Operator: Good day, ladies and gentlemen, and welcome to Enghouse’s Q4 2019 Conference Call. As a reminder, today's conference is being recorded. At this time, I would like to turn the conference over to Steve Sadler, Chairman and CEO. Please go ahead, Mr. Sadler.

Steve Sadler: Good morning, everybody. I'm here today with Vince Mifsud, Global President; Doug Bryson, VP, Finance; Todd May, VP, Legal Counsel; and Sam Anidjar, VP, Corporate Development. Before we begin, I'll have Todd read our forward 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 filing 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 these forward-looking statements and 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.

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

Doug Bryson: Thanks, Steve. Yesterday, Enghouse announced its fourth quarter and year-end financial results for the period ended October 31, 2019.

Revenue increased to $385.9 million for the fiscal year compared to revenue of $342.8 million in the previous fiscal year, resulting in another record year for the Company. Revenue includes $219.6 million from hosted and maintenance services, an increase of 14.9%. Operating expenses were $155.1 million for the year compared to $136.2 million in the prior year as the savings related to operating cost synergies were offset by the incremental costs related to acquired operations. Results from operating activities were $112 million compared to $103.2 million last year, a 13.9% increase. Operating expenses include special charges of $1.2 million compared to $0.4 million last year and reflect the costs related to acquisition restructuring.

Net income for the year was $70.8 million or $1.29 per diluted share compared to $57.7 million or $1.06 per diluted share in the prior year, an increase of 22.7%. Adjusted EBITDA for the year was $115.6 million or $2.10 per diluted share compared to $106 million or $1.94 per diluted share last year, an increase of 9%. Fourth quarter revenue was $109.3 million, a 27.4% increase compared to revenue of $85.8 million in the fourth quarter of the prior year. The revenue increase primarily reflects contributions from acquisitions. Results from operating activities were $32.5 million compared to $27.3 million in the prior year’s fourth quarter, which reflects the impact due to changes in product mix on gross margins and strong operating margin contributions from acquisitions.

Net income for the quarter was $24.7 million or $0.45 per diluted share, an increase of 26.3% from $19.6 million or $0.36 per diluted share last year. Adjusted EBITDA for the fourth quarter was $34 million or $0.62 per diluted share, compared to $27.9 million or $0.51 per diluted share last year, with the increase being primarily attributable to incremental revenue contributions from acquisitions. Operating expenses before special charges related to restructuring of acquired operations were $43.7 million compared to $33.5 million in the prior year’s fourth quarter and reflect incremental operating costs related to acquisitions. Non-cash amortization charges on acquired software and customer relationships from acquired operations were $9.2 million for the quarter compared to $6.4 million in the prior year’s fourth quarter. Enghouse generated cash flows from operating activities of $21.7 million compared to $24 million in the fourth quarter of the prior year and $81.4 million for the year compared to $98.3 million in the prior year.

Cash flows from operating activities excluding changes in working capital were $33.9 million compared to $29.5 million in the fourth quarter of last year, an increase of 14.9%. For the year, cash flows from operating activities excluding changes in working capital increased 9.5% to $118.5 million. Working capital adjustments reduced operating cash flows by $12.1 million in the quarter and $37.1 million annually, largely as a result of settling liabilities assumed from acquisitions. Enghouse closed the year with $150.3 million in cash, cash equivalents and short-term investments, compared to $193.9 million at October 31, 2018. The cash balance was achieved after payments of $21.9 million for cash dividends, an increase of 19% from the prior year, as the Company increased its dividend for the 11th consecutive year.

The cash balance is also after the completion of six acquisitions in the year at a cost of $101.2 million, net of cash acquired. These complementary acquisitions increased revenue while expanding Enghouse’s product portfolio and local presence in new countries. Late in the fourth quarter Enghouse completed the acquisition of Eptica, which further expanded the Company’s footprint in France and added customer engagement software solutions powered by AI to the Company’s Interactive portfolio. Finally, yesterday the Board of Directors approved the Company's eligible quarterly dividend of $0.11 per common share payable on February 28, 2020 to shareholders of record at the close of business on February 14, 2020. I’ll now hand the call back to Mr.

Sadler. Steve?

