Operator: Good day and thank you for standing by. Welcome to the Enghouse Q4 2021 Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Stephen Sadler, Chairman and CEO. Please go ahead.

Stephen Sadler: Good morning, everybody. I am here today with Vince Mifsud; Doug Bryson; Todd May; and Sam Anidjar. Before we begin, I will have Todd read our forward disclaimer.

Todd May: Certain statements made maybe forward-looking. By their nature, such 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 statement, 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 fourth quarter unaudited and year end financial results for the period ended October 31, 2021.

Financial and operational highlights for the 3 and 12 months periods ended October 31 compared to the 3 and 12 months ended October 31, 2020 are as follows. Revenue achieved was $113.1 million and $467.2 million respectively compared to revenue of $120.9 and $503.8 million last year. Results from operating activities was $39.1 million and $155.2 million respectively compared to $42.7 million and $162.0 million for last year. Net income was $30.2 million and $92.8 million respectively compared to $29.4 million and $98.6 million. Adjusted EBITDA was $42.1 million and $168.5 million respectively compared to $46.6 million and $176.8 million while adjusted EBITDA margins increased from 35.1% to 36.1% for the year.

Cash flows from operating activities, excluding changes in working capital, was $42.4 million and $167.8 million respectively compared to $48 million and $175.5 million. Fiscal 2021 was another year of positive income and operating cash flows, improved adjusted EBIT margins and record distributions to shareholders. Although record revenue was not achieved this year, we again demonstrated the benefit of maintaining our financial discipline during times of significant market fluctuations. For the year, Enghouse achieved adjusted EBITDA margins of 36.1% and cash flows from operations, excluding changes in working capital, of $167.8 million. Revenue for the quarter was $113.1 million compared to revenue of $120.9 million in the same period in the prior year.

The decrease reflects exceptional revenue in the comparative period as a result of COVID-19 related demand in addition to unfavorable foreign exchange. Similar to the second and third quarters of 2021, but comparatively higher revenue last year, was driven primarily by the previous year’s significant increase in our video business that is returned to levels more consistent with pre-COVID volumes. Revenue for the quarter was negatively impacted by $4.4 million as a result of foreign exchange as the Canadian dollar strengthened against the U.S. dollar and euro. Enghouse closed the year with $198.8 million in cash, cash equivalents and short-term investments compared to $251.8 million at October 31, 2020.

The cash balance was achieved after making payments of $35.6 million for acquisitions and $115.7 million for dividends this year, inclusive of an $83.2 million dividend – of special dividends. Changes in the macroeconomic environment caused by COVID or other factors continue to impact our business. We closed three acquisitions during the year that met our return on investment criteria. However, acquisitions in the technology marketplace continue to be priced at prohibitively higher valuations that do not support our return on investment objectives. Going forward, we continue to seek earnings accretive acquisitions to grow our revenue and further expand both our product suite and geographic reach while maintaining our commitment to profitable growth in accordance with our disciplined business model.

We continue to operate our business consistent with our value for money philosophy that we believe provides shareholder value in the long-term. Yesterday, the Board of Directors approved the company’s eligible quarterly dividend of $0.16 per common share payable on February 28, 2022 to shareholders of record at the close of business on February 14, 2022. I will now turn the call back to Mr. Sadler.

Stephen Sadler: Thanks, Doug.

Vince will now give some operational highlights of the quarter.

Vince Mifsud: Thank you, Steve and thank you to those who made the time to join our final call of fiscal 2021. This quarter represents our seventh consecutive quarter of exceeding $40 million of adjusted EBITDA. We achieved $42.1 million of adjusted EBITDA this quarter, 37.2% of sales, which is one of our highest EBITDA percentage quarters. We continue operating our business with significant financial discipline, generating positive cash flows from our operations that can be used for acquisitions and investments in the business without the need for debt financing or shareholder dilution.

Gross margins in the quarter were 72.5% consistent with last year’s Q4 and improved over Q3, which was 71.6%. We achieved these gross margins at a time when we are also investing in standing up our own cloud contact center solutions, which tend to have lower gross margins until we ramp up the number of users. Revenue for our interactive group improved slightly this quarter compared to Q3 from $65.6 million to $66.8 million. There are a number of trends we are seeing in the contact center market, communication and video business that are worth noting along with how we have and will continue to respond to these market shifts. COVID has driven more permanent shift to the cloud contact center technologies away from on-prem solutions.

