Enghouse Systems Ltd T.ENGH

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Their upside scenario target is also raised to $105.00. GLTA

September 3, 2020

Enghouse Systems Limited

Q3 Preview: Data shows sustained strong Vidyo downloads

Our view: We expect Enghouse to report another quarter with strong organic growth, driven by WFH demand. Download data shows sustained acceleration in Vidyo app downloads vs. pre-COVID levels. Though not as strong as last quarter, we expect Enghouse to report top-quartile revenue growth and top-10% adj. EBITDA growth for Q3 compared against the last 10 years. Reiterate Outperform, price target moves to $88.00.

Key points:

• Q3 expected to show strong growth. We expect Enghouse to report Q3/FY20 (Jul-qtr) results on September 10. Our model calls for revenue to rise 28% Y/Y (5% organic) to $130MM Q3, compared to consensus at $135MM ($131MM excluding outlier). On strong organic growth, we expect adj. EBITDA to rise 42% Y/Y to $40MM, vs. consensus at $42MM ($40MM excluding outlier). Our Q3 revenue growth ranks in the top quartile and Q3 adj. EBITDA growth ranks top 10 among Enghouse’s last 10 years. Our $0.35 IFRS EPS estimate is in line with consensus ($0.35).

• Organic growth is experiencing an inflection due to WFH (work from home) initiatives. We forecast Enghouse’s constant currency organic growth at 5% Q3, well above the company’s 10-year historical average of -1%. Enghouse’s software portfolio is focused on remote working (includes video conferencing, contact centers, telecommunications), which is seeing stronger demand amidst COVID-19 WFH initiatives. While we conservatively anticipate deceleration from 12% Q2, we expect growth to remain elevated through 2H/FY20 as a result of 1) traction from previous demand generation and sales investments; 2) launch of Enghouse’s contact center for Microsoft Teams; and 3) uptake of Vidyo video conferencing software due to COVID-19.

• Acceleration of Vidyo downloads remains sustained. According to Sensor Tower, downloads of major video conferencing apps remain elevated well above pre-COVID levels. Downloads of Enghouse’s videoconferencing apps Vidyo Connect and Vidyo Mobile increased ~2300% Y/Y to 490k in Q3/FY20 (May-July), stronger than the ~1600% Y/Y increase (to 431k) in Q2/FY20 (Feb-April).

• Stronger organic growth fuels valuation multiple re-rating upwards. Enghouse is currently trading at 25x FTM EV/EBITDA, up from 18x at the start of the year and at the high-end of the company’s 10-year historical range. The upwards re-rating reflects the improved long-term organic growth outlook for the company, along with higher investor visibility to Enghouse’s M&A model. With est. $185MM cash Q3, we believe that potential M&A represents a catalyst for the stock.

• Maintain Outperform, raising target from $75.00 to $88.00. We’re rolling forward the basis of our target valuation from CY21e to CY22e. Our $88.00 price target equates to 20x CY22e EV/EBITDA (previously 20x CY21e EV/EBITDA). Our target multiple is justified below Canadian software consolidator peers at 21x given Enghouse’s smaller size.