Tecsys Inc. (TCS) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to Tecsys Fourth Quarter and Fiscal Year 2023 Conference Call. Please note that the complete annual fourth quarter report, including MD&A and financial statements were filed on SEDAR after market holds 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 Friday, June 30, 2023, at 8:30 Eastern Time. I would now like to turn the conference over to Mr. Peter Barrington, Chief Executive Officer at Tecsys. Please go ahead.

Thank you. Good morning, everyone. Joining me today is Mark Bentler, our Chief Financial Officer. We appreciate you joining us for today's call. As most of you have likely seen in the results issued last night, fiscal year 2023 was another remarkable year for our company, characterized by strong organic growth and important milestones. We believe that our continued momentum, notably in the context of market and industry volatility is a testament to our clarity of vision, sustained investment in technology and obsession with customer success. At the heart of what we do is empower supply chain users to perform their tasks more effectively while ensuring that the right inventory is in the right place at the right time. Done right, organizations running these supply chains are able to operate more efficiently, mitigate risk, adapt to market demands differentiate themselves from competition and seize opportunities to grow. Our job at Tecsys is to provide the right combination of software services and expertise to meet those business objectives. And that's what we've been doing. We have consistently demonstrated our ability as a technology partner to provide tools that meet and exceed customer expectations. We see the impact of that in precedent setting momentum in base account conversions to SaaS and new health care customer acquisitions and in a strengthened position in Gartner's Magic Quadrant as well as quarter after quarter of fiscal performance, all supported by a growing partner ecosystem. I'd like to take a moment to summarize the key events of fiscal '23 and results of operations. Mark will then walk us through the financial results in more detail. And finally, I'll comment on our outlook followed by a Q&A session. Our company began fiscal 2023 with strong growth, underscored by solid SaaS bookings, and that momentum continued throughout the year. In fact, SaaS bookings were up 38% in fiscal '23 compared to fiscal '22. From Forever New, a retail outfit in Australia to the Memorial Health System in New York, we are delighted to have added new logos across industries and geographies. And fourth quarter momentum was strong with total revenue hitting a record and with 20% growth in Q4 of fiscal '23 compared to the same quarter last year. This growth was led by SaaS revenue, which was up 44% in the quarter compared to last year and was also supported by solid professional services revenue growth. In fact, continued momentum in SaaS revenue growth resulted in this being our first full fiscal year where SaaS is our largest recurring revenue stream. It's worth mentioning that our positive momentum and growing SaaS customer base is underpinned by excellent gross and net retention levels. Given the recurring nature of SaaS revenue, growing SaaS revenue provides greater visibility into the -- into our future revenue. And with that in mind, we have decided to start providing financial guidance on several key metrics, which Mark will walk through shortly. This rounds out a fantastic fiscal year that saw our added business from both new and basic account wins, including 9 new hospital network logos and over 30 SaaS migration or expansion deals across verticals, highlighting the ongoing value that our existing customers see in the Tecsys platform. With 24 health care networks, either buying into or expanding their engagement with our SaaS solution this fiscal year, we are cementing our position as the system of choice for health care organizations grappling with supply chain complexity. Due to strong bookings in fiscal 2023, our SaaS RPO is growing at a healthy clip, up 47% to CAD 137.7 million compared to the same time last year. We believe that this is another leading indicator of where revenue growth is headed. With growing SaaS backlog and many major delivery projects in the backlog, we are seeing traction for the Tecsys value proposition across all industries in which we do business within a market that is highly engaged. Our efforts to strengthen and expand our global alliances program continues to gain traction. Getting new partners involved in influencing and implementing our solutions and deepening engagements with existing partners has resulted in almost 70% year-over-year growth in the value of our partner influence pipeline. We have seen excellent momentum in the form of co-marketing, accreditation, tools and training and supporting resources. With respect to health care, 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 at CoreWell Health, the Michigan-based merger of Spectrum Health and Beaumont Health. With respect to warehouse automation, we also announced our partnership with SVT Robotics, a key technology partner that provides integration software that will give our customers broad access to new and emerging robotics solutions as these technologies become more and more important to be competitive in the industry. All of this is translating into positive new SaaS account acquisitions and expansions with about half of our fiscal '23 new logos having been partner influenced, a significant jump from 22% just 3 years ago. As we continue to invest in the products we sell and the manner in which we sell them, Tecsys is proving to be among the best cloud-based solutions available in the markets we serve. The steady growth we have experienced affirms our vision and strategy for shareholder value. Mark will now provide further details on our fourth quarter and full fiscal year financial results as well as financial guidance on several key metrics.

