Enghouse Systems Ltd.
(ENGH-T) C$63.83
Q4/F20 Results: Experiencing Some Delays from the Second Wave
Event
Enghouse reported Q4/F20 results and held its conference call.
Impact: MIXED
Second wave causes some delays. While the IMG group performed to our expectations, hosted and maintenance revenue declined by 6% q/q. The sequential decline was due to two major customers in the travel industry having financial issues. Moreover, customers that ramped up their Vidyo cloud licenses during the peak of the pandemic may have downsized the number of seats recently. The second wave of the pandemic is also causing some delays in closing deals. Management noted at least one Vidyo and network deal that were delayed as a result of it. Despite these delays, we remain optimistic that Vidyo's geographic rollout will generate growth when markets reopen. Since Vidyo caters to regulated industries, such as healthcare and financial services, the sales cycle could take longer than other consumer-facing video conferencing solutions, but should be stickier than non-regulated customers. The 11% decline in the AMG group was largely due to lower hardware revenue given the fulfillment of a large order last quarter. We continue to believe that the 5G rollout will support growth in the AMG group. Management continues to expect consolidated low single-digit organic growth compared to "average historical performance."
M&A environment remains unchanged. While management remains active on M&A activity, the process continues to take longer than normal. The due diligence process is taking longer as management gets comfort around long-term projections beyond the pandemic. Legal work and target response times are also extended as targets focus on their own internal operations. We remain confident that Enghouse will accelerate acquisitions as markets normalize. The $1.50 special dividend was issued because of the company's strong cash flow and access to debt. With pro forma net cash of $168.8mm, after adjusting for the special dividend, and estimated annual FCF in excess of $162mm next FY, we believe the company is well-capitalized to continue executing on its acquisition strategy.
TD Investment Conclusion
Maintaining C$83.00 target price. We remain positive on the name given that we believe the company's strong cash flow and balance sheet position it well to accelerate acquisitions as markets normalize.