Executives: Steve Sadler - Chairman & CEO Doug Bryson - VP, Finance Sam Anidjar - VP, Corporate Development Todd May - VP, General

Counsel
Analysts: Udhay Gill - Scotia Capital Justin Keywood - GMP Securities Paul Treiber - RBC Capital Markets Ralph Garcea - Echelon Wealth

Partners
Operator: Good day, ladies and gentlemen, and welcome to the Enghouse Systems Limited 2017 First Quarter Earnings Call. As a reminder, today's conference is being recorded. At this time, I'd like to turn the conference over to Steve Sadler, Chairman and Chief Executive Officer. Please go ahead, Mr. Sadler.

Steve Sadler: Good morning, everybody. I'm here today with Doug Bryson, VP, Finance; Sam Anidjar, VP, Corporate Development; and Todd May, VP, General Counsel. Before I begin, we will have Todd read our forward disclaimer.

Todd May: Certain statements made in this conference call may contain forward-looking statements which are not historical facts but are based on certain assumptions and reflect Enghouse's current expectations. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations.

These Risk Factors are identified in Enghouse's AIF and other periodic reports filed with applicable regulatory authorities from time-to-time. Enghouse disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events, or otherwise.

Steve Sadler: Thank you, Todd. Doug will now give an overview of the financial results.

Doug Bryson: Thanks, Steve.

Yesterday Enghouse announced its unaudited first quarter financial results for the period ended January 31, 2017. First quarter revenue increased to $78.8 million, compared to revenue of $74.4 million in the first quarter of the prior year. Increased revenue in the quarter reflects incremental revenue from acquisitions net of the unfavorable impact of foreign exchange estimated at $5.2 million in the quarter. Income from operating activities was $22.4 million compared to $17.8 million in prior year's first quarter, an increase of 25.8%. Net income for the quarter was $11.7 million or $0.43 per diluted share compared to $8.5 million or $0.31 per diluted share in the prior year's first quarter.

Adjusted EBITDA for the first quarter was $23.2 million or $0.85 per diluted share compared to $19.1 million or $0.70 per diluted share last year, an increase of 21.4%. Operating expenses before special charges related to restructuring of acquired operations were $30.9 million compared to $32.4 million in the prior year's first quarter and reflect incremental operating costs related to acquisitions and the positive impact of foreign exchange. Operating costs reflect continued efficiencies related to measures undertaken late in the last fiscal year to scale operating costs to revenues. Non-cash amortization charges in the quarter were $7.5 million compared to $6.8 million in the prior year's first quarter and include amortization charges for acquired software and customer relationships from acquired operations. Enghouse closed the quarter with $88.3 million in cash, cash equivalents, and short-term investments, compared to $85.9 million at October 31, 2016.

The cash balance was achieved after payment of $3.8 million in cash dividends and $1.7 million to partially settled loans inherited with the Presence Technology, acquisition, completed on October 28, 2016. Yesterday, the Board of Directors also approved a 14% increase in its eligible quarterly dividend to $0.16 per common share, payable on May 31, 2017, to shareholders of record at the close of business on May 17, 2017. Enghouse has now increased its dividend in each of the past nine years. I will now turn the call back over to Mr. Sandler.

Steve Sadler: Thank you, Doug. As Doug noted, we continue to have a strong cash position with cash and short-term investments of over $88 million. Cash flow before working capital was $23.3 million, an increase of over 22% from Q1 2016. As with recent quarters, foreign exchange had a significant impact. Revenue was negatively impacted by approximately $5.2 million compared to Q1 2016 due in a large part to the weakening of the British Pound and Euro.

The U.S. dollar was also higher in the prior year being $1.37 compared to $1.33 in the current quarter. Of course foreign exchange also has an offsetting effect on cost which was about $3 million compared to the prior year as well. Overall adjusted EBITDA increased to approximately $23 million in the quarter or 21.4% over Q1 2016. Net income increased to $11.7 million in the quarter or 38.7% over the prior year after tax and increased to $15 million from $11 million or 37.4% before tax.

We noted at our AGM yesterday that the Board of Directors authorized a dividend increase to $0.16 from $0.14 effective with the next dividend payment in May. We also mentioned yesterday that we were looking to establish a bank facility to allow payment of dividends without the need to move funds from foreign subsidiaries thereby minimizing withholding taxes and lowering our weighted average cost of capital. On the acquisition side, Premise was completed right at the end of the fiscal year and they had its first full quarter of revenue and operating income in Q1. It adds approximately $2.9 million in revenue and just above $1 million in operating income before amortization and restructuring. I would now like to open the call for questions.

Operator: Thank you. [Operator Instructions]. And we will go first to Paul Steep with Scotia Capital.

Udhay Gill: Hi Steve, this is Udhay on for Paul. Just to start off with on the network side, we've seen pretty strong growth over the past several quarters.

Could you talk little bit about the Telco's spending environment, what's driving the growth in that business?