Steve Sadler: Thank you, Doug. As Doug noted, we closed the quarter with over $150 million in cash and short-term investments, after paying approximately $7 million for Eptica, October 22nd, just before the year-end. It should be noted, a holdback of $3.2 million may also be needed for the Eptica purchase. Cash flow before working capital was $33.85 million in Q4, compared to $29.5 million in the prior year, an increase of 14.7%.

It’s noted that net cash flow for operating activities was $21.7 million. As income taxes paid increased with the added profitability and payments were made related to liabilities and provisions from pre-acquisition activities. Revenue was as expected in Q4, although it was negatively impacted by approximately $1.8 million over Q3 and approximately $1.7 million over the prior year due to foreign exchange. The balance sheet also had a small loss on foreign exchange in Q4 but was basically neutral for the year on the operations. Loss due to foreign exchange was about $4.3 million from revenue and cost was -- the reduction was about $3 million for the entire year.

We have reasonable operational hedging. Fiscal 2019 had two large acquisitions in May. Both these companies had substantial losses over the last 10 years. As noted last quarter, the results of these acquisitions were EBITDA positive in the last quarter. And in Q4, they both achieved our targeted EBITDA margins.

For Espial, we continue to invest in IPTV and expect revenue to improve in the second half of fiscal 2020. For Vidyo, we're planning to invest more in sales and marketing, especially in our international operations to improve growth. This will take time and cost to achieve, but we already have a global business structure on which to build. Eptica was closed October 22nd 2019 and had minimal financial impact on the quarter since it was completed so late in the quarter, but it did reduce our cash balance. For acquisitions in general, economic and market factors in our service industries continue to support our acquisition strategy and meet our acquisition financial payback criteria with strong return on invested capital.

We continue to focus our capital deployment activities, as well as positioning to improve internal growth in future years. I will now open the call for questions.

Operator: [Operator Instructions] We'll now take our first question from Daniel Chan of TD Securities.

Daniel Chan: Hi. Good morning, guys.

So, you've got about $150 million of cash and you generated about $80 million of free cash flow this year. If we add back the $30 million of operating cash flows from settlement of liabilities that came with the acquisitions, that puts you at let's call it an adjusted free cash flow of about $110 million for the year. And that's likely to be higher next year following the integration of these acquisitions. Do you think the opportunities in your acquisition pipeline are large enough for you to use up all your capital, or are you considering any alternatives for the capital outside of acquisitions?

Steve Sadler: I think, the exact number is about $118 million for the cash flow, if you add that back $118 million. And we are seeing good opportunities.

As long as they can meet our financial criteria, we're comfortable that we can deploy at least some of that cash next year. Whether we deploy it all or not, time will tell.

Daniel Chan: I guess, my question is, if you're not able to deploy it all, what are your thoughts on using the rest of it?

Steve Sadler: Save it for next year to deploy it.

Daniel Chan: Okay, sounds good. And then…

Steve Sadler: From a dividend point of view, we do look at the dividends in March, and we have increased it every year for the last 10.

So, possibly, the dividend will go up a little bit, some will be used for that. And we're sticking to our general formula where most of the cash we generate, goes to acquisitions, and about 15% to 20% goes to the dividend. And since our EBITDA is increasing, the dividend generally increases.

Daniel Chan: Thank you. Switching over to AMG, in Q3, you mentioned there were some delayed deals, just wondering if you were able to close those deals in Q4.

Steve Sadler: All closed in Q4. There's always some deals that flow quarter-to-quarter, but there was a little bit more in Q3 and they closed as expected.

Daniel Chan: Okay. And final question for me, just to get update on the IMG Microsoft Teams integration. How's that going?

Steve Sadler: Going pretty well.

We basically have the integration done. As we said, in the last couple quarters, we're now -- there's still all those things to do in getting the APIs from Microsoft finished. But we are now actively starting to sell it, and beginning in Q2, it should help our revenue.

Operator: Thank you. [Operator Instructions] We'll now take our next question from Paul Steep of Scotia Capital.

Please go ahead.

Paul Steep: Good morning. Steve or Vince, could you talk a little bit just with the organic initiatives, it looks like things have done well this quarter in Interactive. Maybe how you're feeling about the buildout of the lead-gen engine and walk through what you've done over the last sort of 18 months and where we're at? Where you feel you're at today and the outlook going forward?