There is growing interest for cloud contact centers, both private cloud and multi-tenant cloud, which depends on the objectives, the size and the security requirements of the corporations. In response, as we previously have mentioned, we stood up our own multi-tenant cloud contact center offering over a year ago and are offering software-as-a-service to our customers to our direct sales team. We expanded this offering by adding one additional node in Canada and plan to add another node in the Asia-Pac market in the next 60 days to address customers that have data residency needs and also for demands in these markets. We also expanded our private cloud offering investing engineering resources over the last year to ensure all of our on-prem contact center products, our cloud ready can be offered as a private cloud. Many companies want the option to select various cloud providers depending on their corporate direction, which include Microsoft Azure, Google, AWS, IBM and others and Enghouse is agnostic and can work with any cloud provider in the market.

Another growing trend we are seeing in the communication space is a move towards cloud unified communication as a service known as UCaaS, away from on-prem PBX communication platforms. Our strategy is to integrate our contact center with multiple unified communication platforms and this remains the same. We are agnostic to the platform the customer wants. And due to the growth in the UCaaS and customers looking for a tight integration of UCaaS and contact centers, we decided to develop our own UCaaS offering, which we have been working on for over a year and we just launched it in Q4. And similar to our overall product strategy, we are offering Enghouse UCaaS in a private cloud, multi-tenant cloud and also allowing our partners to stand up their own UCaaS platform white label it as their own offering.

We don’t believe that there is other UCaaS vendors with the same approach. The other growing trend is in the area of optimizing and augmenting the contact center agent by using artificial intelligence and natural language processing. Enghouse has a growing suite of products in this area. We have products that are used to manage the quality of the agent, improve their time to productivity, augment and automate interactions and even coach the agent in real time while they are interacting with the customer. Our business unit, our video business unit was down this quarter compared to last year, but has now stabilized and shown slight improvement over the last three quarters.

Video channels have become another customer interaction point for the contact center. And three of our large telecom partners have recently integrated video into their white labeled Enghouse contact center solution and are now selling video as part of their offering. On the healthcare side, we are seeing more interest from our customers to integrate video into their healthcare communication workflows and patient monitoring systems. And therefore, we continue to partner with healthcare tech companies as part of our go-to-market. And as an example, we signed one large new healthcare partner to our video product in Germany this quarter.

Given the nature of our asset management division, revenue can fluctuate from quarter-to-quarter depending on the timing of large software and hardware orders and deliveries. In general, we are not seeing as significant of a move to the cloud in the telecom and transportation sectors as we are seeing in contact center. However, we invested and continue to invest in preparing our technologies for the cloud in anticipation of this shift occurring in the future. The first two areas we have initially invested in cloud enabling our offering is in our business support systems area and IPTV. IPTV demand continues.

We now have 10 customer orders for IPTV, 5 just went live and 5 customers are expected to be live in the next 90 to 120 days. In the transit side, we did see some recent increase in ridership over the last 90 days, which are now at volumes that are approximately 30% lower than pre-COVID levels, but it’s up from being 50% lower last quarter. There is also a recent increase in the request for proposals for transit expansions and more opportunities for automated fare collection product. The Europay, Mastercard, Visa offering known as EMV and a certification we received last quarter is starting to get rolled out across our existing customers in Europe. And we started responding to RFPs in the America market.

Just to provide a brief update on our large public safety projects, we have recorded a relatively small percentage of the total revenue of these multiyear projects so far, recognizing just under 12% of the project value. So, we still are relatively early stages of these projects. On a final note, although we are always focused on improving profitability, continually looking for ways to operate more efficiently and save costs in areas like facilities and travel, we plan to continually invest in engineering and product development driving exceptional values through our products to our customers. Let me turn the call over to Mr. Steve Sadler.

Stephen Sadler: Thanks, Vince. As Doug noted, our operations remain financially sound with good cash flow and a strong balance sheet. Acquisitions completed in the year include Altitude, which was December 2020; Nebu, June 3, 2021; and Momindum, July 7, 2021. And they are operating close to our normal and expected EBITDA margins in Q4. We continue to focus on capital deployment doing our due diligence remotely.