Steve Sadler: Generally I mean for us a lot of the growth came from acquisition. But we find we provide software that adds value for Telco, not just processing but that gives them return, so it's been pretty steady for us. I wouldn't say it was huge growth but it's been steady. I know a lot of other people think that Telco environment is really tough and revenues dropping we're just not seeing that because maybe it's the type of customer we are selling to and the type of systems that we're selling. We don't generally aren't selling processing systems.

Udhay Gill: Okay, great. And then on the professional services side, historically we've seen the business mix for the networks having a higher level but we've seen the growth start to trail off for last six to nine months. Are you starting to see some slack in the business or as the project rolled out, could you just talk about little bit about that?

Steve Sadler: I don't think there is any big trend here; I think some of it you realize we have talked about the foreign exchange, so when you say it rolls off lot of its exchanges going down. So the revenue drops on it because again we have a lot of euros for our Telco side of the business and it's dropped recently. I don't see any big trend there one way or the other.

It could be up or down in a quarter.

Udhay Gill: Okay. And then just on to the M&A pipeline, we've seen a larger share for the network side as opposed to Interactive. Could you then just talk a little bit what you are seeing in terms of M&A opportunities for the various businesses?

Steve Sadler: It's been the same as the past. We have a disciplined approach; we are seeing opportunities in both areas.

I do see a little bit more on the network side only because we've rationalized over the last four, five years a lot of the Interactive side already and we have expanded globally already there. But we have a Presence was done October 28, it was on the Interactive side, so it's basically business is usual. I don't see any big trend there either. That is a good pipeline for both.

Udhay Gill: Okay.

And then to wrap up, over the past couple of years we've seen R&D in sales and marketing as percentage start to fall. Should we start to think about the current levels as a go-forward basis or you expecting to increase the major to improve organic growth or product initiatives or anything like that?

Steve Sadler: Well actually we added a little bit about a year ago. We are trying to emphasize sales and marketing a bit more and it turned out, I mentioned at the AGM yesterday it just ended up being a cost because we didn't get the revenue or return we expect from that addition. We maybe were a little early because again the economic environment still struggled a lot last year, it's improved a little bit recently except the attitudes improved, lot of people attribute it to Trump in the U.S. We will have to see if it turns into reality that will probably happen over the next year.

But, yes, we are back to I guess what I call sales and marketing where we were before we did the additions and I'm still considering may be we need to add some more resource there again just may be we just did little bit early. On the R&D side, we have always invested a lot in R&D, it's been pretty high at 14.5%, I think it's 13.7% now that's not a big difference that can just be fluctuations based on revenue and the fact there is little more third-party stuff in the quarter. So ratios can sometimes slow. I guess the common is there is no big trend, its business is usual, same it has been in the past.

Operator: And we will go next to Justin Keywood from GMP Securities.

Justin Keywood: Hi thanks for taking my questions. Just on the balance sheet in the accounts receivables seem to spike in the quarter, is this just normal seasonality or is there something else going on there?

Steve Sadler: I would say, usually at the end of the year you will know did it last year too we do a lot of our maintenance billing. And again so the bill amount ended December but Christmas time sometimes can be a little slow, so sometimes it doesn't get out until the first of January. So if it's not collected by the end of January of course receivables are up. You know deferred revenues up as well.

We had pretty significant collections in February. I don't want to call it seasonality but it seems to being a trend in the last couple of years.

Justin Keywood: Okay, thanks. That's helpful. And then on the Earthband customer announcement earlier this month, will Earthband be reselling Enghouse's products similar to or TELUS relationship or is this different type of sales situation all together?

Steve Sadler: It's pretty similar.

As I said we are trying to get service providers and other resellers who want to have a SaaS model to use our software and then they either buy licenses and sell it SaaS or by paying us Premise or they can share revenue with us. We are pretty flexible with the customers but you got to consider similar to TELUS.

Justin Keywood: Okay. And then just on the organic growth, I think you mentioned the Premise contributing $2.9 million but just to get your view what was the organic growth in the quarter and where do you see that trend going into this year?

Steve Sadler: I always have said in the past it's over time it can be plus or minus in the quarter, low-single-digits, I would say it's more now let's say stable even because again with subscription it does takeaway some immediate revenue and spreads the revenue over some future years. So I think you got to look at it and say its stable again low-single-digits but stable.

Operator: And we will go next to Paul Treiber with RBC Capital Markets.

Paul Treiber: Thanks so much and good morning. I just want to focus on license revenue for a moment, it is up quite strong in the quarter up 17%, does that stem largely from the Asset Management Business as opposed to Interactive and then what was the reason for the strength in the quarter there?

Steve Sadler: Yes I think it does more on the Asset Management side but I wouldn't read again much into that either look as you go up and down, next quarter you could say hey your revenue is down a bit, there are larger deals in the network side, there is no trend there, Paul. It's just quarterly fluctuations.

