over Q1 came as a result of the weak Canadian dollar compared to the U.S. At today's foreign exchange rate, the Canadian U.S. rate revenue would be negatively impacted. We sometimes mention a large sale gets delayed from one quarter to the future. In Q2, we had a large license revenue sale of approximately $6 million, which was brought forward from future quarters related to our dialogic acquisition and included in the IMG group results. As you may expect, our transit revenue was well below expectation in terms of new revenues. and most transit projects were put on hold. This revenue is usually recorded in our AMG group. Also, several projects were delayed, impacting both IMG and AMG groups, impacting overall revenue and especially professional services revenue in the quarter. Video revenue exceeded our expectations by a significant amount. We completed the Microsoft Teams integration and was one of the first contact center solutions to be certified. We do not give quarterly guidance as we build for the longer term, but our solutions are orientated toward visual computing solutions, remote computing activities, and network infrastructure. Some of our customers have been significantly impacted by the pandemic and are very cautious in committing to new expenditures. As to acquisitions, we did no new acquisitions in Q2. The dialogic acquisition has been mostly integrated by the end of Q2. With the large order in the quarter, which we believe was brought forward for future quarters, the business had EBITDA positive above our historic results. But without the large order, the dialogic business progressed as expected and was EBITDA positive in Q2. We continue to focus on capital deployments. as well as to improve our operations. We can do and have done most of our acquisition work remotely, but currently we are limited by opportunities focusing on their own businesses and cash conservation delaying acquisition processes. The pipeline for acquisitions remains active. I would now like to open the call for questions.

If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, star 1. We're taking our first question from Deepak Koshal from Stifle GMP. Please go ahead.

Oh, hi. Good morning, guys. Thanks for taking my question. I hope you're all doing well in the environment. Certainly, your results are looking well in this environment. Steve, I just wanted to ask you, you know, on this perpetual license for Dialogic, you know, what kind of color can you give us on the nature of deployment, you know, as an enterprise customer or a network customer, and, you know, how sustainable this kind of momentum or opportunity is and what you're seeing in the main gym?

Yeah, it was a network's customer with media processing software. That's why it's in the AMG group. We don't have any large licenses sales like that, so I pointed it out with the amount because it is possible that that customer can order that amount in the future, but you cannot expect it in your modeling or numbers.

Okay, so is there a market of similar types of customers that could do similar things, or is this really just a one-off for Dialogic?

We pointed it out because it was a little unusual, and and large in the quarter.

Okay. Okay, excellent. And then just on the asset management side, in general, from network service providers, what has – I mean, we obviously know what the enterprises are doing in terms of supporting work from home. What are network service providers doing or thinking of in terms of responding to the increased bandwidth demand? What are you guys seeing? What kind of timing do you think might be associated with some of their movements here?

I think, you know, as I said, service providers had the large order. I think some of them moved some of their purchasing up a little bit in the quarter. I think they're seeing greater scale, but they also are looking at, you know, how does it impact them in the future? So it's a bit variable right now, but they also have increased demand with more people working at home. So it's got pluses and minuses. Companies are, you know, less demand. people at home more demand.

Okay. And then my last question on the M&A side, you know, I don't imagine you're seeing any cheap acquisitions these days in the communication space or the video space like we were seeing last year. You know, what segments are you finding good value in these days and things that maybe that can get you ahead of the game as we recover from COVID? What are your thoughts there?

You know, we're finding the same value that we found in the past. and I wouldn't necessarily agree with your assumption.

Okay, so that is to say that in video conferencing, communications, telehealth, you're seeing no valuation increases in terms of M&A targets? I mean, not similar to what we're seeing in public markets?

You see some value increases in larger ones, private smaller ones, Because a lot, if you remember, we bought video, a lot of companies in that space do not make money. And therefore, they are challenged in getting money these days. So it hasn't really impacted values in some of them. But other companies, of course, like Zoom, they're not really in that space. They're more in the public market versus the business market. You know, they're doing terrific. But if you look at the results, they still don't make much money. So think of the smaller guys. they generally are challenged in making money and cash, which doesn't hurt us in our acquisition activities.

And no change in terms of bidding wars or competition from other people looking for these same assets?

Not really. There may be, but we haven't really – nothing unusual. Let's just say it that way. You've got to have cash. A lot of people are hoarding their cash. necessarily interested going out and spending that cash buying something that's maybe not making money.

Got it. Okay, well, thank you again for taking my questions. I'll pass away now.

Thank you. We'll take our next question from Daniel Chen from TD Securities. Please go ahead.

Hi, good morning, guys, and congratulations on the new quarter. Steve, can you remind us what the major competitive advantages are for your video conferencing solutions over other major solution providers? You mentioned Zoom, but also WebEx and maybe Skype.

