Enghouse Sys Ltd

Ladies and gentlemen, thank you for standing by, and welcome to the EngHouse Quarter 1, 2021 conference call. All lines have been placed in mute to prevent any background noise. At the end of today's presentation, there will be a question and answer session. To ask your question during the session, you will need to press star 1 on your telephone. If you would like to withdraw a question, please press the pound key. And if you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker for today, Mr. Steven Sadler, Chairman and CEO. Mr. Sadler, you may begin the call.

Good morning, everybody. I'm here today with Vince Massoud, President, Doug Bryson, VP Finance, Todd May, VP Legal Counsel, and Sam Aniger, VP Corporate Development. Before we begin, I'll have Todd read our former 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 NCHO's continuous disclosure following, such as 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. Doug will now give an overview of the financial results.

Thanks, Steve. I'll now review the financial highlights from last night's first quarter release. All the information is in Canadian dollars unless otherwise indicated. Key financial and operational highlights for the three months ended January 31st, 2021 are as follows. Revenue grew 7.6% to 119.1 million. Results from operating activities increased 32% to 40.7 million. Net income increased 27.9% to 20.6 million. Adjusted EBITDA increased 26% to 44.5 million. And cash flows from operating activities, excluding changes in working capital, increased 18.6% to 41.7 million, closing the quarter with 230.4 million in cash, cash equivalents, and short-term investments. In the first quarter of 2021, hosted revenue increased 17.3% to 19.3 million, As a result of ongoing initiatives to transition new and existing customers to cloud based service agreements, notably an edge houses. Cloud contact Center business meanwhile seasonality that is typically experienced in the first quarter was further exacerbated as a result of a coven related lockdowns this delayed some professional services and hardware deployments that require in person integration and customization. And shows continues to realize cost savings from remote work arrangements and reduced expenditure on its physical footprint as the pandemic persists, but most countries experiencing a second wave, the company's adjusted EBITDA margins increased from 31.9% to 37.4% as NHS continues to realize efficiencies related to increased scale after quickly integrating acquisitions and reduced travel costs on December 30th, NSHA has acquired 100% of the issued and outstanding common shares of Altitude Software. Headquartered in Lisbon, Portugal, Altitude provides omni-channel contact center solutions for small and large organizations with a focus on the business process outsourcing market segment. Its modular software suite supports all media channels and has a strong inbound and outbound capabilities for both on-premise and hosted contact center activities. The acquisition of Altitude extends our presence to Portugal and further expands our operations in Spain, Brazil, and Mexico, enabling us to capture additional opportunities within these markets. Efforts to onboard the Altitude team and align their processes with those of Enchouse were almost completed by the end of the first quarter. As previously announced on December 17th, The Board of Directors approved a special dividend of $1.50 per common share, which was paid on February 16, 2021, to shareholders of record at the close of business on January 15th. Today, yesterday, actually, the Board of Directors approved the company's eligible quarterly dividend of $0.16 per common share, an increase of 18% over the prior dividend, payable on May 31, 2021, to shareholders of record at the close of business on May 17th. This represents the 13th consecutive year in which the company increased its dividend by over 10%. With substantial cash balances, no debt, significant operating cash flow, low interest rates, and the ability to access additional capital as needed, we believe that we'll continue to have sufficient funding available for operations and additional acquisitions. I'll now turn the call back to Mr. Sadler.

Steve? Thanks, Doug. This will now give some operational highlights of the quarter.

