Q3 2023 Tecsys Inc Earnings Call
Okay.
Okay.
Good morning, everyone welcome to Texas third quarter fiscal 2023 results conference call.
Please note that the third quarter reports, including MD&A and financial statements were filed on SEDAR after market close yesterday.
All dollar amounts are expressed in Canadian currency and are prepared in accordance with international financial reporting standards.
Some of the statements in this conference call, including the question and answer period May include forward looking statements that are based on management's beliefs and assumptions.
Actual results may differ materially from such statements.
I would like to remind everyone that this call is being recorded on Thursday March 2nd 2000, Twenty's fee at 830, a M eastern time.
I would now like to turn the conference over to Mr. Peter Brereton, Chief Executive Officer at Texas. Please go ahead Sir.
Thank you and good morning, everyone. Joining me today is Mark Miller, our Chief Financial Officer. We appreciate you joining us for today's call.
Now before getting into our third quarter results I wanted to take a moment to welcome Shannon Carl to the position of Chief Marketing Officer, Shannon comes to us with an impressive reputation that organizations like SAP.
IBM and price Waterhouse Cooper.
As we scale up our sales and marketing efforts. We're excited to have Shannon on board and look forward to the positive impact you will have on our marketing pipeline and demand generation activities.
Our company began in fiscal year 2023, with strong growth underscored by solid SaaS bookings and that momentum accelerated in Q3 this quarter of SaaS bookings at $5 8 million set a new record bookings in the quarter spend both new and base accounts, the latter which included six significant SaaS migration and expansion deals highlighted.
The ongoing value that our existing customers see in the Texas platform. We also added another health care IDM.
In fact, we have had 15 health care networks, either buy into or expand their engagement with Texas SaaS. So far this fiscal year, our SaaS offering has proven to be a system of choice for organizations grappling with supply chain complexity.
I'd like to take a moment to summarize some of the key announcements that we made during the quarter on partnerships as well as the product launch and then the key events of the third quarter of fiscal 'twenty three and results of operations Mark will then walk us through the financial results in more detail.
Finally, I will comment on our outlook followed by Q&A.
Since our last results call. We made two notable partnership announcements.
With respect to health care.
Pardon me, we announced our certified integration status with workday.
An important milestone that supports the work we do at customer sites like Prisma health.
South Carolina's largest health system in core will help the Michigan based merger of spectrum health in Beaumont health.
With respect to warehouse automation, we also announced our partnership with SVT Robotics, a key technology partner that provides integration software, which will give our customers broad access to new and emerging robotic solutions as these technologies become more and more important to be competitive in industry.
We also officially launched our warehouse and warehouse E Commerce fulfillment solution designed for the converging distribution market. This is a warehouse management solution that helps run in.
<unk> e-commerce fulfillment business inside of wholesale or distribution warehouse already running a more traditional pellet in case oriented software package.
We are pleased to share that we have implemented this model for a global luxury cosmetics retailer, whose existing ERP was an agile enough to handle their growing ecommerce business.
There are a couple of key indicators I would like to highlight which are can.
Contributing to our continued track record of stable growth as SaaS organization last quarter, we highlighted an important milestone when our SaaS revenue became our most dominant recurring revenue stream representing over half of total recurring revenue. We're now reporting a 36% increase in SaaS revenue for this quarter compared to the same quarter last year.
Based on bookings in Q3, we expect SaaS revenue to exceed $10 million in Q4, another interesting milestone and we feel like this is just getting started on top of that our gross and net retention levels remained very robust.
Our SaaS they are our bookings are up 152% in the quarter and up 68% for fiscal 2023 year to date through three quarters compared to the same period last year.
Due to strong bookings in the quarter, our professional services backlog of $38 million is up about 29% from the same time last year, we believe that.
This is another leading indicator of where revenue growth is headed.
With growing SaaS backlog in many major delivery projects in the backlog, we are seeing traction for the Texas value proposition across all industries in which we do business within a market that is highly engaged.
Texas is proving to be among the best cloud based solutions available in the markets, we serve and we have the people the products and the planned to provide what the market demands.
Mark will now provide further details on our third quarter and first nine months financial results.
Thank you Peter we're very pleased with the strong performance in our third quarter ended January 31 2023.
Total revenue was a record $38 $9 million, 10% higher than $35 4 million reported for the same period last year.
Total revenue, excluding hardware increased 12% compared to the same period of last year or 10% on a constant currency basis.
As many of you know a significant portion of our revenue in fact about 68%. This quarter is denominated in U S dollars as a result movements in foreign currency exchange rates have impact on our reported revenue and growth.
We continue to experience strong and steady revenue streams underpinned by a 36% increase in SaaS revenue up from 7.0 a million in Q3 2022 to $9 5 million in Q3 2023.
On a constant currency basis, SaaS revenue was up 33% compared to the same quarter last year.
SaaS remaining performance obligation also known as RP O or SaaS backlog was $128 3 million at the end of Q3 fiscal 2023.
63% from $78 5 million at the same time last year on.
On a constant currency basis that growth was 58%.
Maintenance and support revenue for the three months ended January 31, 2023 was $8 4 million up 2% compared to the same quarter last year or flat on a constant currency basis.
Maintenance and support revenue generally follows the trend of license revenue and we expect that as current customers migrate to our SaaS offering maintenance and support revenue will decline over time.
