Q2 2024 Tecsys Inc Earnings Call
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Okay.
Good morning, everyone welcome to Texas second quarter fiscal year 'twenty 'twenty four results conference call. Please note that the complete second quarter report, including MD&A and financial statements were filed on SEDAR plus after market closed yesterday.
All dollar amounts are expressed in Canadian currency and are prepared in accordance with international financial reporting standards.
The company has added a companion presentation to today's call, which is available on their website at www Dot, Texas Dot com slash investors.
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 Friday December 22.
Three at 830, a M eastern time.
I would now like to turn the conference over to Mr. Peter Burton Chief Executive Officer at Texas. Please go ahead Sir.
Yeah.
Thank you and good morning, everyone.
Joining me today is Mark Butler, our Chief Financial Officer.
We appreciate you joining us for today's call.
As many of you saw in our results posted yesterday, our company closed our second quarter with continued overall revenue growth underpinned by 37% SaaS revenue growth.
Our SaaS bookings for the quarter were up 34% and we have a healthy IPO also up 34% over the same time last year our.
Our customer count continues to grow.
<unk> added new logos.
In both Canada, and the U S spanning commercial and government entities.
Wanted to take a moment to highlight some key accomplishments in Q2, and how we see the laying the foundation for value creation.
If you're following along on our company her companion presentation I'll be speaking to slide three.
Yeah.
Our market position our presence continues to strengthen our history of positive recognition from Gartner remained solid and our status as a leader in the health care industry has well established recently we were included in the inaugural value matrix for warehouse management system technology by nucleus research, earning us widen their expert quadrant.
This independent analysis is yet another validation that the solutions, we are bringing to market are valuable to the audiences we serve.
When it comes to an enthusiastic customer base, we saw it in this on full display at our user conference in September.
It was our first since the pandemic and the enthusiasm for its return it was clear we had a record turnout 40% higher turnover in 2019.
And the number of partner organizations represented at the conference more than doubled highlighting that the investments we have made in growing our partner ecosystem is bearing fruit.
A key highlight was our remarkable lineup of customers and partners, we heard from supply chain leaders at Mayo Clinic, Nissan North America, and Intermountain healthcare among many others.
We shared the stage with AWS right now zebra technologies anymore.
We had the opportunity to celebrate some remarkable milestones during our award ceremony, where we recognized Mcleod health Warner Electric in Texas Children's Hospital.
Every session panel and keynote at the conference was an opportunity to showcase best practices and innovations.
In fact, we formalized our focus on innovation at the user conference with our announcement of the Texas Innovation Lab R&D has always been a key investment for Texas, representing more than 15% of our annual revenue. We are building on that past investment with a focus on AI machine learning data science process modeling and other advanced technology.
Geez. This research driven group is committed to addressing real world business challenges through co innovation and rapid prototyping.
We are already seeing some interesting use cases emerge in both the general distribution and health care sectors.
Regarding the health care sector those who've been following our story for some time will know that we're the market leader in North America for health systems and hospital supply chain solutions with an end to end value proposition that is second to none.
At the heart of our offering is the consolidated service center and industry Best practice that Texas largely established with projects in several of the top health care organizations in the U S.
The depth of our portfolio in the health care vertical means that one new logo carries years, if not decades of expansion opportunity into basic count white space.
We're particularly excited by one new White space initiative that is certainly heating up.
You may have noticed our recent announcement on Baptist health, It's a great new logo for Texas, and an important new entry for health care offering.
Baptist Health is amongst an early tranche of customers, who have turned to Texas to transform their pharmacy supply chain.
This emerging market.
It's demonstrated problem in managing their inventory and Texas is uniquely positioned to serve them.
Our history is not.
That would be not to just enter the space, but to redefine them and we believe that the consolidated pharmacy service center carries that potential with Baptist Health Parkview Health, St. Luke's health and others. We have early momentum in the market a trusted position in the health care sector, and a solid customer base to Mike.
Early pipeline indications are that there is certainly healthy demand for these solutions.
Momentum continued this quarter with a seven figure base account deal.
And did you include pharmacy.
