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Ladies and gentlemen, thank you for standing by, and welcome to the Enghouse's Q3 2021 Conference Call. [Operator Instructions] Please be advised that today's call is being recorded. [Operator Instructions]I would now like to hand the conference over to your speaker Stephen Sadler, Chairman and CEO. Thank you. Please go ahead.
Good morning, everybody. I'm here today with Vincent Mifsud, Global President; Doug Bryson, VP, Finance; Todd May, VP, Legal Counsel; and Sam Anidjar, VP, Corporate Development.Before we will -- begin, I will have Todd read our forward disclaimer.
Certain statements 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 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 CAD 117 million and CAD 354.1 million, respectively, compared to revenue of CAD 131.3 million and CAD 382.9 million. Results from operating activities were CAD 38.5 million and CAD 116.1 million, respectively, compared to CAD 42.2 million and CAD 119.3 million.Net income was CAD 21.2 million and CAD 62.6 million, respectively, compared to CAD 26 million and CAD 69.2 million.Adjusted EBITDA was CAD 41.7 million and CAD 126 million, respectively, compared to CAD 45.6 million and CAD 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 CAD 41.1 million and CAD 125.4 million, respectively, compared to CAD 45.3 million and CAD 130.5 million in the prior period.Revenue achieved for the quarter was CAD 117.6 million compared to revenue of CAD 131.3 million in the same period in the prior year. The 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 CAD 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 2 tuck-in acquisitions, 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 analytic 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 that broadens our video collaboration solutions.Enghouse closed the quarter with CAD 187.8 million in cash, cash equivalents and short-term investments compared to CAD 251.8 million at October 31, 2020, and CAD 169.6 million as of April 30, 2021. The cash balance was achieved after making payments of CAD 36.3 million for acquisitions and CAD 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 CAD 83.2 million in special dividends to shareholders and annually increasing its eligible quarterly dividend.Yesterday, the Board of Directors approved the Company's eligible quarterly dividend of CAD 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 CAD 41.7 million, achieving 35.4% of sales and strong cash flow from operations. This represents our sixth consecutive quarter of exceeding CAD 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 CAD 6.2 million compared to Q3 of 2020 and CAD 2.4 million compared to our previous quarter Q2 2021.In the quarter, we completed 2 product-centric tuck-in acquisitions: Momindum and Nebu. Momindum brings to Enghouse a new SaaS application that extends our video capabilities. With the Momindum product, we are now able to address the large video meetings and virtual events market that can extend video 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 center space.Our Vidyo business has now returned to volume and demand that were consistent with pre-COVID periods and most of our revenue decline 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 a private cloud.Our cloud contact center is expanding 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 3 additional centers globally. And another partner has decided to start to offer Vidyo 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 -- 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 is 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 4 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 a Europay, Mastercard, Visa, also called EMV certification, of our Automated Fare Collection product. This EMV certification is an important milestone for our AFC solutions and 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 one milestone for this project, and as planned, our application was installed and accepted. We are still in the early stages of this project, as well as our other 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 CAD 60 million so far this year in FY 2020 in engineering and product development, keeping in line with prior-year spend.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 CAD 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 a 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.
[Operator Instructions] Your first question comes from the line of Daniel Chan with TD Securities.
Just want to dive into the Zoom-Five9 acquisition that's announced a few months ago. Do you see that transaction having any impact 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 have quite 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, et cetera, 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, et cetera.I also think, in any acquisition, there is 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 Vidyo into their offerings, but it really doesn't impact us. And Zoom is a strong competitor with a strong sales and marketing group. That will continue, and we tend to be more in the healthcare and financial area a little more focused. And so we'll continue to do that. So, we'll wait and see. I don't see it hurt 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 their biggest issue, and I don't know if it'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 lot of R&D. Five9 is a strong group. I don't think it impacts us that much so in where we are at versus where they are at in the marketplace.
And then, Vince, you mentioned you have about 80,000 names in the cloud contact center, 50,000 concurrent users at any time. Can you just give us some context on that? How has that metric trended over time? And maybe if you can kind of give us, if you know any, how that compares to some of your large competitors?
I mean, it's trended positively. I mentioned it as a point of reference, because they 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.
Your next question comes from the line of Paul Steep with Scotia Capital.
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 at the management, maybe the Board level, what level of cash you're sort of comfortable holding versus using debt that I think we've talked about now, I guess it was around the fall time frame of last year? Just getting your take on that would be helpful.
As you know from my history, I'm comfortable 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 had mentioned before is, we made, what I would call, excess profits because of the pandemic in that everyone went to Vidyo, which was virtually a profit for us as they signed up more software. So, rather than hold that cash, we decided 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 are profitable, we think 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 and we continue to do it.
Got it. That helps with context. If we just zero in, getting your thoughts on the fact that with Momindum, it was a SaaS-based deal, how you maybe approach that deal? Not that there is 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 would be the second question.