Thank you, Peter. We're very pleased with the strong performance in our fourth quarter ended April 30, 2023. Total revenue was a record CAD 41.2 million. That's 20% higher than the CAD 34.3 million reported in the same period last year. Total revenue, excluding hardware, increased 17% compared to the same period last year or 14% on a constant currency basis. As many of you know, a significant portion of our revenue, about 72% this quarter, in fact, is denominated in U.S. dollars. And as a result, movements in currency exchange rates have an impact on our reported revenue and growth. We continue to experience strong and steady revenue streams underpinned by a 44% increase in SaaS revenue, up from CAD 7.7 million in Q4 of '22 to CAD 11.1 million in Q4 of 2023. On a constant currency basis, SaaS revenue was up approximately 40% compared to the same quarter last year. As Peter mentioned, SaaS remaining performance obligation, or RPO, was CAD 137.7 million at the end of Q4 of fiscal 2023, and that's up 47% from CAD 94 million at the same time last year. On a constant currency basis, that growth was 41%. Maintenance and support revenue for the 3 months ended April 30, 2023, was CAD 8 million, flat compared to the same quarter last year or down 3% 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 services revenue for the fourth quarter was CAD 14.6 million. That was up 13% from CAD 12.9 million reported for the same quarter last year or up 10% on a constant currency basis. As we noted in 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 customer development work as customers opt for a more out-of-the-box approach to platform implementations. We're also continuing to experience the increased collaboration of our partner ecosystem in helping to implement our suite of solutions. While we expect that over time, these factors will continue to moderate our professional services revenue growth, we had another solid quarter of professional services bookings, which I'll speak to in a moment. As we disclosed in our published MD&A, we expect total services revenue, so that's combined SaaS, maintenance and support as well as professional services, ranging between CAD 33.5 million and CAD 34.5 million per quarter in the short term. Hardware revenue in Q4 of fiscal 2023 was CAD 6.9 million. That was up 35% compared to the same period last year. As a reminder, we sell primarily third-party hardware to our customers for warehouse operations and in-hospital point-of-use storage and tracking. While hardware revenue can tend to be uneven, it is a key component of our market offering and thereby supports our recurring revenue business. That said, like last quarter, our hardware backlog remains strong, driven primarily by hospital network point-of-use orders. Turning now to bookings. SaaS bookings are reported on an annual recurring revenue basis. SaaS bookings were CAD 3.9 million in Q4, down 13% compared to CAD 4.5 million in the fourth quarter 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. As Peter mentioned, our SaaS bookings are up 38% for the full year fiscal 2023 compared to last year. Professional services bookings were CAD 16.7 million in the quarter. That was up 13% compared to CAD 14.8 million in the same quarter last year and up 8% for full fiscal 2023 compared to last year. Professional services bookings are in part related to SaaS subscription bookings and are subject to quarterly timing. Professional Services backlog was a record CAD 41.3 million at April 30, 2023. That was up 24% from the same time last year. For the fourth quarter, total gross profit was CAD 18.4 million, that was up 21% compared to CAD 15.1 million in Q4 of last year, led by higher gross profit contribution from SaaS maintenance, support and professional services. As a percentage of revenue, gross margin in Q4 was 45% compared to 44% for the same period last year. Combined SaaS, maintenance, support and professional services gross profit margin in the quarter was 47% compared to 46% same period last year. We expect to see continued service margin improvement in the coming quarters as the business continues to scale and as we focus development and operational energy on optimizing platform efficiency. Some of you may recall that last quarter, we added a new slide to our investor presentation, which is available on our website that provides some directional indication of where SaaS and combined services margins would end up under certain projection assumptions. Our SaaS margin in fiscal 2023 ended up slightly higher than our projection model, which is an encouraging sign as we look into the future. As I said last quarter, we see this as a multiyear journey with incremental benefits building over time. Switching now to our expenses for the quarter. Operating expenses increased to CAD 17.0 million. That was higher by CAD 3.2 million or 23% compared to CAD 13.8 million in Q4 fiscal 2022. Sequentially compared to Q3 fiscal 2023, Q4 operating expenses were up CAD 1.0 million. Operating expenses are up sequentially as well as compared to the same quarter last year, primarily because of higher sales and marketing costs and higher research and development costs. Sales and marketing costs were up sequentially by CAD 0.4 million in Q4 fiscal '23 compared to Q3 on higher marketing program spend. We expect sales and marketing costs to be relatively flat in Q1 fiscal 2024 compared to Q4 fiscal 2023. In Q2 of fiscal 2024, we expect sales and marketing costs to increase with added investment, including costs related to our user conference, which is in September this year. I'll draw your attention once again to another new slide we added to our investor presentation last quarter that provides 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 Q3 of this year, research and development costs were up CAD 0.8 million in Q4. As we noted last quarter, Q3 costs were positively impacted by a CAD 0.4 million true-up of R&D tax credits and e-business credits. Run rate cost for research and development increased with added headcount as well as bonus and benefit costs. We expect continued increases in R&D costs during fiscal 2024 as we continue to invest in our SaaS platform and product offering. Net profit for the quarter was CAD 446,000 or CAD 0.03 per fully diluted share compared to CAD 2.6 million or CAD 0.17 per fully diluted share for the same period last year. Recall that in Q4 of last year, net profit and earnings per share benefited from the recognition of CAD 1.9 million of net deferred tax assets the recognition of approximately CAD 0.6 million gain on remeasurement of lease liability as well as a recognition of approximately CAD 0.6 million in tax credits generated in prior periods. Adjusted EBITDA was CAD 2.4 million in Q4 of fiscal 2023 compared to CAD 1.7 million in Q4 last year. Net profit and adjusted EBITDA were both positively impacted by favorable foreign exchange of approximately CAD 0.6 million compared to the same period last year. Turning now to our results for full fiscal year 2023. Our total revenue was CAD 152.4 million. That was up 11% compared to CAD 137.2 million in fiscal '22 and up 9% on a constant currency basis. SaaS revenue for fiscal '23 was CAD 37.5 million. That was up 39% from CAD 26.9 million in the same period last year, and that was up 35% on a constant currency basis. Our net profit for fiscal 2023 was CAD 2.1 million compared to CAD 4.5 million in the same period last year. As I just mentioned, last year's net profit benefited from the recognition of the CAD 1.9 million net deferred asset recognition, approximately CAD 0.6 million gain on remeasurement of lease liability and approximately 0.6 million tax credits generated in prior periods. Foreign exchange movements had a positive impact of approximately CAD 1.8 million on profit and adjusted EBITDA in the current year compared to last year. Adjusted EBITDA for fiscal '23 was CAD 9.5 million compared to CAD 10.1 million last year. We ended Q4 fiscal 2023 with a solid balance sheet position. We fully repaid our long-term loan in December 2022, which was early. And as a result, we are debt free. On April 30, 2023, we had cash and cash equivalents and short-term investments of CAD 37.1 million. That was down CAD 6.1 million compared to CAD 43.2 million at the end of fiscal 2022. Having not repaid the loan early, cash and cash equivalents and short-term investments would have risen by CAD 1.1 million during the year. While operating activities provided cash, the overall decrease in cash and short-term investments was driven by the full repayment of the long-term debt as well as the payment of dividends. Finally, with respect to financial guidance, as Peter mentioned, with our growing SaaS revenue driving up recurring revenue, we have greater visibility into future revenue. As some of you probably noticed in our earnings release, we were providing financial guidance for total revenue growth in fiscal 2024 in a range of between 10% and 15% and total SaaS revenue growth for fiscal '24 in a range between 35% and 37%. In terms of profitability, we're providing financial guidance for adjusted EBITDA margin in fiscal 2024, up 6% and in fiscal 2025 adjusted EBITDA margin in a range between 8% and 9%. I will now turn the call back to Peter to provide some outlook comments.