Additionally, with our white space opportunities and new business pipeline, and our existing health care and distribution sectors continues to show positive momentum.
We are seeing excellent activity in our base account.
Based accounts around conversions, including a large elite ERP SaaS migration deal this quarter.
We believe our continued momentum is a testament to our clarity of vision and sustained investment in technology as well.
Section with customer success.
We also launched a normal no.
Normal course issuer bid this quarter, which we continue to execute.
To buy back shares at an attractive value, we have confidence in our business outlook and we believe that this initiative allows us to use excess cash effectively to enhance shareholder value.
As we continue to invest in the solutions, we sell and the manner in which we sell them, Texas has proven to be among the best cloud based solutions available in the markets we serve.
We have the people the partners the products and the plan to capitalize on these emerging market opportunities. We continue to add new hospital networks and global brands to our repertoire of customers. We are seeing an expanding pipeline of new SaaS opportunities expansions and conversions.
See a very solid path for shareholder value creation.
Before turning back to results I wanted to just take a moment to welcome Andrew Kirkwood to our board Andrews.
Andrews Global leadership experience at high growth supply chain organizations like Blue Jay solutions Blue Yonder, Red Prairie and Manhattan Associates will be instrumental in developing our continuing growth strategy. Andrew is based in the U K.
I will now hand, it over to Mark to provide further details on our second quarter financial results as well as financial guidance on several key metrics.
Thanks Peter.
We're pleased with the sustained performance in our second quarter ended October 31 2023.
I'm going to start with slide four and talk a bit more about SaaS.
SaaS continues to be a key driver for our growth and we believe the key driver for value creation.
Reported SaaS revenue growth in Q2 of fiscal 2024 was 37%, reaching $12 $1 million in the quarter.
At the end of Q2 fiscal 2020 for SaaS RR represents 63% of our total air are.
And recurring revenue in Q2, so that's SaaS plus maintenance and support reps.
It represented just over 50% of total revenue for the first time ever.
Q2, SaaS are our growth was 35% year on year on a constant currency basis.
Bookings were $3 7 million in the quarter, which is up 34% compared to the second quarter of fiscal 2023.
SaaS remaining performance obligation or SaaS RP O was $146 $7 million at the end of Q2 fiscal 2024.
And that's up 34%.
From $109 $5 million at the same time last year.
On a constant currency basis that growth was 32%.
So yeah, we are excited about SaaS.
Moving onto slide five.
Total revenue for the quarter was 41 $5 million, that's 9% higher than the same period last year.
On a constant currency basis total revenue growth was 6%.
I'm going to come back to professional services revenue on the next slide, but first I want to point out.
The decline here in license revenue down about 0.8 million.
Compared to Q2 of last year.
This is really the backend of our transition to SaaS and is an important driver in our year on year. Adjusted EBITDA result comparison in Q2.
For the second quarter.
Total gross profit was up 10% compared to the same quarter last year.
That's about $1.7 million.
Of additional contribution in the second quarter and SaaS was the key driver.
As a percentage of revenue gross margin was 44%.
That was flat compared to the same period last year.
However, combined SaaS maintenance support and professional services gross profit margin for the three months ended October 31, 2023 was 47% and that was up compared to 46% in the same period in fiscal 2023 and that was in spite of lighter professional services margin.
The main component of the increase in gross profit margin was SaaS margin expansion.
And we're pleased to report that this is tracking as planned.
Switching now to our expenses for the quarter Opex increased to $18 7 million are higher by about $3 1 million or 20% compared to Q2 of fiscal 2023.
The largest component of the increase was sales and marketing costs.
Which included ongoing investment as well as costs related to our user conference in the quarter.
Research and development costs were also higher on ongoing investment despite having benefited from an increase in tax credits recognized in the quarter.
Net loss adjusted EBITDA and earnings per share in the second quarter of fiscal 2024 were impacted by higher operating expenses, which were which were partially offset by higher margin contribution.
Net loss in the quarter was $340000 compared to 715000 net profit in the same quarter last year.
Adjusted EBITDA was 1.0 million in Q2 fiscal 2024 and that compared to $2 8 million in the same period last year.