Well, remember, it ties to Vidyo, which is also a SaaS offering. So, it ties it. It isn't like it's different. It's a slightly different market for us. It was smaller. We do find some smaller SaaS companies struggle a little bit. Everyone talks about the big ones and they are growing revenue and losing money, but they are getting money, mostly from the public markets. But the smaller ones are not. So, we see some opportunity there. This is 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 will 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 hitting valuation metrics that over time would be similar to sort of your targeted returns, or the assumption is to get to the targeted returns that are integrated with other things in the platform, and you're going to pick up the returns on maybe higher synergies on some of those products was how I should have phrased that.
We always get some of our returns through synergies, be it revenue or costs, no change. We expect it to meet our returns. We aren't changing our discipline or -- 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 is 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.
Last one from me to whoever I guess wants to field it. On the contact center, Vince had 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 pedal in terms of investment maybe in distribution is what I'm thinking of? Because, Vince obviously highlighted the R&D investment.
I'll do a little bit and 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 are 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 in the past. So, we have sort of stuck to that discipline rather than let's sell something at a CAD 1.00 that costs us a CAD 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 take it.
Just to 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 US 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.
Just so you understand what Vince is saying, we do that through partners. So, it does not change our capital expenditure profile. A lot of those companies that do SaaS also have a lot of capital expenditures. You can see it on their financials. Ours hasn't changed, because it's all operating cost for us. In other words, we have some who -- 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.
Your next question comes from the line of Stephanie Price with CIBC.
On the cloud contact center, any 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 new customers and whether you expect some of the [indiscernible]?
I'll take it. It's hard to know. The cloud is very much in the market today and a lot of new people going to -- especially with 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, having their own cloud. So, we're trying to 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.
Yes, and just to add to that. So, we definitely give customers choice, and our whole model is, you can do -- 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 want a private 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 is no rush to move there, we just tell customers, when you are ready, we are here to provide you that migration path.
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 the implementations are now up and running. Just curious if you can give us an update on that? And if you've seen anything post quarter, just given the Delta variant?
Well, let Vince talk to it, but I can tell, I don't think we delayed the professional service side. I think what you see is some of the 2 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 request on those. So I think that's helping our professional services side. And they knew it and signed it. And now the COVID is not impacting 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 holiday periods in Europe and you got other things that can impact it. I don't see a big change, but Vince you might take it.
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 their services work for us to integrate our cloud -- our contact center, whether it's cloud or on-prem to Teams. So, there is 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 from me. The MD&A mentioned some restructuring initiatives. Just wonder if you could elaborate on this a bit. Whether they are outside some 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 it 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 cost. That's number one. It also will help our cash flow, because our 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 up to -- 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 on-premises and whatever it might cost in the future for travel and entertainment, we're probably going to save on-premise costs. So, we started to look at some of the smaller ones and even some of the larger ones. We 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 and entertainment comes back, which will increase costs, that we have things that will offset it. Right now travel and entertainment has now come back and we're already getting the [Technical Difficulty] offset a bit from the premise side. We intend to do a hybrid model; have offices smaller that people could come into. Some people want to come to the office and probably have them come in a day or 2 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.
[Operator Instructions] Your next question comes from the line of Paul Treiber with RBC Capital Markets.
I 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 then could you also put that in perspective in terms of the number of seats that you may have for on-premise?
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 products specifically. And that includes our partners and our own cloud -- the number of named agents on those platforms.
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 has been tracking over the last couple of quarters?
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.Sorry, what was your second question?
Just in terms of the customer churn or retention of on-premise customers over last few quarters?
So, on the contact center side, the on-prem churn numbers are relatively in line with what they have 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.
And then the Asset Management side, basically the churn has not changed at all in the last 3 years. It's been pretty flat.
And then one for Steve. Just on high level, in terms of M&A, you 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 do you think you will continue to build out your video conferencing business through acquisitions in the near term?
I think there's 2 parts there, not to mislead. Look at Zoom share price and, yes, the valuations have come down, but they are still high. So, they still want to see what the opportunity. Everyone's 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 is no opportunities for us, but they are usually at the lower end like the Momindum. There are opportunities out there. We see a lot of them. And -- because a lot -- Zoom has done well and good for them, but a lot of the smaller ones don't make money and their future of making money is questionable. So, we see those opportunities. It will probably get greater as -- depending what this market does. And always we talk about Zoom, but you also have Cisco, you also have Teams, like there are several players here and they have all tried to grab share in this market. While the going is good, you got to get going. So, that's what they do.
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 to increase or get more into providing your own unified communication solution?
Yes, that's a good question. So, there is 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 cloud. So, we're getting more and more request to connect with multiple of 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 a 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 considering that.
And at this time, there are no further questions. I will now turn the call back over to management for any closing remarks.
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.
Ladies and gentlemen, that does concludes today's conference. We thank you for participating. You may now disconnect.