Thanks, Mark. Tecsys performance in fiscal 2023 is strong. We have a strong balance sheet, and we continue to have a great backlog and sales pipeline. We are seeing widespread buyer intent across target markets. Solid opportunity cycles and a highly capable sales team with the tools and talent to capitalize on a market that is ready to invest in new tech. Our increasing market share in health care, supported by a growing partner network and increasing acceptance of the clinically integrated supply chain and consolidated service center model, together with our expanded health care sector offering gives us confidence that the health care sector will continue to serve as an important revenue stream for us. Our converging distribution business continues to represent a massive market opportunity, and we're still only scratching the surface. We continue to hone our sweet spot and carve out our share of that pie with rising market indicators, driven by fundamental changes to the supply chain industry. Changes spurred by aging legacy systems, digital adoption and a realization that heightened consumer expectations are definitely here to stay. We are pleased that our fiscal '23 result continues to demonstrate our dominance in key markets and emerging opportunity in growth markets. The wave of change and systems modernization and supply chain management is underway, and businesses are actively investing in the tools that they need to adapt to consumer expectations. As we look ahead to fiscal '24, we're confident in our ability to seize market opportunity and expand our presence in this rapidly growing market. Fiscal '24 is also the year that we celebrate our 40th year in business. It's an exciting milestone in our journey as a supply team leader and reminds us of our legacy of innovation and market leadership as we embark on another successful year. And so in summary, I want to share with analysts and investors our key themes as we look to a successful fiscal '24 and beyond. First, a sustained commitment to expanding our SaaS revenue model, which will drive changes in the way we deploy solutions and delight customers. Second, a continued strategic partnership approach characterized by deeper and stronger alliances. This helps us tap into new opportunities and fuels our scalability around the world. Third, a continuous evolution of our distribution and omnichannel business platform that takes advantage of innovative technologies and the power of data. And fourth, an emphasis on advancing and deepening our health care vertical, covering both med-surg and pharma. We continue to solidify our position as the go-to provider for health care solution -- sorry, health care supply chain solutions. As a final point, I'd like to stress across our markets, we will place emphasis on customer success. We have long stood by the philosophy of customers for life. A big part of that formula is to deliver value quickly, stay connected and then expand on the value delivered. With that, we will open up the call for questions.