Thank you, Steve, and welcome everyone to our Q1 2021 conference call. As Doug mentioned, NSHAS had a strong earnings quarter with adjusted EBITDA results of $44.5 million, hitting 37.4% of sales, a meaningful improvement over Q1 of 2020. This was driven primarily by our improved gross margins, employee productivity, as well as less travel-related costs. Throughout Q1, we continue to operate the business globally in a work-from-home environment. It's been almost an entire year now where we've been adjusted to selling and servicing our customers virtually, as most countries we operate in remain in various stages of lockdown. Our team has adjusted well to this new working environment, and we continue to seek opportunities to reduce our facilities footprint. I would like to turn now to our different business divisions and give some perspective on what we're seeing in each of our vertical markets. On the interactive side of our business, we completed the acquisition of Altitude on December 30th, 2020, and welcome the new Altitude team to our organization. Altitude brings us additional scale in LATAM, Spain, and Portugal, as well as new channel partners, customers, and new team members to inch host. One added benefit of this acquisition relates to the strength of the Altitude engineering team. With strong domain knowledge in the contact center space, we decided to set up a shared services engineering center in Portugal to help drive the development not only of the existing Altitude products, but also to expand our engineering team for other NHELS global products, specifically our multi-tenant and private cloud contact center product offerings. With regards to our video business, we continue to focus primarily on the B2B mid and large enterprise sector in the general collaboration space, telehealth and technology verticals. During the quarter, we saw some good expansion of video outside the Americas market, although we are still early in our video business development in these geographies. In the Americas market, Since the initial burst we experienced at the beginning of COVID in Q2 and Q3 of 2020, we have seen customers who initially purchased significant capacity continue to right-size their capacity as they better determine their needs and volume requirements. The other trend we're seeing in video is a drop in the demand for video rooms and the related support for video rooms as many enterprises continue to have their employees work from home and therefore have less need for video rooms required in office environments. One of the other common use cases for video is offering our product to technology companies, enabling them to embed video in their software and hardware applications. This continues to be a key market for us. However, these opportunities generally take time to build momentum and have longer sales cycles. For the contact center business, our differentiation continues to be focused around offering choice to our customers, providing a multi-tenant cloud, private cloud, or on-prem solutions. And for our multi-tenant cloud solution, which we call NHEL's Cloud Contact Center, we've recently started to offer this directly to our market, standing up our own SaaS solution while continuing to focus on service provider channel partners that have white-labeled NHEL's Cloud as their contact center. Our approach to standing up our own cloud solution is to leverage large existing cloud infrastructure providers and ensure we're agnostic to any of these providers in the market. We are seeing more customers request our multi-tenant cloud solution as well as our private cloud solutions driven partly by more agents working from home. One of the other focus areas in the contact center market continues to be on enterprise customers that select Microsoft Teams as their unified communication platform. We are seeing more of our existing Skype for Business customers migrating to Teams, as well as some new customers that have picked Teams as their UCAS offering. The migration of existing customers from Skype to Teams generates additional professional services demand and also contributes to customer retention. Turning now to a few highlights in our asset management group, this division continues to focus primarily on enterprise companies in the telecom, defense, transit, and public safety verticals. As we had previously stated, this business unit can be impacted by large deals that fall into one quarter over another. Last year in Q1 2020, we won a large contract in the defense market, which impacts this comparative quarter as we didn't see a similar large order in Q1 2021. In late 2020, NHELS announced the signing of a large $55 million multi-year transaction with the Norwegian government in the public safety vertical, specifically focused on medical-related emergencies. This project is progressing as we expected. We have previously spoken about our IPTV initiative, which we launched in 2020. Things are progressing as we expected in this area also. as we have signed six new customers over the last few quarters. These customers are at various stages of rollout and based on the way we structure our deals, we generate most of our SaaS revenue in future periods when IPTV subscribers are deployed on the platform. The rest of our telecom market is progressing as expected in Q1. With the global rollout of 5G in many markets and the expansion of IoT devices globally, opportunities continue to emerge for VAS, OSS, and DSS solutions. The one area of our business that has been negatively impacted by COVID is the transit market, as ridership is down significantly when compared to pre-COVID periods. However, having said that, we still believe there is demand for our automated fare collection solutions in the transit market, driven by the need for more cashless, contactless payments. As such, we plan to expand our automated fare collection offering into new geographies later in calendar 2021. Let me turn the call now over to Mr. Steve Sadler. Thanks, Vince.

About acquisitions, as Doug and Vince noted, we completed the acquisition of Altitude on December 30th, 2020. So there was one month of financial results in the quarter. We did a review of staffing at Altitude in the month of February. and did some restructuring at the end of January. This resulted in some restructuring costs in Q1, but these costs were minimized as we redeployed some of the Altitude staff to other edge house operations, especially their cloud-experienced R&D staff. Altitude had an EBITDA loss in the month due to restructuring being done at the end of January, but we expect to be EBITDA positive in Q2, thereby adding to our overall EBITDA performance. It should be at full EBITDA percentage in Q3. We continue to focus on capital deployment, doing our due diligence remotely. As noted last quarter, completing acquisition transactions are taking longer than they did historically due to the pandemic. The acquisition pipeline remains consistent with historic levels, although valuations have increased slightly due to public market influences and low interest rates. We continue to maintain our discipline in terms of financial objectives on valuations when reviewing acquisition opportunities. I would now like to open the call for questions.

Thank you. At this time, if you would like to ask a question, please press star, then the number 1 on your telephone keypad. Once again, that's star 1 on your telephone keypad. To withdraw a question, please press the pound key. Thank you. Our first question comes from the line of Stephanie Price of CIBC. Your line is open.

