Enghouse Systems (TSE:ENGH) reported lower revenue in its fiscal second quarter as management cited continued customer caution, recurring revenue churn and delayed discretionary projects, while profitability improved on cost controls and cash generation remained strong.
Chief Financial Officer Rob Medved said revenue for the quarter was CAD 114.3 million, down from CAD 124.8 million in the same period last year, a decline of about 8%. Sequentially, revenue fell 4.8% from CAD 120.1 million in the first quarter.
Recurring revenue, which includes SaaS and maintenance streams, was approximately CAD 79 million, representing about 69% of total revenue. Medved said recurring revenue remained “a significant and stable part” of the business, even though it was slightly lower year over year.
Profitability Improves Despite Lower Revenue
Enghouse reported adjusted EBITDA of CAD 26.5 million, representing a 23.2% margin, which Medved said was marginally higher than the same period last year. Operating income was CAD 23.6 million, while net income rose to CAD 16.3 million, or CAD 0.30 per diluted share, compared with CAD 13.5 million, or CAD 0.24 per share, in the prior-year quarter.
Medved said the profit performance reflected continued cost discipline and operational efficiency. Operating expenses were reduced by about 13.5% year over year, helped by targeted restructuring actions taken during the quarter.
“We have proactively aligned our cost structure with the current revenue trajectory,” Medved said, adding that the company expects further benefits as those cost actions annualize over coming quarters.
Cash generation remained a key focus. Net cash provided by operating activities, excluding working capital changes and income taxes paid, was CAD 28.7 million, up from CAD 25.5 million a year earlier. Enghouse ended the quarter with CAD 269.7 million in cash equivalents and short-term investments and no external debt.
The company paid CAD 16.4 million in dividends and repurchased CAD 2 million of its shares during the quarter. Its board also approved a quarterly eligible dividend of CAD 0.31 per common share, payable Aug. 28, 2026, to shareholders of record on Aug. 14, 2026.
Segment Results Mixed
The Asset Management Group generated revenue of CAD 51.4 million, a slight increase from the prior-year quarter. Medved said acquisitions contributed to growth and helped offset softness in some areas, though the segment experienced some variability because of the timing of larger one-time transactions.
The Interactive Management Group reported revenue of CAD 62.8 million, down from both the prior-year quarter and the first quarter. Medved said the decline was primarily due to recurring revenue churn, including expected attrition from prior acquisitions, along with a customer transition toward cloud and SaaS models. Software license and professional services activity were also softer in the segment.
Chairman and CEO Stephen Sadler said the hosted and maintenance revenue decline was “a little larger than what we would have thought,” pointing to continued runoff from acquisitions, including Lifesize, as well as pressure among small and medium-sized customers.
“There’s also decline generally in the marketplace,” Sadler said. “We’re generally in that medium-sized accounts or small business accounts, and they’re struggling more in this market.”
Management Cites Tough Market and Competitive Pressure
During the question-and-answer portion of the call, analysts pressed management on churn, gross margins and the company’s ability to win share as some competitors face financial difficulties. Sadler said the environment remains challenging, especially in contact centers and among smaller customers.
Sadler said some larger competitors are under financial stress and may be cutting prices to retain revenue, making deals more difficult. He also said some customers in the small and midmarket segment are facing financial difficulty, which is contributing to churn.
“It’s a little baffling to me that we aren’t doing better, because a lot of our major competitors are having financial difficulties,” Sadler said. He added that customer moves to new providers can take time and that Enghouse is working to improve execution.
Sadler said the company’s transportation and network businesses are performing better than contact center and video-related areas. He noted that transportation has returned to profitability and is growing, helped by two large contracts being rolled out, particularly in the Nordics. On the network side, he said the business remains relatively steady, though telecom customers have slowed some spending amid uncertainty and the transition from 4G to 5G.
AI Monetization Remains Unclear
Management also addressed artificial intelligence, saying customer interest remains high but monetization is still difficult in Enghouse’s markets.
Medved said customers are interested in AI-powered capabilities that improve efficiency, automation and analytics, but adoption tends to be measured and use-case driven. He said Enghouse is focusing on practical AI features within its software offerings, rather than pursuing AI as a standalone initiative. The company is also using AI internally in development and operations to improve productivity and lower costs.
Sadler said enterprise AI investment remains difficult to monetize and cautioned that many customers have yet to see a clear payback.
“The staff doing the work are saying, ‘There’s no payback,’” Sadler said, referring to some AI initiatives. He said Enghouse has established two small AI-focused groups and trained employees on the technology, but has not yet identified a major revenue-driving AI application for its business.
Acquisitions and Buybacks
Sadler said Enghouse continues to see opportunities in both private and public markets, but private market valuations remain higher than public market valuations in some cases. The company did not complete any acquisitions during the quarter, instead continuing to repurchase its own shares under its normal course issuer bid.
Sadler said Enghouse believes its own shares currently offer better value than many acquisition opportunities when considering both valuation and risk. He said the company has the balance sheet capacity to do larger deals but remains cautious, particularly in areas such as contact centers where investor sentiment is negative and management is still evaluating the potential long-term impact of AI.
“We have the capability of doing something bigger,” Sadler said. “The key is, it isn’t a matter of being cheap, or it’s where’s all this going, and we need a little more time to see that.”
Sadler closed the call by emphasizing Enghouse’s debt-free balance sheet, positive cash flow and cautious capital allocation. He acknowledged that the company needs to improve its performance but said management does not want to increase risk by deploying capital imprudently.
About Enghouse Systems (TSE:ENGH)
Enghouse Systems Limited is a Canadian publicly traded company (TSX: ENGH) that provides mission-critical vertically focused enterprise software solutions. Our core technologies are used for contact centers, video communications, virtual healthcare, education, telecommunications, networks, IPTV, public safety and transit. The Company’s two-pronged strategy to grow earnings focuses on both organic growth and acquisitions, which, to date, have been funded through net cash provided by operating activities as the Company has no external debt financing.
