Tecsys Inc. (TCS) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to Tecsys First Quarter Fiscal Year 2024 Results Conference Call. Please note that the complete first quarter report, including MD&A and financial statements were filed on SEDAR+ after market closed 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, September 8, 2024 at 8:30 Eastern Time. I would now like to turn the conference over to Mr. Peter Brereton, 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 many of you saw in our results posted yesterday, our company began fiscal '24 with another solid quarter led by record revenue and strong fundamentals with 44% growth in SaaS revenue. We're seeing the results of our investments over the last several quarters in business development and R&D. We believe our continued momentum is a testament to our clarity of vision, sustained investment in technology and obsession with our customers' success. Our primary mission remains unchanged to empower supply chain users to perform new tasks efficiently and effectively. 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 role in Tecsys is to provide the right combination of software services and expertise to meet those business objectives and that's what we have been doing. We have consistently demonstrated our ability as a technology partner to provide solutions that meet and exceed customer expectations. Much of this will be on full display in a couple of weeks where we will be hosting the 2023 Tecsys User Conference, our first since the pandemic. With a high level of enthusiasm, we have higher registration numbers than any event in our 40-year history. We've been laying the groundwork for this event over the last few months and have been promoting a remarkable lineup of customers and strategic partners to help strengthen our base and put the spotlight on the business successes experienced by them. From Werner Electric's journey of innovation and AI-driven augmented cluster building to insights at St. Luke's Health Systems, speaking about their visionary consolidated pharmacy service center from Intermountain Health and Baylor Scott & White Health to Nissan North America sharing their supply chain management stories, we are confident that the successes of our customers will create new market opportunities. And with AWS, Locus Robotics, Zebra Technologies, RiseNow and other partners, we have more partner representation than any other conference in our history as well, an endorsement of our strengthening global alliances ecosystem. We look forward to hosting an amazing user conference where we have the opportunity to showcase innovation, best practices and knowledge sharing. Turning back to the results. I'd like to take a moment to summarize the key events in the first quarter of fiscal '24 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 Q&A. Our company began fiscal '24 with sustained growth, underscored by that 44% year-over-year SaaS revenue growth, a 23% increase in total revenue and a healthy RPO up 36% over the same time last year. We added new logos across verticals and geographies, including 2 new health care networks in the quarter, one of which was in Canada. We also signed a new health care network in August just after the quarter end. We again closed solid base business, including significant expansions across verticals and renewals that extended commitments from existing customers. Our SaaS bookings at $1.9 million in the quarter were down compared to the same quarter last year. Q1 of last fiscal year was an unusual comp with pent-up demand releasing post-COVID and an exceptionally large order in that quarter as well. Q1 of this fiscal year was a more normal Q1 with summer vacation impact. We remain encouraged by continued solid new pipeline creation and overall market activity. So as we close out another successful quarter, we're pleased that we continue to capitalize on the opportunities in front of us. We continue to add new hospital networks and global brands to our repertoire of clients, and we enjoy an expanding pipeline of new SaaS opportunities, expansions and conversions. We see a solid path for shareholder value creation. As we continue to invest in the solutions 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. And we have the people, the partners, the products and the plan to provide what the market demands. Mark will now provide further details on our first quarter financial results as well as financial guidance on several key metrics.