Good morning. Congrats on the hosting revenue growth in the quarter. Just curious if you could talk a little bit about what's driving that growth. Is it the direct sales force, increased customer demand, or implementing new programs to incent people to move?

Hi, Stephanie. Yeah, so a little bit of all of the above. We have, as I mentioned, we stood up our own cloud contact center and are going more direct there. We also have our cloud contact center product being hosted by our channel partners, and they're having more customers on their platform as well. So it's a combination of our direct and our channel partners. And just generally, in the market, we're seeing more demand for both private and public multi-tenant cloud.

Okay, great. Thanks. And then on the hosting and maintenance revenue line, it looks like it's been down sequentially over the past three quarters. Should we think about video here and maybe video hosting as the reason for that? Or maybe you can give us some color on what you're seeing in that line.

Yeah, so as I mentioned, a lot of it is related to video, both in the video rooms area where there's less people needing video rooms and basically they don't need the hardware support for the rooms. So that's one area. And then there's a bunch of customers sort of adjusting their capacity from their initial sort of surge in Q2 and Q3 of last year. They've essentially right-sized what they need as they figure out where the demand is going to land post the initial surge.

Okay, that's helpful. And then maybe just finally on altitude, it seems like you're integrating this one pretty quickly. Just curious if there's anything unique about this acquisition or how we should kind of think about the integration abilities here.

Yeah, we're probably integrating it a little bit like we did Dialogic a year ago. The same thing. The only difference here is they had a lot of expertise and a lot of staff in R&D trying to write a new omni-channel system software solution in the cloud, which we already have. So we took some of their staff and rather than reducing the staff, added them to our R&D development. And they also had other pretty good expertise at a reasonable cost in Portugal. So we added it to some of our other divisions as well. So rather than doing a restructuring where the cost would have been much larger, we actually took the opportunity to fill vacancies we had and increase our R&D people in what we call the cloud contact center area. So it's a little different that way. What they had was a system that they were just working on for a year and a half with no customers and it wasn't finished. So we discontinued that as we moved these people over. So we integrated the R&D in much faster than usual. Usually we keep running it. but they had a group just doing a new system as well as supporting their other systems. We kept all that, and the people working on the new cloud system, we moved to basically our cloud system to move it along faster.

Great. Thank you very much.

Thank you. Next question comes from the line of Deepak Khoshal of Stifle GMP. Your line is open.

Oh, hi. Good morning, everyone. Thanks for taking my questions. Just a couple for me. First, on the follow-up to Stephanie's on altitude, can you guys talk a little bit about the geographic strategy there? I think you alluded to it in the prepared remarks. I know in the past you guys had a local presence in places like Brazil and Mexico. Are you now servicing that all through Spain and Portugal, or do you still have a local presence in Latin America and South America, and what's the strategy there? Thanks.

So it was interesting in this area because they were – a pretty big competitor in Spain. Portugal, we weren't in, so it opened up Portugal for us. They have a large operation. I mean, over 30 people in Brazil. We had like three, so we put our three people into their operation in Brazil. Mexico, we combined the two. So actually, we've expanded scale in all areas. Expanded it in Spain, set it up in Portugal, sort of as a new area for us. and expanded our Brazil operation. In fact, put our Brazil operation into their operation. Put Mexico together and Columbia, which we also have, we increased presence there as well. So it was actually a good fit where we increased scale in all the areas we were in and added Portugal to the area. So I guess your question was, did we expand in South America or LATAM? The answer is absolutely. They had... I think they had about 35, 40 people in Brazil. So we added our five to their operation in Brazil, and they're going to be taking our products into that geographical area.

Okay, excellent. And then just stepping back in terms of the cloud contact center, you guys set up your own solution in addition to your channel partners, white label solutions. How do you think about potential for conflict there with your channel partners? Now, how do your channel partners, how have they reacted to you guys setting up your own solution? In other words, how have you kind of segmented those two parts of the market?

Yeah, when you talk about channel partners, our channel partners generally sold on premise. They have not set up their own solution. So we, by setting up our solution, have given our channel partners the opportunity to sell and put it on our solutions. So our channel partners never really had their own solution. They were actually looking for, when they had customers who were interested in the cloud, they had the, looking for a place where they could direct them to. So there is no conflict there.

Okay, okay, that's helpful.

Yeah, and just to add to that, sorry, just to add to that, we're constantly direct in channel across our business, so we're used to coexisting with our channel partners. The way we do things, we break it up by verticals or by micro segments, et cetera. So it's kind of a common way for us to coexist with partners.

Okay, thank you. And then my last question, you mentioned COVID impacting implementation, second wave across multiple countries. Which kind of geographies are you seeing the most impact or is it equal across the board?