Professional service revenue for the third quarter was $13 $6 million up 5% from $12 9 million reported for the same quarter last year or 2% on a constant currency basis.
As we've noted the last few quarters, we're starting to see the impact that our transition to SaaS will ultimately have on our professional services revenue line.
That is we're seeing a continued reduction in custom development work as customers opt for more out of the box approach to platform implementations.
We're also continuing to experience the increased collaboration of our partner ecosystem and helping to implement our systems.
While we expect that over time. These factors will continue to moderate our professional services revenue growth, we had a very robust professional services bookings quarter, which I'll get to in a second.
As we discussed in our published M. DNA, we expect total services revenue. So that's combined SaaS maintenance support as well as professional services.
Ranging between $32 5 million and $33 5 million per quarter in the short term.
License revenue in the quarter was $1 1 million compared to 0.9 million in the same period in fiscal 'twenty two.
As we've stated before with most of our SaaS bookings with most of our software bookings now SaaS, we expect license revenue to decline in general over time.
In the current quarter.
We did book one new logo a license deal we certainly don't see this as a trend and we had some user count expansions on the base.
Hardware revenue in Q3 fiscal 2023 was $6 4 million flat compared to the same period last year.
By way of reminder, we sell primarily third party hardware to our customers for warehouse operations and in hospital point of view storage and tracking.
This is part of our business tends to be lumpy and revenue recognition here is tied to delivery timing.
That said like last quarter, our hardware backlog remained strong driven primarily by hospital network point of view just orders.
Turning now to bookings SaaS bookings are reported on an annual recurring revenue basis as Peter mentioned SaaS bookings were up 152% in the quarter to a record $5 8 million compared to $2 3 million in Q3 last year.
I would point out that while SaaS bookings can be somewhat lumpy due to the timing of quarter deal closings. It's also helpful to look at a longer term period to see the positive trend on SaaS bookings.
We have been seeing some sustained momentum with SaaS bookings up 68% year to date compared to the same period last year.
Of course, this is a leading indicator of SaaS revenue growth.
Professional services bookings were $19 8 million in the quarter up 112% compared to $9 3 million in the same quarter last year, and that's up 6% year to date compared to the first nine months of fiscal 'twenty two.
This highlights then the lumpiness and impact of timing on reported quarterly bookings.
As Peter noted professional services backlog was a robust $38 2 million at January 31, 2023 up 29% from the same time last year.
For the third quarter total gross profit was 17.0 million, that's up 12% compared to $15 2 million in Q3 of last year led by higher gross profit contribution from SaaS maintenance support and professional services.
As a percentage of revenue gross margin was 44% compared to 43% for the same period last year.
Combined SaaS maintenance support and professional services gross profit margin for the three months ended January 31, 2023 was 47% flat compared to the same period in fiscal 2022 but up sequentially from 46% compared to Q2 of fiscal 'twenty three.
We expect to see continued services margin improvement in the coming quarters as the business continues to scale and as we focused development and operational energy on optime optimizing platform efficiency.
In fact, we added a new slide to our investor presentation.
Which is available on our website that provide some directional indication of where SaaS and combined services margins would end up under certain projections assumptions.
As I said last quarter, we see this as a multi year journey with incremental benefits building over time.
Switching now to our expenses for the quarter operating expenses increased to 16.0 million higher by $2 1 million or 15% compared to $13 9 million in Q3 of fiscal 'twenty two.
Operating expenses are up compared to the same quarter last year, primarily because of higher sales and marketing costs and higher research and development costs, including the impact of unfavorable foreign exchange rates.
Sales and marketing costs were up sequentially in Q3 on higher marketing program spend and employee related costs.
We expect an increase in sales and marketing costs sequentially in Q4 that will be slightly more modest than the increase we saw in Q3.
I'd also draw your attention to another new slide we added to our investor presentation that provide some insight into how we measure sales and marketing efficiency by comparing customer acquisition cost to lifetime value of expected margin contribution.
Now moving to research and development costs compared to Q2 research and development costs were down slightly in Q3 Q.
Q3 actually benefited from a zero point $4 million true up of R&D tax credits of knee business credits as a result of this and increasing run rate costs. We expect Q4 research and development costs to increase relative to Q3.
Net profit for the quarter was $888000 or six cents per basic and fully diluted share compared to 940000 or six cents per share for the same period in fiscal 'twenty two.
Adjusted EBITDA was $2 8 million in Q3 of 23 compared to $2 7 million in Q3 last year.
Net profit and adjusted EBITDA were both positively impacted by a favorable foreign exchange of approximately zero point $2 million compared to the same period last year.
Turning now very briefly to our results for the nine months first nine months of fiscal 'twenty three.
Our total revenue was $111 2 million up 8%.
Two one or 2.9 million for the first three quarters of last fiscal year and up 6% on a constant currency basis.
SaaS revenue for fiscal year 'twenty three eight year to date was $26 3 million that was up 37%.
Compared to $19 2 million in the same period last year, and that's 33% growth on a constant currency basis.
Our net profit for fiscal 'twenty three year to date was $1 6 million.
Compared to $1 9 million in the same period last year.
Foreign exchange movements had a positive impact of approximately $1 2 million on profit and adjusted EBITDA compared to the same period of last year adjust.
Adjusted EBITDA was 7.0 million for the first three quarters of fiscal 'twenty three.
Compared to $8 4 million last year.