The acquisition pipeline is improving and company values seem to be declining into our financial range with lower impact from the public markets. We believe as interest rates increase, as taxes rise, as cost, inflation increases and as stimulus declines in our business sectors, acquisition activity will improve. We continue to maintain our financial discipline when reviewing acquisition opportunities. In the quarter, there was a report about our M&A potential activity. As a matter of company policy, we do not comment on our M&A activity or market rumors.

We remain committed to executing our historic strategic business model, which we believe will add substantial value for shareholders. I would now like to open the call for comments or questions.

Operator: Thank you. [Operator Instructions] Our first question comes from Paul Treiber from RBC Capital Markets. Your line is open.

Paul Treiber: Alright. Thanks very much and good morning. Just on your last comment, I know you can’t comment on market rumors or media articles out there just in regards to M&A, but could you speak at a high level, what you see as a longer term, either potential exit strategy for shareholders or how you think about long-term succession planning for the company here?

Stephen Sadler: So, long-term planning is basically doing what we are doing. We have got a good team. There is people in the team that can as if people move or leave or retire, they can move up.

I think we are just going to continue with our plan. It’s worked pretty well for 10 years. I am pretty sure it can work pretty well for another 10 years.

Paul Treiber: And can you elaborate a bit more on the team? I think you added one or two M&A people. How do you think about the division of duties in the process around M&A and due diligence? Yes, if you can just elaborate a bit more there, please?

Stephen Sadler: So we have talked about this before, but we have a couple of people who look for opportunities and that’s different than it was 2 years ago where we didn’t really have any of those people employed.

We have hired a couple of analysts then put them under a long-term analyst who did a lot of the initial acquisitions with me. Sam still project manages the whole thing. And as we get opportunities and get agreement to an LOI, we involve the operational staff to be involved in the due diligence. So, when the deal closes, they generally take on the responsibility for running under the plan that we had for the acquisition, pretty simple model, done it for over 10 years, works, not too hard.

Paul Treiber: And just in regards to the M&A environment the – you made a comment in the press release about valuations being expensive.

But then also at the end of prepared remarks, you mentioned that valuations have come down. How should we think about like, is it common in a press release more encapsulating the year? And in your more recent comments is more relevant? Like how should we think about valuations where they stand right now?

Stephen Sadler: Valuations, and this is just our view, in the year have been expensive, for many reasons, stimulus. One, you have got a lot of money floating around chasing things. But that seems to be changed lately. Stimulus has dropped.

People are talking about interest rate increases. They are also looking at, how do we pay this money back, which means taxes, you hear it all the time in the U.S. are going up, but every country is talking that way. You do have to pay for the money that was spent. So, we believe that you put all those factors together, it makes the acquisition environment better.

And we see that going into 2022 as a reasonable possibility of what will happen.

Paul Treiber: Okay. Thank you. I will pass it on.

Operator: Our next question comes from Paul Steep from Scotia Capital.

Your line is open.

Paul Steep: Thanks. Steve, can maybe we talk a little bit about just capital and use of capital and maybe revisit from a year ago. You have talked about, willingness to use debt and we ended up because you had larger, outsized profits, let’s say and built cash, you have returned that to shareholders. But if we look here, you are sort of close and almost here by $20 million off on a net depth basis from where you would have been, I guess 16 days before the payment would have been made for the special dividend.

Maybe just walk us through, how you are thinking beyond M&A? How you might think about share repurchases, or the regular dividend, a special, anything like that, and in the context of where you are headed today?

Stephen Sadler: Okay. The special dividend and I think we have said this before. We had an unusual event, as did the world with the pandemic. In that process, we had a lot of orders come in and made a lot of money, profit and cash. So, we decided that this was probably not an ongoing event forever.

At least we would hope that’s the case. And so we actually give a special dividend to give that money back to shareholders. That’s not normal. We have never done it before. And hopefully, there is not another pandemic that we have to do it again.

