Executives: Stephen Sadler - Chairman and Chief Executive Officer Todd May - Vice President and General Counsel Doug Bryson - Vice President, Finance and

Administration
Analysts: Paul Steep - Scotia Capital Deepak Kaushal - GMP Securities L.P. Paul Treiber - RBC Capital Markets Daniel Chan - TD

Securities
Operator: Good day, ladies and gentlemen, and welcome to the Enghouse Systems Limited 2018 Q4 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. I am 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 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 that 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 statement 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, Todd. Doug will now give an overview of the financial results.

Doug Bryson: Thank you, Steve.

Good morning everyone. Yesterday, Enghouse announced its unaudited fourth quarter and audited year-end financial results for the period ended October 31, 2018. Revenue increased to $342.8 million for the fiscal year, compared to revenue of $325.4 million in the previous fiscal year resulting in another record year for the company. Revenue includes a $176.4 million from hosted and maintenance services, an increase of 6.4%. Operating expenses were $136.2 million for the fiscal year, compared to $134.4 million in the prior fiscal year as savings related to operating cost synergies offset incremental costs related to acquired operations.

Results from operating activities were $103.2 million, compared to $90.6 million last year, an increase of 14%. Net income for the fiscal year was $57.7 million or $2.11 per diluted share compared to $50.8 million or $1.87 per diluted share in the prior year. Adjusted EBITDA for the fiscal year was $106 million or $3.88 per diluted share compared to $94 million or $3.45 per diluted share last year, an increase of 12.8%. Fourth quarter revenue was $85.8 million, an increase of 1.9% over revenue of $84.2 million in the fourth quarter last year. Operating expenses were $33.6 million compared to $34.9 million in the prior year’s fourth quarter and include incremental operating costs related to acquisitions.

Non-cash amortization charges related to acquired software and customer relationships in the quarter were $6.4 million, compared to $7 million in the prior year’s fourth quarter. Results from operating activities for the quarter were $27.3 million, compared to $24 million in the prior year’s fourth quarter, an increase of 14%. Net income before tax for the quarter was $22.3 million, compared to $19.9 million in the prior year’s fourth quarter. Income tax expense was $2.7 million in the current quarter versus an income tax expense of $1 million recorded in the comparative quarter last year. As a result, net income for the quarter was $19.6 million or $0.71 per diluted share, compared to the prior year’s fourth quarter net income of $18.9 million or $0.69 per diluted share.

Adjusted EBITDA for the quarter was $27.9 million or $1.02 per diluted share compared to $25 million or $0.92 per diluted share in last year's fourth quarter. Enghouse generated cash flow from operations of $24 million in the quarter compared to $29.1 million in the prior year's fourth quarter. Cash flows generated from operations for the fiscal year were $98.3 million compared to $83.2 million in the prior fiscal year, an increase of 18%. Enghouse closed the year with a record $193.9 million in cash, cash equivalents and short-term investments, compared to $130.3 million at October 31, 2017. The cash balance was achieved after payment of $16.8 million for acquisitions net of cash acquired and $18.4 million for dividends.

Shortly after year-end, Enghouse acquired Telexis Solutions B.V. and Telexis B.V. of the Netherlands and Capana Sweden AB. The acquisitions will expand the suite of solutions and geographic reach of the Company's Asset Management Group in the coming year. Finally yesterday, the Board of Directors approved an eligible quarterly dividend of $0.18 per common share, payable on February 28, 2019 to shareholders of record at the close of business on February 14, 2019.

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

Stephen Sadler: Thank you, Doug. As Doug noted, we continue to grow our cash and short-term investments and now have over $193 million from $130 million last year. This is after spending $18.4 million on dividends, $16.8 million on acquisitions and over $2 million on capital expenditures.

Cash flow from operating activities was $24 million and over $98.2 million for the year, an 18% increase over the prior year. Revenue in Q4 was up modestly from the prior year as we restructured our sales organization and demand generation activities. Adjusted EBITDA was a strong 32.6%, a record up from 29.6% in the prior year Q4 and 30.9% for the year compared to 28.9% in the prior year. Foreign exchange negatively impacted Q4 revenue, compared to Q3 by about $1.3 million, but also reduced our cost by about $800,000 negatively impacting operating income slightly. In terms of acquisitions, we did not complete any acquisitions in the quarter, but we did complete two early in November, Telexis and Capana.

Both these acquisitions are in the Asset Management Group, a good start to the year. Economic and market factors are favorable for acquisition opportunities that meet our acquisition criteria. I would now like to open the call for questions.

Operator: [Operator Instructions] We will now move to the first question from Paul Steep from Scotia Capital. Please go ahead.