Thank you, Peter. We're pleased with the strong performance in our first quarter ended July 31, 2023. We had yet another record in total -- a record quarter in total revenue at $42 million. That's 23% higher than $34.2 million reported for the same period last year. As many of you know, a significant portion of our revenue, in fact, about 73% this quarter is denominated in U.S. dollars. As a result, movements in currency exchange rates have an impact on our reported revenue and growth. FX rates, including the impact of hedging, had a positive $1.5 million impact on revenue in the quarter compared to the same quarter last year. On a constant currency basis, total revenue growth was 17% in Q1 fiscal '24 compared to the same quarter last year. Total revenue, excluding hardware, increased 16% compared to the same period last year or 11% on a constant currency basis. We continue to experience strong and steady revenue streams underpinned by a 44% increase in SaaS revenue, up from $8 million in Q1 of fiscal '23 to $11.5 million in Q1 of fiscal '24. On a constant currency basis, SaaS revenue was up approximately 38% compared to the same quarter last year. SaaS Remaining Performance Obligation, or SaaS RPO, was $139.4 million at the end of Q1 fiscal '24. That's up 36% from $102.5 million at the same time last year. On a constant currency basis, that growth was 33%. Maintenance and support revenue for the 3 months ended July 31, 2023, was $8.3 million. That was flat compared to the same quarter last year or down about 4% 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 quarter was $14.9 million. That was up 9% from $13.6 million reported for the same quarter last year or up 5% on a constant currency basis. As we've noted in the last few quarters, we're starting to see the impact of our transition to SaaS ultimately have on our professional services revenue line. That is, we're seeing a continued reduction in custom 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 and 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, support as well as professional services, ranging between $34.5 million and $35.5 million per quarter in the short term. Hardware revenue in Q1 fiscal '24 was $6.8 million, up 77% 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 our hardware revenue can tend to be uneven, it is a key component of our market offering and thereby supports our recurring revenue business. Like last quarter, our hardware backlog remained strong, driven primarily by hospital network Point of Use orders. Turning now to bookings. The SaaS bookings are reported on an annual recurring revenue basis. And as Peter mentioned, SaaS bookings were $1.9 million in the quarter, which is down 50% compared to $3.9 million in the first quarter of last year. Professional services bookings were $13.8 million in the quarter. That's up 42% compared to $9.7 million in the same quarter last year. Professional Services backlog was a robust $40.2 million at July 31, 2023. That's up 31% from the same time last year. For the first quarter, total gross profit was $19.5 million. That's up 32% compared to $14.8 million in Q1 of last year, and that's led by higher gross profit contribution from SaaS, maintenance, support and professional services. As a percentage of revenue, total gross margin was 46% in the quarter compared to 43% for the same period last year. Combined SaaS, maintenance and support and professional services gross profit margin for the 3 months ended July 31, 2023, was 50% compared to 46% in the same period in fiscal 2023. The main component of the increase in this gross profit margin was SaaS margin expansion. There was also some tailwind here from FX. Switching now to our expenses for the quarter. Operating expenses increased to $17.7 million. That's higher by $3.1 million or 21% compared to $14.7 million in Q1 of fiscal '23. The increase was primarily the result of higher research and development costs as well as higher sales and marketing costs. Looking ahead to Q2 of fiscal 2024, we expect sales and marketing costs to temporarily increase primarily due to added marketing program investment, including costs related to our User Conference, which, as Peter mentioned, is in September. We also expect that research and development costs will increase slightly in Q2, resulting from investment in our platform and product offering and the normal impact of our annual salary increase. Net profit for the quarter was $1.2 million or $0.08 per fully diluted share compared to $40,000 or $0 per fully diluted share in the same period last year. Compared to the same period last year, net profit was positively impacted by the higher contribution from SaaS and associated higher gross profit and favorable foreign exchange. Adjusted EBITDA was $3.2 million in Q1 of fiscal '24 compared to $1.5 million last year. Net profit and adjusted EBITDA were both positively impacted by favorable foreign exchange of approximately $1.2 million compared to the same period last year. We ended fiscal 2024 with a solid balance sheet position. We had cash and short-term investments of $31.9 million and no debt. Q1 net cash used in operations was $6.9 million, primarily the result of normal seasonal working capital changes in that quarter. Finally, with respect to financial guidance, with our growing SaaS revenue driving up recurring revenue, we have greater visibility into future revenue. As a result, recall the last quarter for the first time we provided financial guidance. We would like to reiterate that guidance for total revenue growth in fiscal '24 in a range of between 10% and 15%, total SaaS revenue growth for fiscal '24 in a range between 35% and 37%. And in terms of profitability, we are reiterating financial guidance for adjusted EBITDA margin in fiscal '24 up 6% and the fiscal '25 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 stable growth continues through the first quarter of fiscal 2024 with a strong balance sheet and a robust backlog and sales pipeline. We are seeing widespread buyer intent to cross 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 technology. We continue to solidify our leadership position in the health care market, supported by a great partner network and rising adoption of the clinically integrated supply chain and consolidated service center model. The upcoming November 2023 compliance deadline for the U.S. Drug Supply Chain Security Act provides a favorable backdrop for our consolidated pharmacy inventory management solution. With customer proof points from organizations like Parkview Health and St. Luke's Health System, we're well positioned to be the preferred vendor to support this developing best practice. Our expanding -- our expanded health care sector offering and growing footprint gives us confidence that the health care sector will continue to serve as an important revenue stream for us. Our converting distribution business continues to represent a massive market opportunity. We continue to hone our sweet spot there and carve out our share of that pie with rising market indicators, driven by fundamental change to the supply chain industry. Changes spurred by an aging legacy systems, digital adoption and a realization that heightened consumer expectations are here to stay. So in summary, I want to remind analysts and investors of some key themes for fiscal '24 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, as continued strategic partnership approach, characterized by deeper and stronger alliances. This will help us tap into new opportunities and fuels our scalability around the world. Third, 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 supply chain solutions. Lastly, the continuous evolution of our distribution and omnichannel business platform that takes advantage of innovative technologies and the power of data. And as a final plan, I'd just like to stretch across our markets that 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 the call up for questions. Thank you.