Without going into detail, I'd say it's pretty even across the board. Again, you've got many factors. Seasonality, because of professional services, you're coming into the holiday period. You had a lot of people, again, during the year, hoping the pandemic would maybe end earlier and they could take their holidays at the end of the year. And we encourage them to take their holidays each year. So there's a lot of factors that came into that. And it slowed professional services, obviously. and some hardware sales that we could not deploy because our customers' people were on vacation.

Okay. So there's no particular geography you want to call out or any geographies we should look at for rebounds on that area?

No. I mean, it impacted them all. Maybe the U.S. a little bit more. Because in Europe, they generally take the holidays in the summer, but they also go skiing. A lot of the resorts were shut down. I think we didn't assess where it impacted more or less. We think it was pretty even across the board, depending on the customers in the region.

Okay, great. Thanks. That's it for me for now, and I'll pass on.

Thank you. Next question comes from the line of Paul Steve of Scotia Capital. Your line is open.

Good morning. Could you maybe just go over what the plan or the strategy sounds like in terms of the new cloud solution on the contact center? Are you actively sort of encouraging clients to migrate? It sounds like they've got the option, but is there sort of a plan put in place now to sort of shift more of that base to the cloud?

You know, we've always taken the approach we do what the customers want. If they want to move to the cloud, we have that available to them. I wouldn't call it a new system. It's a system we've had for a while. We're just enhancing it. It's up to them. We will support them in the cloud. We'll support them on premise, and we have software to do both. We aren't encouraging one way or the other. Let them make the choice.

Okay, that helps. Maybe on asset management, is there anything we should think of, guys, just in terms of year-on-year volatility there over the next couple that you want to point out? Obviously, the Norwegian contract will contribute. It'll help offset. But is there anything else in terms of pressure you're seeing in that part of the business that has maybe caused things to ebb and flow a little more in the last couple of quarters?

You know, the only thing is on the transportation side, that large contract's pretty steady each quarter. Professional services, every now and then they'll have to pay milestones on software. But on the network side, it can be lumpy. As Vince mentioned, in Q1 last year, we had a very large deal. We had a very large deal mid-year last year with one of our customers for nearly $6 million. So it can be a little lumpy. So, yes, you do have that, but that's pretty normal. It's been like that for a while. It'll probably continue like that going forward.

Okay. And just maybe on that same topic, Steve, not that we normally want to spend much time on quarters, but last year, obviously, it was the start of COVID. You had the home run quarter with video there. How should we think about the Q1 to Q2 seasonality? Like in the last few years, it's stepped up a little bit, driven in part by acquisitions. And this year we've got altitude. But should we think that that's maybe more muted at this point due to lockdowns and where we're all at, I guess, in mid-March at this point?

Yeah, I wouldn't say the altitude is going to mute it more. I mean, As usual, we take on an acquisition. We do eliminate some revenue, which we found to be either not high quality or not profitable. So it can impact it a little bit. But we announced what we thought the revenue would be. We're pretty confident. What I will say is in the first month, usually the first quarter, but in this case the first month, just like Dialogic a year ago, Customers tend to slow buying because they want to see what we're going to do. Are we going to keep their old system? What action are we taking? So we went through January. So I would say January as a month was a little lighter in altitude than what we expect going forward now because we made our changes. We talked to the customers. It's getting back to more what I'll call normal rather than wait-and-see type of approach.

Okay. And then the last one for me is just a quick clarification. It may just be how I was reading the press release last night. You talked about facilities reduction, and we've talked about that for a couple of quarters, but it sounded like maybe you've made more of a substantive decision there. Is there, not that subleasing is likely great right now, but is there a move to sort of permanently actually strip out some of that facilities cost? I guess how I was maybe reading it last night. Thanks, Vesta.

As our facilities come up to be renewed, we either reduce space or eliminate them, depending how many people were in there. We found our people now are more, what can I say? used to working from home. Before it was like, oh, we can't do it. Now it's not so bad. So yes, we will continue to reduce our facilities costs as it makes sense. And we do it in conjunction talking to the people. What would they think is the best for them to do? And a good portion of them would like to continue to work from home. So our facilities costs, we look at them every time they come up for renewal. And yeah, we We're starting to reduce that administrative cost, yes.

Okay. Maybe a clarification on that without having looked at the annual. Is there a big bump in terms of, you know, one of the larger facilities coming up in the next year, Steve, or is it sort of pushed out a couple of years into the future where we'll see maybe the full benefit of the reduction? Thanks.