[Operator Instructions] Our first question comes from Gavin Fairweather with Cormark Securities.

I wanted to start on the guidance, and I appreciate you guys putting that out there this quarter. Maybe you can just discuss some of your underlying assumptions that you're modeling out the business for the second year.

Yes. As you know, this is the first time we've provided that type of guidance. And as we said in our prepared remarks, the driver was the growth of SaaS in our business. So we looked at our backlog of SaaS RPO and our annual recurring revenue on SaaS and the coverage that provides into the future. And then added into that. Of course, the -- our expectations on bookings during the year. The tricky thing there is, as we've mentioned previously, it's -- sometimes those bookings are kind of hard to call in a quarter. So obviously, we had some make some assumptions about how those bookings would happen across the year. And of course, we included an assumption on attrition and an impact on our attrition on that model as well. In terms of the overall revenue assumption, overall revenue growth assumption, I think the interesting thing in there that we talked through was the range is fairly large between 10% and 15%. And the reason it is so large for us is hardware revenue for us is notoriously sort of hard to call. We've got a big backlog of hardware deals, and so we sort of wanted to take that into consideration when we provided that range, which is why it's pretty wide. And then finally, on the EBITDA margin side, we wanted to signal that we're continuing to invest in sales and marketing and R&D this year. But we do expect that continued margin contribution heading into next fiscal is going to be where we're going to see an opportunity to create some operating leverage.

