Operator: Good day and thank you for standing by. Welcome to the Enghouse Second Quarter 2021 Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today Stephen Sadler, Chairman and CEO.

Please go ahead.

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 we begin, I will have Todd read our former disclaimer.

Todd May: Certain statements made may be forward-looking.

By their nature, such forward-looking 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 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.

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

Doug Bryson: Thanks, Steve.

Yesterday Enghouse announced its second quarter unaudited financial results for the period ended April 30, 2021. All financial information is in Canadian dollars unless otherwise indicated. The financial and operational highlights for the three months and six months ended April 30, 2021 compared to the three months and six months ended April 30, 2020 are

as follows: Revenue achieved was 117.3 million and 236.4 million respectively compared to the record revenue of 140.9 million in the second quarter of last year and 251.6 million year to date last year. Results from operating activities were 36.9 million and 77.6 million respectively, compared to 46.3 million and 77.1 million. Net income was 20.7 million and 41.4 million respectively, compared to 27.1 million and 43.2 million.

Adjusted EBITDA was 40.2 million and 84.7 million respectively compared to 49.3 million and 84.6 million. Cash flows from operating activities excluding changes in working capital was 42.6 million and 84.3 million respectively, compared to 50 million and 85.2 million. Although revenue for the quarter achieved was 117.3 million, compared to record revenue of 140.9 million in the same period in the prior year, Enghouse continues to generate positive cash flow through operating income and profitability. The decline in revenue was driven primarily by the prior year's significant increase in our Vidyo business that has now returned to levels more consistent with pre-COVID volumes. Enghouse continues to expand its cloud offerings and has implemented new initiatives aimed at increasing sales of cloud-based products, while offering choice to its customers by providing multi-tenant cloud, private cloud, and on-premise solutions to the market.

As previously announced on April 28, Enghouse signed a $29 million multi-year agreement with the Norwegian Government to update its National Emergency Fire Services Technology System. The eight-year agreement builds on the success of the Norwegian market with the 55 million 12-year agreement with Norwegian Health Care announced in October 2020. The company closed the quarter with 169.6 million in cash, cash equivalents, and short-term investments, and no debt after paying 90.5 million in dividends during the quarter. As always, Enghouse prioritizes 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 has replenished its acquisition capital, while returning 83.2 million in special dividends to shareholders.

Yesterday, the Board of Directors approved the company’s eligible quarterly dividend of $0.16 per common share payable on August 31, 2021 to shareholders of record at the close of business on August 17, 2021. I'll now turn the call back to Mr. Sadler. Steve?

Stephen Sadler: Thanks, Doug. Vince will now give some operational highlights for the quarter.

Vince Mifsud: Thank you, Steve and welcome everyone to our Q2 2021 conference call. As Doug mentioned, Enghouse had another strong earnings quarter with adjusted EBITDA of 40.2 million, achieving 34.3% of sales and strong cash flows from operations before working capital of 42.6 million. This represents our fifth concession quarters of exceeding $40 million of EBITDA. The strong earnings and cash flow performance was achieved despite lower demand in our Vidyo business, which we believe speaks to our company's ability to manage costs, and ensure they are in-line with revenue, ultimately providing long term sustainability to our business, benefiting our shareholders, employees, customers, and suppliers. During the quarter, we did experience a spike in demand for our professional services with our highest quarterly revenue achieved of 18.5 million.

And I'll speak later to what is driving the demand in each of our vertical businesses. One of the advantages we have at their companies is diversity in terms of the verticals and geographic markets we operate in, enabling us to perform well when demand for B2B enterprise software shifts between markets and verticals. Our Vidyo business experienced a massive rise in volume and demand at the start of COVID in Q2 2020, followed by a fall that we've seen over the last few quarters. Demand for our Vidyo platform as a solution that technology companies integrate into their software and hardware products continues to be good and an important part of our business. VidyoRoom’s hardware demand and its related hardware support, which was used primarily by enterprise customers, has declined significantly since the start of COVID.

We believe demand for VidyoRoom’s hardware will continue to be low until businesses decide on their final mix of employees working from home or in the office. Our overall view on Vidyo’s that we have now returned to more normal levels of volumes and our through the COIVD related fluctuation. For the contact center business, our differentiation continues to be focused around offering choice for our customers, being one of the only companies in the market that provides multi-tenant cloud, private cloud, and on-prem. Currently, we are seeing more interest in demand for our cloud offering. In particular, a multi-tenant cloud that we recently began to offer directly to the market, as well as continued to provide to our network of service provider partners is experiencing more demand.

