Sylogist Ltd. (SYZ) Earnings Call Transcript & Summary

Thank you for standing by. This is the conference operator. Welcome to the Sylogist Limited Second Quarter 2026 Results Conference Call and Webcast. [Operator Instructions] The conference is being recorded. I would now like to turn the conference over to Alex Balca. Please go ahead.

Thank you, Nick, and good morning. Joining me to discuss Sylogist Second quarter 2026 results are Joel Leetzow, Sylogist' Chief Executive Officer; along with Sujeet Kini, the company's Chief Financial Officer. This call is being recorded live at 8:30 a.m. Eastern Time on Wednesday, August 12, 2026. I'd like to remind everyone that Sylogist's second quarter 2026 press release, MD&A, financial statements and accompanying notes have been issued and are available for download on SEDAR+. Please note that some of the statements made on the call today may be forward-looking. Actual events or results may differ materially from those expressed or implied and Sylogist disclaims any intent or obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. A complete safe harbor statement is available in both our MD&A and press release as well as on sylogist.com. We encourage all our investors to read these materials in their entirety. Additionally, Sylogist is reporting financial results in accordance with IFRS accounting standards as issued by the International Accounting Standards Board. Today, the company may also refer to or discuss non-IFRS performance measures, which should be viewed as supplemental. The company has included in its MD&A definitions of the non-IFRS performance measures used by the company. All dollar figures expressed on this call are in Canadian dollars unless otherwise stated. I will now turn the call over to Joel for his opening remarks. Sujeet will then provide an overview of our Q2 financial performance, and Joel will return with closing remarks before opening the line for Q&A. With that, I'll hand the call over to Joel.

Thank you, Alex, and good morning, everyone. Thank you for joining us today. It's been just under 3 months since I've joined Sylogist as CEO. During that time, I've spent a great deal of time with our employees, customers, partners, Board and shareholders, assessing the strengths of the business and where we need to improve. What I've seen has reinforced my confidence in Sylogist long-term potential. It has also confirmed that we have more work ahead of us. Our second quarter results reflect both encouraging progress and areas that require improvement. SaaS subscription revenue grew 5% year-over-year. SaaS ARR grew 6% and our adjusted EBITDA margin improved sequentially from the first quarter. At the same time, total revenue declined 6%, SaaS net revenue retention was 99% and project services performance was below where it needs to be. These results reinforce the priorities that we have established. We need to improve execution, strengthen our product portfolio, invest in the customer experience and operate with greater discipline. Following years of investment, Sylogist has a strong base of mission-critical cloud products. Our job now is to translate those assets into more consistent recurring revenue growth, stronger retention and improved profitability. In June, we announced optimization initiatives intended to sharpen our customer focus and strengthen capital allocation. As part of those changes, I assumed direct leadership of the sales organization. We are bringing greater accountability to how we position our products, pursue opportunities and deliver successful customer outcomes. Project services performance is not where it needs to be. Project services revenue declined 20% in the quarter and associated gross margin fell to 8%. We are taking direct action to improve delivery, utilization and accountability. Partners remain important to our scalability and market reach, but we will selectively retain project services where doing so, improves customer outcomes, supports ARR growth and delivers appropriate margins. The objective is straightforward. Our products must be positioned to win and our customers and partners must have the resources required to deliver a high-quality experience. With that, I'll turn it over to Sujeet to walk you through the detailed financial results for the quarter and first half. Sujeet?