So, that’s where the special dividend comes in. Share buybacks, I mean we look at it very easily. We say, is it better to buy our own shares or buy other companies’ that then can add to our business. And we find buying other companies to add to our business is a better route to go. So, share buybacks we tend to not do.

But if the market crashes down, we have a special acquisition bid, that’s normal on the Toronto Stock Exchange and we would buyback our shares. But they have to be very attractive. And that they may come. But it isn’t here yet. So and I can’t predict it.

Paul Steep: And I guess the other part of that, that didn’t maybe make clear, but a year ago prior to that you have talked about, willingness to maybe use what was inexpensive debt, I think is the best way to phrase it, and use that to do more acquisitions. Have we sort of gone back to the historic plan of holding more cash and avoiding debt? You never ultimately tapped the debt, but just that was part of it in there as well but I prepped in?

Stephen Sadler: The debt is a possibility if the acquisition is large enough, that we need to get the debt as well as keep cash for working capital. So, that’s still possible. But we have a lot of cash, and we don’t have any significant acquisition that would cause us to go get debt. A lot of the banks are anxious to give money.

They are calling all the time, do we need money and the answer is we don’t. We think the environment could be that those who have money might have great opportunities. And those who don’t might find it more difficult in the future to borrow with higher interest rates and maybe a bit of a change in some of the other parameters we have talked about. So, it’s still a possibility that we could borrow money, every opportunity to do so. But we are not going to borrow money just for the sake of giving banks some more income.

We are going to only borrow money when we have a good need for it. And it always takes some time. But we can get money in 30 days to 60 days pretty easily based on our historic profitability, our cash flows, and just how we run the company. So, it’s still there, Paul, but we have had no need for it yet, maybe next year, maybe not.

Paul Steep: It makes sense.

And just maybe on video for a minute, and then the cloud business. Can you just remind us, whoever wants to take it on the rough size of what remains around that hardware business? You have called it out in the MD&A, that there was sort of some runoff as you have seen people transition obviously, from using video rooms, given the changes in our lives at this point. How much more of a run-off would there be in that as you sort of transition over the next year?

Stephen Sadler: I will let Vince to answer that, because he is right on top of it, so.

Vince Mifsud: Yes. I mean, last quarter, Q4 of 2020 was sort of last peak of the video.

And as I mentioned over the last three quarters that our video business unit has stabilized and started to increase. We don’t see any pickup on hardware rooms. So, our revenue – our hardware revenue was down about $1 million from last year. If you notice, I think last year we were about $1 million, just over $1 million more. But I don’t see any demand for hardware rooms at this moment.

Stephen Sadler: The only thing that I will add to it is right now we are in video rooms. We took our boardroom and we have set it up to be a video room. One day, we might use it.

Paul Steep: Got it. Just what’s the rough size of the cloud business today and in contact center, just as we start to think about the transition you outlined in the trends, I know we are not yet at a point of you breaking that out into a separate line.

But maybe you could give us a sense of where we are in terms of the journey?

Stephen Sadler: Are you talking the industry or us?

Paul Steep: You. I am meeting specifically to you guys just because we had a large part from on-prem.

Stephen Sadler: We have a pretty good software and have for a long time in the cloud. But as you know, we did it through the telcos. So, they hosted it.

They either shared revenue, or they bought the software from us and paid maintenance on it. We found that wasn’t aggressive enough in this environment. So, as Vince said, we are starting to set up our own nodes. We have already changed the sales force over the last 2 years to be a little bit more direct, because there is not enough margin it to go in direct. And if you looked at us let’s say 5 years ago, the channel they would sell our software, where they make their money on selling the PBXs and doing all the services.

That revenue has declined a lot. So, using the channel we had to go to direct a lot more. I think it was a good idea. The pandemic came in, it makes it tougher to set that up. If you haven’t set up, you are okay.

But now the direct salespeople were almost inside salespeople, because they can’t travel to go actually do the selling. And therefore the SaaS or in the cloud, actually, companies have done better because of the pandemic, because you can’t go and install the system on their machines and all that kind of activity that might take place. The market is mostly still on-prem, but it’s growing quickly in the cloud. So, if I said it was 10% last year, it might be 20% getting the cloud now and the pandemic has brought that forward a little bit, which certainly has hurt us. Because just like it brought some of our video forward, it brought some of the cloud forward, because you can’t get on-prem to do the on-prem installs you need for that in many cases.