We believe this is the result of the overall contact center market accelerating its move to the cloud, as agents in many parts of the world continue to work from home. One of the other trends we're seeing in the contact center business is more demand for our professional services. As customers request our assistance in migrating to the cloud and move the [Microsoft Teams] teams as their UCaaS platform from Skype and other premise based communication platforms. Q2 was our first full quarter of post-acquisition of Altitude. The acquisition is progressing well and are particularly happy with the engineering team that we inherited in Portugal.

We were able to leverage this strong talented team and some of these engineers have been quickly able to contribute positively to our product roadmap of other Enghouse Cloud products. Turning now to a few highlights in the Asset Management Group. As Doug mentioned, at the end of the quarter on April 28, we announced the signing of another large public safety deal with the Norwegian Government to update its National Emergency Fire Services Technology. This $29 million deal is another great win earned by our public safety team. And this deal was an addition to the October 2020 announcement of the large $55 million deal to deliver medical emergency services.

Both of these projects represent a considerable amount of revenue backlog in our public safety business, as only a nominal amount of revenue has previously been recognized. Our telecom business is experiencing normal demand for OSS infrastructure solutions, and some positive demand for BSS, IPTV, and professional services. The growth in BSS is driven by the emergence – partly by the emergence of mobile virtual network operators that are looking to leverage their large customer bases. As an example, in the quarter, we added a new customer in the insurance industry that are providing mobile offerings to their customers to drive more revenue. Added professional services demand is also being driven by our telecom customers transitioning our Enghouse on-prem BSS solutions to the cloud.

On the transit market, ridership continues to be down significantly compared to pre-COVID. However, our primary transit product offering is our automated fare collection product enabling cashless contactless payments. And we view this as an area in the transit market that will continue to have demand given its public safety benefits. We continue to build out our transit product suite adding EMV in Mobile ticketing and IoT features to expand this business into new geographic markets. Let me turn the call now over to Mr.

Steve Sadler.

Stephen Sadler: Thanks Vince. As Doug and Vince noted, our operations remain financially strong with good cash flow and a strong balance sheet. We completed the acquisition of Altitude December 20 and Q2 was the first full quarter that this acquisition was included in our financial results. It operated as anticipated in terms of revenue and profitability.

In fact, the operating income was a little better than expected. We expect this business to be operating at our normal EBITDA percentage next quarter earlier than our normal time frame for acquisitions. After the quarter, we announced the completion of a small tuck in acquisition in the survey and community marketplace, which is being combined with our Survox business in the U.S. No financial results were included from this operation in the quarter. We continue to focus on capital deployment during our – doing our due diligence remotely.

The acquisition pipeline is strong, which is positive, although the company values looking to be acquired have increased with strong public markets, low interest rates, and stimulus that makes it a little tougher to do deals within our financial parameters, but opportunities are not getting done at these higher levels in our marketplace. As a result, opportunities are taking a little longer to be successfully completed. We continue to maintain our financial discipline when reviewing acquisition opportunities. We believe higher global taxes and the possibility of increasing interest rates, or provide significant opportunities within our financial parameters. I would now like to open the call for questions.

Operator: [Operator Instructions] Your first question is from Daniel Chan with TD Securities. Your line is open.

Daniel Chan: Hi, good morning, guys. So, you're still pushing on the cloud, sounds like there's still a lot of demand for your cloud solutions. How far along would you say your products are to satisfying your customers cloud needs, just trying to get a sense of whether you're seeing any risk of these customers turning over to a cloud native competitor?

Vince Mifsud: Hey, Daniel, this is Vince.

So, our product is quite mature. It's been in the market through our service providers for many, many years. We have literally thousands and thousands of agents on our Enghouse Cloud product. The only new thing is, we stood up our own cloud, you know, a few quarters ago. So, when customers – our existing customers that we deal directly with want a cloud solution, we offer them the choice of going to our cloud offering.

So, the product is fully functional. It's been in the market for many years, and it’s fully featured competitive with other cloud multi-tenant cloud vendors in the market.

Daniel Chan: Okay, thanks. That's helpful. And then just on that point where you said, for customers that want their own cloud rather than through the service provider, is there any risk that you're competing with some of these Telcos that are offering contact center as a service? And if there is, how do you kind of carve out the market relative to what they're addressing?

Vince Mifsud: Yeah.

So, most of the service providers that offer that actually use Enghouse. So, we have a lot of the world's leading service providers that white label our product and offer it as a contact center as a service. And the way we segment the market is, we work closely with our partners, and we go by verticals. So, we'll go directly in some verticals, and they'll go directly in other verticals. So, we work closely with them and minimize channel conflict that way.

