Operator: Good day, ladies and gentlemen, and welcome to the Enghouse Systems Limited 2019 Q1 Earnings Call. As a reminder, today’s conference is being recorded. At this time, I would like to turn the conference over to Stephen Sadler, Chairman and CEO. Please go ahead, Mr. Sadler.

Stephen Sadler: Good morning everybody. I'm here today with Vince Mifsud, President; Doug Bryson, VP, Finance; Todd May, VP, Legal Counsel; and Sam Anidjar, VP, Corporate Development. Before I begin, I will have Todd read the forward disclaimer.

Todd May: Certain statements made maybe forward-looking statements by their nature. Such forward-looking statements are subject to various risks and uncertainties including those disclosed in Enghouse’s AIF and other continuous disclosure documents which could cause the Company’s actual results and experience to differ materially from anticipated results or expectations.

Readers should not place undue reliance on this forward-looking information and the Company shall have no obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

Stephen Sadler: Thanks. Doug will now give an overview of the financial results.

Doug Bryson: Yesterday, Enghouse announced its unaudited first quarter financial results for the period ended January 31, 2019. First quarter revenue increased $86 million compared to revenue of $85.1 million in the first quarter of the prior year.

The revenue increase primarily reflects contributions from acquisitions which were offset by a decline in license revenue in the interactive management group. Income from operating activities was $25.8 million compared to $24.5 million in the prior year's first quarter an increase of 5.2%. Net income for the quarter was $15 million or $0.27 per diluted share compared to $6.8 million or $0.12 per diluted share in the prior year's first quarter. Last year's first quarter included the one-time charge of U.S. $6.2 million to reflect the impact of the United States tax reform.

Adjusted EBITDA for the first quarter was $26.3 million or $0.48 per diluted share compared to $25.3 million or $0.46 per diluted share last year with the increase being attributable to contributions from acquisitions and operating cost synergies. Operating expenses before special charges related to restructuring of the acquired operations were $33 million compared to $33.9 million in the prior year's first quarter and reflect incremental operating costs related to acquisitions net of operating cost synergies. Non-cash amortization charges on amortized on acquired software and customer relationships from acquired operations were $7.1 million for the quarter compared to $7.2 million in the prior year's first quarter. The company generated cash flows from operating activities of $24.2 million compared to $23.1 million in the first quarter of fiscal 2018 a 4.5% increase. As a result, Enghouse closed the quarter with $190.5 million in cash, cash equivalents and short-term investments compared to $193.9 million at October 31.

The cash balance was achieved after payments of $4.9 million for cash dividends and $22.4 million net of cash required for acquisitions concluded in the current fiscal year and $1.1 million for acquisitions closed in prior years. On December 21, the company declared a stock dividend payable on the basis of one common share for each common share held as of January 22, 2019 which was paid on January 25, 2019. This dividend doubled the number of shares outstanding to 54,638,000 as of January 31, 2019 and effectively achieved a 2-for-1 stock split. Yesterday, the Board of Directors approved a 22% increase of the company's eligible quarterly dividend from $0.09 per common share to $0.11 per common share payable on May 31 to shareholders of record after close of business on May 17. Enghouse has now increased its dividend in each of the past 11 years by over 10% each year.

I'll now turn the call back to Mr. Sadler.

Stephen Sadler: Thanks Doug. As Dough noted, we continue to have a strong cash position of over $190 million after paying over $4.9 million in dividends and over $23.5 million related to acquisitions in the quarter. Cash flow before changes in working capital and taxes was $27.1 million, an increase of 17% over last year's Q1.

IFRS 15 was implemented in the quarter resulting in a reclassification of software license to host of the maintenance to some degree and as we in the past had recurring revenue in our license number. This reflects the new accounting rules. Adjusted EBITDA remained strong at over 30%. In addition, I want to point out a couple of items. Deferred revenue increased to $80.8 million in Q1 2019, an increase of $14.6 million or 22% over Q4 2018 and $12 million or 17.4% over Q1 of 2018.

This bodes well for our future. The Board of Directors as Dough mentioned, after reviewing the cash position and projected operating cash flows increased the quarterly dividend by over 22% from $0.09 to $0.11 per share effective May 17, 2019. In terms of acquisitions we completed two acquisitions in Q1 deploying more capital $22.4 million that we did in all fiscal 2018. In addition we acquired a small tuck in company in February which is not reflected in the Q1 results deploying an additional $3.3 million of capital. Telexis and Capana had minimal restructuring in Q1 performed as anticipated and provided approximately just over $4.5 million of revenue in the quarter.

These acquisitions are now part of the Asset Management Group. Economic and market factors are favorable for acquisition opportunities meeting our acquisition criteria. We intend to provide more focus to capital deployment in fiscal 2019. I would now like to open the call for questions.

Operator: Thank you.

