Operator: Good morning, ladies and gentlemen, and welcome to the Enghouse's Q4 2024 Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Friday, December 13, 2024. I would now like to turn the conference over to Stephen Sadler.

Please go ahead.

Stephen Sadler: Good morning, everybody. I'm here today with Rob Medved, VP, Finance; and Todd May, VP, Legal Counsel. 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 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. Rob will now give an overview of the financial results and a brief comment on operations.

Rob Medved: Thank you, Steve.

Let me first take us through the fourth quarter and annual financial highlights. Revenue increased 2.1% to $125.7 million from $123.1 million in the fourth quarter and 10.7% for the fiscal year to $502.5 million from $454 million last year. Recurring revenue, which includes SaaS and maintenance services, grew 1.1% to $88.2 million compared to $87.2 million in Q4 2023 and represents 70.2% of total revenue. For the fiscal year, recurring revenue increased to $346.6 million from $297.6 million in the prior year, an increase of 16.4%, as we continue to see increased demand for SaaS. Results from operating activities decreased to $33.4 million compared to $35.7 million in Q4 2023, and increased in the fiscal year to $133.8 million from $122.1 million the prior year.

Net income was $22.6 million compared to $25.1 million in Q4 2023, and $81.3 million in the fiscal year compared to $72.2 million last year, as we continue to grow our business with a focus on profitability. Adjusted EBITDA decreased to $35.6 million compared to $37.9 million, while achieving a 28.3% margin for the quarter. Annual adjusted EBITDA was $143.8 million compared to $133.8 million in the prior year, an increase of 7.5%. Cash flow from operating activities, excluding changes in working capital, was $40.3 million compared to $43.5 million in the prior year's fourth quarter, and $151.8 million for the fiscal year compared to $140.5 million in the prior year. Cash and cash equivalents increased to record levels of $274.2 million as at October 31, 2024.

Fiscal 2024 yielded a third year of consecutive revenue growth as we achieved a significant milestone, with revenue for the fiscal year exceeding $500 million, representing double-digit balance growth and just a little bit below our all-time high achieved during COVID. We are also pleased to announce record annual SaaS and maintenance services revenue of $346.6 million, an increase of 16.4% compared to the prior year. SaaS and maintenance services continue to be an important predictable source of revenue, and now represent 69% of total revenues for the year, growing from the prior year. In addition to the SaaS and maintenance growth, we are pleased our professional services and hardware revenue have showed marked increases for the year. However, in the current business environment, demand for on-premise, perpetual software licenses has declined as more customers choose SaaS solutions that require less upfront capital investment.

Our commitment to providing customers with choice across our product suite through a range of deployment options, including multi-tenant SaaS, private SaaS and on-premise solutions differentiates us in the marketplace. Through this market transition, we continue to focus on maintaining profitability as we see competitors spend on profitably in pursuit of growth. Our disciplined approach to revenue investments has not changed. A good example is with artificial intelligence where we are implementing gradually in our internal processes and our software in practical profitable ways. This structured approach to our business has provided benefits as demonstrated by the 12.6% increase in our net income to $81.3 million from $72.2 million in the prior year.

During the year, we deployed cash of $43.4 million on acquisitions, purchasing the assets of Mediasite and SeaChange. These have been successfully integrated into our operations and are provided the intended payback. Acquisitions remain a cornerstone of our strategy as we continue to investigate opportunities that meet our criteria and we have the resources to execute. We also returned $53.1 million to our shareholders through dividends, an increase of 18.7% from the prior period. At the same time, we increased our cash reserves to $274.2 million, with no external debt, which positions the company well for future growth.

In summary, we closed the year with a double-digit increase in revenue and net income, significant expansion of our recurring revenue, record cash reserves, and no external debt, positioning us to pursue opportunities that meet our acquisition criteria, while continuing to pay dividends to our shareholders. The growth in revenue was achieved through our ability to acquire and effectively integrate new acquisitions into our business model. Yesterday, the Board of Directors approved the company's eligible quarterly dividend of $0.26 per common share payable on February 28, 2025 to shareholders of record at the close of business on February 14, 2025. I'll now hand the call back to Mr. Sadler.

