Stephen Sadler: This will be Rob's last conference call for Enghouse as he moves to a new adventure. Before we begin, I'll have Todd read our forward-looking disclaimer.
Todd May: Certain statements made may be forward-looking. By their nature, such forward-looking statements are subject to various risks and uncertainties, including those in Enghouse's continuous disclosure filings such as its AIF, which could cause the company's actual results and experience to differ materially from anticipated results or other expectations. Undue reliance should not be placed on forward-looking information, and the company has no obligation to update or revise any forward-looking information, whether as a result of new information, future events or otherwise.
Stephen Sadler: Thanks, Todd. Rob will now give an overview of the financial and business results.
Rob Medved: Thank you, Steve. Good morning, everyone, and thank you for joining us today. I'll begin with a review of our third quarter results and then provide some additional context around our operating performance. The third quarter reflected many of the trends we have discussed over the past several quarters. While the global business environment remains uncertain due to ongoing geopolitical tensions, evolving trade dynamics and broader economic caution, we continue to focus on the factors within our control, serving our customers, improving operational efficiency, managing costs prudently and generating strong cash flow. Revenue for the quarter was $117.6 million compared to $114.3 million in Q2 and $125.6 million in the prior-year period. While revenue remains below last year's level, we were encouraged by the sequential improvement from Q2, which was driven by stronger software sales, favorable foreign exchange and the timing of certain transactions. Recurring revenue remained stable at approximately 69.5% of total revenue, continuing to provide a strong foundation for the business. One point I would emphasize this quarter is that while revenue growth remains important, our primary focus has been on profitability and operating discipline. Over the last several quarters, we have taken steps to better align our cost structure with current business activity, and we are beginning to see the benefits of those actions reflected in our financial results. Operating expenses, excluding special charges, declined to $45.7 million compared to $49.9 million in the prior year, while adjusted EBITDA increased to $30.8 million, up from $26.5 million in Q2. The EBITDA margin improved to 26.2% compared to 23.2% in Q2 and 25.7% in the prior-year quarter. These results demonstrate that our profitability initiatives are having a favorable impact on the business despite continued revenue pressure in certain areas. Results from operating activities were $24.5 million compared to $23.6 million in Q2 despite recording a $4.6 million restructuring charge during the quarter. These restructuring activities were the most significant we have undertaken this fiscal year and were done late in the quarter, so there will be further phasing of benefits. Within the Asset Management Group, revenue was $53 million compared to $51.4 million in Q2 and $55.9 million in the prior-year quarter. Sequential improvement was driven by stronger maintenance, SaaS and professional services revenue, along with contributions from the Sixbell acquisition. Professional services activity improved as several delayed projects moved forward during the quarter. Segment profit increased to approximately $18.5 million from $15.3 million in Q2, reflecting both improved revenue and continued cost discipline. Within the Interactive Management Group, revenue was $64.6 million compared to $62.8 million in Q2. Software sales improved from the prior quarter and recurring revenue was stable. Maintenance revenue remained below prior-year levels. However, churn moderated during the quarter and renewal performance has improved. Lifesize and Qumu continued to experience declines, but the magnitude of these declines has reduced compared to prior periods. Segment profit increased to approximately $21.5 million compared to $18.5 million in Q2. Cost reductions, particularly within R&D, helped to offset ongoing pressure from recurring revenue attrition. Cash generation remains a key strength of Enghouse. We generated $28.4 million of operating cash flow before changes in working capital and income taxes paid and ended the quarter with $267.8 million in cash, cash equivalents and short-term investments while continuing to carry no external debt. During the quarter, we returned capital to shareholders through $16.9 million of dividends and $7.5 million of share repurchases, reflecting our confidence in the long-term value of the company and the strength of our balance sheet. Subsequent to quarter-end, our Board declared a quarterly dividend of $0.31 per common share payable on November 27, 2026, to shareholders of record at the close of business on November 13, 2026. This continues our long-standing commitment to returning capital to shareholders while maintaining the financial flexibility to invest in the business and pursue acquisition opportunities. Before concluding, I'll briefly touch on AI. Across both IMG and AMG, our approach remains practical and customer-focused. We continue to see customer interest in AI-enabled solutions and recorded growth in AI-related activity during the quarter. Internally, we are also leveraging AI to improve productivity, accelerate development efforts and support operational efficiency. As always, our focus is on solutions that provide measurable value to customers rather than pursuing technology for its own sake. In summary, revenue improved sequentially during the quarter, and importantly, our focus on cost management and operational efficiency is beginning to translate into stronger profitability. While the external environment remains uncertain and customers continue to make purchasing decisions cautiously. Enghouse remains financially strong, highly cash-generative and disciplined in its execution. We believe these characteristics continue to position the company well regardless of broader market conditions. Before I hand the call back, I want to thank Steve, the Board and the entire Enghouse team for the many opportunities that have been given during my time here. It has been a privilege to be part of the company, and I wish everyone at Enghouse continued success in the future. With that, I'll turn the call over to Steve. [Technical Difficulty]
Stephen Sadler: Okay. I think Rob was just going to hand it over to me.