Relative to the second quarter of fiscal 2023, despite solid growth in our SaaS business.
Lower professional services and license revenue negatively impacted current quarter profitability.
Which is a good transition to slide six.
Professional services revenue for the second quarter was $12 $9 million that was down 5% from $13 5 million.
Reported for the same quarter last year.
Despite a sequential temporary dip and professional services revenue this quarter due to project scheduling and the Swift Swift growth of our partner ecosystem.
We maintain a strong backlog.
In fact professional services backlog was a robust $43 million at October 31, 2023, and that's up 27% from $31 9 million at the same time last year.
We are adequately staffed to drive $15 million plus of professional services revenue per quarter.
And our intention is to maintain current staffing levels as we grow into that level of revenue.
Turning now briefly to our results for the first half of fiscal 2024.
Our total revenue was $83 $5 million that was up 15%.
Compared to $72 3 million in the same period last year, and that's 11% growth on a constant currency basis.
SaaS revenue for the first half of fiscal 2024 was $23 6 million, that's up 40% from $16 8 million in the same period last year.
That's 36% growth on a constant currency basis.
Our adjusted EBITDA for the first half of fiscal 'twenty, four was $4 2 million compared to $4 3 million in the same period last year.
Basic and fully diluted earnings per share were six cents in the first half of fiscal 'twenty four compared to <unk>.
The same period last year.
We ended fiscal 2024 with a solid balance sheet position, we had cash and short term investments of $33 $6 million and no debt.
Q2, net cash provided by operating activities was $4 $2 million.
During the quarter, we used $673000 to repurchase shares under our CIB.
Additionally, the board yesterday approved an increase in our quarterly dividend to <unk> <unk> cents a share.
Finally, with respect to financial guidance and I'm moving on now to slide number seven.
As a result of the temporary slowdown in professional services revenue. We are adjusting our short term adjusted EBITDA margin outlook to provide a range between 4% to 6%.
While affirming our adjusted EBITDA margin guidance for fiscal 2025 in a range between eight and 9%.
We are also affirming our guidance for SaaS revenue growth in a range between 35 and 37% for fiscal 2024.
And we are affirming our guidance for total revenue growth in a range between 10 and 15% for fiscal 2024.
Please note that it is our confidence in our rising revenue and margins that is supporting our confidence in a rising profit and free cash flow and that in turn is supporting our decision to fund the CIB and the dividend increase.
I will now turn the call back to Peter to provide some outlook comments.
Thanks Mark.
Texas stable growth continues through the second quarter of fiscal 'twenty, four with a strong balance sheet and a robust backlog and sales pipeline, we're seeing widespread buyer intent across our target markets solid opportunity cycles, and our highly capable sales team with the tools and the talent to capitalize on a market that is ready to invest.
Our expanded health care sector, offering and growing footprint gives us confidence that the health care sector. We will continue to serve as an important growth engine for us.
Our conferred converging distribution business presents a significant market opportunity amidst shifting supply chain dynamics driven by factors like aging legacy systems digital adoption and a realization that heightened consumer expectations are here to stay.
And so after an impressive fiscal 'twenty three we're pleased that the first half of fiscal 2004 continues the trend.
We are demonstrating dominance in our key markets and seizing on emerging opportunity in growth markets. As we continue to celebrate Texas <unk> year in business, we continue to invest strategically so that we remain at the cutting edge of our industry.
Based on these principles in a clear vision of our market opportunity. We believe the remainder of fiscal 'twenty four is on track to continue growing shareholder value.
Summary, I want to remind analysts and investors some key things for fiscal 'twenty four and beyond.
First a sustained commitment to our expanding SaaS revenue model, which will drive changes in the way, we deploy solutions and delight customers.
Secondly, our continued strategic partnership approach characterized by deeper and stronger alliances.
As tap into new opportunities and fuels, our scalability around the world.
Third an emphasis on advancing and deepening our healthcare vertical covering both med surge in pharma, we continue to solidify our position as the go to provider for healthcare supply chain solutions.
Lastly, a continuous evolution of our distribution and Omnichannel business platform that takes advantage of innovative technologies and the power of data now with the support of our new innovation lab.
