Enghouse Systems Ltd.
(ENGH-T) C$43.67
Q1/F23 Preview: Cloud Migration Expected to Continue
Event
Q1/F23 Results: Thursday, March 9, 2023, after markets close.
Conference Call: Friday, March 10, 2023, 8:45 a.m. ET. 416-764-8646 or 1-888-396-8049, passcode: 09140113.
Impact: NEUTRAL
We expect total revenue of $111.3mm, flat y/y. We forecast Interactive Management Group (IMG) revenue of $63.0mm, up 1.8% y/y, and Asset Management Group (AMG) revenue of $48.3mm, down 1.9% y/y. We estimate $36.7mm of EBITDA, or 32.9% EBITDA margin.
Expecting declines in revenue to have stabilized with slight decline in margin.
We expect Q1/F23 revenue growth to improve from the decline experienced throughout FY2022, as y/y comps become easier. The decline in Vidyo seems to have stabilized last quarter, but we note continued competition from cloud-based competitors is likely to persist. Five9 and Zoom results suggest ongoing macro headwinds are expected to persist throughout the year, but demand to migrate to the cloud from on-premise remains strong, which we believe is negative for Enghouse. IMG is still expected to grow y/y, due to recent license wins driving growth in maintenance revenue. The AMG segment is expected to generate moderate declines in Q1/F23 y/y.
Strong balance sheet and declining valuations expected to accelerate M&A activity. As of Q4/F22, Enghouse has ~$228mm of gross cash and no debt. We expect it to generate ~$121mm of FCF in the NTM. Enghouse completed two SaaS acquisitions after quarter-end, including cloud-based enterprise video software provider Qumu and Brazil-based enterprise mobility management software provider Navita. Management remains optimistic of the M&A opportunities for the fiscal year, noting a larger pipeline matched with declining valuations. As potential targets come under increased challenges with macro uncertainty and rising interest rates, we believe acceleration of M&A activity is likely.
TD Investment Conclusion
While we expect the declines in prior quarters to have stabilized, we expect organic growth to remain challenged. This could be offset by increased M&A activity as valuations continue to decline. We acknowledge that our target return does not align with our recommendation, and we will revisit our estimates, target, and recommendation after the company reports results.