We ended Q3 fiscal 'twenty three with a solid balance sheet position, we repaid our long term loan in December of 2022, and as a result, we're now debt free.
On January 31, 2023, we had cash cash equivalents and short term investments of $27 $9 million.
That was down $15 3 million compared to $43 2 million at the end of fiscal 'twenty two.
The decrease results primarily from the repayment of long term debt seasonal working capital fluctuations and payment of dividends.
I'll now turn the call back to Peter to provide some outlook comments.
Thanks Mark.
<unk> performance in the third quarter of fiscal 'twenty. Three was strong we have a strong balance sheet and a robust backlog and excellent sales pipeline. We are seeing widespread buyer intent across target markets solid opportunity cycles.
Really capable sales team with the tools and talent to capitalize on a market that is ready to invest in new technology or.
Our increasing market share in healthcare supporting supported by an increasingly robust partner network and growing acceptance of the clinically integrated supply chain and consolidated service Center model together with our expanded healthcare sector offerings.
It gives us confidence that the health care sector, we will continue to serve as an important revenue stream for us.
Turning to converging distribution, we continue to hold our sweet spot there and carve out our share of a massive market opportunity driven by fundamental changes to the supply chain industry changes spurred by aging existing systems digital adoption.
Realized realization that heightened consumer expectations are here to stay.
We are pleased.
<unk> that our third quarter of fiscal 'twenty three.
Continues to demonstrate our dominance in key markets and emerging opportunities in growth markets.
It isn't hard to see that accelerated changes on the horizon. When it comes to supply chain management and companies are starting to invest in that change. We believe that the remainder of fiscal 'twenty three is tracking well against our internal kpis kpis and we are well positioned to expand our footprint.
This growing market.
In summary, I want to remind analysts and investors of our key themes as we look to a successful fiscal 'twenty three and beyond first we will continue to maintain a laser focus on expanding our SaaS revenue model.
Lee will continue to deepen and strengthen our partnership ecosystem. This is key for us to scale rapidly into North American and international markets.
Third we will continue to expand and refine our distribution.
And Omnichannel business platforms to service evolving needs in both our health care supply chain.
Converging distribution market segments.
Across our markets, we will place emphasis on customer success, we have long stood by the philosophy of customers for life and a big part of that Formula is to deliver value fast stay connected and expand on the value delivered with that we'll open the call up for questions. Thank you.
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Again to register for a question. Please press the one followed by the four one moment for the first question.
And it comes from the line of.
So then <unk> with Stifel. Please proceed.
Good morning, Thanks for taking my questions. It's Daniel on for Susan Today. So for my first question. It's on professional services. So it looks like bookings grew at a healthy clip. This quarter I know you mentioned in the past that you're shifting some more work to your partners. So far for the quarter are you seeing stronger attach rates and if it works.
Still more centered on the client service side or has that changed.
Okay.
Yeah, I think I'll take that one if it's okay, Peter Hey, Daniel Thanks for the question. Yeah. We're seeing you know the attach rates are are moving around a little bit I mean I think.
With about what happened in the quarter with just very significant booking level just in general.
With SaaS you know 5.8, we saw over $19 million of of P. S bookings come in.
We got it.
We've got a reasonably good attach rate there, we still see a lot of our a lot of activity with our with our partner ecosystem, we see more and more interest you know.
And from from a size and potential size. So we see positive things there but.
That attach rate and the level of bookings that we saw in the quarter were definitely robust.
Okay.
Okay.
For my second.
Question here with regards to IGN wins, I think you mentioned that you added one new IGN wins this quarter in the prepared remarks can you provide us an update on the deal on implementation cycles within health care at the moment.
Yes, I mean from the standpoint of overall deal flow I mean, it always sort of ebbs and flows a little bit.
At this point to where we're at.
What would be Mark I should know this are we at six year to date now Stein.
Yep.
Yes, so six idea inside this fiscal year.
We still think we're going to continue to see some pretty good momentum there.
Our objective is to get that up to 12 per year that eventually up to 20 per year and we think we are on track to do that we see actually are.
Even some of the sales reps that have joined us within the last 12 to 18 months are now driving very significant pipelines in health care. So so the deal flow looks.
Strong in the average deal size looks very strong. So we are very happy with that the implementation cycles really haven't haven't changed I would say we are we are starting to make some headway in.
Using.
So to some artificial technology artificial intelligence techniques to refined data master data.
And that is having an effect on some of the implementations to accelerate the implementation cycles, we will see how that plays out but the quality of master data in health care has always been a challenge you'll often end up even within a network. If they've got 20 hospitals in the network, sometimes different hospitals are calling the same item by different item numbers and different descriptions.
And so on so when you start putting in an integrated end to end supply chain platform. Obviously, that's a problem you need the same item identifier to be able to do consolidated forecasting and demand planning and run an efficient supply chain. So we're now that sometimes used to take months to clean up that data. We're now we've.
Developed it.
And artificial intelligence.
Product that we're just in the process of.
Working working through to a final release, but we're already using it in the field and it's working out quite well. So we'll see how that continues to play out that may end up being able to shorten some of these implementation timeframes, but other than that they remain pretty good.
If it's a straight consolidated service center the implementation will typically be.
Six to eight months, if its a full end to end rollout across a large hospital network.
Take a few years couple of years.