Daniel Chan: Great, thank you.

Operator: Your next question is from Stephanie Price with CIBC. Your line is open.

Stephanie Price: Good morning. I was hoping if you could talk a little bit about the host of the maintenance revenue line.

So the press release mentioned Vidyo as an impact has also had a comment about customers adjusting their software requirements. Just curious if you could expand on that a bit.

Stephen Sadler: Yeah, just as a comment, as Vince had said before, you know, our maintenance, for example, in the Vidyo part where we had VidyoRoom’s, it's down quite a bit. So, it's caused that line to go down on our financial results. We expect – as things open up when we go back to the premises that will come back up.

We also had a couple of, let's say, large clients that were hanging on in the transportation area and the retail area. And when the third wave hit, they basically stopped or went out of business in one and the other one, they just stopped using the services because it was an airline that wasn't really having much business. So, the number is down, but our future is still fine.

Stephanie Price: Okay, sounds good. And then can you talk a little bit about the Norway fire infrastructure contract that you signed? And just wondering about any other opportunities in that region, and in the transportation division at this point?

Vince Mifsud: Yeah, so – as we mentioned, these two deals are fairly large.

So, there's a lot of revenue backlog to deliver in the near future. So, the focus is currently on delivering those two large projects. The other area of transit that we're looking to geographically expand is the automated fare collection market. And that's the product and suite that we are focused on selling in many markets in the world currently.

Stephen Sadler: Yeah, the one item that we should mention and clarify, the numbers we provided you is the contracts that [we want], we're already getting additional revenue from changes they want made to what was originally proposed.

So, it's not all in, it's a matter of this is the contract for delivering what they put out originally, but we're already getting additional revenue and services requests to do additional work.

Stephanie Price: Okay, that's helpful. Thanks. And just finally, for me on the margin in the IMG division, are these, kind of normalized margins here, how do you think about the margin profile this quarter and maybe going forward?

Stephen Sadler: On the IMG it’s pretty steady. So they're probably pretty normal.

I would say it always depends on our revenue mix. The more license or software that we do direct has higher margins, of course, and again, it also depends on maintenance. The SaaS side generally have little bit lower margins, because it's right now is quite a competitive market with pricing being still tough in that area. So, it just depends on the mix, but you can probably use the margin numbers pretty normal.

Stephanie Price: Great, thank you very much.

Operator: Your next question is from Paul Steep with Scotia Capital. Your line is open.

Paul Steep: Great. Good morning. Maybe just to tee on some of the topics we've talked about in the past on cloud, I know you're agnostic and just want to deliver to clients, but could you give us a sense of how much the business has maybe moved to the cloud, and IMG and AMG, where do you think that maybe goes over the next couple of years?

Stephen Sadler: I'll give a brief one and let Vince talk to maybe a little more detail on it.

On the AMG, very little goes to the cloud, they're generally direct, it's generally, OSS BSS type systems that we sell. So, really not much cloud there. Some competitors are trying to go to the cloud, but they're having difficulty getting a market there. On IMG it is moving to the cloud. Again, we offer both whatever the customers want.

My comment would be that I think we've got to learn how to sell more to enter the cloud. While in the past, we did a lot through channels and on-premise type systems. We've hired the direct sales. We're going more direct in the cloud, but it takes a little time to ramp that up. Last year, we were basically ready to go Vince had put some of the pieces in place and in the COVID hit.

So, that gets tough to do. So, we've sort of got the [80-year], but I still feel pretty confident that we're ready. It's just a matter of getting out there and executing it. We have the software, we have the products, we just got to get more into execution on the sales and marketing side.

Vince Mifsud: Yeah, and just to add to Steve's comments.

So, the Vidyo product, we sell a lot of that in the cloud. Like we get a lot of requests for our Vidyo, multi-tenant cloud. In IPTV, which I touched on last quarter, that's pretty much all cloud centric. So, it is moving – the area of contact center as a service, unified communication as a service is moving more aggressively to the cloud.

Stephen Sadler: Just another comment.

In the pandemic when you're not going on site and people are running on their own premises, the Cloud is a little easier. So, you can see that revenue in that area really hasn't been impacted very much. But on-prem has, which we've done more of, and our position is, we can sell either. We have products that do both.

Paul Steep: That makes sense.

And just to key on the one comment you said there, Steve, and think I know the answer, but it's worth hearing you articulate it. In terms of building up that direct cloud salesforce, unlike others, I assume you're going to be pretty measured and going after that. And we shouldn't expect that IMG margins, take a big hit. If you upfront and invest, I'm assuming you invest only if you're seeing significant demand. Just to clarify.

