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Sani Ibrahim
Abubakar Tafawa Balewa,University
Agricultural economics and extension
100Level, Nigeria.
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One of the best-performing TSX tech stocks this
year, Enghouse Systems (TSX:ENGH) is firing on all cylinders
after reporting another great set of quarterly earnings results
on September 10. The latest financial results give strong
support to my earlier claim that Enghouse Systems is among
the best Canadian tech stocks for investors who want to
compound their wealth in a Tax-Free Savings Account (TFSA).
Enghouse Systems is a software company serving enterprise
customers with corporate communications, information
management, and customer service systems, and asset
management tools.
Scroll to continue with content
A TSX tech stock with strong revenue, earnings, and cash
flow growth
Enghouse Systems’s third-quarter revenue to July 31, 2020,
was nearly 30% higher than last year at $131.3 million. Gross
margins expanded to 69.7%, up from 68.7% during the same
period last year. The company’s strong revenue growth trend
remains strong, building on a previous good quarter, which
ended in April this year.
Deferred revenue on the company’s balance sheet increased
by 35% year over year to $106 million. There’s a lot more
service to be delivered to customers who have already paid in
advance.
Impressively, operating income grew by 56.2% to $42.2 million
up from $27 million during the same quarter last year. Its
operating margins expanded from 26.7% a year ago to 32.1%
during the past quarter. Likewise, the adjusted EBITDA margin,
another more reliable gauge of operating profitability,
expanded to 34.7%, up from 27.7% last year.
Most noteworthy, ENGH’s third-quarter net income surged by
77.3% year over year to $26 million, up from $14.7 million in
2019. Stellar cost management was a driving factor.
A strong surge in cash flow fuels growth strategy
Enghouse didn’t just report growing profits. The company saw
its cash balance balloon to give it a better arsenal for its
acquisitions-led growth strategy.
Operating cash flow increased by 301.7% to $55.69 million for
the quarter. Cash, cash equivalents, and short-term
investments increased to $228.9 million by the end of July, up
from $150.3 million on October 31, 2019. This growth was
achieved even after paying out $19.5 million in dividends and
spending $43.9 million in acquisitions over the past nine
months.
The company has replenished its dry powder. Management is
currently negotiating with possible acquisition targets. Some
prospects have reportedly been slow in advancing acquisition
negotiations as they focus on serving the pandemic. However,
we could still expect an accretive transaction or two in the
near future.
Can you still buy ENGH stock and make money today?
Enghouse Systems was my contrarian buy recommendation in
March 2019. Investors have more than doubled their capital
since then. The stock was again a buy recommendation in
December last year for growth-focused investors.
I remain bullish on the company’s future prospects. Its
resilient, cash-rich, and high-margin business model has
proven defensive during the ongoing recession. Investors
could look forward to new acquisitions funded from non-
dilutive internally generated funds. Growth will sustainably
continue in the future.
The company remains a highly profitable heavy cash-
generating growth machine that ticks all boxes for a growth-
oriented investor. Winnings during the COVID-19 pandemic
were added benefits to an already growing business with
increasing recurring revenue and a sustainable growth
strategy.
ENGH is clearly a winner in this pandemic economy. It
assisted companies to comfortably implement secure work-
from-home solutions and its subsidiary Vidyo saw strong
demand growth for its video communications platform during
the onset of the COVID-19 pandemic. The company continues
to see above-average demand for its technology suits, even as
international governments started to ease some social-
distancing guidelines.
Given the company’s high double-digit revenue-growth rates,
double-digit returns on assets, and a 21% return on equity
annually, long-term investors could still record decent equity
returns on this TSX tech stock. Invested capital could
compound faster in a TFSA.
The post This TSX Tech Growth Stock Continues to Shine
Through a Recession appeared first on The Motley Fool
Canada.

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