Stephen Sadler: Thanks, Rob. With Vince's departure, we have reorganized the business from a global functional unit to global business units. Building, selling and supporting enterprises is a team activity. We are maintaining our global focus, but with a functional approach to our main business units. This will assist in developing each business while making capital deployment a more focused and streamlined activity.

Our strong management strength has allowed promotion of two of our internal senior executives who have substantial experience in the business units to take on the new management positions. With respect to acquisitions, in the quarter, we continue to integrate the assets of SeaChange, which we expect to be operating at their normal EBITDA profitability within the next quarter. We continue to see substantial opportunities in our industry sectors with some larger organizations having debt problems, staff reductions, interest costs, which are not supported by their cash flow and slowing growth operations. Enghouse is financially strong and continues to enhance both its cloud and on-prem products with new features, including using AI technologies to improve efficiencies in a practical manner. Enghouse is very well positioned for the future and also to add shareholder value.

I would now like to open the call to questions.

Operator: Thank you. [Operator Instructions] Your first question comes from the line of Daniel Chan from TD Cowen. Please go ahead.

Daniel Chan: Hi.

Good morning, Steve. I understand that the licenses revenue decline may be a result of the cloud transition, but shouldn't we see a resulting growth in the SaaS revenues with the transition as well? If we look at total SaaS revenue, that was somewhat flat year-over-year and sequentially, and was actually down year-over-year in the IMG segment. So, any color on that would be appreciated.

Stephen Sadler: Okay. Yeah, you got to realize the product revenue comes in all at once, SaaS revenue over time, and we have a lot of moving parts in that area.

An example would be Lifesize, which we bought, as you know, a year ago out of basically bankruptcy. They had many customers, mostly SaaS, and an older product, and some difficult SaaS software issues that we took on and that revenue has been declining. It's still well above what we expected, i.e., the revenue is higher than we expected, but it's been a substantial decline, and it declined again from Q3 to Q4 and almost $5 million from last year to this year. So that's part of why that SaaS revenue is down. We also have our -- of course, our -- in the cloud -- let me -- it's had me think.

It's in the cloud. What did we call it? The voice...

Rob Medved: VCaaS...

Stephen Sadler: Yeah, the VCaaS revenue, which is still declining, i.e., the video revenue, which we have in the IMG division as well. And it's declining, again, not as much, so it's sort of turned the corner, but that was also in Lifesize as well as our own VCaaS.

And we bought some businesses in that area because the market is tough when you've got competitors like Zoom, you got Microsoft really picking up. So again, it's a lot of moving parts that's causing that shift. But what Rob says is correct, our SaaS is improving and it is coming from our perpetual or on-prem revenue. It's just that there's a lot of components that go into it.

Daniel Chan: Yeah.

Appreciate that. And that's very helpful color, Steve. So, if I just look at the customer call center transition from on-prem to cloud, if I were to just look at that SaaS, that is growing, right, the customer -- the call center?

Stephen Sadler: The call center to cloud is still not growing, because you have the Lifesize part, which had both, they have on-prem and cloud, and a lot of customers had made the decision to move off, because they went into bankruptcy. So, of course, they didn't know what we were going to do. Are we going to continue the product? Are we going to make them change? So, there has been at least $5 million from last year that is not in our numbers this year for that product.

And it comes both for on-prem and in the cloud. Their older product was on-prem. But when you buy -- I guess, the learning there is when you buy a bankrupt company, you're going to have some problems. But I will point out, from a return on investment point of view, we expect -- the return on that investment will probably be less than two years. We're very close to already making back all the money we paid on it.

So, that's with the revenue decline. The other side is we expect that to happen. This is not a surprise. So, we took action on costs on the Lifesize as well early and that's why we're going to make the return back still very quickly, but it doesn't mean a decline in revenue.

Daniel Chan: Okay, that's helpful.