Rob Medved: Correct, Steve. I did.
Stephen Sadler: Okay. Well, thanks, Rob. At least we know there was not anything from Russia or something over there in Karachi doing damage to us because we still hear you. So that's good. As noted in our last conference call, the markets which we operate in continue to be challenging. With respect to AI, which Rob mentioned, although there's a lot of interest and promotion by major AI players, it continues to be difficult to monetize AI investment in our markets. We continue to explore and use AI-leading models for internal productivity and building practical solutions which provide a return on our investments. Monetizing AI with customers, like the many solutions noted in our last quarterly call, continues to improve to benefit both ourselves and our customers. With respect to capital deployment, there's not been much change since the last quarter. We continue to investigate a lot of opportunities in the private and public markets in our business sectors and continue to find the private market valuations are smaller but also at a premium to public market valuations. Although we investigated a number of opportunities, no new acquisitions were completed in the quarter. We continued to purchase our own common shares using our internally generated funds under the TSX-defined Normal Course Issuer Bid. We believe the purchase of our own shares is a good use of our funds and better value in many cases than the acquisition opportunities that we are seeing, especially in the private markets. I would now like to open the call to questions.
Operator: [Operator Instructions] We have your first question comes from Erin Kyle from CIBC.
Erin Kyle: Good morning. Maybe just to start with the demand environment. SaaS and maintenance revenue increased sequentially this quarter, which was good to see. And we've talked about cautious customer spending for a few cycles now. Just wondering if you're starting to see any signs there of normalization or stabilization. I believe Rob mentioned some churn moderated in the quarter and some renewals improved. So maybe if you can just expand on what you've been seeing there?
Stephen Sadler: Yes. I would say, Erin, it's about the same as it has been in the past. Our quarters can vary a little bit up or down. So I don't really see any big improvement at this stage in the marketplace. It is like it has been for the last few quarters.
Erin Kyle: Okay. And then maybe just on the profitability side. Good to see the EBITDA margin in the quarter as well. You've been taking cost actions for several quarters now. So just on that, do you think there's still meaningful efficiency opportunities remaining? Or are we starting to approach a point where future margin gains will require revenue growth to achieve them?
Stephen Sadler: Yes. I'm not sure revenue growth is the answer for margin gains because it's a tough market. And as you probably know, some of our major competitors are in a difficult financial situation. So they're keeping margins down, trying to get some revenue basically to survive. And these are pretty large competitors with $1 billion-plus in revenue. So I don't see the cost reductions improving margins that way. Internally, as Rob mentioned, we did some of the restructuring that you see in the quarter right at the end of the quarter. So that will benefit future quarters. It didn't really benefit this quarter. And it takes time because you give notice periods and then you talk to people. So I'm not fortunate that we have to do that, but that's just the way the market is today, and we match cost to revenue. So we continue to do so.
Erin Kyle: That's helpful. Maybe just one last one on the leadership changes then and congratulations to Rob and Vince on the promotion here. Just on authority and the changes -- any changes regarding acquisition evaluation, financial oversight. How are you thinking about Vince's promotion here to VP Finance and the M&A valuation team.