As a final point I'd, just like to stress across our markets, where we will place emphasis on customer success, we have long stood by the philosophy of customers for life.
Big part of that Formula is to deliver value quickly stay connected and then expand on the value delivered.
With that we'll open the call up for questions. Thank you.
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Our first question comes from Amir is that with Echelon partners. You May proceed with your question.
Peter Mark Good morning, Thanks for taking my question.
Just looking to get color on the services gross margin 47, and a half is pretty healthy, but its slower than last quarter's 49 six.
Is the read through for US as this is purely on professional services.
Yeah, absolutely Ammar you you know that.
And in fact, you mentioned, Matt could you ask SaaS SaaS as I am.
As I indicated in my prepared remarks, our SaaS margin expansion is really on track with our with our plan.
Fantastic.
Is there.
Any color you could give us on.
The slightly lower like professional services, you're sort of running close to that $50 million capacity than a bit of a dip.
This quarter is there anything for us to sort of.
Think about for the next couple of quarters.
Yes, I think I mean.
Go ahead Peter.
I actually can Sam or we see it as a temporary dip I mean this happens to US every few years.
Like most quarters you got.
Typically we're running 50 to 60 projects at a time right and typically five or six of them are kind of the big ones.
And usually every quarter you have one or two empty ending in one or two starting and you don't even see the transition down in the transition of <unk>.
Seems like every two years or three years, we ended up with one quarter, where like a bunch of big projects all end at once.
And new projects are just starting up and you end up actually seen that yet.
Between these projects and that's what happened this quarter.
Very large projects starting up.
We had a number of large projects that ended and you end up with this sort of transition that that all added in the quarter. So.
It will happen from time to time creates a bit of lumpiness, but.
Our view is that those projects will be winding up again in the third quarter and full.
Full strength in the fourth quarter.
Fantastic So no real read through we like that.
Desktop market comment.
Year to date.
Up 40% year on year.
You continue to guide, 35% to 37% growth.
The full year. So is that a case of you guys building some buffer into your numbers are you expecting a deceleration in the second half of the year or how do we sort of think about that.
Well I mean, I think if you see our our our expanding our SaaS revenue.
It takes more and more bookings.
Growth of that.
To grow that.
To increase that growth number we.
We see some really solid opportunity in.
In the coming quarter, we've got really really strong pipelines.
We're we're feeling good about we're definitely feeling good about about bookings in the quarters ahead.
But the impact if you could just kind of model it out.
You'll see a significant.
A significant increase in SaaS revenue and landing in that 35% to 37% ranges.
We think that's the likely outcome.
Okay.
You guys have an updated number for us that would be cost of the user conference.
Yeah.
I mean, we did we don't really we don't really.
Disclose that that number but if you look at the increase of our overall our overall marketing.
But and in the quarter.
There is rough.
Rough order of magnitude there is half a million dollars.
Costs in that line. There is also quite a bit of travel related to that event.
That's sort of peppered in throughout the rest of the of the P&L, but that's sort of the order.
Maybe half a million dollars that youre talking about yeah, yeah, Okay got it because sales and marketing higher by $1 million quarter on quarter and I recall last quarter. You said there was half a million dollars.
So on the EBITDA margin outlook.
For the year moving to 46% instead of the 6%.
If I were to think about the different items that prompted that move still obviously.
The professional services that you spoke to.
Is there anything else that we should be thinking about.
Outside of that now.
No. That's that's it that's the that's the number hammer.
If we if we had.
We had $14 million for over almost 15 million $14 9 million of professional services in Q1.
And then the timing dip that we had that we saw in this quarter.
That's like $2 million lower than that than the than what were staffed for essentially right. So as Peter indicated now we expect that yeah. That's definitely a temporary dip. So we're gonna be getting that level is going to be going up in the coming quarters, but you know.
We're not gonna do 17 million to make up for for the depth you know what I mean, so that's that's coming through the margin.
Great Thanks, and congrats on from possible false growth numbers.
Alright.
Thank you Sir.
Okay.
Our next question comes from the line of John Scholl with National Bank. You May proceed with your question.