[Operator Instructions] We will now take our first question from Daniel Chan of TD Securities. Go ahead.

Daniel Chan: Hi good morning guys. Steve, I just wondered if we could get some color on the competitive dynamics in the IMG space, this is the second quarter that we've seen significant declines? Last quarter you highlighted that it was due to some competitive pressure from the cloud providers, is that still the case?

Stephen Sadler: You know that's been the case for a long time. So I don't think that's anything extra or new, so that's still the case.

But we're going through a bit of a transition in our sales performance. We're emphasizing a little bit more and focusing on direct as well as indirect. So that transition takes a little bit of time, that's continuing. The other aspect again which has been here for several quarters, and it affects generally only the IMG division, is that Microsoft where we were very strong and tied directly into the Microsoft software, they have now decided that they are going to move from Skype for Business to Teams. They don’t have all the APIs ready for Team, so this has slowed and caused the customers to hold back a little bit on implementing, so we can't tie the contacts in our software in.

Of course the Skype for Business is still continuing on for at least another three years, but it does give the market a bit of a hold especially in the U.S. and Sweden where it was more advanced than in another places. So there's a couple of factors that went into. You know the SaaS is always a factor. I don’t think it was an extra factor.

It continues to be a factor.

Daniel Chan: Okay, that's helpful. So do you expect some of these APIs to come out within the next year and that just helps you create a product to address some of those issues?

Stephen Sadler: Well we're addressing it now. They have some now, but they are not very good and again we were sort of a leader in tying directly into their system. Most people did it through an API connection.

We were directly in. So we've got to change our software around a little bit to do that which we've been doing for six months now, but on the other side of the equation, Microsoft really has to cut all the API connections done well enough in the Teams. So the ideas, they – customers should sell or continue to buy Skype for Business, but you have to make, they got to be confident there is a conversion over to Teams because that's the future direction of Microsoft. So it will continue on for a few more quarters, yes for sure. The year might be right, depends how fast Microsoft moves.

I don't have any, I can't influence that actually.

Daniel Chan: Okay, great, thanks. And Vince, I just want to get an update from you, it's been a year since you've been here, just given an update on any progress that you've had over the last year and maybe what you have planned for the next year?

Vince Mifsud: Yes, I mean, just as I've – we'd done previously we did a lot on the go to market team. As Steve mentioned we've added more direct sales, we added Demand Gen. So we've got Demand Gen teams globally and those are starting to generate leads and get our – the lead flow increased.

So those are some of the major things. We're doing more in the cloud. As you know, we can offer on-prem private cloud and public cloud, so we're seeing more traction in our cloud hosted offerings. So and you know and the building blocks are there and we're hoping to see some results in 2019 and in the future.

Daniel Chan: Great, thank you.

Operator: Thank you. We will now take our next question from Paul Steep from Scotiabank.

Paul Steep: Great, good morning. Steve, could you talk a little bit more, you or Vince I guess, on the sales transition you alluded to a minute ago, what specifically is going on in terms of maybe comp plan changes or more significant reorganization or is it more smaller moves that you've made has been so wide?

Vince Mifsud: I'm not sure it's smaller moves. We've gone from what I would call a marketing organization to Demand Gen organization.

We believe we have one of the some of the best products, but we've got to get in more deals. In doing that sometimes you have to take a more direct approach, because when you go through channels like we mainly do in the U.S. and in the Nordics you are really in their hands in how they do it. So that transition takes a bit of time. It means hiring some of the people who sell to channels are not the best direct sales people, so we're making that transition.

It always takes time to hire the people, it takes time, some people changed over a little bit, we've got to cover the channels. So there's a lot of moving parts there, but it has to be done for the future.

Paul Steep: Where would we be at just to close off on that timing wise in terms of when you would have made the majority of the staff or headcount changes, so that way we can think about it, because obviously none of this is going to happen overnight or even in a quarter or two so?

Vince Mifsud: We started the process last summer. I think we mentioned there, Vince had been in for a quarter. We wanted to take some new approaches, so we started then.

So we've been at it now pretty solidly for six to nine months, but again it takes time to organize it, there's lot of changes going on. So it's about nine months we've been on it now.

Paul Steep: Got it. And just maybe as well on the license side not to dwell on that or bring that up too much, but there was a negative impact in the quarter, was there anything deal related? Obviously we had the IFRS changes, but did sort of moved quarter to quarter on you in a more specific way related to deals we might not have thought about that sort of skewed the number? I know you have called that the deferred growth in your commentary, but is there anything else one time in nature we should just be thinking about there as well?

Vince Mifsud: I'm not sure it is one time, but the movement of IBM or Skype for Business to Teams that does have an impact. It will change over time as that transition happens, but that would be the other item.