Okay. And then maybe just zeroing in on the SaaS revenue growth of 35% to 37%. It seems to imply that soft bookings in your model will be kind of roughly flat with fiscal '23. I mean you touched on the difficulty of forecasting that line. So are you trying to be a bit conservative on that? And am I kind of reading that right?

Yes. I think we wanted -- we definitely didn't want to put out a range there that we weren't comfortable with. I think I'll put it that way. And the other thing is, as I mentioned, it's the timing of SaaS, the timing of SaaS revenue in the year is quite dependent on hitting numbers early in the year. And it's -- like I said, for us, it's kind of hard to call the timing of some of these deals can slip and move around by a couple of months, and that can have some sort of -- some impacts on the in-year impact of revenue from those bookings. So we wanted to make sure that we were providing some guidance that took that into consideration.

Got it. And then maybe just on the bookings this order, Peter, can you just discuss kind of the mix between health care and distribution. I don't think I caught it if there are any IDNs in there that were new this quarter. Maybe you can just discuss kind of the sales performance that you saw in this quarter.

Yes. I mean it continues to be similar to what it was last quarter in a sense is that it's health care, it's absolutely on fire. I mean it's -- that's where we're seeing sort of new account wins, expansions, migrations. We're seeing -- it looks like pharmacy is finally really heating up. I suspect we'll be doing several pharmacy deals in the next couple of quarters. Mark, if I remember now in Q4, we did what -- we ended up with 9% for the year?

3% in Q4.

3% in Q4, right? Yes. So it was a pretty strong quarter, but it was definitely -- I mean, a pretty strong quarter in health care, and the overall mix was definitely dominated by the health care side. Average deal value in health care also moved up a little bit more. So it was -- I mean, in terms of Q4, it was it was -- health care was the story, I would say. On the -- and as we look at Q1 and Q2, I think it's going to be pretty much the same that the general distribution and converging distribution side continues to get more active. We continue to see -- we're just looking at the pipeline the other day, the lead count is way up from this time last year and so on. So it's getting more active. But I still think it's going to be the fall before that really starts to turn into regular deal flow. So it's -- at this point, it's -- health care dominates the story.

And you'll note, van, the mix for the year, which looking at these things on a quarter is sometimes a little bit tricky and can be a little misleading. For the year, we had about -- I think it was 73% of our bookings for health care?

And then maybe just on services. The backlog has grown pretty substantially despite increased partner activity. Curious if you can kind of deliver on that with the existing team or if this will be an area where you're doing some hiring.

Yes. We actually expect a little bit of hiring, but it's going to be pretty moderate. We think the team is going to have a lot -- has capacity to deliver this. You've been following the story. We started building that team up over the course of -- at the end of not 23, but fiscal 2022, came into 2023 with a pretty a pretty good-sized team, and we've kind of grown the revenue into that team in a lot of ways. So there'll be some hiring going on there, but it's not going to be -- we don't expect it to be material.

Our next question comes from John Shao with National Bank.

So Peter, your position that stock deal is actually getting bigger. So how should I think about the margin profiles between small and large deals?

You mean in terms of SaaS or?

Yes.

Yes, we're seeing -- the larger deals are coming in with SaaS margins up in the sort of mid- to high 70s. Smaller deals come in with SaaS margins closer to around 50%. What's interesting to us is something we continue to look at is our SaaS customer base growth, is the most accounts that start small, 3 years later, they're not small. So we're trying to look at that in terms of sort of where we place the emphasis in the market, continue to sort of invest in landing some of these smaller opportunities to then become growth opportunities within our customer base and can also end up over time moving up to being higher margin accounts. So we're looking at -- and that's -- those are the reasons why we were able to put that sort of slide in the deck starting in Q3, showing evolving SaaS margins over the next few years is we're just seeing the new deals coming in and the growing deals and the growing relationships in our customer base are all driving those margins higher. At the same time, we continue to take advantage of SaaS technology that decreases our public cloud infrastructure cost. So you end up being able to reduce your cost per account even as the average deal value expands. So the combination ends up creating a fairly powerful sort of updraft on the SaaS margins over time.