Great. That's good to hear and just one last quick question for Mark here, our growth investments can you provide us an update on the expected size and timing of ongoing growth investments and their impact to margins in the near term.
Yes.
Yeah can you just I didn't quite hear you said on on on what type of investment.
Our growth ongoing growth investments Oh, okay, Yeah, I'm just in general I get it.
I mean, a couple of different vectors there we've been talking about professional services and how we've invested there I mean, we've got a pretty pretty significant team there and and we've been.
We haven't been growing that team.
Very rapidly here, we've got what we think is capacity that'll now with the existing team that can drive.
Higher revenue than where we're at right now on that line. So that that's probably in pretty good shape.
For a while I think in terms of you know.
Sales and marketing and in R&D I think we continue to grow there.
In the prepared remarks, you made some comments about.
How we think about investing in sales and marketing and in fact.
You know we added a new slide in our Investor presentation. That's on our website, there which describes how we how we measure sales and marketing investment and efficiency.
Our near term expectation there is that you know we're going to continue to invest to.
Capture to capture market share.
So no change there on the R&D side as I as I mentioned in my prepared remarks.
What we saw there and in the current quarter was was a slight hum.
We had a bit of a true up that we recorded in the quarter on R&D.
Tax credits so the R&D expense that came through in Q3 was was a little bit lower than what it will be next year next quarter.
Without that without that adjustment and then with some some continued you know increase in run rate costs.
But yeah, we we continue to see some investment happening in those areas going forward.
Great that's helpful I'll pipeline here.
Thanks.
And our next question comes the line of Gavin Fairweather with core Mark. Please proceed.
Oh, Hey, good morning.
Hey, Kevin.
Good morning.
Just to clarify the different six south migration this quarter.
Okay.
Well we did.
We said serious migrations and expansions.
Okay, I guess I'm, just curious how you're thinking about that going forward I think in the fall product release is going to be SaaS only so how is that kind of change in the nature of conversations with with the base around migration lengthy do you expect that to be a catalyst to continue to drive this trend port.
Yeah.
Yes.
There's no question I mean, we.
As you May know R 22, dot one release that so that was the release, we released in last year in the spring.
That was our last on Prem release, So I mean anyone now who is looking at anyone in our customer base that is looking at.
Our latest product releases all the work we're doing around the drug supply chain Security Act.
Work, we're doing that I mentioned, there, but using artificial intelligence to accelerate data master.
Cleansing all of that kind of.
Enhancement and forward movement is only on the SaaS platform. So so because of that.
We're seeing.
<unk>.
A steady rising interest in the SaaS platform combine that of course with the fact that increasingly organizations find its getting it well, it's just getting more and more difficult to operate your own.
Your own data center.
It's hard to keep the people, it's hard to maintain security, it's harder to protect against ransomware.
So theres a variety of reasons why.
Interest in public cloud is rising.
And combine that with the fact that all of our new developments and features and functionality early on the SaaS platform. It's.
We are definitely seeing an accelerating move to migrate to the SaaS platform.
And I know that you I mean, you typically signed multi year contracts.
So should we think about that.
Of that maintenance stream over the next kind of.
Three to five years really declining quite significantly with obviously, a big up upsell and.
Revenue accretion on this offline.
It should gather I mean it.
It held remarkably steady so far.
Frankly, we've been pleasantly surprised how it's held steady but it has to begin to decline.
The migration over is just.
Becoming quite significant and.
Definitely outpacing <unk>.
Increases in expansions in the on Prem on the on Prem side of things so.
So we certainly expect the maintenance revenue line two to begin to turn down.
It.
Really within the near term I mean, Mark I don't know if you want to add any more color to that.
Yes, no I think that's it that's it that's exactly the point I mean in the in the quarter GAAP and what we saw here was it was you know it's pretty extreme from what we've seen historically in terms of the number of migrations in one quarter.
So you know that'll that'll start to move the needle on on on maintenance revenue.
On the other hand, you know we did we did see.
We did see while we keep saying you know expect license.
Revenue decline, we did see another $1 million.
License quarter, you know and then that's back to back million dollar a license quarters and we definitely don't expect we don't expect that to continue.
So that'll that'll also put pressure on you know lower additive maintenance coming into that line at the same time that that migrations or are sort of.
Taken taken maintenance and shifting it up to SaaS.
Got it and then maybe just on <unk>.
Converging distribution the Manhattan commentary was.
I would say cautiously optimistic on kind of a demand environment I'm curious if you've seen any kind of green shoots on that side of the business or whether the sales environment has shifted at all and kind of pass through six months.
Yeah, Yeah, I mean, we're definitely seeing the same green shoots as interesting.
We are.
Steve <unk>.
VP of sales that heads that sales team and.
I know I said it a pipeline review that he was leaving the other day and I mean as you can tell I mean, his confidence and optimism is way up from six months ago.
In the fall there is still a lot of it.
Pardon me I had a cold that ended last week, but this cough will go away.
<unk>.
He was in the fall we saw a lot of top of funnel activity that I think I talked about a full conference call.
We saw just a lot of tire kicking but not a lot of movement into the actual sales pipeline and not know seems to be shifting we're seeing a lot of good activity moving right into the sales pipeline. So so we're certainly.
Optimistic that that business is starting to.
Heat up again.
I mean, there are supply chain issues have largely smooth out right.
A year ago.