Stephen Sadler: Yes. The acquisition teams are both the same. They're working hard on many opportunities. But the environment is quite difficult, one, because there's a lot of risk, so you've got to be careful what you buy, so you don't buy something that's not going to produce the return that we've committed for shareholders on our website and elsewhere. We have a high return on investment generally at 20% or higher. We're continuing to do that. We're not trying to rush to make the revenue look better by buying things that won't give us the return that we need. But there are a lot of opportunities out there. It is probably a more difficult environment than people understand, especially for the medium- and smaller-sized companies. And larger companies are having difficulties as well. And it's showing up somewhat in their marketplace, but they're very large, which increases the risk. You don't want to do a large deal. You'd like to do at least a medium or a smaller deal. So we're very conscious of that. We try to avoid mistakes, shall we say.
Operator: Your next question comes from Kevin McVeigh from UBS.
Kevin McVeigh: Good to see the cost adjustments. I wonder -- can you help us understand where are you in that journey? And is there any way to think about what the business is sized for from a revenue perspective in terms of is the adjustment factor a new normal? Or just, I guess, how are you thinking about those cost adjustments? And should we see some more?
Stephen Sadler: We really always have taken the approach. We match cost to revenue. Unfortunately, as you noted, our revenue over several quarters, though it happens to be up this quarter over last quarter, we had projected before that our margin dropped last quarter, and we had to get it back to what we see as more normal, which is like a 25% EBITDA level. So yes, to answer your question, it depends on what happens in the marketplace. We do match cost to revenue, and hopefully, the revenue has stabilized and could grow, but it may not have. It's a difficult market for us right now in all the markets. The contact center market is generally difficult -- and again, some of it gets attributed to AI. It's really not AI causing a lot of it. What's causing it is major, I mean, billion-dollar contact center solution providers hitting receivership or being taken over by creditors. So they're pretty desperate and that makes it tough in the market to compete against because they have to get the revenue to keep going, and they probably are doing it still at a loss. We are profitable. We tend not to jump into that game just to get the revenue higher and lose or have less profitability. So we manage the profitability, not the revenue.
Kevin McVeigh: That's helpful. And Steve, I wonder, could you give us a sense -- AI as a percentage of revenue. And one of the things we're kind of focused on is, right, we're more than one year into this AI journey and the clients haven't changed the behavior and like we probably aren't going to change nearly as much as what the sector is discounting. But if you think about that thought process, is there anything from a client perspective that gives you more confidence? Because I happen to agree with you that I don't think it's going to be nearly as meaningful as what the stocks are discounting. But -- any thoughts as to goalposts you can point to, whether it's renewals or just again, as these competitors go through the investment process and the receiverships, any sense of when we start to come out of this malaise, I guess, for lack of a better word?
Stephen Sadler: I think there's lots of different views on that. I might have contributed to some of the others because there's a lot of promotion of AI, but not a lot of results except for the platforms where everyone is experimenting, doing proofs of concept. Studies that I've seen show these proofs of concept rarely provide a return on investment. The number I saw from an MIT study was 95% do not add any value at this point in time. But we're new in the game. So you've got to be in the game, you've got to play, you've got to keep trying things because you never know when you've got a very good one. But right now, AI is just like all technology in the past. The cloud was a technology. Technology has a history of coming out with new things and it takes some time for them to produce results. And you've got to keep experimenting a little bit until you find the right path forward. So right now, we -- internally, we're using it. It's providing some help in getting our costs down for sure. I'm sure that's the same with customers. But putting it in a product that a customer buys, not so much. We don't see that yet. We still experiment with it. But customers generally will build their own or try their own. And again, most of them aren't producing results in enterprises. It is quite different in different markets. If you're in the film industry and you can use AI to automate images, et cetera, that's probably quite good. If you're a retailer, it's probably quite good. But in the areas that we're in, it's still challenging, but there's potential there, and therefore, we've got to keep up with it.
Kevin McVeigh: That makes a lot of sense. One more for me, if I could. It was great to see the previously delayed professional services reengage. As we think about that as a proxy for future revenue, where does that surface on the income statement in terms of longer revenues that professional services starts to -- obviously, it sounds like that occurred in the quarter. Where will we see the transition to other parts of the revenue stream?
Stephen Sadler: It's interesting. The professional services can be seasonal. We have a fair bit of our business in Europe. They take a lot of time off in the summer, a lot more than the Americans do. So professional services drop sometimes down a little bit then. But on the other hand, as you go to SaaS and you go to the cloud, it's more of a standard system. You're not customizing as much as when it was on-prem for a particular customer. So professional services generally in a cloud environment will decline. So we've gone through a lot of that already because we have about 70% of our -- just under 70% of our revenue. [Technical Difficulty] Hello, are we back?