Okay. I understand that the investment in sales and marketing and R&D will be the main focus in the coming years. So my question is how much of investment goes to health care vertical relative to the complex distribution? Can I assume a majority of them is for health care?

Yes, you have to sort of split that out a little bit. In -- first of all, in sales and marketing. The investment in sales certainly is heavily weighted towards health care at this point. I mean that's the -- a new investment you're going to see over the next couple of years would be -- my guess would be at this point, you're going to be looking at sort of 80% of the investment going into health care. The -- that could change if the general distribution market continues to heat up and gets more active, we could switch that. But if you look at the way things are lying right now, I would say that's where it's going to go. Marketing is a bit different just in that health care is such a contained market. It's -- we know the networks. We're going after the -- any network in the U.S. with more than CAD 1 billion in net patient revenue. So we know their names. We know where they live. We know their executives. So it is less of a marketing-led effort and a sales led effort. So the heavy investment tends to be more on the sales side and account executive side than on the marketing side, whereas general distribution and retail is very much sort of a you create digital demand in the marketplace, you use digital marketing engines and so on to create demand out there, which then drives into the website and then eventually flows through into the sales team. So there, you'll see it's more balanced, I would say, in terms of marketing spend between health care and general distribution. On R&D, it's much harder to dive up just because it's all the same platform. So we just -- I was in a meeting earlier this week. We're looking at a number of improvements we're looking at making to further strengthen our competitive advantage on our platform. And we -- at the end of the meeting, we look back to everything we decided to do and realize that everything on the list boosted both health care and general distribution. So because it's a single platform, the investment there really is predominantly just in the platform. There's a few specific things like we are continuing right now to do a lot of work on 340B central pharmacy management. That has proven to be the fastest-growing part of the pharmacy market for us. And so that will definitely require some investment, but it's not -- that's still a relatively minor component within the overall R&D team.

Okay. I guess my last question is, you just mentioned the newly hired accounting negative. How long does it -- how long does it take for them to fully scale and to potentially break even?

Yes. I mean we typically expect them to be landing their first deal within about 12 months. I think in our internal planning, we sometimes even use that sort of the 9- to 12-month window as the where we expect their first deals to be coming in. At the same time, it's really the third year by the time we consider them fully up to speed. And some of that is sort of training, building knowledge and understanding of our products in the market and so on. But a lot of it is just due to the fact that sales cycles are so fairly long, especially in health care, I mean, they're shorter than they used to be, but they're still fairly long. So you're -- the deals that -- or the relationships that they're building in the first year tend to start paying off in the second year. And by the third year, they've really got some serious run rate going. So that's the way it tends to work out. The payback is pretty quick because you're -- if you look at the investment in a fully loaded account executive, including salary and the support we provide to them and travel costs and everything, we look at it fully loaded, you're probably looking at CAD 0.5 million per account executive. And yet if they land on average size health deal, that -- the gross margin on that deal is going to come pretty close to covering that cost. So the payback is pretty quick. And I mean that's one of the reasons why the LTV to CAC looks as strong as it does.

[Operator Instructions] Our next question comes from Suthan Sukumar with Stifel.

Wanted to touch on the police demand environment today? And trying to get a sense from you guys on what you've been seeing sort of play out and evolve post the quarter with respect to sales cycles and kind of spending priorities from your customers?

We're -- I think we're seeing a pretty strong demand environment. I mean, I understand your question, at least I think I do. I mean there seems to be so much uncertainty in the news. There's still concern about what's happening with inflation and interest rates and everything else. We're just not seeing any of that affecting our customers or our sales pipeline. It the business is rolling along. The yields are coming in, et cetera. I mean we always have the normal stresses. I mean, right now, we're in our first quarter and our first quarter ends in July and a lot of people going to vacation in July. So I think this is roughly our -- well, this is actually our 100th public quarter. So we've been through this cycle quite a few times. And this is just the only way pretty typical July that we're stressing out more over vacations and getting things through legal and so on, then we are any of those kind of economic issues. So it feels like it's a pretty normal busy looking year. So we -- I keep watching for sure the signs of these sort of the overall sort of economic angst in the market in terms of is it affecting our target markets? Is it affecting our customer base. And so far, not -- it looks like a great year coming up.