Stephen Sadler: I like those questions where you ask me the question, and then you give me the answer. So, yes, you're right.

Paul Steep: Just checking. All right. Actually, the last one for Vince here, Vince on public safety, what's the opportunity or what's unique in those contracts in the Scandinavian countries, it could maybe take to other markets or are they unique requirements, just to those geographies? Thanks guys.

Vince Mifsud: Yeah. I mean, our unique advantage there is we have a lot of credibility in that market. We have a track record and the way our solution is designed, these systems are quite complex. So, they got to integrate with a lot of systems. So, think about integrating with your lights, so that you can max, you know, optimize the routes to the emergency situations, you're integrating to databases around people's health, etcetera.

So, we're really good at having a very open system that has lots of API's to connect into multiple systems. And so that's kind of part of the reason [we won] plus our credibility in the market.

Paul Steep: Great, thanks guys.

Operator: [Operator Instructions] Your next question is from Paul Treiber with RBC Capital Markets. Your line is open.

Paul Treiber: Thanks very much and good morning. Just wanted to going to focus on Vidyo for a couple of questions here. You know, with the hardware versus let’s say the subscription or the services business of Vidyo could you, you know you mentioned that total revenue of Vidyo is basically back to pre-COVID levels? Can you speak to, you know, how those two different moving parts the – what impact that had over the last year, hardware versus the services business [indiscernible] subscription business?

Vince Mifsud: Yeah, so the hardware business, like I mentioned has gone down dramatically. Almost down to nothing. We had hardware, we were selling hardware rooms to enterprises, along with the support that you need for their hardware rooms.

So, that just as a, you know, COVID, sort of continued, people just didn't renew those support contracts and stop buying hardware rooms, for their enterprise. In the Vidyo business, where we're strong on the subscription side is in telehealth. So, what happened there is, you know, there was a buying surge or where a lot of the hospitals that use us bought tons of capacity not knowing where it was going to land. So, they sort of bought in anticipation of massive amounts of Vidyo calls with doctors. And then as it sort of leveled out, they just renewed according to the volumes they needed.

So that's sort of what happened. So, you had this kind of lift, massive lift, and then normalization over four quarters.

Paul Treiber: And just to put some numbers or to try to quantify that better, like how large was the hardware business pre-COVID? And then when you look at the telehealth business, you know, has that grown versus pre-COVID levels?

Vince Mifsud: Yes. So the telehealth business is up on the subscription side relative to pre-COVID. It is up slightly.

The hardware is just down dramatically.

Paul Treiber: Okay. And when – I mean you paid two years ago for a Vidyo, you paid $40 million, you know, when you look at the free cash flow that Vidyo has generated over the last two years, have you gotten to the breakeven point yet on that acquisition or looking at another way, you know, how's the IRR tracking on that acquisition relative to when you bought it, your expectations when you bought it?

Stephen Sadler: Yeah. We're doing very well on that. I guess that's the good news out of the pandemic for us.

We basically got all our money back already. So, we go to a five year or six year payback. That one was probably, maybe one more quarter, but it was just over a year for a payback.

Paul Treiber: Yeah, that's great to hear. Last one for me, just on the expense side, looking at SG&A and R&D on a sequential basis, SG&A declined slightly sequentially, but R&D increased, could you explain some of the moving parts there?

Stephen Sadler: Yeah, part of the R&D, remember what Vince said, we bought Altitude on December 30, and they had quite a large R&D group, and normally, we would rationalize that, but they had what we thought was talented people.

So, we actually took a lot of their team and redeployed it into our other groups for now. So that covered any openings or a lot of the openings we had, and give us some additional staff to move our products ahead a little bit faster. So, we've moved up mainly because of the acquisition. It's not like we're adding in places, it’s just we filled openings faster. Lot of people are having difficulty finding technical staff.

The Altitude gave us quite a few additional staff that we deploy not only in helping in the IMG Group [indiscernible] did, but also in other groups as well. So, that's why that went up a little bit more than other items.

Paul Treiber: Thank you. That's helpful.

Operator: We have no further questions at this time.

I turn the call back to presenters for closing remarks.

Stephen Sadler: Well, thank you everybody. Enghouse continues to have a strong financial position to execute our capital allocation and business strategy even after paying out over 90 million of dividends in the most recent quarter. We continue to build on our journey. Thanks for attending the call and your continued support.

Operator: This concludes today's conference. You may now disconnect.