They couldnt get product from from China factories. So many factories were closed down and the container costs, where extreme in the backlog to the ports were crazy and whatever else and that's also with David I mean, you've probably seen the Porto San Francisco now has actually spare capacity or sorry, part of Los Angeles, I mean, now the spare capacity in the price of containers.
Come back down to it we're not quite to pre pandemic norms, but it's come the vast majority of the way back down again.
So everything is really starting to flow again and as a result, a lot of these organizations are able to start looking towards the future rather than just focusing on current crisis.
Yes, that's very helpful and then.
Appreciate your commentary on Salesforce productivity and haven't yet gotten to the slide in your deck, but I'm curious like how many of your Aes within health care are kind of relatively new.
Let's say kind of added within within the past 18 months and maybe just touch on kind of.
The pipeline generation that Newark, cohort and maybe how much bookings upside there could be as as the newer reps mature.
Yes, I mean, we will see how that continues to turn out.
Thats something bill King is tracking very closely.
Can you sort of talk to us.
As.
Juniors and as sophomores and seniors and he looks at sort of how their pipelines are moving and it's interesting I mean, our long term sales reps that have been with us a long time in that market.
They currently are carrying I think roughly a third of the pipeline.
Two thirds of the pipeline is really being carried by reps that have joined us in the last really over the last three years.
I don't know if I want to give more detail than that but we're we're pretty happy to see the.
The success in pipeline building, that's happening and of course it factors into the strategic planning process, we're going through now as we look at our next fiscal year to say, okay. How much do we grow that team how fast we grow that team et cetera, I mean, the success in pipeline building that has happened with the ones that joined US two years ago, when the wind situated as a year.
So certainly encourages us to keep keep the investment grade.
That's great I'll hop on.
Yes.
And our next question comes the line of Nick Agostino with Laurentian Bank. Please proceed.
Yes, good morning, guys.
Good morning circling back.
Comment you made I guess on the complex distribution pipeline improving over the last six months I'm. Just wondering what are your clients. Obviously as we go through 2023. There is lot continued recessionary fears.
What are your clients screen thinking that is may be changing their approach specifically in complex distribution and just maybe on that you might have on the other market segments healthcare and retail when it comes to the company and a potential recession in general.
Yes, I mean, what we're seeing is that it's.
Complex distribution in many ways is more of a horizontal and a vertical right. So it spans many industries.
And the recession fears are very much centered in certain industries.
I mean, we've got clients that for instance, mainly sell sort of truly high end luxury goods.
They don't seem to be worried at all about recession.
We've got clients theyre, selling wine and spirits.
Don't worry.
We've got clients that are in <unk>.
Applying the construction industry they are not worried.
They've gone through a period of time, where there were so many supply chain shortages.
They had sort of some bumper years.
And they are seeing more of a return to normalcy, but theyre still seeing perfectly healthy demand looking ahead into the future.
There are some segments.
Giftware, some home furnishings areas et cetera, where there seems to be more caution.
But.
Or I mean.
Our approach always in the.
In the converging distribution market has been to sort of focus on this year's hotspots.
Those hotspot side to move around so that's why right now for us even though theres some segments that are definitely <unk>.
Being cautious there is plenty of segments that are not cautious at all and you are saying you know what we've come through some pretty strong couple of years here and we now need to invest for the future.
So we are.
We're seeing that overall activity level up quite significantly we will see how it plays out in some ways you don't really know until the deals start to sign an actual deal signature is still so in that space.
But the pipeline movement has now is now looking quite healthy.
In health care.
Specifically the hospital space.
I mean that market just continues to be on fire I mean, I've never seen that market et cetera.
They are anxious to get supply chain platform to rollout.
Whether they are using our pro services or third party services.
Other members of the ecosystem right now.
Lloyds et cetera.
It's sort of okay, let's get this done let's get this inlets.
Let's.
Get much better at managing our supply chain issues.
The backlog issues and the allocation issues that plagued that industry during the worst of the pandemic.
Have settled down for some suppliers, but by and large there is a growing recognition that.
The supply chain issues that have.
Plagued if I if you ignore the blip that as the pandemic the supply chain issues that have plagued health care over the last 10 or 12 years are only getting worse.
So there is a real focus on saying we need agile supply chain that are real time digital platforms that can help us to deal with these issues.
So that market is only getting theres only getting hotter.
Sure.
Okay I appreciate that excellent color.
Just curious on that license deal that you guys announced for the quarter just to give you everything you said about the shift to the public cloud, maybe just a little bit of color as to do.
What sector that customer was in and maybe what the what the basis was for signing a license deal as opposed to stock SaaS deal.
Yes that was a bit of a unique situation.
And I don't want to give out names or whatever but that's a.
General industrial sort of supplies type company.
And the.
Internal sort of.
Thought process and that company is that they werent ready to adopt SaaS yet.
So they knew they were literally buying the last release of an on Prem product line. They knew there was going to be no upgrades coming as part of the product line.
They had searched the industry they had looked at.
All of the usual suspects that checked out net suite dejected, Microsoft they looked at some of the Oracle and SAP products, and so on and end up coming back and saying no.
You really have the best product for a true sort of business to business wholesale type platform.
And so they decided to just go with it anyway.
So we decided to take them on our hope is that over time as.
They get more comfortable with the SaaS World and we continue to move forward with more and more capability on the SaaS platform that they will eventually migrate over to the SaaS platform.
