Enghouse Systems Financial Results Surprise Investors

Enghouse Systems Limited (TSX:ENGH), a Canadian tech stock trading on the TSX, reported Q4/19 financial results on December 12, 2019

SmallCapPower | December 17, 2019: Enghouse Systems Limited (TSX:ENGH), a Canadian tech company trading on the TSX, reported Q4/19 financial results on December 12, 2019, after markets closed. Results were highlighted by EPS of $0.45 on revenue of $109.3M, and adjusted EBITDA of $34.0M. Financial results beat consensus estimates on all three metrics (EPS of $0.30, revenues of $106.7M, and adj. EBITDA of $30.4M).

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About Enghouse Systems

Enghouse Systems Limited develops and sells enterprise-oriented applications software worldwide. The Company operates through two main business segments: Interactive Management Group and Asset Management Group. The Interactive Management Group segment provides customer interaction software and services. Its technologies include contact center, attendant console, interactive voice response, dialers, agent performance optimization, and analytics that support various telephony environment. The Asset Management Group segment offers a portfolio of products to telecom service providers, utilities, and the oil and gas industry. Its products include operations support systems, business support systems, and mobile value-added services solutions, as well as data conversion services.

Figure 1: Enghouse Systems Financial Highlights

Source: Company reports, Ubika

Net revenue rose 7.9% quarter over quarter. Enghouse Systems reported top-line growth of 7.9% QoQ and 27.4% YoY to $109.3M, which beat analysts estimates of $106.7M. This represents the highest revenue growth since Q4/15. The increase in revenue reflects primarily contribution from the recent acquisitions of Vidyo and Espial. Vidyo is an enterprise-class video software solutions company acquired for $40M in May 2019, with LTM revenue of $60M, implying a takeout multiple of 0.7x sales. Espial Group is a SaaS cloud-based, multi-tenant IP Video platform that powers millions of operator-managed, set-top boxes and consumer-owned devices globally, such as Smart TV, AndroidTV, Roku, FireTV and AppleTV. The acquisition price for Espial Group was not disclosed.

Gross margins expanded by 165 bps QoQ, but contract by 62 bps YoY. Gross margins increased quarter over quarter but decreased year over year. SG&A also contracted by 155 bps QoQ, but increased YoY as the savings related to operating costs synergies were realized through the acquisition of Vidyo and Espial. However, cost synergies were offset by incremental costs related to the acquisitions. Enghouse is continuing to integrate the acquisitions, which could fuel more SG&A cost synergies. Adj. EBITDA for the fourth quarter rose 21.4% to $34.0M, compared with $27.9M in the prior year. The increase in adj. EBITDA is attributable primarily to incremental revenue contributions from acquisitions. The 68.0% increase in net income was due to lower taxes, which we expect to normalize in Q1/20.

Figure 2: Enghouse Systems Comps Table

Source: Capital IQ, Ubika

Trades at a discount to peers. Enghouse Systems trades at 14.8x NTM EV/EBITDA and 4.4x NTM EV/Sales multiples, a discount compared with its Canadian tech peers, which trade at median multiples of 19.0x and 6.8x, respectively. Enghouse Systems has among the highest gross margins and revenue growth of its peer group. As such, we believe that this valuation gap should close as Enghouse continues to generate positive ROI from M&A and continues to convert EBITDA into FCF.

Key takeaways. Solid revenue growth as a result with the integration of the Vidyo and Espial, however organic revenue growth remains anemic. Slower organic revenue growth is a result of Amazon entering Enghouse’s contact center business in March 2017, which helps small and medium business manage their customer support and call centers. However, the risk of slower organic revenue growth seems to be priced in as shares of the Company are trading above their 50-day and 200-day moving averages of $38.94 and $35.99. Additionally, Enghouse Systems has a strong track record of positive ROI through acquisitions with mid-teens to low 20s investment hurdle rates. Another solid acquisition could bolster the Company’s valuation. We believe that Enghouse is a solid Canadian tech story and investors should keep this stock on their radar and should accumulate shares on pullbacks. Enghouse pays a quarterly dividend of $0.11, implying an annual dividend yield of ~1%.

Enghouse Systems stock ended Friday’s trading session up 20.6% to C$47.90. Enghouse trades at a market cap of C$2.2 billion.

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