Yeah, we're more concentrated in telehealth and financials. We are, therefore, from day one, paying more attention to security. For example, Zoom has had many articles where they haven't, but don't really need to because, you know, it's really for the public, talking to your kids. It's for school kids, talking to their teachers. You know, they still have some business as well, but their focus is more on the broader markets. So ours is more on the security side. And, you know, we tie – we mentioned that part. It's a little harder sell for us, so growth's a little bit harder because you really have to have people who really understand not only the video technology but also your customers and how they can use it.

Yeah, that's helpful. Thanks. And, Steve, do you have a view on whether this strength in the video segments will continue once the lockdowns are lifted?

No idea.

Okay. I was wanting to switch over to the network business. I wonder if you can comment a little bit on whether the CapEx spending has changed at all with your major carrier customers. I know you said there's a little bit of a mix, but in particular, have they changed their timelines on network upgrades to things like 5G technology?

Yeah, they're working on 5G. That's an opportunity for us. But the 5G, if it's new things to put in, today, they tend to have slowed that down a little bit, but they've increased their spending on infrastructure that they need to run the extra volumes of today. So it's a mix, just like you said.

Okay, great. Thanks. I'll pass the line.

Thank you. We'll take our next question from Paul Steepe from Scotiabank Capital. Please go ahead.

Morning, Steve. Could you maybe talk a little bit about how you're viewing the business. I noticed you've tightened in some of the commentary about how you're describing it in the overview of the business. Should we sort of read away that? Sorry about that. Welcome to working from home. Not everybody likes Canada Post. So can you talk maybe a little bit about DM&A? Just if you're shifting the focus a little bit, because I notice there's more emphasis on remote work, visual computing. Should we read into it similar to when you went into communications and call center, that we're sort of heading maybe in more of a new direction? Thanks.

Well, you've been around long enough. When we started out, what I've said today is what we said when we started. I didn't want to be back office. I didn't want to be vertical markets. I wanted to be remote computing and visual computing. At the time, we were doing graphical information systems, where we started out. Then we got into the contact center space. And then we built up infrastructure that supports remote computing and visual computing. So actually, we strayed a little bit away from the overall strategy or concept that I've always done from day one. Whenever I've done anything, I've thought of that. If we come up and say, here's a good... you know, GL system or accounts pay, we're just not interested. We're doing remote visual computing, things are not in an office. That's what we've really done from day one. And so we've just gone back and made sure everyone understood. That's the overall umbrella over our tactical strategy that we're doing.

Great. A couple quick clarifications. Just on that dialogics deal, everything sort of shipped and booked into Q2. Or is there some to sort of come into the next quarter?

I think we'll have revenue in the next quarter. I think the only thing that's really shifted into Q2 is that one big deal. The rest was pretty normal. And that doesn't mean there couldn't be more. It doesn't mean it'll pick up. But you've got to be cautious in going forward. Because a lot of people, once they're dealing with the capacity, they're waiting to see, is it a W on the pandemic? Is there going to be more? So once they've got the infrastructure in place, which they mostly, I guess, have been working on, then they've got to think about new 5G and new things that they will do. That's slowed down a bit. So I don't know where that's going next quarter, but I do believe, I had to point out that we had about a $6 billion deal that I found unusual that you cannot expect to be in the next few quarters. And I think it came forward because they needed to get their capacity up faster than they originally thought.

And last two ones for me. Just potential cost savings on facilities reduction. You mentioned that in the MD&A. You've always been cost aware. What are we thinking in terms of moves or changes there that you might make over time?

So you've heard a lot of other people talk about everything's good, but they're cutting staff. We have not cut any staff. We're adding staff.

Okay.

Really nothing more to say than that. You know, we've always operated in a very way. If people don't perform, we look at it then. But we aren't doing any restructuring now, really. unless it's the normal business thing we would have done with or without the pandemic. So we don't see – we still have our current cost discipline, for sure, and we're going to continue that, but it's what we've done for over 10 years. It's nothing new. Others are all saying, yes, we're going to grow and be back, but we're cutting staff 5%, 10%. Well, we're not doing that. We don't need to do that. In fact, I would guess we're a net higher right now.

But last one was, you know, any comments just around the uptake of the no-cost video licenses? Obviously, you know, great move, smart marketing. What's been the uptake and then maybe the conversion that you're hoping to see on the back end of that?