Hey, good morning, guys and thanks for taking my questions. So Peter could you just give us some additional colors on the demand for the pharmacy solution you mentioned in the press release.
Maybe how we should think about the nature of those customers on to existing or new and their size and timing of the final implementation.
Yes, it is still a developing market for us so we're having a little bit of trouble precisely sizing it ourselves what we've seen so far is if we look at sort of what's happened in the last 12 months we've seen.
A couple of new accounts and a couple of base accounts adopt.
The pharmacy supply chain.
So we're seeing it coming from both sides.
When we look at the overall market Tam, we haven't yet adjusted our Tam site.
To really reflect that but.
Certainly looks as though overall.
It probably adds another three.
$3 to 500 million to the Tam kind of thing.
And the payback on it is is nothing short of fantastic.
And this is not I mean, sometimes when you look at these things you have to look at sort of some hard payback some soft payback.
Makes people's lives easier it helps the collections it frees up time for them to spend more time with patients et cetera.
In addition to some <unk> savings in the on the pharmacy side, they're just a massive amount of hard savings across $3 40 breaks management.
Reduction in.
Expired product.
Astute bind.
The payoff is quite significant and it's in an area of supply chain that a lot of these hospitals are wrestling with drug shortages and need the ability to know exactly what they have and where they have it and.
If you're able to sort of utilize sort of stretch into the Max kind of thing so.
So we're still sort of getting our heads around how big it is how fast it's going to move.
But we are very excited about the opportunity in that space.
We've been sort of working away at it for probably five years now and I got to tell you by the end of the fourth year I was starting to wonder if it was ever going to take off I think we finally connected all the right thoughts and having the right alright.
Roy backing to show this thing really pays off in it.
We're pretty excited about what we're seeing.
Okay got it so so much discussion has been around the health care side of the business and we're just wondering if you could just comment on the complex distribution opportunities in 2024 and perhaps beyond.
Sure.
That market.
I mean, an interesting market.
It's a very large market.
We estimate 12000 companies in North America in that market for us.
And is.
That market was picking up speed in 18 and 19.
Definitely hit the break through the pandemic.
The pipelines began waking up about a year ago.
In the at the very top end of the funnel sort of quite clear he is coming in and so it began moving into the main part of the pipeline in the spring and if you look at our pipeline in that market today.
It's doubled almost exactly double what it was a year ago.
It has really picked up.
We are just starting to see deals getting to final decision point.
So we're sort of waiting to see.
Is this thing our board, it's actually going to improve the spend there is still a lot of caution in the market.
People worried about recession, and economic slowdowns and interest costs are still high and so on so there are things that would be slowing down that market on the other hand.
Most of them are running 25% to 25 year old systems that were put in in time for Y two K and a lot of them are feeling like they really can't wait anymore. So.
So it looks like that sort of damage is about to burst.
We're expecting that to hit sort of over the next couple of quarters.
But honestly the jury's still out on it like until we see boards of boards of directors directors actually improve our proven new investment in these areas.
It's sort of hard to call at Garten.
Gartner is predicting a 20% annual increase in this space.
For the next 10 years and I think they're right.
The market is right for a massive technology renewal cycle, but we're sort of we're sort of waiting to waiting to see our actual business in that market is growing quite nicely.
If we look at our SaaS revenue for instance, it's up.
Significant double digits over last year.
But most of that still is coming out of our base, there's not that much new account activity actually coming through yet.
Okay and then my.
Last question is in terms of the outlook for the P. S revenue how much do you think the upcoming holiday season can be factor of where theyre trying to project a rebound in professional services in the near term.
Yeah, clearly gets good question, Jamie that is our that is kind of a seasonal I mean, there's definitely some seasonality in that quarter, but what we're seeing right now is.
We expect the number to certainly increase from these Q2 levels because of the.
You know the dynamics that Peter talked about earlier, so you know it typically isn't or that quarter with those holiday seasons and it isn't typically our biggest.
Professional services quarter of the year, I mean that that tends to be.
Q4.
Broadly.
But we expect we expect Q3 to be moving up from from Q2 levels for sure.
Okay. Thank you I'll pass along.