Rob Medved: Yes.
Stephen Sadler: Okay. Most technology is interesting. Let's go back to the questions. I guess that's why you've got to be careful on all automated technology taking over everything because sometimes it doesn't work very well. Question?
Operator: Your next question comes from [Stephen Lynn].
Unknown Analyst: Could you hear me okay?
Stephen Sadler: You're good. I hope we stay good.
Unknown Analyst: Okay. Perfect. Maybe start off with can you help us unpack the churn picture a bit? How much of churn is still coming from acquired businesses like Lifesize versus your existing customer base? And then are you seeing any sign of stabilization in either bucket? And then a quick one on the AI front. You guys did set up those groups in both IMG and AMG earlier this year. Just wondering how the conversations are going, how customer engagement is tracking and then whether some AI offerings are in the pipeline coming up?
Stephen Sadler: I think you've asked too many questions for me to remember them all. But churn is still an issue. Again, some of it comes from acquisitions. Some of it is just general in the marketplace. Remember, what I said is major competitors, like $1 billion revenue, especially in the IMG market, which is our contact center market, are in difficulty. And it's -- think of a retail store that gets in difficulty, they start lowering all prices and that attracts some customers, but it also -- there's risk involved in going with a company like that. But it gets them to think about what they're doing. So churn is continuing. It's still there. It's a little lower. When you say from the acquisitions, we're mostly built by acquisitions. So everything sort of was an acquisition at one time for the last 10 years. But again, some of it is especially video, which is still part of our IMG group. And it's a tough market right now. So it continues like it was -- it's a little bit better, but I wouldn't say it's improved drastically.
Unknown Analyst: All right. I appreciate the color on that. And then just the second part to the question will be on the AI front, just how are conversations happening with customers, some of how customer engagement is tracking.
Stephen Sadler: So we have two groups, one in AMG and one in IMG, that do AI. We've got some projects. We had an interesting one that we've gotten in the quarter, but it's all small. It's nowhere near the promotion that you see in the marketplace. Like they aren't all rushing to it. They are -- it's hard to get a return and the token costs are going up quite -- have gone up or the usage of it has gone up, and they're eating through their budgets pretty quick doing some of these proofs of concept. So we find it interesting. We find it helps internally for us because we try and do practical solutions. But we don't see a huge uptake in our customer base. That could be the areas we're in. It doesn't mean it doesn't happen in films or in other places. But in our products, we don't see a huge uptake. That could change in the future. So you have to be in the game and you have to understand how to do it, so you can react to things as they change. Like every day, I heard somewhere today that everyone is going to be eliminated totally in 2 years. Like I just don't see it. Maybe I'm missing something, but I heard that about robotic cars 10 years ago and I'm still looking out the window right now. I don't see any on the road. There are some somewhere, but they're not on the road here in Toronto, where I am. Maybe they're on the road in Karachi. I have no idea. But it's something you're going to be in. Everyone's talking about it. But monetizing AI, unless you're a platform or a chip maker, is still difficult as far as we can tell in the areas that we're in.
Unknown Analyst: I appreciate the color. And I guess, switching gears a little bit, besides the private market valuations at a premium to public factors that you mentioned earlier, wondering any other constraint on the pace of deals, and then how would you characterize the current kind of M&A pipeline?
Stephen Sadler: The M&A pipeline is quite large. We have a lot of activity going on. We do take risks into consideration. And just think of all what you said on AI, are they going to be disruptive in some of the areas that we're looking at. So it takes a little more thinking and a little more due diligence to make sure we don't do a bad deal. We've always taken pride in the fact that we've generally done good deals and got a return for our investors. So it's -- there's a lot -- there's actually more opportunities than usual, but there's more risk for all the reasons that we've talked about on the call today than usual as well. So we're trying to avoid a mistake. But there's lots of opportunities. We should be doing more. The private companies are smaller, which is less risk. When you're smaller, you can make a mistake and it isn't a huge one. The public companies are huge and bigger, but they're having trouble, mainly because of the public markets and no one is willing to put new money if you're not making money and you have debt. To get new money in the markets where it is, is very difficult. So we're in quite a good position because of our financial resources, but it makes the market tough to get new business because others who are more desperate will lower prices because they have to get some revenue in to support the cost that they have. We tend to take the other approach of rather than rushing to take revenue that will hurt us maybe in the long run, we've taken our costs down to match the revenue that we have and are going to have.