Steve Sadler: I'm going to pass it over to Vince, but this does take time to do. DemandGen, you got to put -- you got to start building things online, so people will understand what you do.

We've done -- we've started that, done a lot of it, but it does take time. Maybe Vince you can go through what we’ve been working on.

Vince Mifsud: So, continuing on what I said previously, so the DemandGen part is part of us also going more direct. So, that's moving along nicely. We are doing more on customer success, in terms of selling to our large customer base, cross-selling that kind of thing.

So, overall, the progress is going pretty well. And generally speaking, you're starting to see some of those results happen. So, like Steve said, it takes time and we're making some good progress there.

Paul Steep: On the direct sales force, on that side, how far is the build out sort of through, Vince? Are we -- are you still in the process of trying to recruit and build out the organization, or you feel like, okay, we've done the building out and now we're just giving people time to season and sort of build the pipeline?

Vince Mifsud: Well, we’ve built out some of the direct sales force. What we're adding now, like Steve mentioned is some direct in Vidyo in Europe.

We think there's a big opportunity to sell Vidyo in the European market. So, we'll be adding some more direct sales people in Europe as well to sell the Vidyo product. So that's kind of still new. But the other direct sales teams are built out quite well over the last 18 months.

Paul Steep: Maybe just on to margin upside, obviously Steve, you did a great job with Vidyo and Espial getting some cost out there.

How should we think about where you're at in the progress of that? Have we sort of hit the full inflection point of you removing those costs or is there more to still come in terms of some opportunity for margin upside.

Steve Sadler: We're pretty at the margin, our standard margin, plus a little bit. And now, our objective for both was let's get the operations profitable, they had been profitable for 10 years, get them profitable, and then look at the cash we’re generating and see how to redeploy that back into grow the business and grow the operations. Again, Espial and IPTV, that's probably coming out for the second half the year and we're still investing in that. So not much change there.

For Vidyo, the margins actually are little better than I would expect. And we’ve got to invest, as Vince just said, in some of our global sales and marketing to grow the business a bit more, which again, it always takes a little bit of time. So, usually, there is some costs before you get the benefit of extra revenue. But, the margins are there now. We don't see really anything more to improve the margins other than, hopefully, we can grow the Vidyo but it will cost a little bit to do it.

Paul Steep: Okay, great. And then, I'm not sure if I caught you, you went a little fast at the beginning. So, apologies if I grabbed the wrong one here. You talked about further investments, I know around IPTV. Maybe talk about what that looks like into next year in terms of what you're actually building and when you think you’d have a product in market or if it’s enhancements to the existing solution Espial had in market?

Steve Sadler: Espial was mainly cable.

So, it’s actually a new product that goes for TV over the Internet. They were working on it. And we continue to expect the product will be for first release around the third quarter or early in the third quarter, April, May next year. We already have interest in the product. One could say orders, but let's wait until we get the product all finished to make sure it does what everybody wants, which will be in the second half of next year.

Paul Steep: Great and just the last quick one for me. Steve, in the quarter, I know you had to recognize some of the licenses point in time, should we think about next year when we anniversary that there's potentially bit of a gap, or no those are orders that might have an annual cadence to them in the future? Is there a bunch of volatility? I know that was forced on you by the accounts choices.

Steve Sadler: Yes. Accountants like to change the rules, but we are pretty steady. We don't see any big impact plus or minus from that now.

The first year is always tougher. We had to take some that we could not recognize in the prior year, about $2.2 million that we did last November. So, I think we're fine, it's pretty steady now as we go forward.

Paul Steep: Thanks, guys. Happy holidays.

Operator: Thank you. Our next question comes from Deepak Kaushal of Stifel GMP. Please go ahead.

Deepak Kaushal: Steve, I just wanted to follow up on Paul's question on margins. So, if 30% is your standard corporate rate and you are investing a little bit in sales and marketing and Vidyo next year.

Will that cause margins to get below that standard rate or can you do that within the standard rate?

Steve Sadler: First of all, our standard rate, which I usually tell everyone, is 25% to 30%. So, we’re doing a little better than what I would say our standard rate is right now. We do have to invest a little bit into Vidyo. But, we do have a global infrastructure already in place. So, it's not as much as a lot of other companies might have to do.