But we think given that that product line I mean, the statewide is already sort of coming up on its first birthday.
We really do think thats, probably the last one.
Okay I appreciate that color and then the last question just on the hardware revenue.
It was a strong number this quarter just trying to understand supply chain bottleneck.
You guys talked about in the past any movement.
That would have helped you guys.
I guess, so that strong hardware number and specifically on prop tech has that side of the the hardware market improved over the last few quarters or even over the last quarter and leave it there. Thanks.
Yes, Nick we can we continue to have challenges there on the prop tech side.
So that number that you saw in the quarter wasn't wasn't wasn't pushed upward by you know by.
By supply chain issues being resolved in the quarter on <unk>.
But we do.
Mixed mixed picture here like that was a pretty big hardware number anyway in Q3.
That said.
Prop tech supply chain issues due.
They they do seem to be starting to come to resolution now.
We expect in fact to be.
We're now starting to ship some prop tech some.
Some prop tech stuff, maybe not yet and in Q4, but but just just after problem in Q1, and Q2 and beyond where we're going to start seeing that loosen up.
Okay.
Okay, great. Thank you.
Yeah.
And our next question comes from the line of John <unk> with National Bank. Please proceed.
Hey, good morning, guys and thanks for taking my questions I'm, just curious about any other opportunities down there well regarding your product ecosystem. Peter you already mentioned your integration with workday collaboration with robotic company.
Patiently retail space, so anything else, we should be expecting.
Yes.
Not really in the short term I mean, we're really looking to deepen the relationships with the ones that we've already got in place now.
We I mean, there's there's always some organizations that we work within the field.
Where the sales reps for those organizations work with our sales reps from our organization, even though in fact, sometimes.
The other company's head office.
They compete with us kind of thing.
That kind of thing continues to happen, but in terms of these sort of mainline partnerships.
Workday I mean, we continue to look to deepen that relationship.
You look at.
What's happening with Deloitte I think there is huge opportunity to deepen the relationship with Deloitte.
Right now continues to grow at a very significant clip.
Largely on the <unk>.
On our platform I mean, they're hiring people. They are building out resources, they're taking on more projects largely around assisting with implementing our platform in the all of the ancillary work that goes around that so.
So our focus really is just continuing to to deepen those relationships more than more than anything else.
Okay. Thanks, I think Peter you also mentioned international market in your prepared remarks, so how should we decide that the opportunity and how should we think about your go to market strategy and outside North America.
Yes.
That is interesting we will see how that develops.
The latest platform that we released in the fall of the $22 two release.
Contained a lot of additional functionality for the western European market space, specifically some of the regulatory requirements for France and Germany.
And we're already seeing deployments happening now in that in that region.
We've got some other opportunities in the pipeline that look like they're moving along well so we expect to see more of that.
Sure.
As you know we had been looking for and continue to look for the right acquisition to really accelerate building out our market presence in that region.
Those are proving very difficult to find at least at any.
At least at prices that are anywhere near the professional in our opinion.
So it may well be that we just begin to build that out organically and we're going to be making that decision in the next.
Probably over the next couple of months.
Okay. Thanks, and last question from me is if I remember if I recall from last quarter's earnings call. There were some challenges with quantum capacity talent shortage in supply chain supply with your hardware now when I think about those challenges can we say that they're kind of moderate it and we're now and then.
More normalized environment.
They are moderating, but I think they are moderating because of specific proactive steps that clients are taking to deal with.
There has been substantial.
Substantial increases in wages paid for supply chain workers in warehouses and so on that will allow those positions to effectively compete for talent with.
<unk>.
Bluebird drivers and all the other places that those some of those people who've gone.
There is also.
<unk>.
Agencies that have grown up to help to fill those spaces that are.
Dealing with.
Returning military placements and so on that can really help to to fill some of those roles and robotics is growing very significantly and is enabling some of these warehouses to get the same work done with less people I mean robotics, sometimes it doesn't make any sense when you're going higher warehouse workers for 15 Bucks an hour.
When youre, having to pay 30 Bucks an hour all of a sudden the whole robotic starts to make a lot more economic sense. So so we're seeing a real increase in the in the rollout of robotics, allowing many of these places to run with.
Smaller smaller pools of users. So it is starting to abate, but I think it's starting to abate not because the labor market is changing but because these.
These organizations are sort of rising to the challenge in finding new ways to attract and keep talent and yet use less of it at the same time.
Okay, that's great color. Thanks.
Great. Thanks.
And as a reminder to register for a question. Please press the one followed by the four and our next question comes from the line of <unk> Sharma with BMO capital markets. Please proceed.
Good morning, Peter and Mark. Thank you for taking my question.
So good morning.
You've already spoken extensively about the pipeline and both have Ken flex distributions.
Would you be able to provide us maybe some color on the split between the two segments and how you expect that to evolve.
I'm, sorry, I missed the one word on the wet between the two markets.
The split.
Oh, the split sure I mean, the right now our pipeline overall is two thirds roughly two thirds healthcare.
In spite of the fact that our if you look at our company revenue were still 55% non healthcare.
So.
We certainly expect that in the next.
Would even say the next 12 to 24 months.
We expect healthcare to continue to be probably two thirds of the pipeline.
As we look at it longer if you start looking out at sort of the third year.
We do expect just because of sheer market size and sort of rising demand.
We expect that to come back to probably somewhere more around 50 50, but we'll.