Unknown Analyst: And then just a final one from me. On the restructuring charges, gets to a very sizable $4.6 million this quarter. It seems like toward the end of the quarter. Maybe you could give us some color, more detail on where the cost cuts are being made. And then whether from a margin perspective, there's room to further improve and right-size and then put the margins...
Stephen Sadler: Okay. They are made in various areas. Of course, as our customer support and our revenue drops, we match to it. So we generally have not taken out much cost in sales because we're trying to improve that area. Where we've taken out more cost in that number is in R&D. We have some older products where we're trying to concentrate more on our go-forward products versus our regional products that we've had for quite a time. And they're good products. They still work, but we don't have to develop a lot of things new there because the customers are happy with what they have. So in the last reduction, which was done towards the end of July, you'll find our R&D, which is nearly 20% of our revenue. That's quite high for the industry. So there were some reductions in that area. That was the majority of where the cost reduction came from. I could say, like many others, AI saved it, but it's not true. So I don't do that. It's generally we had to fine-tune that, looking at putting more emphasis on our go-forward products. And the products, or more regional products that we've had for some time, we still want to make sure we get good service to the customers, but we're not doing a lot of new things in them, except for new products that we're tying to the platforms that we have.
Operator: [Operator Instructions] Your next question from David Kwan from TD Cowen.
David Kwan: So Steve, you mentioned -- I think Rob mentioned that the restructuring happened late in the quarter, so there was a modest benefit to margins this in Q3. So should we expect margins to improve from these levels in Q4 and into 2027?
Stephen Sadler: When you talk about margins, I think about it differently. There's a cost of revenue. We are working to improve that to make that better. A lot of people who've gone into the cloud use a lot of third-party products and have a high cost of revenue, much higher than when it was on-prem. So we've worked on that side. That's what we see as margin. And then below, to get to EBITDA, you have all your costs of professional services, you've got your cost of sales, you've got financial costs, et cetera. We trim those back again to match to the revenue that we have. We constantly look at doing this. Although you'd say there's cost at the end of the quarter, we still have people who, especially in Europe, have to work out their notice period. So again, it takes a little bit of time. So you won't -- you'll see some of the savings this quarter and next quarter because some notice periods are quite long, so we don't just take all that cost and do it right away. We finish off projects we're working on, especially in R&D. So again, we hope to see some savings. And hopefully, our revenue doesn't go down to cause more issues in that area. But it is a tough environment. And again, if you look at -- if you look at, let's say, the IMG side, contact center side, big billion-dollar companies are in financial difficulty. And so they're hustling to do something. And again, it's hard to get money because investors are not investing in that because of the promotion and image that AI may take it all over. We don't see that, but one never knows. You've got to make sure you're prepared for anything that can come up in technology because it changes quickly and you've got to be ready for it.
David Kwan: Do you think that getting margins back into the high 20s is realistic? Or is -- are you kind of targeting something around the current levels in the mid-20s?
Stephen Sadler: I would say mid-20s is more realistic now, again, for the very comments I just made. The competition are being active because they need to -- they have issues. And their issues are they can't really get more financial resources easily. The marketplace is not rewarding the area. So if you have debt and you're not making money, you've got a problem. Fortunately, we have cash, and we make money. So we don't have that problem, but I don't want to have that problem. In other words, we've got to keep watching and matching our cost to revenue. But it's still a tough market. There's no doubt about it.
David Kwan: That's helpful. And do you expect any more material restructuring in Q4? Or was what happened at the end of July kind of the big restructuring work for now?