[Operator Instructions] The first question comes from Amr Ezzat with Industrial Alliance.

It's [ Andre ] on behalf of Amr. You're talking about your guidance for topline and SaaS growth. Last quarter you also had strong momentum. Just wondering what's driving the outperformance relative to your initial guidance? And do you foresee this momentum continuing?

You want to take that one, Mark?

Yes, sure. I mean I think our topline revenue was really strong. And when we provided the guide poster for total revenue, we were thinking about a full year, and that's the guidance we provided. I think the thing you have to watch pretty carefully in our numbers is that hardware number in our P&L, which can move around quite a bit. And we had a pretty robust hardware quarter this quarter. We also have a pretty good backlog. But if you look across last year, our hardware quarters range from $3.8 million to $6.9 million. So there's quite a bit of movement that can happen in there. So I think that provides a little color around that 10% to 15% guidance range that we provided and are sticking with for right now.

And how much are you budgeting for your User Conference later this month?

Yes. I mean that's -- we haven't really disclosed that number. But I mean, really rough orders of magnitude, that's roughly $0.5 million event for us.

And one more from me. The last couple of calls, you noted that you didn't see many opportunities for inorganic growth due to [ rich ] pricing. Just wondering how that has evolved since the last call?

Yes, there's no real change there. I mean, we continue to poke around and look at what's out there, but we have not -- our focus at this point is on the organic side.

The next question comes from Gavin Fairweather with Cormark Securities.

Maybe just a quickie for Mark to start. Just -- it looks like the CAD strengthened a little bit in the quarter. Can you just discuss the impact that FX had on ARR growth this quarter?

Yes, the headline growth there, I mean, I think we -- if you think about it sequentially, we moved from like a $132 million level last quarter to a $136 million level. So I think there was about maybe 3 to 4 percentage points of tailwind there.

And then maybe for Peter, just can we dig a little bit deeper into the health care sales environment? How would you kind of describe buyer intent? Obviously, you saw a couple of new health care networks join in one subsequent quarter. But I guess when you look into the pipeline, how are you thinking about the number of IDNs and how are they moving? And how are you thinking about your -- the ability to increase the pace of IDN?

Yes, I mean we're sort of waiting to see it actually fully pick up speed. It seems to be accelerating. That team is probably -- round numbers, that team is probably 30% larger. The sales team is right 30% larger than it was this time last year. And yet they are very busy. The total pipeline in sales in health care is up measured by sort of SaaS -- potential SaaS revenue is up over 50% from this time last year. So we're seeing a lot of excellent activity. At the same time, we are seeing -- frankly, it seems like half of the management teams who were trying to close deals were in Europe for vacation [indiscernible]. So it's – they’re -- everything is now returning as we get into September and things can be picking up speed. So we'll have to see how the year works out. But if I look at the -- sort of what we see on the dashboard, great sales team, significantly larger than it was last year and a pipeline up by more than 50%. So we're feeling pretty bullish about [indiscernible] in health care. That's for sure.

I mean, maybe some of that will turn into a tailwind in the quarters ahead here. Maybe just on maintenance, been holding pretty steady. I keep expecting a bit of a deceleration. Maybe you can update us on the planned pace of migrations and how those conversations are going? I mean, you talked about maintenance kind of starting to moderate in the years ahead, but it seems to be holding steady. Maybe just unpack that a bit for us?

Yes. I think the conversions from on-prem to SaaS, they do continue. And if we look at our pipeline, the activity there, it's actually -- the pipeline is actually ahead of where we expected it to be right now in terms of additive conversion opportunities. But you raise a good point, like we're expecting that number to go down and it doesn't. Our retention rates are super high. In fact, they ticked to measure those LTM and they ticked up to like 97% gross retention in this last 12-month period ended July 31, 2023. So really solid retention is helping support that number a bit. The other thing is our -- some of our other businesses, in particular, that hardware business and that proprietary technology business that we do, it does attach some maintenance and support to that business. And so that's conspiring also along with price increases and strong levels of retention to kind of moderate the decline there. But we do see that conversion pipe building and expect that it's going to continue to head down rather than out that total maintenance and support line.