We will see I mean that gets into a real crystal ball gazing in terms of how that's going to play out, but but certainly right now.
It's.
Our health care, our pipeline is absolutely dominated by health care.
And so when you think of.
Growth investments.
Over the next 12 months.
Would you consider.
Demand is lower and complex distribution, a little bit higher in health care side.
Is it a possibility that you would.
Allocate investments accordingly.
Yes, I mean, certainly the or our focus here is on.
Is on the health care market I mean, there are certain functional things that we need we know we need to invest in for the general distribution market and because it is such a sizable market and has so much future potential we intend to remain very competitive in that market. So from an R&D standpoint, we're continuing to invest in the platform for that market.
There is a lot of carryover I mean, we're beginning to invest for instance in.
Updating the API is across the platform to sort of the latest and greatest technology for instance will that that really helps both markets. There is no. There is no that is not sort of one vertical or the other that's the whole platform and affects both markets.
Got it.
Certainly going into our fiscal 'twenty four.
I would expect and I've actually got to an Offsite strap planning meeting with our board in a couple of weeks.
So.
I don't want to come to any conclusions before we go through that strap planning process, but but certainly all of the data, which support us pouring the bulk of our sales and marketing effort.
Over the next 12 to 24 months into the into the health care space.
Makes sense and so going back to healthcare.
Are you like there's obviously been a lot of momentum but are you also seeing a he left on my side.
Are we also seeing sorry.
Are you also seeing any demand on the pharma side.
Yes.
Yes, we are.
Two areas actually were.
We are seeing some interesting demand.
For the in hospital pharmacy.
And the the distribution network within a hospital network for the pharmacy some of the centers around proper management of 340 <unk>.
Which you May know is this interesting sort of U S regulation that.
Creates.
Very low priced.
Sort of supply chain for pharmacy being supply pharmaceutical products being supplied to.
Mainly indigenous.
People group. So if you if a hospital serves a region of the country that has a significant indigenous population then they become a 340 <unk> licensed hospital and are allowed to buy certain drugs at much much lower prices and so on so.
So that our platform manages all of that and streamlines the process all of that and so and so that.
We're seeing some interest around that and in fact I think it is this week, we have an event happening at Odeon.
That'll work.
We're we're we're meeting it actually it in AWS.
Cloud Center there.
Two to run a sort of a pharmacy.
Similar.
And lastly, I heard I think we've got eight hospital networks coming too.
To sort of sit through the seminar and engage and sort of how they need to modernize their pharmacy supply chains and so so we're seeing a good degree of interest in pharmacy. There. We're also seeing some rising interest from the mail order pharmacy market and we'll see how that evolves we have one client in that market now.
But if you look at the pipeline, we're starting to see some rising interest around mail order pharmacy, which is which are mainly operated those mail order pharmacy operations in the U S are mainly run by the big insurance companies. So for drugs that are.
But our long term sort of chronic type drugs cholesterol lowering drugs blood pressure lowering drugs et cetera that youre going beyond maybe for the rest of your life rather than going to the pharmacy you opt for the mail order fulfillment and they just arrived in the mail every month.
So that that business is a very significant and growing business in the U S market and it looks like that may be turning into an interesting market for pharmacy offerings as well.
Great. Thank you that's very helpful color and lastly.
If you could provide any details on the IBM you added this quarter like how big it is and the impact youre expecting on revenue.
Yes, I mean, it's it was a fairly typical sized IV.
And it was actually a children's hospital.
We're not giving out the name at this point, but it was a large childrens hospital.
We mainly pursue you know when we talked about the top 300 idms that we pursue we mainly pursue.
And that are over $1 billion in net patient revenue.
And that is the bulk of the pipeline. It's the bulk of what we pursue and it's the bulk of our client base. We've got a few below that.
But this one was a fairly typical it sort of fits right in your sort of average size deals.
Our average size if you look at our last sort of 12 months a typical idea and this is coming in.
A little north of 600000.
Annual recurring revenue.
And that's up from sort of 350 to 400000, a couple of years ago. So that's typically where theyre coming in some of them come in below that some of them come in significantly above that if they are.
Writing off more at once.
But that's a pretty typical type deal.
Hello, and thank you that's that's it for me.
Great. Thank you.
And our next question comes line of AMR as that with Echelon partners. Please proceed.
Good morning, Jeff.
Have a couple of quick ones for you on the new flights.
Can you walk us through.
The SaaS margin expansion is that just don't scale.
It is yeah, the projections that you're seeing that and that.
That new slide in that Investor deck is really based upon.
A certain assumed SaaS bookings growth level, which is which is disclosed there.
In a certain.
Certain incremental margin level, which is which is also disclosed there.
So we wanted to lay it out in a way that was pretty evident that that these are projections based upon those assumptions, but this is how the platform scales.
Given those assumptions and where we would expect margins to go Kevin given those assumptions.
Okay.
Costs associated against like the SaaS revenues.
This would be like already at 89% margin.
Yeah, and you're right I mean, that's the direction you know it's.
It's going in that direction, but as we've as we've talked about in the past you know we have.
You have a core a bunch of costs that you have to that you will have to incur in order to run a 24 seven operation.
Including.
Security and <unk>.
<unk> 24, seven you know ops team and support team and once you build that up.
Eventually you get to the point, where you can really scale off of that off of that base of investment and that's what we're starting to see happening and that's what we're sort of projecting in that model.