Paul Treiber: And in regards to the shift from upfront license to subscription is that predominantly on the Interactive segment it sounds like you expect a shift to continue to be sustained here?

Steve Sadler: Yes, it's mainly in the Interactive side, again that's up to the customers we are just allowing them to pick, I wouldn't say there was a big shift, we don't have a whole strategy or anything like that, is we just giving the opportunity to customers who don't really want to pay upfront because that is what the SaaS model allows them to do, we give them a financing way to do the same thing.

It wasn't large in the quarter for a subscription revenue number in the quarter but even a small number by 50,000 or even 100,000 takes away a couple of million in potential premises could just spreading it over like three years rather than taking the revenue upfront. So yes just it's not a strategy, it's just giving the customers the ability to do whatever they want without us having the flexibility to do so.

Paul Treiber: And I think last quarter or couple of quarters ago, you mentioned that very aggressive pricing on the Interactive business from some competitors, you are now seeing some consolidation, are you beginning to see more rationale pricing environment?

Steve Sadler: Your question assumes it was totally irrational. I think the SaaS model on that lot of them are using they were selling below costs. Interactive was a big, Interactive intelligence was large in that regard, they will be bought up by Genesys.

We haven't really seen any change; we expect there will be some. As you know Vaio went to bankruptcy in the last few weeks. So again what's going to happen with that probably anyone who takes that on i.e. the debt holders et cetera, they will probably want to rise some price to get make sure they get their money back. So I think in time pressure will come off the pricing but I would say it has done so today.

Paul Treiber: Okay. And just one more one from me, with regards to the profitability, you're at the high 20s now, I think previous in the past you have called out of target for 25% EBITDA margin. I mean how sustainable do you see that the margins in the high 20% range and you think we can drift back down to 25% target over the next few quarters?

Steve Sadler: Yes, I think it stays pretty much in the range of high 20s. The only thing I would say is if we now go back to emphasize a more internal revenue generation that means investing advance in sales and marketing some more money that could have a drift down a little bit hopefully to get some revenue in the future from doing that. So the way we're running today I think the margins is 20A it's certainly gone up a bit as you pointed out but remember we put in some sales and marketing and so to taking it out again, there will be a time and maybe it's soon that we have to put that back in again.

So I still think overall I'm pretty happy with 25-percent-plus but it will be a little higher if we continue to operate like we're today. The 28%, 29% is more normal for what the business is doing today because R&D is down a little bit, it's gone to 14.5 to 14 and you've also got sales and marketing down a little bit because we haven't had to back in to try and get some greater growth.

Operator: [Operator Instructions]. And we will go next to Ralph Garcea with Echelon Wealth Partners.

Ralph Garcea: Good morning gentlemen, couple of quick questions.

One on the Presence deal that's your first one in Spain, sort of second one in Southern Europe, I guess the RITEK deal a couple of years ago. Are you seeing more opportunities I guess in that region, Spain, Italy, Portugal, possibly and can you leverage the Spanish one into other Spanish speaking country?

Steve Sadler: Yes, I wouldn't say because we have to look it's little bit opportunistic we know some of the competitors that are out there. I would say that we're trying to build a global organization. We were in Spain, we were in -- solid in South America, we are now better there. It does as we expand in all these regions, Germany, Italy et cetera it does have people there looking for other opportunities in those geographical areas that we can put with our organization.

So just continues on the plan, it just happened to be at Spain rather than Italy rather than Germany which are the geographical areas we looked at over the last three, four years.

Ralph Garcea: And what were the revenue splits for Presence between Spain and South America roughly?

Steve Sadler: Hard to do, I'd say half in Spain.

Ralph Garcea: Okay.

Steve Sadler: You got Spain, South America you also have a bit in the U.S. but it's all sort of tied together some customers expand over each area, so which way you account it, so I would say it's probably 50% in Spain.

Ralph Garcea: Okay. And when you develop your Skype for Business product, are you getting pulled into more deals by the Microsoft sales force or you just sort of being opportunistic in certain accounts to try to capture that extra revenue dollar on the Skype side?

Steve Sadler: Yes, we're trying to build that relationship with Microsoft. But I won't say they're pulling us into a lot of deals. I think it's still pretty early for them and us they're still getting their systems better but yes it's positive for the future and again we're trying to build that relationship with Microsoft.

Ralph Garcea: I mean and all the developments have been done right, mainly channel activity trying to grow the pipeline there.

Steve Sadler: I can assure you all the development is never done. All this developing new things, things are changing, they're changing their software you got to react to it, so certainly yes, we are selling accounts right now, it's not a matter we have to do development to start it, it's already been happening and been happening for some time. But I wouldn't say all the developments been done it's never really done.

Operator: And there are no further phone questions in queue. I would like to turn it back over to Mr.

Sadler for any additional or closing remarks.

Steve Sadler: Well, thank you everyone for attending the call. We appreciate your continued support.

Operator: And this concludes today's conference. Thank you for your participation.

You may now disconnect.