Enghouse Sys Ltd

ladies and gentlemen, and welcome to the Eng House Q3 2020 conference call. As a reminder, today's conference is being recorded. 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 of Legal Counsel, Doug Bryson, VP Finance, and Vince Massoud, Global President. Before we begin, I'll have Todd read our forward disclaimer.

Certain statements may be forward-looking by their nature. Such forward-looking statements are subject to various risks and uncertainties, including those an inch has its 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. Undue reliance should not be placed on these forward-looking statements and 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. Doug will now give an overview of the financial results.

Thanks, Steve. Yesterday, Enchest announced its third quarter unaudited financial results for the period ended July 31, 2020. All of the financial information is in Canadian dollars unless otherwise indicated. Key financial and operational highlights for the three months ended July 31st compared to the same period in 2019 are as follows. Revenue grew 29.7% to 131.3 million. Results from operating activities increased 56.2% to 42.2 million. Net income increased 77.3% to 26 million and 46 cents per diluted share. Adjusted EBITDA increased 62.4% to 45.6 million. Cash flows from operating activities, excluding changes in working capital, increased 58.8% to $45.3 million. Cash equivalents and short-term investments were $228.9 million, an increase from $150.3 million at October 31, 2019, which was achieved after making payments of $19.5 million for dividends and $43.9 million for acquisitions this year. 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 acquisitions. Internal growth includes the expansion of the acquired businesses, particularly video, since acquisition. To date, COVID-19 continues to have an overall positive impact on revenue. Although the initial surge of customers requiring immediate remote work and visual computing solutions upon the initial outbreak of the pandemic was primarily served in the second quarter of 2020, demand for these solutions remains above historic averages. The pandemic has tested NCHS's ability and capacity to respond to significantly altered circumstances. NCHS's results continue to demonstrate the resiliency of its business model, which is based on significant recurring revenue streams, positive operating cash flows, large cash reserves with nominal debt, and a disciplined cost management and value-for-money philosophy. Yesterday, the Board of Directors approved the company's eligible quarterly dividend of $0.135 for common share, payable on November 30th, 2020 to shareholders of record at the close of business on November 16th. I'll now turn the call back to Mr. Souther to provide his comments.

Thank you, Doug. As Doug noted, we had another good financial quarter from our operations during these challenging times. Strong cash flow from operations of over $45 million increased our cash and short-term investments to $229 million, approximately, from $168 million in Q2, despite paying our quarterly dividend of $7.4 million. Considering our changes in working capital and income tax installments paid, net cash provided by our operating activities was $55.7 million. Compared to prior years Q3, foreign exchange increased revenue by $1.4 million and increased operating costs by $1.1 million with a small positive impact on operating income. Some of our revenue is being delayed by COVID-19, and the business environment remains challenging for new customers, although one of our significant transit customers proceeded to roll out its hardware purchased on a commitment related to a contract completed before the COVID-19 impact. This increased our hardware revenue in the quarter, but at a lower margin. Video revenue once again exceeded our original expectations, but was reduced from the high Q2 customer demand. As stated last quarter, some of our customers have been significantly impacted by the pandemic and continue to be cautious in committing to new projects, although we have seen some improvement. In terms of acquisitions, in Q3 we completed no new acquisitions, although our dialogic acquisition which we did at the end of December, has been integrated into our operations and is progressing as anticipated. We continue to focus on capital deployment, doing most of our acquisition work remotely, but as indicated last quarter, several opportunities continue to focus on their own business issues, delaying acquisition processes. The acquisition pipeline remains at it consistent with historic levels. I would now like to open the call for questions.

Thank you. At this time, we will open the floor for questions. If you would 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. Again, press star 1 to ask a question. We will pause for just a moment to allow everyone an opportunity to signal. Our first question comes from Stephanie Price with CIBC. Please go ahead.

Good morning. Just looking at video, just wondering if you could talk about what you've seen with video so far in fiscal Q4 in terms of demand and just curious about whether the Q3 run rate is, you know, something you'd expect through kind of the pandemic here.

Okay, so you asked about Q4. I think you meant Q3. Okay. But we did see an initial demand, mostly from current customers, but some new in Q2. That lowered down in Q3 as they bought a lot of the requirements in Q2. We still see more than we anticipated at the beginning of the year for video, but our international rollout of video has been slower than we expected, and so we're still pushing to improve in that area.

Okay, thanks. And then the MD&A mentioned the possibility of facilities reduction and other cost savings. Just curious around the margins and how we should kind of think about the impact of those opportunities.

You know, it's pretty similar to the past. When we don't do acquisitions in a quarter, which we always try and fix over one or two quarters, our margins tend to increase to about 35%. If we do acquisitions, I still maintain you've got to think of it and model it at about 30%. 25 to 30, depending how big and how much restructuring has to be done. But it's pretty much the same model that it's been for the last 10 years.

Okay, and I'll ask one more on the M&A environment since you mentioned it. You mentioned that some of the opportunities are kind of focused on internal operations here. Can you give us a bit more color there and how you kind of think about M&A in the back half of the year here?

We're pretty set up to do M&A, but you've got to remember opportunities that we see, they're having their people work from home, and they're a little slower gathering data for us and doing the due diligence process. Also, if an issue or something comes up, they tend to delay things for a week or two. Some have delayed it into next year because they just have other things that they're focusing on that are more urgent than others. doing a transaction with their company at this time. But again, that's also freeing up a little bit, but it's still an issue today.

Okay, thank you very much.