Thank you, Joel, and good morning, everybody. Our Q2 results continue to reflect our ongoing transition to a SaaS-driven enterprise with a focus on growing ARR and increasing the mix of recurring revenue. Total revenue for Q2 fiscal '26 was $14.7 million compared to $15.7 million for the same period last year. While SaaS revenue continues to grow, the year-over-year decline in total revenue was primarily due to lower project services and hardware revenue in the current quarter compared to the same period last year. SaaS revenue momentum continues with SaaS revenue growing 5% year-over-year. Within its component parts, SaaS revenue grew 17% in our Solutions segment, 14% in our Gov segment and 6% in our Ed segment, partially offset by a decline of 3% in our Mission segment. Maintenance and support revenue declined 6% year-over-year. This decline happening primarily within our Mission and Gov segments. Project services revenue was $3.3 million this quarter compared to $4.2 million last year. This decline in PS was primarily within our Mission and Ed segments. Recurring revenue represented 76% of total revenue in Q2, up from 70% in the same period last year. SaaS revenue made up 74% of recurring revenue, up from 72% at the same time last year, reflecting continued net growth in our SaaS subscription base. ARR and SaaS ARR for the second quarter of fiscal '26 were $45 million and $33.5 million, growing 3% and 6% year-over-year, respectively. SaaS ARR growth was primarily attributable to growth within our Ed and Gov segments. SaaS NRR, or net revenue retention, declined to 99% in the second quarter of fiscal '26 compared to 107% at the end of the second quarter of fiscal 2025. This decline was largely tied to churn within our legacy customer base in the Gov and Ed operating segments. Importantly, this decline is not reflective of any underlying weakness within our modern SaaS platforms. Q2 gross margin was stable at 57% for the current quarter compared to 58% in the same period last year. Recurring revenue gross margin improved to 72% from 71% in Q2 fiscal 2025. Blended gross margin compression continued to be primarily attributable to project services, where we are carrying associated delivery costs that are not currently being fully offset by revenue. G&A expenses for Q2 fiscal '26 increased to $2.8 million compared to $2.5 million in the same period last year, primarily due to higher professional fees and legal expenses in the current quarter. Sales and marketing expenses decreased to $1.3 million in Q2 fiscal '26 from $2 million in Q2 fiscal 2025, primarily due to lower employee-related expenses and lower programmatic marketing expenses. Gross R&D spend for both Q2 fiscal '26 and Q2 fiscal 2025 was stable as a percentage of revenue at 18%. As we've discussed on our earlier calls, we have discontinued capitalizing R&D in line with best practice, and we expect this practice to continue as our platforms near technical readiness. Q2 adjusted EBITDA was $1.6 million, representing a 10.8% adjusted EBITDA margin. This was up sequentially from 7.9% in Q1 fiscal 2026 and compares to $15.3 million -- my apologies, 15.3% in Q2 of last year. Additionally, we note that absent the impact of capitalized R&D, the adjusted EBITDA margin for the same quarter last year was 10.9%. GAAP net loss for the quarter was adversely impacted by approximately $0.7 million worth of shareholder engagement costs and an additional $0.2 million of severance-related accruals related to salary continuance payments to a former executive. Additionally, expenses incurred in fiscal '26 in connection with shareholder engagement activities were $1.9 million. Our cash balance at the end of Q2 was $2.5 million, this being adversely impacted by shareholder engagement costs incurred during the first half of fiscal 2026. We also note that we typically enter our higher cash generation period at this point in the year, and our cash balance today is approximately $9 million. With that, I'll hand it back to you, Joel. Joel?

Thank you, Sujeet. Looking ahead, our priorities for the remainder of fiscal 2026 are clear: improve execution, strengthen the product portfolio, invest in the customer experience and operate with discipline. We will continue to align our cost structure and resources with the opportunities that can generate sustainable recurring revenue growth and improved profitability. We have more work ahead. Our progress will be measured by results, improving ARR growth and retention, stronger project services execution, better margins and a more consistent experience for our customers and our partners. I remain confident in Sylogist's long-term opportunity. We have talented people, deeply embedded customer relationships and mission-critical products in attractive public sector markets. By uniting those strengths behind a clear operating model and a stronger accountability, we believe we can create sustainable value for customers, employees and shareholders. With that, let's open it up for questions.

[Operator Instructions] The first question will come from Gavin Fairweather with ATB Cormark.

