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Enghouse Systems (ENGH) Stock | TSX: ENGH.TO

The Crystal Ball Acquirer

Enghouse is a Canadian based, publicly traded company (TSX:ENGH) that provides enterprise software solutions focusing on remote work, visual computing and communications for next generation software defined networks.

The Company’s two-pronged growth strategy focuses on internal growth and acquisitions.

Enghouse has operations in Canada, the United States, the United Kingdom, France, Germany, Sweden, Israel, Croatia, Denmark, Norway, India, Japan, Hong Kong, Singapore, and Australia etc.

Growth

17

Valuation

77

Quality

57
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Investment Thesis

  1. Enghouse is a grow by software acquisition company out of Ontario, Canada with a strong track record for buying software businesses in the communications, networks and transportation verticals.

  2. The business has been a solid compounder with high return on invested capital (ROIC) and compounded annual growth of free cash flow trading at a more than reasonable price.

  3. The Interactive Portfolio is benefitting from remote work tailwinds and seeing significant organic growth.

  4. Risks include pulled forward growth as a result of the pandemic, some churn of the new customer acquisitions in the remote work environment,

  5. Stephen Sadler and Team have very sizeable equity in the business and are well incentivized to deploy capital at high returns. They have been able to make acquisitions in secular trends before they are consensus, thus paying attractive prices.

The Basics

Acquiring secular trends before they are consensus

Enghouse is a grow by acquisition company looking for businesses to tuck into the portfolio with the following characteristics:

  • >$5M in revenue

  • Recurring revenue (maintenance, hosting, subscriptions)

  • Can be profitable or not

  • Flexible with either partial or full exits for founders

Here is the twist, organic growth has been explosive recently.

The part that makes us believe Enghouse has the secret acquisition sauce is that they acquire and operate inside of exciting fast growing secular trends ultimately leading to organic growth within their ecosystem.

These deals are done with cash (fuelled by the other cash flowing businesses) and the business has literally zero debt on the balance sheet.

Stephen Sadler has been at the helm for a long time and remains out of the spotlight. Researching him or this company is a tall order, and by far our least favourite thing about the business.

Enghouse Systems Company Structure in a graphicSource: Enghouse Corporate Presentation

The business operates two segments:

  1. Interactive Management Group

  2. Asset Management Group (Networks, Transportation & Public Safety)

Within the two business segments, they acquire software firms that are involved in video conferencing, contact centres, fleet management, transportation, supply chain logistics, public safety, telecom services software, GIS.

Enghouse has additional optionality and say they also are open to new fragmented sectors ripe for consolidation.

Enghouse is a now global company with offices in 25 countries and in every continent on the planet. Except for Antarctica (yet), but we’ll let that one slide.

Crystal Ball Acquisitions

Either a good hunch, a time machine, or just plain luck

Whatever the reason, we’ll take it.

A company investing in remote work, telemedicine, cloud enabled call centres, video conferencing APIs is surely benefitting from the new way work is being done.

Enghouse acquired a business called Vidyo in Q3 of 2019.

Vidyo saw 1,349% pandemic surged growth in web real time-communications (WebRTC) just one year later post-acquisition.

Vidyo has been so successful that the “growth… due to Vidyo” was mentioned 10 times in their Q3 2020 report and 11 times in Q2.

Enghouse Companies

Finding a list of Enghouse’s acquisitions doesn’t seem to exist on the internet, so we created it using Stratosphere’s press releases function from 2010-onwards.

  • Visionutveckling AB (Vision), Sweden - November 2012

  • Aktavara AB, Sweden - September 2015

  • CTI Group, USA - December 2015

  • CellVision AS, Norway - March, 2016

  • NetBoss Technologies, USA - May 2016

  • Presence Technology, Spain - October 2016

  • Tollgrade Communications, USA - April 2017

  • Survox, USA - September 2017

  • XConnect GmbH, Germany - November 2017

  • SimaTech, Denmark - December 2017

  • Mobilethink, Denmark - April 2018

  • Telexis, Netherlands - November 2018

  • Capana, Sweden - November 2018

  • ProOpti, Sweden - February 2019

  • Vidyo, USA - May 2019

  • Espial, Canada - May 2019

  • Eptica S.A., France - October 2019

  • Dialogic, USA - January 2020

Enghouse Systems' Graphic of Acquisitions

Rock Solid Financial Performance

The software with high recurring revenues model spinning off tons of cash, acquire, repeat model works. We have seen it work with countless public co’s now.

When you add organic growth, the results are impressive.

These acquisitions are all cash. Rinse and repeat.

Enghouse Systems Revenue ($M) (Q3 2021)

Enghouse Systems Free Cash Flow ($M) (Q3 2021)

Bottom Line

Enghouse Systems is a vertical software acquirer that has been acquiring businesses with a seemingly crystal ball over the last few years. Buying businesses all over the world that enable fast growing secular trends such as telehealth, video conferencing APIs, cloud based contact centres, remote work integrations and telecom software.

The pandemic economy has been a very positive tailwind for Enghouse’s portfolio.

Enghouse is managed by a very experienced team who has been executing for shareholders exceptionally. Expect further growth both organically and by acquisition. Investors looking for recurring revenues, stable growing cashflows and a growing dividend, Enghouse is a name that is still small but has global capabilities in fast growing sectors.

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