Thanks. Yeah, the uptake, you know, it's a new area for us. We had to move quickly to do it, which we did. Vince did a great job of getting that up and running quickly. We've had some interest in it. Where that leads, we don't know. It was normal things when you do that type of project. People come and try it out, but you don't know what they're going to do afterwards. The one thing I will point out, and I didn't say in my messages, we did very well with video in the U.S., but I've always had and wanted to do it geographically in all rather regions. To me, that was weaker than I would have liked. In other words, we still have the opportunity to expand in our other geographical regions with our video product. So most of the video success was because of our U.S. group, some outside, but again, I think there's still opportunity for us in our non-North American operations to improve our video results. Thank you.

Thank you. We'll take our next question from Stephanie Price from CIVC. Please go ahead.

Good morning. You mentioned in an earlier question that, you know, video at the moment is geared towards financial services and healthcare. Can you talk about the opportunity to roll it out more broadly to other verticals and potentially even more broadly to a Zoom-like offering?

You know, we certainly can do that because we have a system that allows that to happen. Our limitation, of course, is our sales and marketing, because we weren't preparing to do that. So we're gearing up a little bit more, therefore the free offering that was discussed on the previous call, our previous caller. So we can do that, but let's face it, Zoom is very good at that. That's where they came from. We still have some work to do if we are going to expand that area, but we are getting some interest, again, because If you're a business and talking to your staff, you need security. It's not just in healthcare, you need it. Do you want people to listen in on your calls? Or do you want, and Zoom's changed some things, but they certainly have a much superior market presence and sales and marketing than we do right now. But they do not tend to do the private healthcare type stuff as much as we emphasize on that. They're more public education. where security probably is not quite as important.

Okay, thanks. And then you mentioned also delays in hardware procurement and systems deployment. Can you talk a little bit about the environment and what you've seen since the end of Q2?

It's pretty much the same. Remember, our Q2, a lot of people that's reported their Q1 was the end of March. RQ2 is the end of April, which is really a lot of the pandemic is already in there. So you probably have some people who said, we've got to do something in thought. So that probably helped. And then you've got people who said, hold it until we sort this out. Everything's on hold. Transit, if you ever, when everyone's staying at home, there's not many people riding the transit. So, of course, they're really struggling. I think their numbers are down. probably 80, 85%. So we got our ongoing revenue from that because we generally have maintenance there. We don't have by subscriber. So that's okay, but it's down quite a bit. And if you look at our group, you know, we divided up by group segment reporting. If you look at the asset management group, you know, the network side did okay, but transition, which is also in there was quite weak. It, it, So, you know, we have got a lot of variances. It's a little complex right now. Where it all ends up, I don't know. If transit picks up, are people going to go back on the buses? How quickly? Are they going to have money to spend? There's certainly projects in the works, and there are good projects for them, but, you know, they've all got different issues these days. So I don't know.

Okay. And then last one for me is on the Teams integration that you announced at the end of March. Teams obviously seeing some strong growth in the current environment. Just wondering what Inge has to say post the integration announcement and how we should kind of think about the migration of those contacts and our customers to Teams.

Yeah, we have a large Skype for business. So we went to Teams because they ended up live Skype for business. So we hope to protect that base. That's objective one. Objective two, of course, is get new revenue. We've seen interest, but everyone's slowed all that down right now. So there's really not much revenue, additional revenue, in our numbers in Q2 related to teams. It's really being that we're there to do it. We've got interest, but everything's sort of delaying as people want to know how long this is going to last. Is it a swish? Is it a W? Is it a V? What type of curve it is? And so everyone are being quite cautious. So we're optimistic that it will help us in the future, but it hasn't really helped that much so far, other than people are more comfortable with Skype because we can now move into Teams when they want to move there.

Fair enough. Thank you very much.

Thank you very much. We'll next go with Paul Treber from RBC Capital Markets.

Thanks very much, and good morning. Just wanted to be clear on, Steve, I just want to be clear on Dialogic. Previously disclosed the expected $58 to $63 million in revenue there. Now, is the large $6 million license deal, is that upside to that outlook, or was it already previously reflected in that outlook, but it just came earlier in the year than what you expected?

Good question. I could answer that either way. It might be upside, but it might have been moved earlier, and there's other things that won't make up for the future revenue we thought we were going to get. I wouldn't expect... In the immediate future, it's probably part of the 60. But I will say that in the quarter, we did better than that ratio. First quarter was a little light. Second quarter, with that in there, did better than the multiple to get to the 60. So... It's hard to tell in this environment. You know, we react. We're not a huge company, but we do react well when we see what's happening. So if you're looking at it, trying to figure out your model, I would say it's in the 60. Put it in the 60.

Okay, that's helpful. Also, in the prepared remarks, you mentioned your video had significant contribution in the quarter? You know, just hoping if you could quantify, you know, significant, like, you know, specifically, you know, how much did video grow, you know, quarter over quarter or maybe put it in dollar terms? And then, you know, on a go-forward basis, do you expect that run rate to be sustained here?

