Kim BoltonEnghouse SystemsENGH.TOTRADEJul 16, 2025

Execution hasn't been good lately. Fundamentals have gone the wrong way. Bargain-level valuation, probably a decent balance sheet. He avoids the smaller-cap companies, as it's hard to get out of positions. He's sticking with CSU.

Probably won't know until 2027 what the outcome is for all these software firms. AI has created this "SaaS-pocalypse". They've all seen multiple contraction from ~40x PE down to 10-15x. 

Some are buying on the dip on the expectation that this is overblown. You have to decide for yourself whether things are OK now and the only place to go is up. If AI does have a lasting impact, this sector is not where you want to be.

He got rid of all of his software stocks last year.

EPS of 38c beat estimates of 36c; revenue of $124.4M missed estimates of $125.8M. EBITDA of $33.66M beat estimates by 1.2%. Revenue fell 1% year over year. EBITDA fell 5.5%. Net cash is $258M. It was an earnings beat and the stock bounced a bit, but consensus calls for only 6% EPS growth next year. The stock is very very cheap but it will take more than this quarter to really get things moving here again. We think it is good for income investors (5.71% yield) but not hugely attractive otherwise. 
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Software companies are really under the gun right now, could be going the way of the buggy whip. He sold a couple of months ago. His view is that software's being taken over by AI. Challenged to grow business going forward.

Poor man's CSU. Buys businesses and puts them together, but these businesses tend to be in decline or at the end of growth. He likes companies with positive organic growth. A lot of single-person risk.

He sold a while back. It wasn't delivering. Hit his downward loss trigger, and he exited. Lack of shareholder friendliness tipped the balance. Company was sitting on massive cash, but not using it in (what he thought) was the best interests of shareholders.

Looks very undervalued compared to peers. Business is declining more aggressively. Could be a value trap. Whether to sell depends on your individual profile. If you're down big, and it's in an unregistered account, you could bank a loss. If you're a newer investor and down just slightly, might make sense to sit tight and wait for a catalyst or potential takeover offer.

Chart's quite volatile. Currently paying out a high proportion of cashflow to cover the dividend. So it's not reinvesting substantially in the business. Making acquisitions, but revenue hasn't changed one iota.

The caller asked about his opinion on both of these companies. Open Text is much larger and is very leveraged, Open Text did a large deal which is not at their comfort level. He has never owned it. Enghouse has no debt along with lots of cash. The CEO of Enghouse is on the board of Open Text. He owned Enghouse but sold last year. It is cheap so it's time to move on. It is a much much smaller version of CSU

The chart is a long downtrend since 2021. Look elsewhere.

Management has had lots of success with prior companies, but has struggled with growth at ENGH. In its early days, there was a premium for management, and without growth as expected this impacted the valuation and the stock's returns over time. 10-year return is now negative. We do not know why the company has been so reluctant to spend its cash. It has had too much cash for far too long. A growth acquisition would be a good catalyst, certainly. Insiders do own 22%. The share count has not changed much but it has not gone down significantly with buybacks, either. The tech sector of course has been very strong, but its particular niche has been less robust. ENGH is focused and is proud of its profitability record, so its less-aggressive growth stance has kept it a laggard versus faster-growing peers (who may be unprofitable). We think it is OK, but now it is more OK for income. A takeover/privatization may be possible as we are sure management is just as frustrated as public shareholders. We think in tech CLS looks better, as do the CSU group of companies (CSU, TOI, LMN).
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Small cap. Earnings coming out June 5, 3 days away. Usually when a company raises dividend by 18%, the expectation is that profits will grow by that much (though he can't speculate). Climbing back since April lows. Margins are good and getting better. Revenues are starting to grow again since Covid. Yield is 4.5%.

He has it in TFSAs, RESPs, and accumulates more over time.

Essentially an 18% dividend increase every year. Taking on the MSFT business model for SaaS, as subscriptions smooth out margins from quarter to quarter. Recent acquisition announcement raised stock. Growing margins. Asset light, little debt. He likes these serial acquirers. 

ROIC is 15%, WACC is 8.5%. That means a ton of free cashflow to make acquisitions, pay off debt, rinse & repeat. It's a small cap now, and he anticipates it growing and gaining attention.

Not getting much love in the market. Cheaper than almost anything out there, yet keeps getting cheaper. Holding massive amount of excess cash; not using it to increase dividend or buy back shares, so it's in the penalty box. Value tends not to work in tech.

So much other great stuff out there now at reasonable prices.

A mini-CSU, because they have built by strategic acquisition well. It hasn't excelled like CSU, because they haven't scaled their business yet. He targets $36.50.