Got it got it Covid then will you guys be breaking out your services margins and your financials going forward between SaaS and the rest of it is maintenance and support.
You know, we're talking about that internally, just providing more insight into that because it.
Clearly the market.
The market is interested in that and that's in fact, the impetus for for that slide.
No commitments right now, but we see the we see the interest there and we went out we want to shine some more light on that because because of that interest.
Understood Yeah, that's very helpful and then if I think.
The other side of revenues I guess on license and hardware.
Is 30% margin the good number long term to use if I were to sort of.
Yes.
Project the charts for for for license of hardware.
You know what I mean, it's kind of a it's a little bit of a fielder's choice. There Amor frankly, I mean, the prop tech stuff that we sell in hardware is is it's.
It's typically higher higher margin than that.
License you know like I said before we don't expect to have million dollars quarters.
The opposite effect on that on that our net margin in our.
And our third party hardware businesses, you know that margin is down in the in.
In the twenties typically might get up to 30, but it's it's kind of in that range. So then the question becomes well how much of that mixes is prop tech out there and what does that do to the margin.
How much is license and what does that do the margin. So I mean, I'm, giving a little bit of evasive on the on the response here but.
That's that's kind of why that 30% is showing up in there and if you look at the future and headwinds in <unk>. There's there's headwind on that margin for declining license, then and there's probably some tailwind on on maybe on prop tech mix.
Understood. Thanks very helpful slides.
I'll pass the line.
Thanks.
And the next question comes from the line of Steven Li with Raymond James. Please proceed.
Thank you Peter.
I have a question on your P S.
So it feels like the growth has been slowing down.
Is this temporary or is this more structure in that maybe more implementations is being done by your partners.
Yeah.
The jury's still out on that a bit Stephen I mean, we've been talking about what we see as kind of structural shifts.
Happening over the last couple of quarters and believe that that is.
That structural shift is going to continue on that structural shift is is driven by a couple of a couple of factors. One is the fact that as more and more customers.
And prospects choose SaaS, they want to be more and more in line with our mainline SaaS version that.
You know that is easy to upgrade going forward.
That means less custom modifications.
Another thing Thats driving down customer modifications, which we bill for which we've historically built for.
Other thing driving down on customer modifications is that.
Health care customers tend to not always but tend to be a lower level of.
Modifications, yet even on a historical platform so.
It's more shifts towards health care of that probably also brings down the custom mod.
Activity.
Over time, so that's that's that's custom mods being one systemic part of.
Decreasing growth rate or moderating growth rate in professional services.
Other thing is as you mentioned, it's the partner ecosystem point.
And.
Now, we do see that happening, we do see that as a long term structural trend that's going to moderate.
Professional services growth.
And we and we think that is true in the future. All of that said you know what just happened in Q3, as we booked $19 million of of professional services in one month.
So there's clearly some inertia there.
For some for some for some strong professional services revenue in the quarter and quarters ahead, we just we just.
And the results that we just put out.
We we hit we hit a P. A total combined P S.
Revenue level of sort of mid 13 millions now about $13 5 million.
And we think we have capacity to drive you know probably another million.
On top of on top of that number with our with our existing team and in the short term.
And with that $19 million of backlog that $38 million of backlog driven by that 19, a $19 million of bookings in Q3.
We kind of expect that.
And there's going to be some some P. S revenue growth coming in the quarter and quarters ahead.
Got it and I guess, if I take.
Steve brought another million.
I mean, when you look at your PS organization I mean, what is the kind of utilization you're running above 90%.
Yeah, no not nowhere nowhere near 90% and and you know nobody nobody could run a P. S organization at that kind of a level for any kind of sustainable time, I mean, we sort of shoot for something like.
If we can if we can be around.
Really really broad terms in the in the sixties I think youre really add up at a very strong utilization level. That's that's that's sustainable.
Some of that down to the facts.
Sorry, I was just going to say some of that comes down to the fact that different companies, sometimes talk about utilization levels in different ways.
Some some sort of score their utilization out of 500 hours a year because they are <unk> hundred hours a year, because they've already taken out a vacation in education time sick days in.
You name it.
And other score we scored in very simple terms literally total number of working hours in a year.
How many of those hours are billable so.
But I know there's differences across the industry in terms of how how people score typically the way we score.
Sort of industry best best in class tends to hit as Mark says the sort of the mid <unk> mid <unk> up to maybe 70.
It tends to mean that in a in a crunch you can wrap that all the way up to the low eighty's.
But the low eighty's are not sustainable yield.
People would just get too tired running at that base. So if you've got a bunch of go lives all happening in the same month, you might get up into the low <unk>, but your average over any extended period of time is going to be.
Quite a bit lower than that.
Got it thanks, Thanks Craig.
Yes.
Thanks for the question Steve.
And Mr. Barrington, there are no other questions I will turn the call back over to you.
Great well. Thank you everyone. Thank you for joining us today and.
As always if you have any additional questions feel free to reach out to mark.
And otherwise, we'll look forward to talking to you again at the end of Q4 Q4 of course is our audits to follow so.
Actual release of numbers, we would expect to be around the end of June so look forward to talking to you then thanks Bye for now.
Thank you that does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your lines have a great day.
Yeah.
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Yeah.
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Okay.
Yeah.
Sure.
Uh huh.
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