Those are forecasts, so we don't know what happens going forward. And in the quarter, it's significant. We don't give numbers. We don't want people to focus on a quarter. We try and think longer run. I don't know where the longer run is with work from home and all the changes that happened. So, we're just not willing to give any more information and say we had a significant increase in the quarter. Okay.

And those are license deal specifically. I assume there'll be the ongoing maintenance associated with those deals, though.

Correct. And there are also some deals that would be hosted or in the cloud as well. but most of the benefit in the quarter were licensed deals. Yes, that's right. Okay. You know, how is everyone going to predict what's going to happen? Is there going to be a vaccination? Like, I don't want to predict the future. We've never really did forecasts, and now everyone else seems to be following us and not giving forecasts because of the pandemic. Certainly, I'm not going to start.

Yeah, no, that's totally understandable. So switching gears to SBL, I think it's this quarter 2-3 is where SBL is expected to launch its new IPTV product. And is that launch on track? And then, you know, like are the carriers planning to roll it out? And then, you know, how material is the revenue associated from that launch?

So the launch is on track. We actually have an initial customer installed. We have some interest, and I don't do forecasts.

Okay. Last one for me. In Q2, how are renewal rates for the overall business tracking compared to your historical average?

I'd say pretty normal. You have a couple of customers might be in some difficulty, but we had before customers that would be required. So I would say it's pretty normal there. Okay.

Thanks for taking my question.

Thank you. We'll next go with Mark Gaskin from Manitou Investment Management.

Hi there. Good morning, guys. Some of my previous questions have been asked already. Vince, can you just give us a little bit of an update on organic growth and how you're seeing a pickup amongst the various companies in terms of selling a suite of products and how some of these new acquisitions may be helping some of your existing companies sell more product?

Yeah, there's a few questions there. Can you guys hear me? Yep. Clear. Yeah.

Yeah.

Yeah, I mean, we're just continuing a lot of the things that we started, you know, a couple years ago. So, like, things like demand gen, customer success, the video business, trying to expand it outside of just the U.S. market. So, things, you know, things are progressing well from an organic perspective.

Okay. Steve, do you have any comment on that?

No, Vince said it very nicely.

Okay. Keep on doing what you're doing. Well done, guys.

Thank you. We'll next go with Deepak Khushal from Stifle GMB for a follow-up question.

Hey, Steve. I just had a follow-up to Paul's question, and I'm going to back up my fellow analysts here. I know you guys don't give forecasts, but When we look at FDL and we look at the launch of a new IPTV product, excuse me, I'm not barking at the postman. What kind of parameters can you give us to help us get a sense of what this business could do if this product is successful? How many telcos are you speaking to? What kind of ASPs are you looking at or how much? Could average Telco viewer be talking $10, $12 million for Telco and you're looking at 20 of them? Any kind of parameters you can give us to help us forecast on your behalf would be helpful here. Thanks.

Yep. Can't do it. No parameters. You know, we're just putting it out there now. Whenever you put an early version out, you've always got to fix some things. I don't know if people are going to put in more products with a pandemic or what's going to happen with it in the future. So, you know, we've done what we said we would do in getting the product done. We think we have a good product. We have some interest, but that's all I got.

Okay.

And so that would be primarily an organic initiative. In terms of that line of business, in terms of television for telcos on the IPTV side, are there any things that you need to round out the product suite that would be looking to put in on the M&A side, or was this a purely organic thing and you got everything you needed?

We always look for things on the acquisition side as well. And there's opportunities there. But mostly this is an organic thing. They were in the middle when we bought a spiel of developing the IPTV. We wanted to finish it and then take it to market. So we've done that, and so we'll have to see how that goes. This is not one where, you know, you've got massive orders all at once. So it is a business to business sale. So it takes time to put it in. And with a newer system, you know, you're going to have issues. So it takes time to fix them. Can we add some items to that system? Absolutely. It takes time, but we have a system we can sell now. Call it a basic first level system if you want. But again, It showed progress. We've got interest, and of course, we'll be putting more things into that system as we go along.

Okay. Thanks. Appreciate you sticking with your discipline and seeing success. Thanks again.

Thank you. It appears that we have no more questions at the moment, but once again, if you'd like to ask a question, signal by pressing star 1 on your telephone keypad. It appears that we still don't have any questions at the moment. I'll give the floor back over to the speakers.

Okay, thank you everyone for attending our call and your continued support in these unusual times. Stay well and safe and we look forward to updating you again next quarter.

This concludes today's call. Thank you for participating. You may now disconnect.