If the revenue -- depends on how fast it picks up, what happens to those margins. Initially, it would be a bit of a drag on the margin. So, we might drop a little bit below 30%. But, as revenue picks up, we should be back and above. But as I constantly mention, as we do acquisitions, they usually negatively impact the margins for a couple quarters as we integrate them in.

We happened to integrate both, Espial and Vidyo, both large troubled companies, very quickly. So, that's why our margins are back up where they are. But depends on what we do with acquisitions in the future what happens to those margins. So, if we continue to do some more, they probably will come down a bit. Our Eptica didn't impact the margins very much negatively, because there wasn't really much restructure to be done, which as you know in France is very expensive.

So, we look for companies, we assess all those factors. So, we're doing okay, margins at 30. We've always said, you should think about 25 to 30. We've been beating it a lot, but it depends a lot on acquisitions and how much restructure we have to put through.

Deepak Kaushal: Okay.

That’s helpful. Thanks. Yes, of course, notwithstanding future acquisitions. So, a couple of follow-ups. M&A, are you seeing any change in the dynamics from private equity, either competition or in terms of selling the M&A side or any -- and new things on the video side, since you bought Espial and Vidyo?

Steve Sadler: Well, you know in video, there is a company called Zoom that trades about 20 times revenue, and they're the market leader, growing quite quickly.

For us, what that means, it's a very good market and a big market, looking at their growth. So, we don't see any difference there. In fact, sometimes that can help you, because when you got a large company doing well, there's probably some smaller companies that aren't doing as well. And remember, we're capital allocators. So, that may give us some opportunities.

But we'll have to wait and see. I think the rest of it, it's about the same it has been for a couple of years. Private equity has a lot of money and are active, but generally on bigger deals. They really -- we don't see -- if revenue’s not $50 million to $100 million, mostly over $100 million. So under 50, where we generally play, they don't have a big impact.

They've gone for bigger deals, but they do have money to spend.

Deepak Kaushal: And then, I know, I've asked you about the potential risk on Brexit, but now we might have more clarity on that happening after yesterday. So, given there's more clarity on Brexit, are there any opportunity that this kind of cements in your mind for your UK business and your -- in general?

Steve Sadler: I haven't seen much impact one way or the other. Never thought of it as a big issue for us and actually don't see it as a big benefit for us either. So, unless the Company moves their contact center to another location and then has to buy another system, but that -- it's way too early for all that.

So, not really negative and not really positive, other than its impact on foreign exchange.

Operator: Our next question comes from Stephanie Price of CIBC. Please go ahead.

Stephanie Price: Good morning. I was hoping you could talk a bit about the Eptica acquisition in terms of what it was growing at pre-acquisition, the revenue it brings and how you see it fitting in?

Steve Sadler: So, Eptica is a little bit unusual.

I've said pretty open in the past, France is a hard place to do business. But, this is a pretty good company that had some software that actually ties to contact centers. So, we believe that we will -- and pretty good recurring revenue. So, we believe that we can see this as a base for us in France to bring our contact center software in there. They have a group who can sell it, and it's with our strategy of think globally, but act locally.

Everyone's putting -- all countries and regions are putting bubbles over themselves, including the U.S. now. And so, we're in the countries with support, with professional services, with management and we see getting into -- we weren't in France real, we had a couple customers, but now we can move in there. With Vidyo we had a large customer there. So, they will take on those customers in France and hopefully will improve revenue with our local presence.

Stephanie Price: Okay. And then, in terms of margins in the IMG division, they were stronger than we anticipated. Is that mostly Vidyo integration, or were there other kind of drivers with that margin in IMG this quarter?

Steve Sadler: Yes. I don't know how you anticipated it. So, the hardest question for me to answer…

Stephanie Price: Fair enough.

Could you see any other one time…

Steve Sadler: Well, let me say, the Vidyo margins were quite good and certainly at or above our normal margins, as was the Espial margins. I mean, if I look at the quarter, anything, we took two large companies that never made money, had them break even after a few months and have them at our margins in the next three months. That's pretty good. A lot of credit goes to all the staff who will help get that done.

Operator: Thank you.

[Operator Instructions] We'll take our next question from Paul Treiber of RBC Capital Markets. Please go ahead.