Well, the full benefit probably is a few years, but there's facilities coming up every year, some of them larger, yes. So it's a continuous process over the next couple of years. We expect our facilities cost to decline. Okay, thank you.

Thank you. And if you would like to ask a question, please press star then the number one on your telephone keypad. Next question comes from the line of Paul Treiber of RBC Capital Markets. Your line is open.

Thanks very much and good morning. I want to follow up on the last question. The MBA mentioned the renewed focus on profitability. I would think for MTAs it wouldn't be a renewed focus, but just ongoing. So beyond facilities, do you see other opportunities Further safe costs, you know, perhaps things like, you know, just permanently reduced travel or marketing expense, you know, maybe using more for video conferencing. And do you think, you know, this is like a long-term structural improvement in the cost base of the company?

The short answer is yes, we agree with what you've just said. We do see the opportunity to reduce costs. We have our own video system which we can use. Of course, it also depends what customers want. Some customers, when travel comes back, want to see salespeople and see people. Right now, they don't. So it'll be a bit of a hybrid model, both on the premises. We won't get rid of all the premises, but we'll have less premise costs. I expect we'll have a bit more travel costs, but we probably will not go back to where we were.

And just to put some numbers around it, the magnitude, like in the past you've called out EBITDA margin targets in the 30% range. I mean, do you want to throw out like where you think that could perhaps go in time?

It's hard. We really, a lot depends on acquisitions. But it's very interesting to note that with an acquisition, a fairly reasonable sized one in Q1, we did 37%. Usually you would see a drop in that first month. And you can also, we also told you that altitude did not make money in that first month. So as we get it to our normal margins, that percentage should improve.

Okay. And, um, shifting, shifting to these, uh, you know, the delayed, uh, delayed projects and implementations, what's the timeframe for when you think that the revenue or these fields may start to flow to revenue? Like, is it, is it just, is it predominantly vacations or is it, you know, the travel restrictions related to COVID and obviously, you know, it's more than just a one quarter, um, delay. It's, you know, it may take till the summer until the fall.

Yeah, I would say it's a combination of both those things, but I don't think the delay, I will call it temporary. I think it'll pick up in Q2. So it's picking up now. Okay. Because the seasonality from the Christmas period is gone. The travel part's still there, but it wasn't a huge impact to us last summer in the pandemic. So most of it I would think relating to customers being off or our staff taking vacation, but it's also customer staff not available because of that time period. So I think we're seeing it pick up already.

Okay, that's great to hear. Thanks for my question.

Thank you. Once again, if you would like to ask a question, please press star 1. Your next question comes from the line of Daniel Chan of PD Securities. Your line is open.

Oh, hi. Good morning. Just wanted to talk about the Cloud Contact Center. Are you guys hosting that in a public hyperscale cloud, and as a result, we should see minimal impact on capital intensity? Maybe related to that, how should we be thinking about the margin impact as more workloads are moved to your cloud solutions?

Yeah, so exactly right. We are using one of the public cloud offerings. So there's no capital at all. It's pure variable costs. As we get more tenants on the platform, more customers on the platform, you know, the cost scales. And we do video like that already. We do IPTV like that already. So it's common for us to use multi-tenant cloud environments, public cloud offering. And the margins are really healthy.

Okay. And then, Vince, you commented on the host and maintenance revenue coming off sequentially, largely because everyone's rightsizing their video deployments. Can you remind us what the contract structures are for some of these video, the average contract? Is it annual? Is it monthly? And to what extent can they change these agreements relatively quickly?

Yeah. Yeah, we did. something during COVID to help our customers. And we let them sign three, six, nine, and 12-month agreements. Typically, they're all 12. But we made an exception in COVID because of the scenario we were in. You know, we let them, because there was so much uncertainty and nobody knew what level of volumes were going to actually happen, we made an exception. But typically, our deals are 12 months.

Okay, that makes sense. So are there any renewals, maybe large renewals that are maybe coming up soon that people may want to right-size as well?

We do have a lot of renewals that happen on January 1 every year, a majority actually. So that's our common renewal period. Having said that, there's renewals that happen every quarter. With video, the only kind of anomaly was what I said, which was we gave some people some shorter-term flexibility, just given the scenario they were in. Okay, thank you.

Thank you. Once again, if you would like to ask a question, please press star 1. There are no further questions at this time. Presenters, you may proceed.

Ench House continues to have a strong financial position with $230 million in cash, minimal bank debt, and good cash flow. I want to thank the Ench House team who performed well in fiscal 2020 in spite of the pandemic. Also, I thank you, our shareholders, for your confidence and continued support. Ench House continues its journey to build into fiscal 19 to 2021 and beyond.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Have a great day.