Everything's remote. Everything's remote except we're kind of lucky because we have people who've done acquisitions virtually in every geographical area. So when we look at acquisitions, we tend to still send somebody in on premise to have a look at the environment, culture, and some other factors.

Great, thank you. We will go to our next question coming from Deepak Kaushal with Stifel GMP. Please go ahead.

Thanks for taking my questions. Good morning, everyone. Just a couple of follow-ups on Stephanie's questions to start. Just on video, Steve, are you able to kind of quantify or even give us qualitative sense of the pace of acceleration for that business and how much it's exceeding your expectations?

Of course, they need to have to know my expectations, too. It's hard to answer that. But let me say that in Q2, it far exceeded it. There was a lot of the current customers who already were using the product ordered more, you know, ordered more license revenue and some hosting revenue. That was mostly in Q2. We saw still some in Q3, but it has slowed down in Q3. And I don't predict Q4, but it's still, you know, the work-from-home environment, there's a lot of moving parts. It's still an important area for us going forward.

Got it. And for the non-video part of the interactive business, any caller on that, the call center, contact center side,

Yeah, if you remember at the beginning of the quarter, we talked about how we got certified by Teams, which is the Microsoft product, which we've been working on for about 18 months. And we've had several of our products certified now. So that's positive. But again, new customers buying new contact centers in this environment where it takes work and people coming in to set it up, it's been slower. but the opportunity is still there.

Okay, got it. And then just on the M&A side, I'm just curious, you know, we've heard a couple of companies report in as many days signaling valuation expectations of targets has risen quite substantially. You know, we see it in the public markets for tech stocks. What are you seeing in terms of valuation expectations? And is that a hurdle for you guys to get acquisitions done? over and above what you're seeing on the working home side?

No real change, and our parameters haven't changed. Certainly, if you're going to the public markets and looking at very large deals there, there's a lot of money virtually that's free, no interest rates that private equity has. So I suspect that those valuations are higher, but we are not seeing that in what we're looking at.

Okay, and is that because You're seeing more companies with problems or because they're just smaller and private, they haven't really seen that kind of... They're basically not public.

And although money's cheap, you still have to get money. And some of these companies have difficulties getting money even though it's cheap. So we aren't seeing really any difference there. In fact, if I was going to make any comment, we'd probably see a little better valuations in what we're looking at.

Okay. That's interesting.

And then my last question. Where your comments are coming from NNA is probably in the public markets. You know, that's what you generally look after. We find the public markets are a little expensive based on the criteria that we usually look for.

Yeah. No, no. I mean, it's often the private markets. I'm surprised because these companies typically acquire private companies and they're signaling higher valuation expectations. So yeah, I guess you're finding them in certain pockets. Are there any particular segments that are showing better value than others?

We've always had some companies that want higher valuations. If it doesn't meet our financial criteria, we just pass. Many of those companies are still available. So often when people say, yeah, the numbers are higher, et cetera, either they're justifying paying more or justifying not doing stuff. We're not finding that in the areas that we're looking at.

Okay. Okay, that's very helpful. Thank you for taking my questions, and we'll talk to you again soon.

Thank you. And once again, if you would like to ask a question, you may press star 1 now. We will go to our next caller, Tom Travar with RBC Capital Markets. Please go ahead.

Oh, hi. Good morning. I'm Tom Travar. Just a follow-up on M&A. The MD&A mentioned other income increased by about $2.5 million because of unrealized gains and investments in equity positions. Are those trading positions or are you considering acquisitions of public companies?

We're always considering acquisitions of both public and private. When you say trading positions, if we see a company that is a potential acquisition, sometimes we take a foothold in it. Often when they do that, for some magic reason, the stock runs up. And then if we make some money and it's above our valuation expectations, we sell it. Okay, so nothing to disclose. So we're not out trading, but they are potential companies. We would buy the whole company. And, you know, sometimes when you talk to them, magically, all of a sudden their stock goes higher. And we're not interested in paying up. We're very disciplined. So then we may just sell our positions at that point.

Okay. Also, in regards to M&A, I mean, you mentioned that you have people on the ground that can visit targets in all your regions. From your perspective, though, I mean, you tend to be hands-on with M&A. How are you adapting to this, you know, the challenge of, you know, travel restrictions in this environment and also doing M&A from a remote basis? Is it something you're finding comfortable adapting to, or would you prefer going back to the old world of travel and in-person meetings?

Okay, so about 80% plus of our M&A work is done remote and always has been. We tend to go to the site to finish off and just have the talk of the people. We now have video. We do that through video and online. And we really just have someone remotely go there, just sort of get the layout and get another view. So we never just do it with one view. We always have several people maybe ask the same questions to make sure we get the same answers. Okay, thanks for that perspective.

One more from me. In regards to professional services, this flat quarter over quarter, are you still seeing challenges in terms of travel restrictions and the inability to travel to customer locations as just restraining the ability to do professional services? And more recently, as we enter the fall, are you seeing that beginning to lift or is it still a challenging environment?

It's still pretty challenging there, but a lot of our professional services is not done on a customer site. It's done on our site or done even from people working at home. But sometimes there's implementation that has to be done on a customer site. So there is some limitations there, but it's not a big factor.

Okay, thanks for taking my questions.

Thank you. there are no additional questions at this time. Mr. Sadler, at this time I'll turn the call back to you for any additional remarks.

Okay, thank you. Ench House is well positioned both operationally and financially for this unusual business environment. We look forward to finishing our fiscal year 2020 and preparing for whatever business environment develops for next year.

Thank you. Thank you all for your attention. This concludes today's conference. You may now disconnect.