Paul Steep : Morning. Steve, can you talk a little bit on Interactive, just in terms of how you want to think about the targets in the next year for the team? We’ve seen declines over the past couple of years. Is there been a specific product – excuse me or market segment that’s been driving some of those declines? And are we near a point where hopefully some of the lead gen and the other activities start to reverse things in the other direction?

Stephen Sadler: Well, you’ve got a market whereby there is a lot in what they call SaaS type competitors. And we’ve got a bit more to that SaaS area as well as subscription. So, of course, that changes the revenue profile.

Again, it’s a tough market. But I don’t see it really changing that much for us. Again, pretty steady, I think low-single-digits and we are taking some demand gen activities which take time to show results that hopefully will show some results in the next year.
Paul Steep : Okay. Fair enough.

On the Asset Management side of the business, if we think about what drove growth there? You called out, I guess, CDRator and Locus on a full year – well, CDRator on a full year basis and then you talked about Locus and Transit on the other side on the PS side. How is demand and where are you seeing the most success, I guess, on the license side on the Asset Management business?

Stephen Sadler: Yes, if you look at our competitors, they seem to be struggling, because again, it’s a tough market. But we are doing pretty well, because we generally provide software that makes telco’s money. So from our point of view it’s no particular area. It’s really the whole business is doing okay.

Paul Steep : Okay. And then, M&A team, how are you progressing on building out that team? You’ve been putting some efforts there in the last bid. You’ve obviously closed a couple deals post quarter. How are you feeling about buildup of the team, Steve?

Stephen Sadler: Yes, the team is pretty well built. We are not building it up anymore.

We just got to get some more deals done.
Paul Steep : Okay. Last one, IFRS 15, any thoughts on how we should think about the impact to that into next year just on the numbers?

Stephen Sadler: You know, we will have some impact. Some of our revenue, I think is about 1.8 or so that we normally did in the next year or two too that we will take to retained earnings in Q4. But we will, I think make that up with the new rules, some of our revenues that would push out years will come into next year.

So, I wouldn’t think it’s going to have a major impact.
Paul Steep : Okay. Thanks.

Operator: We will now take the next question from Deepak Kaushal from GMP Securities.
Deepak Kaushal : Thanks for taking my questions.

So, first of all, I just got a quick follow-up on Paul’s earlier question. Just in general, then, Steve, commentaries on organic growth. So you put a lot of efforts this year into improving demand generation. So you are saying that you expect to see some benefit in 2019 from those strategies?

Stephen Sadler: That’s correct. And again, we put a lot of effort into it and continue to do so.

We are not finished.
Deepak Kaushal : Okay, great. And then, I think in the past, relating to organic growth, you embarked on a strategy to sell hosted services via telco partners. I wonder if you could give us an update on that effort and if you are starting to see any traction? Or they are starting to see any traction with their end-markets for you guys?

Stephen Sadler: I think it’s going okay. But a little slow, mainly because telco partners aren’t that aggressive in moving it forward.

So we have to help them to move a little bit faster.
Deepak Kaushal : And is that something you might see move faster in 2019 in the coming year, calendar year or beyond that?

Stephen Sadler: We hope so. Deepak Kaushal : Okay, okay, excellent. So, Steve, just stepping back, when I think of the last ten years, and when I first met you, the economy has been on an incredible run here and south of the border. I was just wondering what you think of – in terms of, but how you think of the business cycles over the longer term? And how you shift or change the way you manage your business through these cycles and where you think we are currently in that?

Stephen Sadler: The biggest cycle right now is going through this recurring revenue call it, SaaS or subscription model.

We’ve been living through that for many years now. Some of those guys have actually been acquired. But that continues to be the thing we have to address. We are a little surprised that people doing that model for a long time continue to lose money. But we’ve got to be more active in that space because it seems to be still popular and growing with customers and we want to do and offer solutions that the customers want.

Deepak Kaushal : Okay. And in terms of the telcos, as they look to start investing in things like 5G, how do you see that creating opportunities or challenges for your business units?

Stephen Sadler: It’s pretty steady. We are ready for that. I am not sure how fast they are going to invest in it. But, again, I don’t see any positives or negatives from it.

Deepak Kaushal : Okay. And then a last macro question on Brexit. Any kind of outlook or things we should consider for the UK business in the coming year?

Stephen Sadler: The only thing I would watch is the exchange. I don’t know what’s going to happen. Is it going to be higher or lower.

Again, it does a lot compared to the U.S., not sure what it will do compared to Canada. But the impact in the business, I don’t see any major impacts for us. But exchange of course impacts the numbers that we report you guys see.
Deepak Kaushal : Okay. And are you looking to put a hedge on for those things or do you just naturally hedge through your business?

Stephen Sadler: We are pretty naturally hedged.

We’ve got a large group in the UK including R&D. So, we are naturally hedged. We believe well enough for that. Deepak Kaushal : Okay, great. And then one final housekeeping question and then I’ll pass the line.