Great. Thanks.
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Our next question comes from the line of Gavin Fairweather with core Mark Securities. You May proceed with your question.
Hi, there. Thanks for taking my question. This is Graham on for Kevin.
First one is on.
Like on pharmacy, so can you remind us the competitive landscape what that kind of looks like in pharmacy, and maybe if you have any statistics on early win rates that'd be really helpful.
Yes, I mean, it's interesting and it's very similar at this point to what we've seen.
Across the sort of med surge and the whole Cath lab why are.
General supplies area of hospitals in that we don't see any competitor that is providing a full end to end supply chain.
There is we do see players that that offer pharmacy buying solutions. So just once you know what you need to buy.
They provide a portal that I'll ask you to go and purchase the drugs. We also see there are players that just offer forecasting and demand planning specific pharmacy.
But in terms.
And then there's there's players that offer pharmacy automation, so dispensing machines and sort of killed counters and bottle fillers and all that kind of thing but in terms of an end to end platform that goes all the way from forecasting demand planning through into a central.
Supply areas Central distribution center with the ability to do sort of just in time delivery of to hospitals.
Patient level doses.
We don't see any any direct competition at this point. So so so far and it's early like I would emphasize it's early but if you look at the sort of the ones. We've signed in the last 12 months.
Our win rates about 100%.
So.
Obviously, we'd like to keep it there.
Yeah.
That's really helpful. Thank you and then again it might be too early for this but.
If you have any color on kind of sales cycles and pharmacy like are they also under one year I think similar to overall health care.
The color would be helpful.
Yeah, they seem to be under a year I think part of it is when you actually look at the ROI.
I mean, we've seen some of these situations, where they're far their five year rois. It looks like it's going to be over $100 million. So when you are looking at that level of ROI.
The project team.
Project takes on some degree of urgency.
Okay.
Yes, that's helpful.
And then just I guess the last one on complex distribution are there any sort of verticals, where youre seeing the pipe strengthened specifically.
You want to call any of those out.
Yes.
Probably the area that continues to look the most interesting.
And it makes sense in a way because it is a little bit adjacent to our hospital space.
Drug distribution.
The drug distribution market is looking like it's it may be one of the first ones to sort of really wake up and get moving.
But there is theres other ones I mean consumer goods is it looks like it's going to wake back up again.
Electrical.
HVAC kind of market looks like it's going to it's going to wake back up three P. L, which is I mean, <unk> is almost more of a horizontal or vertical but but it's also looking like it's getting pretty active so.
But I would say.
From what we're seeing today it looks like.
Pharmaceutical drug distribution is going to be the.
Front runner there.
Perfect and I'm, sorry, just one more from me before I pass the line.
How many ideas.
In the quarter and maybe what some of the cadence that you guys are expecting for.
So over the next couple of quarters.
Yeah hard to call we added two in the quarter.
In terms of from here.
We keep thinking the number is going to rise and what seems to happen. Instead is the average deal size rises and the.
The base continues to expand pretty dramatically.
If you look at our base today, I mean, we could we could literally stopped selling new accounts and just go after the base and and get to are probably get two or three or four year goal for SaaS I mean, theres literally that much opportunity sitting there in the base, but it's certainly if I were to hazard a guess I would say we're going to continue for the.
In the near term I think you'll continue to see two to three quarter added.
It may spike above that occasionally, but I think it's going to be in that kind of range.
Perfect. Thanks, so much.
Okay.
Yeah.
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And it seems we have no further phone questions at this time Sir.
Great well, thank you everyone for joining us for today's call.
In case, you haven't picked it up I'm not sure we've ever been more excited about the future of this business.
The last few years, we've certainly had their challenges, but as we look at what we see going forward here I think we're in for a pretty exciting couple of years. So.
Thanks for taking the time to join us and as always if you have additional questions. Please don't hesitate to reach out to Mark right and we will be in touch after the end of the next quarter, Thanks and bye for now.
That does conclude the conference call for today, we thank you for your participation and we ask that you. Please disconnect your lines.
Yeah.
Okay.
Yeah.
Uh huh.
[music].
Okay.
Hum.
Okay.