So, we watch the environment, and we try and react to it. And I think that’s what Vince went through. He is telling you how we were reacting to it.

Paul Steep: Fair enough. One last one for me, and I will pass the line.

Just is there an opportunity, Steve, or Vince to do some of the same sales changes you have done in the Interactive segment to asset management, recognizing, obviously, that there are distinct businesses and markets? But it sounds like we are sort of through the process and solidly in implementation on interactive. What’s the possibility on the other side of the house?

Vince Mifsud: Yes. On the asset side, the good news there is we are already direct, quite direct, because the nature of the deals are quite – they are usually big, bigger deals. So, we have always been more direct on the asset management side and we are more channel on the interactive side. There is an opportunity in asset management to do some channels, but they are usually large companies like Ericsson, Nokia, Airbus, etcetera.

So, we do have some channel business, but it’s mostly direct.

Stephen Sadler: And you also got to remember why we did channel on the interactive side is because the channel saw PBX is in good services. That’s not – there is no opportunity for that in going on the asset management side. So, the channels are unless they were big, because they are selling their own equipment with it. They are less interested as Vince pointed out.

Paul Steep: Great. Happy Holidays, guys. Talk in the New Year. Thank you.

Operator: [Operator Instructions] Our next question comes from Stephanie Price from CIBC.

Your line is open.

Stephanie Price: Good morning.

Stephen Sadler: Hi. Good morning.

Stephanie Price: Good morning.

I just want to follow-up on Paul’s question around the cloud contact center business. I mean how many of these have you setup to-date? And how many more are you looking at adding and maybe how we should think about those in terms of investments?

Vince Mifsud: Yes. We have added three nodes to-date. So, we have got one in the U.S., one in Europe, and just recently did one in Canada in the last 90 days. And we are adding another one in Asia-Pac.

We don’t necessarily need to put them in every single country. What – we can leverage a node, for example, the one we have in Germany, for other markets outside of Germany. We will set up a node when we have a large customer that says, we would like to have the data resident and stay in the country. That drives us to setup another node.

Stephen Sadler: Stephanie, the other point, so we aren’t confusing anything is these nodes are with other suppliers.

We are not a – capital expenditures and the financials don’t changes operating costs we have. There is very little like we are not setting up our own data centers.

Stephanie Price: That’s helpful. Thanks. And then maybe moving over to the networking division, can you talk a little bit about telco spending at this point, and what you are seeing there?

Vince Mifsud: I can start.

So, I mean no real change there. Like I have said in my presentation, it’s that business has some bigger deals. So, it does vary from quarter-to-quarter, depending on when we get an order and when we ship it. So, you get a little bit of quarterly variability, but no real change there. The cloud hasn’t impacted that business.

It’s still mostly on-prem. We – the two areas, we see some move to the cloud is for business support systems that help the telco companies run their business and in the IPTV area which we started investing in about 1.5 years ago or so. So, those two areas are moving to the cloud a bit. But everything else is pretty much the same on-prem.

Stephanie Price: Great.

Thank you.

Operator: Our next question comes from Daniel Chan from TD Securities. Your line is open.

Daniel Chan: Hi. Good morning, Vince, you talked about video now being able to be sold through some of your telco partners.

Can you talk about how that structured, whether that’s being sold as add-on package to the contact center software, or whether it’s been sold as a standalone? And what’s the up-sell opportunity there? Thanks.

Vince Mifsud: Yes. It’s being sold as an add-on to a contact center if they want a video channel for their customers. And we get paid by usage. So, as they get more usage of the video, as they use video, we get paid.

So, what we had to do first is integrate it closely with their white label solution, and they are out marketing it as an add-on.

Daniel Chan: Great. Thank you.

Operator: There is no further question at this time, you may continue.

Stephen Sadler: Well, thank you, everyone.

Enghouse continues to have a very strong financial position to execute our capital allocation and business strategy. We continue to build on our journey. Thank you for attending the call and your continued support and have a happy holiday season.

Operator: This concludes today’s conference call. Thank you all for joining.

You may now disconnect.