Thanks, Steve. And then maybe a question on AI. In the past, you stated that fears of adoption of AI in the contact center are overblown. Many of your competitors are touting high [attach rates] (ph) of GenAI and our conversations with executives imply broader adoption of GenAI for customer support next year. So, does this quick adoption of GenAI change your view on the technology's market appeal?

Stephen Sadler: No.

And if you look at the competitors that are saying that, look at their financial results and get the real assessment of what's happening versus the promotional stuff they tell you. You do have to have a large language model to do it. And some of the companies that service just large contact centers, they're more inclined to do it. And I can see a return there. We're generally in the medium to smaller size.

We don't have that large language model, but we do a lot of practical AI based on the information that we have currently. For example, calls coming in, if someone raises their voice because they're upset, we pass it to a supervisor. You hear a lot of that on as disclaimers on people when you call into them. We do a lot of that AI, which doesn't need that large language model. We're progressing ahead and we use it internally to help our own people answer questions on our contact center.

But again, it's -- we don't see the uptake as great as the promotion of the uptake.

Daniel Chan: Great. Thanks, Steve.

Operator: Thank you. And your next question comes from the line of Erin Kyle from CIBC.

Please go ahead.

Erin Kyle: Hi, good morning. It's Erin Kyle on for Stephanie Price. I just had a question on profitability and the margin profile. So, you know the focus on profitability in light of the current demand environment, but EBITDA margins are down year-over-year.

So, do you expect to be able to drive that margin back up into the 30% range in the near term? And if so, what levers do you have to achieve that? Or are you expecting the margin profile remains at this level given the transition to more SaaS revenue?

Stephen Sadler: Lot of factors go in, but -- and we really don't like making forecasts. But we have a large project in the Nordics that has been losing money, which is now going to turn to maintenance because we're finishing that project. That's been the main reason for the decline in that margin. And so, we expect it to improve in the near future.

Erin Kyle: Okay.

Thank you. That's helpful there. I actually also wanted to ask one question, just a clarifying question on the business reorganization that you commented on earlier. You're reorganizing into the two business units and you've moved up some staff internally. I just want to clarify, are you still conducting an external search to replace the President role, or have you reorganized in a sense that that role is no longer necessary?

Stephen Sadler: So, we're always searching for good people.

And yes, I would say, if we find such a person for the President's role, we would certainly hire them. However, we're not doing an active search at this time, because we want the organization to stabilize and I can look after until then, until it's get put in place rather than have a new person come in when it's really just -- it's actually being reorganized to start January 1. So, we see bringing another parameter in right now probably wouldn't be the best move. The other thing I would say is there are larger acquisitions out there that we've talked about and potentially having a little room for management coming in from those acquisitions could be an interesting activity. So, again, we're not in the rush right now.

If we do find a good candidate, we certainly have a position to hire them into, but we're looking at various alternatives right now.

Erin Kyle: Okay. Thank you very much.

Operator: Thank you. [Operator Instructions] Your next question comes from the line of Paul Treiber from RBC Capital Markets.

Please go ahead.

Paul Treiber: Thanks very much, and good morning. Just a question on the underlying business. I mean, you mentioned a number of moving parts. Can you speak to renewal rates and customer churn and how that's been trending? And what I mean by renewal rates, if you can include, when you see an upgrade from or switch from on-premise to SaaS, whereas churn is just completely migration away from Enghouse?

Stephen Sadler: Yeah, there's a lot of parts there, too.

Of course, because as you say, some of the churn on the maintenance goes into the cloud and SaaS. And as you know, that comes in over time. They don't like in the past did buy new software, now they just convert over. We are seeing some of that. Certainly, I think the maintenance renewal, you're probably looking at still about 90%.

There's still a lot of on-prem customers. Everyone talks about the cloud, which really benefits all the platform players, [Navita] (ph), et cetera, but there's a lot of customers who still want to be on-prem. We do both. We give them choice. We make a little more money on the on-prem than we do in the cloud, because those third-party platform providers, which we generally use, we don't use our own centers, they've been raising cost to all the suppliers.