Paul Treiber: Just want to follow-up on the last comment you made just in terms of the integration, the pace of integration at Vidyo and Espial. You mentioned it's faster than the fourth quarter target that you typically have. Why -- could you elaborate on why the integration was so smooth and so much faster than a typical target? And then, could you also speak to the impact, positive impact, perhaps that your financial systems are having in terms of integration?

Steve Sadler: You have a couple questions there.

Remember, I told -- I said before the deal even closed, action was taken to restructure their business. They were looking at doing that restructuring and then we, of course, did what they said and then tying to us a little bit more. So, it started earlier than normal, usually a buy -- you don't start until after you buy. This one here, they both were troubled companies and were having to take some action themselves. So that's -- it started a little early.

And once we got into it, look, you just -- you sort of answered the question about the financial systems. We said we did a lot of that work over a couple of years and it was a little painful. So, we could bring acquisitions in faster. I guess, all I can say is, it shows that we can do it. So, we are bringing acquisitions in faster.

And we have taken their systems and put them all on our systems already. So, we did that before the end of the year, had it audited. We're just getting a little better at it.

Paul Treiber: Okay. That’s good to hear.

And also, when you acquired those two companies, you gave a comment that the businesses would generate $70 million to $75 million in annual revenue going forward. Is what you saw Q4 consistent with that? And then, looking forward, is there anything that you’re seeing right now that would lead you to revise that outlook either up or down?

Steve Sadler: Yes. It’s very consistent with that, maybe a little on the high end, and depends how well we move the Vidyo, how well internationally we can develop that business. The Espial, like, don't until the last half of the year, and it always takes a little bit longer. So I don't see a lot of growth from that in the current year.

We’ll have to see how the new product works. And on the Vidyo side, we’re hoping we can get a faster start because we do have an infrastructure, a global one with people in all those countries. So, we don't have to add much cost, one or two salespeople, maybe a support person to start developing the product in those companies. We don't have to set up. We’ve already got management, we’ve already got support, we’ve got professional services, and we’ve got salespeople, but we do have to add a bit more in the sales and marketing side because it’s slightly different than our contact center or networks products.

So, we have to do that. It depends on what happens there. We are usually pretty conservative. But, it is a challenge to do that. And you’ve got a pretty big and good competitor in zoom, a little bit mostly U.S.

So, they don’t -- I’m not sure that they had the same structure that we do. And I think, local markets too tend to like having staff locally to support them.

Operator: [Operator Instructions] We will take our next question from Deepak Kaushal of Stifel GMP. Please go ahead.

Deepak Kaushal: Hey.

Sorry, guys. Thanks for taking my follow-up. Steve, just on your comments on Zoom, just kind of piqued my interest. Just kind of wondering if you could remind us on Vidyo how their technical infrastructures are. Are they fully cloud based, is it totally SaaS? What are the differentiating or common features you have with a competitor like Zoom?

Steve Sadler: So, Zoom is really SaaS, cloud based.

We are both. So, they we were on-premise and had slowed it down for a couple years. So, we're still investing in sales and marketing. You will notice our R&D is up because of that because just fixing up their system. They were doing partly a new system, but they have a system that can be on-premise or in the cloud, and we are happy to do either one for the customers.

We do have to make it a little bit more robust, we’ve got to catch it up a bit. We’ve been working on doing that and will continue to. But pretty good shape. We’re in the cloud. And like everything, we try and do both.

But, the customers choose if they want to be in the cloud or SaaS.

Deepak Kaushal: Okay. And what percentage of your existing customers prior to Vidyo were overlapping with their product?

Steve Sadler: Hard to say, haven't gone all through that because it's sort of different groups, but I would say, most of our customers did not overlap. They brought new customers to us, banking, hospitals. We weren’t big in those two areas.

So, a lot of the customers were basically new.

Deepak Kaushal: Okay, excellent. That's helpful reminder. I appreciate it. Again, I will pass the line.

Thanks again.

Operator: Thank you. [Operator Instructions] It doesn't appear we have any further questions at this time. I would like to turn the conference back over to Mr. Sadler.

Thank you.

Steve Sadler: Well, thank you everyone for your continued support, and have a Merry Christmas and a happy holiday season.

Operator: Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.