Touch on your priorities for growth investments going forward? I know you spoke a little bit about sales and marketing and R&D strategy. But on the sales and marketing side, is it -- it's just kind of sort of adding to kind of headcount on the direct sales side? Or is there some element of customer success as well? And on the R&D side, what's kind of the core focus there? Is it really just expanding on the product road map or kind of building out infrastructure. Just would appreciate some color there.

Sure. I mean on the sales side, yes, it's both. So we are expanding the head count, not dramatically, but we're continuing to add in additional account executives and support for those executives. I mean every time we add a couple of account executives, you need to add another presales solutions person to work with them and support them and so on. So that team just overall continues to grow at a steady pace. The customer success side this year, we have a pretty small customer success team at this point. But our plan is to grow that a fair bit this year. We'll probably -- by the end of the year, I would think we'll probably be -- have doubled our investment in customer success this year. But again, it's not -- we really have 2 full-time customer success people right now. We'd like to get that up to sort of a team of 4 or 5 by the end of the year. On the R&D side, the investment is -- I mean, it's fairly widespread. I mean we continue to put probably 1/3 of our overall spend. It goes into the back end of the platform, scalability, security, efficiency and public cloud infrastructure sort of all the boring stuff that customers don't really see, but which is absolutely necessary to continue to strengthen our technological position and the sort of structure for future growth and margin. The -- we then have roughly another 1/3 of it goes into the core sort of ongoing supply chain demands that come in from various sectors. There's always new regulatory issues that we need to update to support. There's new -- sometimes new taxes that we need to build into the platform in terms of supporting and calculating. We've added support for Europe and European taxation due to some of the demand we're seeing there. So that -- and then the last 1/3 tenants move into the new stuff. I mean I mentioned we've been doing pharmacy. It looks like it's getting very active at this point. I mean we sort of trying to crack open the pharmacy market health care networks for the last 5 years, and it looks like that the first thing. So that's creating some demand for some of the interesting stock 3% utilizing AI to increase warehouse efficiency without using automation, the absolutely pretty interesting. We're also using AI to streamline and standardize site master files, which is a huge challenge in the health care sector. So we've got -- we have a product that's just in testing right now, but it looks like you can do sort of 80% to 90% of the work of cleaning up these item master files and helping its health care companies deploy much more effectively and efficiently. So there's -- so that's sort of the innovation side, and that tends to be about typically also about 1/3 of the spend. I mean I'm rounding all over the place there, but that's typically how breaks it.

I would just add one other comment on the sales and marketing side there, Suthan, where we have been -- I think you know we've been investing in partner ecosystem development, and we'll continue to -- we plan to continue to ramp up that investment. That's around just the basic ecosystem development partner enablement. We're seeing a lot of good things happening there with our ecosystem growing and having a more important impact on our pipeline growth and pipeline development, and we expect to continue to invest there.

Okay. Last question for me is we all understand the prospects for inorganic growth. Do you see opportunities to leverage M&A to enhance or accelerate some of your strategies on whether it be kind of region, very cassette or more on the product or technology side?

We're honestly not seeing any great opportunities there right now. I mean the market -- I mean, pricing has come down, pricing has become more reasonable. So it's not that we don't continue to kick tires and look around, but we are continuing to see private equity firms that are willing to pay a lot more than it makes sense for us to pay given our current valuations. And add to that, the fact that we've got an organic growth opportunity in front of us that we think is harder than it's ever been. So we're sort of looking at the overall scalability of this thing and saying we more or less doubled the company in the last 4 or 5 years. We think we can double it again faster than that. So there's a strong emphasis internally right now and saying, okay, don't get distracted, just execute, execute, execute because the organic opportunity is nothing short of fantastic.

Gentlemen, there are no further questions at this time.

Great. Well, thank you, everyone. Thanks for joining us, and have a great summer. And as always, if you have any questions, don't hesitate to retail to Mark or I, and we look forward to chatting in September. Thanks again. Bye.

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, everyone.