In the past, you’ve talked – or you’ve considered adding some debt to facilitate the dividend payments. We had a rising interest rate environment. Have your thoughts on that changed? And how you might deal with those things going forward?

Stephen Sadler: Let’s just say, we are implementing some things we will be able to get cash into Canada and probably we have a lot of cash, but it’s not all in Canada and we probably are not looking at doing any debt at this time.
Deepak Kaushal : Okay, great. Thank you very much.

Appreciate the updates and you guys have a good end of the year and a happy holiday.

Stephen Sadler: Thanks.

Operator: [Operator Instructions] We will now take the next question from Paul Treiber from RBC Capital Markets.
Paul Treiber : Thanks very much and good morning. I was just hoping you can elaborate on your last comment in prepared remarks on economic and market factors being favorable to M&A.

Stephen Sadler: Okay. I mean, as we all know, if you just turn on the news, every day there is issues between countries, with the U.S. and Europe with Brexit, so there is a lot of uncertainty. Again, if anyone running a business that weighs on them a little bit. And the other side you got raising interest rates, which also gets people to wonder and people who use debt to do deals makes it a little more difficult if they have to borrow money to do it.

So, for us, it looks a little bit like 2007, 2008 environment again and we did very good in acquisitions after in that environment. I guess, the summary would be, the environment has more motivated sellers than it has had in the last couple years.
Paul Treiber : Okay and then, just to elaborate a little bit further on that, are you seeing sellers begin to revise down their valuation expectation or you expect them to do so going forward?

Stephen Sadler: We are comfortable that the valuations that meet our criteria, they – recently, they’ve been a little higher and if we passed on the deal, no one bought them. So, maybe that’s a wakeup call a little bit. But with rising interest rates, the aging population and the news you read every day, I think we’ll be fine with the criteria that we’ve always used and we’ll continue to use.

Paul Treiber : And then, with cash building up on the balance sheet, it’s a record high it seems over the last couple years now. What are your thoughts on the larger acquisitions? And then you’re potentially adding a new vertical. How do you think about that in terms of the big picture?

Stephen Sadler: Two questions there, thoughts and acquisitions and larger ones. If they meet our criteria, we have the cash to do it. Don’t really need much help from the markets or anything.

So we are in a pretty good position. A new vertical if it’s more opportunistic. We are not searching a new one, because we’ve got plenty of opportunities in the verticals we are in. But if one comes along, and I’ve been saying that for a long time we’d be willing to do it. But we haven’t seen attractive one that’s come along.

It has to be a little bit bigger if it’s going to be the first one in a new vertical.
Paul Treiber : And shifting gears to margins, obviously, the profitability is quite high this quarter. And then, that to me it seems like it’s because the – that you’ve integrated the acquisitions over the last few quarters there hasn’t been any new acquisitions to offset those margins. But is it – where do you typically see the efficiencies in your business? And then, going forward, previously you’ve commented that certain margins between 25% and 30%. Is that’s still a reasonable outlook going forward with the normal mix of acquisitions?

Stephen Sadler: I think it’s probably at the high-end of that now.

It depends on the acquisitions we do. The ones that we did early November had very little restructuring. And you got to remember, with restructuring, we only put in severances or premise things we have to get out of. When there is very little special charges of restructuring, it means, we get to those higher margins and EBITDA faster. So, I expect our margins still to stay pretty good in Q1 unless of course we do other acquisitions which might drag it down in the quarter.

Paul Treiber : Okay. Thank you. I’ll pass the line.

Operator: We will now take the next questions from Daniel Chan from TD Securities.
Daniel Chan : Hi, good morning.

Just a follow-up question on Paul’s question on the margins. So, we’ve seen a couple quarters now where you haven't done the acquisitions and margins continue to move higher. So, in a steady state, where you are not doing acquisitions, where do you think your margins would peak out of that?

Stephen Sadler: No, we don’t really forecast that. We are always doing continuous improvement. But I will point out that the exchange in Q4 took down revenue by $1.3 million, took down cost by $800,000.

So if it was the same as Q3, we would have been $500,000 higher on the bottom-line and our margins would have also been higher. So it depends a little bit on that exchange rate, but - and acquisitions, but we continue to look for ways to keep our profitability at a reasonable level while investing to grow our revenue with some new demand generation techniques. Daniel Chan : Okay, great. Thank you.

Operator: [Operator Instructions] As there are no further questions, I would like to hand the call back over to Mr.

Sadler for any additional or closing remarks.

Stephen Sadler: Well, thank you for your continued support. We continue to take actions to better the company for an improved future. Have a Merry Christmas and a happy holiday season.

Operator: Thank you.

That will conclude today’s conference call. Thank you for your participation, ladies and gentlemen, you may now disconnect.