Enghouse Systems: An Opportunity Appears

Enghouse Systems: An Opportunity Appears

NicoElNino/iStock via Getty Images Enghouse Systems LTD ( OTCPK:EGHSF ) is a Canadian company that develops and provides enterprise software solutions for various end markets. The company is active globally and has a very diversified turnover geographically, with the largest source of revenues coming from the United States (34% of the total). The company, following the latest acquisitions, has also strengthened its presence in Europe, a continent characterised by a substantial presence of small and medium-sized companies. Europe represents a context of great potential for the Canadian company, as those companies are more likely to outsource processes that would be too expensive to internalise. Europe is currently worth 54% of total revenues: 14% in the UK, 18% in Scandinavian countries and 22% in the rest of Europe. In addition, Enghouse Systems is also very diversified in terms of the products offered to its clients, with the company being divided into two main business units: Interactive Management Group (or IMG): through enterprise software solutions, Enghouse provides contact centre and customer services to improve the customer experience. Enghouse systems also offers various solutions for inter-company communication and a structured network for smart working. Moreover, through cloud platforms, they offer customers the collection and processing of data obtained from the services offered, to optimise their business processes (in particular for financial, healthcare, telecoms and IT companies).

Asset Management Group (or AMG): the company provides software and services such as network infrastructure, operations and business support systems. The offering is aimed at a wide variety of companies, mainly network communication providers, media, defence, cable operators and public safety.

As of October 2021, IMG business unit revenues were worth 53% (vs. 59% in FY20′) of total revenues versus 47% (vs. 41%) for AMG.

The main competitor of Enghouse Systems is Genesys, a company belonging to the Permira Funds group, leader in the contact-centre-as-a-service sector. According to the latest rumors, Genesys could go public in mid-2022 with an estimated total capitalization of $21 billion, well above that of Enghouse Systems. Given the potential and the growth that currently characterizes these markets, Genesys does not seem to represent a major obstacle to the growth of Enghouse Systems. There are no other major players in the sector, especially in the European market, which it currently seems is the main growth target for Enghouse Systems. FY 2021 results and outlook

FY20 was an outstanding year for Enghouse Systems, as the pandemic accelerated certain phenomena such as digitalization of companies, both sales and management side, and smart working. These two factors have enormously pushed the company’s revenues which grew by 30.6% compared to FY19 to CAD 504 million. However, in FY21 the company was not able to confirm its performance and had a reduction in revenues of 7.2% (CAD 467 million). The decrease during the year is only physiological given that 2020, was an exceptional year of transformation for many companies: digitalisation to survive in a new economic environment. On the contrary, 2021 was characterised by fewer restrictions and less spending by companies towards digitalisation. The Canadian company in the long run has a sustained and stable growth trend with a CAGR of 8.7% over the last five years (FY16-FY21). According to estimates, after the FY21 slowdown, in FY22 the company should return to grow, exceeding FY20 revenues in FY23. Enghouse financials (Mare evidence lab) The company’s profits in FY21 were equal to CAD 92.8 million, down by 5.8% (-35% considering exchange adjustments) compared to FY20, with profit margin rising from 19.6% to 19.9% and remaining well above the company’s historical levels. The increase in margins at Enghouse Systems is not related to savings on R&D expenditure which reached CAD 77.2 million in FY21, 16.5% of revenues (vs. 15.8% in FY20). Moreover, in FY21 the company has a good cash conversion ratio with an OCF of CAD 118.5 million, worth 70.3% of EBITDA, and an OCF/market cap ratio of 19.5x.

Focusing on investing cash flow, given the business in which it operates, Enghouse Systems has low CAPEX expenses. Most of the investments are directed towards M&A operations, made possible by the high internal cash production, CAD 195 million in cash (29% of total assets) and a low debt of CAD 25 million. In the last five years the company has allocated CAD 208 million to acquisitions, compared with the CAD 549 million of OCF produced in the same period, concentrating mainly on the European market. They have consolidated their European position reaching CAD 102.8 million in revenues in FY21, up […]

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