Maybe, Joel, just to start with you just on growth engines within the business. After a bit more time in the seats and getting feedback from partners and customers, curious where you see the best growth opportunities in the portfolio today and how you're thinking about timelines to getting growth going there?

Gavin, thanks for joining the call. The specific growth engines that I would say have a great amount of upside for us. One is the government ERP space. We have an opportunity ahead of us. I won't get too much into the details on the commercial side because of competitive intel. But I'm excited about our positioning and where the product currently is and the take-up from our channel and partners in that arena have been fantastic. It's also already showing some growth and the pipeline is really building across that platform. And I'm really excited and encouraged by it. Second is education. It's always been one of our strong suits at Sylogist, and we continue to make progress in that side of the business. Our Victim Services has been growing over time, and it continues to grow. And once again, we've got a nice pipeline within that product and building. And then our services is something that I think is all over the story historically with changes to channel and things that we've done in that nature, but the channel has been loud and clear with me that they need those services and they need our support. So we will definitely be seeing some growth on the services side of the business as well.

That's helpful. And just on the partners, I know you've, kind of, identified the partner program as an area for improvement. Maybe you could just discuss, kind of, where you are in the process of redesigning that program and any early feedback you've gotten from the channel network there?

Sure. Well, one, we have just an amazing portfolio of partners, some of the biggest names in the ERP and accounting business worldwide have supported us on selling our products, installing our products and providing service and support for our mutual customers. I've engaged with the majority of the partners personally. They've given me feedback about what we've historically done together, how we can grow the business together and have reassured each day by their commitment to invest and build a practice around the Sylogist products. They've also told us that we need to do some things better, and I mentioned earlier what some of those things are, but we need to be there with documentation and an opportunity for them to self-serve the customer in ways with product and technology that we have not delivered as good as we should have in the past, and we're making big strides to improve that.

That's great. And then just on the professional services, if I look back a few years, you used to deliver about $20 million of revenue with a cost base that's, kind of, similar to where you are today. So is that, kind of, the plan over the next few years is to try to ramp services back up to that level? Is that achievable? Any comments there would be helpful.

I don't think it's going to go back to that level, Gavin, because we've changed our business model to a channel-first mantra. And so some of those services are absolutely going to be taken on by our partners. The benefit, though, to us is that the partners allow the ecosystem of Sylogist to expand beyond our organic capabilities as a company. So, by using their services, sales skills and I'll just say, general fit within the market and experience that they bring to the table, our goal in the future is to make Sylogist bigger through the partners versus historically at the onset of these partner programs, we had to do some investments to make sure that the partners were trained, knew what they were doing. And in many cases, we had to do joint installs together. And in the future, we'll still be continuing to do them together, but it will be on a professional services engagement model with us versus the courtesy of supporting our partners through a transition.

Great. And then lastly for me, maybe for Sujeet. I know that there was some restructuring of the business, kind of, mid-quarter. Maybe you can provide us with a bit of help on kind of the cost profile of the business as we enter into the second half.

Yes, absolutely, Gavin. So just so that I understand your question, is the question more around where do we see OpEx going in the next couple of quarters kind of thing?

Yes, exactly the cost structure because you had a partial quarter of the restructuring benefit there in the June quarter.

Yes. No, absolutely. So from an overall restructuring perspective, we -- essentially as a combination of contractors and full-time employees, we were able to reduce our bench strength in approximately kind of the 40 people -- 40 headcount range, approximate savings from a cost perspective in the $3 million range. From an OpEx perspective, we do expect our profile on the OpEx line, sales and marketing, G&A, R&D to stay in the same range as we see currently in Q2. So, essentially, that reduction that you've seen in Q2 will continue in that same range. And overall, we expect our -- we expect our cost structure to stay in that general range.

[Operator Instructions] The next question will come from Daniel Rosenberg with Paradigm Capital.

Product portfolio, I was curious if you could share at a high level the thoughts you have around it. I know you talked about rationalization or optimization. Just any color there you could share would be helpful.

Daniel, you mean across the product portfolio? How are we optimizing?