It had been there for a while, probably since last summer as well. But you know people will now are – it's holding up because Skype for Business is not just for contact centers, it's for communication. So sometimes it is delaying people making decisions, they got to decide which way they're going in communications. The Teams actually work to do that, but it doesn’t work for contract centers in tying in right now, although they are working it and of course Microsoft wants to do that. But I guess they want to get Teams over to SaaS they could with not all the IPI all the APIs completed.

Paul Steep: Fair enough. And then the last one from me, Steve I guess, six months ago you made some changes to increase staffing in the M&A area and some - I don't know if they are, we'd call them big process changes, but may be talk a little bit about how you've seen the build in the pipeline and how you're feeling? You obviously sounded more bullish about the opportunity set out there, but just in terms of how you're running the process with Sam and the rest of the team?

Stephen Sadler: Yes the – well you say in Q1 we did more, we deployed more capital in all of last year and all the year before as well actually. We're emphasizing and putting more focus on that now. You know, Vince is looking at the new operations taking that forward. I'm going to go back and help Sam out a little bit and see if we can get some deals done and deploy more capital this year.

And as you know, we have lots of capital to deploy. We don’t need to raise money in the markets, so I guess we just have to see how we do.

Paul Steep: Great, thanks guys.

Operator: Our next question comes from Paul Treiber of RBC Capital Markets. Please go ahead.

Paul Treiber: Thanks very much and good morning. Just on IFRS 15 could you, did you have apples-to-apples numbers in terms of the impact on Q1 revenue and EBITDA?

Stephen Sadler: You really can't do that easily. I think we disclosed before, $2.2 million of revenue, what the retained earnings is not reflected in our revenue now in future revenue and we got some revenue because IFRS 15 brings it forward a little bit. And I think that was about 700,000 or so in the quarter. As time goes on it will impact revenue positively, but you've got to go through, you've got the retained earnings part there now that you're going through and those will roll off and then the new ones will come in, in your recognized revenue earlier.

So there's a lot of moving parts there, but that's okay, it is what it is. It doesn't impact cash flow and as you know, I like the cash flow, so that's what I keep watching. And let the accountants go change rules again. I think next year they're going to have - they're going to want us to capitalize all our leases which will make EBITDA go up, but it's not cash. So we continue just to run the business like we have in the past.

Paul Treiber: And in terms of the cost impact related to IFRS 15 with the commissions, I think that was, what you meant, I think you mentioned that in a nominal, there's no real impact on costs in the quarter?

Stephen Sadler: We still expense it all because we don't think its material and again it ties to my thinking, we do it as we pay it. And so we - a lot of people capitalize that upfront if they were depending with the revenue. We're not doing that right now because we don't think its material. So that said, though it still from the cost side just to be clear, no impact. We're expensing everything looks through like we have in the past.

That's some - I think it's a negative but for us it's where the - how we do the cash.

Paul Treiber: Okay and then how do you think about margins and profitability here? I mean you mentioned that the two acquisitions that you did in the restructuring, was that still initial drag on your margins and there's still a ramp up as you take costs out of those businesses and bring them in to your operating model?

Stephen Sadler: Yes, I don't see them as a significant drag on the margins in the quarter. The last quarter I think was when it got up to 32 or so. I think was a little higher than normal because we haven't had acquisitions for a while. Remember there are still other costs related to acquisitions the quarter they're not restructuring costs.

But I wouldn't think there's anything there really we can keep a 30 it's still pretty good. So I don't see that I wouldn't want to say yes, we're going to go back up to higher than that, although with some of our revenue once we get it going that might happen, but I wouldn't put it in a model today.

Paul Treiber: Okay, thank you. I'll pass the line.

Operator: [Operator Instructions] Our next question comes from [indiscernible] GMP securities.

Please go ahead.

Unidentified Analyst: Good morning. So you talked about the larger M&A opportunities last night at the AGR [ph]. I was wondering if you could talk about what's driving these opportunities, are entrepreneurs more willing to sell, is private equity backing off, or is it strictly a pullback in valuation? Thanks.

Stephen Sadler: I think it's just the general environment out there.

I mean everyone watches the news. There's lots of things happening in the U.S. There's lots of things happening in Europe. There's Brexit and interest rates were going up. So yes, I just see people think it might be a good time to sell the business.

I don't think it's anything more than the outside environment. Like I don’t have any particular item any more than you would, but I just see an environment in which there is a little more concern and some people want to take money off the table I guess. The public markets aren't any better. There's none of these companies trying to go public or that right now it's still both the same. So their only exit is really to sell the business.

Unidentified Analyst: Okay, that's really helpful. That's it from me, so I'll pass the line. Thanks.

Operator: [Operator Instructions] It appears there are no further questions at this time.

Stephen Sadler: Well, thank you everyone for attending the call.

We appreciate your continued support.

Operator: This concludes today's call. Thank you for your participation. You may now disconnect.