Stephen Sadler: We're hoping the July one has helped us going forward and has done what we need to do. But again, it depends on the market, the revenue and all the things that are happening out there these days. We match cost to revenue. I'm hoping that's done. But if it isn't done, we may have to look at some more, but we've done a -- we don't try and keep doing it. In other words, we try to do it once. And again, a lot of it was in the R&D side, which we hadn't done for quite a while. If you look at the competition, you'll see they can run around 12%, 13% of revenue for their R&D expense. We're closer to 20%, 19%. So we're a little high. Some of that we should be a little higher because we have a different model or different solutions in different geographical regions, but we're a little bit too high. And so we've started to say, okay, it's time to fix some of that. And again, obviously, spending that extra money wasn't getting us the extra revenue. So it's a matching of cost and revenue, and no one likes to do it, but that's what we have to do, and we don't want to be in the position of some of our major suppliers. You can talk to buyers, you can talk to many, they'll tell you they all have some difficulties. And we've seen quite a few more even $20 million, $30 million companies, especially in the contact center market. For whatever reason, it's a more mature market. But also, if you look at the telcos, that's our IMG or networks area. Think of Dell, think of Telus, look how they're doing. That's pretty standard for what we're seeing in that market as well. So we've got a bit of a perfect storm against us. We have to manage for that, and we expect we'll come out ahead of the game, but it will take a little bit of time.
David Kwan: That's helpful. Just two more questions. One, I think last quarter, you alluded to some deals that might have been delayed there. So did this quarter benefit from some of those slipped deals and maybe help lead to that sequential improvement in revenue?
Stephen Sadler: I usually don't talk about slipped deals because I find they slip forever, okay? In other words, they slip, but then they come in and new ones slip. So I really think we've done pretty well on the revenue growing over last quarter. I'm not sure where that goes forward because, again, the competition have difficulties and they're making how much margin decline do you want to take to get revenue versus make money on the bottom line. That's something we have to deal with every day.
David Kwan: And then one last question. Just on capital allocation and the balance sheet. So I was wondering like how much cash do you think is enough to fund the business and provide enough flexibility to fund acquisitions? Should things kind of turn around here? I'm just trying to get a better sense of when you might look to redeploy your cash in a more significant way, like a special dividend or an SIB given the tougher M&A environment? And just looking back, what I think it was roughly 5 years ago, when you paid the special dividend, you had less cash than you have right now. So why not maybe pay a special dividend or maybe do an SIB, especially given where the valuation is right now, kind of multi-year lows.
Stephen Sadler: Our dividend is actually quite high right now, not because of the absolute dollar of the dividend, but because our stock price went down, okay? So we're at 7%. What other tech companies out there are paying 7%, 8% dividends? So I'm hoping that we can improve the stock price. I don't think we have to improve, really, the dividend. We actually put a smaller dividend increase in this year to do buybacks instead because, quite frankly, our stock price, in our opinion, is a good investment right now, probably better than -- and it hasn't been like this for 10 years plus, probably better than some of the acquisitions we're looking at currently. But these things change pretty quickly. If there's any criticism you can do, I'd characterize it as we aren't doing enough deals. I think there are deals out there that are good value, and it comes down to if there are larger ones, do I want to accept that risk. It's tough in this market. Everyone thinks contact centers are going to be eliminated, I've heard, in 1 year. Well, that didn't happen because they said that a year ago. Then I've heard, well, 3 years, 5 years. I think AI, in particular, helps make the contact centers more productive and more responsive, but you're going to need both. You're going to need humans and you're going to need better technology to help do contact centers. Remember, contact center is not inbound. It's also outbound. We do both. We actually call it internally communication centers because we do both inbound and outbound. But there's challenges there for sure. Some of it is theoretical challenges, and some of it are real, and sometimes you can't tell the difference. What's theoretical and could become real? Or is it really real? Is it really happening? I think more and more people see AI, and always have, as being technology that helps do better things and give better service. That's how we see it. We see AI with humans, I guess you'll say, working together to provide better service to customers. And that's how we're approaching it right now.
Operator: There are no further questions. I'll turn the call back over to Stephen.
Stephen Sadler: Well, thank you, everybody. I know these are interesting times, to say the least. Sorry for the interruption. Again, technology. Sometimes you get them with calls. But thank you for attending the call and your continued support. We understand a little bit of patience is hard to do sometimes, but we're hopeful it will prove to be the right thing for you to do. Enghouse has good positive cash flow and, overall, a strong debt-free financial position. This is very good in this marketplace. We just need a little more visibility and certainty of where it's all going. We look forward to our year-end conference call in December. Thank you for attending.
Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