And if you look at the competition in our market, you'll find we're one of the most profitable ones as a percentage and in totals. Again, some of them don't have enough debt that they don't create enough cash flow even to cover that. So, the market is interesting right now. I think there may be some changes to that as platform players who don't have unlimited demand start competing against each other, maybe those rates don't keep going up, but we do both. We want whatever the customer wants.

We're willing to do on-prem. We're willing to do in the cloud. We're one of the few that do that, as most of the competitors move to the cloud, and it's quite a competitive situation right now.

Paul Treiber: And you mentioned you are seeing growth in your SaaS business. Can you -- are there any metrics or is there any way that you can quantify the magnitude of growth that would help investors understand that business better?

Stephen Sadler: It's very hard to do in some ways, because as you know, we're really a capital allocation company.

Most of the questions everyone asks is if we're an ongoing company, but when you're doing capital allocation and you're buying companies, it changes that every time you do it. So, I can't tell you it's growth. I can tell you it's more than double digits that we've done. If we take out, for example, the Lifesize decline, which again had some product issues when we bought them again out of bankruptcy, we fixed those. And in fact, it's probably our premier product right now that we're going to go forward with.

But it took about a year to get that product more stable for both the current customers and future customers. But it is one that for enterprises we'll be leading with, while for the telcos we're leading with our CCSP product, which we've always had in the telco side. It's a difficult one to do when you're a capital allocator to really define that for you. So, we do the best we can. We've showed you the numbers, but there's ups and downs, and there continue to be.

So, I really don't have any more color on that right now. If I knew exactly what you wanted, maybe call on, I can go do some research on it, but there's a lot of moving parts.

Paul Treiber: And switching gears to capital allocation, when you look at the capital deployed on acquisitions over the last couple of years, I mean, it's probably been below what most investors would have expected. Is that primarily a gap between pricing expectations in the market versus what you're willing to pay? And then, the cash has built up. At what point do you start returning that cash to shareholders perhaps more aggressively than when you've done with share buybacks?

Stephen Sadler: There's a bunch of questions there.

I hope I get them all, not ask it again. The expectation for me on acquisitions is a little light, but not a lot. And it's not a matter of pricing for the most part, because in some of our markets, we don't see other bidders interested, especially in the communication center/contact center space. What we see is continuing declining revenue from some of the competitors and they've got a little bit of financial stress. You can do your analysis on them and make your own conclusions.

As paying back more cash, considering what I just said, it's nice to have that cash available in case a larger opportunity comes up. We don't have to go to the bank. We don't have to do a lot of hoops that financial institutions want us to do. So right now, we think the cash that we have is best maintained. We gave a good special dividend because of our -- the money we made on video a couple of years ago.

That's unusual. We don't intend to really do that again, but we do intend to keep our dividend consistent and growing like we have for the last 10 years.

Paul Treiber: And in terms of potential acquisition candidates, you mentioned there's some larger companies out there. Are you looking at larger ones or would the profile be similar to the ones that you've done pretty much in the past?

Stephen Sadler: We look at anything that gives us our return, which we have on our website is we try and get a cash on cash payback in, let's say, five to six years. And if we have to go a little higher, we can do that.

So, it's not a matter of we're looking at larger or smaller, we look at both. But there are larger ones out there that whose values have declined quite significantly and whose shareholders aren't so happy with them in some cases. So, again, we are watching that situation carefully.

Paul Treiber: Okay. Thanks for taking the questions.

Operator: Thank you. There are no further questions at this time. I will now hand the call back to Mr. Stephen Sadler for any closing remarks.

Stephen Sadler: There's a lot of moving parts, and I know it's hard to keep track of, but if you look over the last three years, the bottom line, we grow every year and we generate more cash every year.

We have cash, and we don't really need anything from the market or from the banks to do our strategy. So, we continue to move forward at a nice steady pace. I thank you all for attending the call and have a happy -- a Merry Christmas and a happy holiday season.

Operator: Thank you. And this concludes today's call.

Thank you for participating. You may all disconnect.