And then maybe lastly before I requeue, just on SaaS gross margin. You provide that kind of illustrative walk over the next few years on kind of services gross margins and SaaS gross margins. I'm curious how the back end optimization work is progressing in that deck? You kind of have assumptions around 75% incremental gross margin on SaaS. Curious if that kind of incorporates some of the efforts you're making on the back end? And if there's also an opportunity to kind of improve the existing SaaS space as well?

Yes. It does incorporate that. But I mean -- I think the more we scale there and the more we scratch and invest there, the more efficient we become. So we're making -- we continue to make progress on -- the key metrics in there for us are public cloud infrastructure costs as a percentage of revenue. We continue to make progress there. That's with platform optimization and overall infrastructure efficiency, how we set up the platform and utilize public cloud infrastructure. So we continue to make progress there. And the other factors are -- the other main factors are our cloud operations, costs and our ability to execute there. So we measure that metric as -- internally as cloud operation costs ex public cloud infrastructure costs and monitor that as a percentage of revenue. And we see that still doing interesting things as well as we scale and continue to leverage our technology, our platform and external technologies that we use to monitor, et cetera, that help us manage that metric. So I think there's more goodness to continue to squeeze out of that margin as we move forward and continue to scale.

Our next question comes from John Shao with National Bank.

I also have a question on gross margins. So you guys definitely have a decent margin expansion this quarter driven by the SaaS business. So from a modeling perspective, is this improvement permanent? And also, how we should think about the margin profile in future quarters?

Yes. I mean -- I think we -- I would direct you to our investor deck there, John, and we provided some kind of projection numbers. I hesitate to call them forecast, but sort of projection numbers based upon some assumptions. And we saw -- we started publishing those a couple of quarters ago. We outperformed what we expected there in Q4 slightly. And I would say right now we're tracking with our expectations. And I would leave it at that.

And in terms of ARR, how should we read into the Q1 number, given it's just sequentially flat, is also because of the timing of deal lumpiness?

Yes. I mean the ARR number being sequentially flat, I think we had -- we have that $1.9 million SaaS bookings number, which was not a fantastic quarter. So that didn't drive up that ARR as much as it otherwise would have increased. So I think that's probably the main driver for the sequential flatness there.

Last question is to Peter. So Peter, you mentioned your sales team is 30% larger than compared to last year. So my question is around your plan to continue to grow the headcount for the rest of the year?

Yes. I was specifically -- first of all, I was specifically referring to the health care side of the sales team. So the -- that's where the bulk of the growth has gone, and that's where we've seen a substantial increase in the size of that team. We do plan to continue to invest in the team. I mean, when you look at our LTV to CAC numbers, general guidance and sort of best practices in the SaaS world, if your LTV to CAC is about 3, you should be pouring more money into sales and marketing. And if you look at our general trend over the last 4 quarters or 8 quarters or whatever time frame you want, in fact, we're well above that number. So we continue to invest more in sales and marketing. You'll continue to see that number rise. We limit our investment there, largely just to manage productivity. There is a point at which you grow that organization too quickly and you can actually end up with declining sales results to you. Just too many new people, not enough sort of in-depth knowledge of the marketplace, you start blowing opportunities and so on. So that -- the practical considerations of growing an excellent sales team are what limits the investment there because the underlying financial metrics that we track and the KPIs we track tell us that we should be continuing to expand that team quite rapidly.

And John [indiscernible] -- yes, John, just going back to your last question about ARR. I failed to mention, but I should’ve, the FX impact -- the sequential FX impact from the end of Q4 to the end of Q1 was actually a negative drag on that ARR number. So that kind of offset the gains of the increased narrow from the SaaS bookings.

Our next question comes from Suthan Sukumar with Stifel.

Daniel on for Suthan today. My first question here is on your EBITDA peak this quarter. Can you speak to what drove the [indiscernible], and was it due to the pace or timing of growth investments? Or are you seeing early leverage benefits in the business?

Daniel, can you repeat that question? I didn't quite hear the beginning of -- kind of broke up a little bit for me at the beginning.

Yes, sure. On your EBITDA peak this quarter, can you speak to what drove the peak? Was it due to the pace or timing of growth investments?

Yes. I mean we -- our OpEx was up pretty significantly -- in the quarter. But the big contribution -- the big change was the contribution margin in the quarter, which was really solid, as we mentioned, driven mostly by SaaS expansion, but also with a little bit of FX tailwind in that number.

On professional services revenues, what appears to be quite healthy again this quarter? Is there anything specific to call out? And can you speak how much partner engagement there was during the quarter?

Yes. I mean -- I think the thing to call out there, Daniel, is our backlog heading into this quarter was very large. We did actually quite a bit of bookings in the quarter as well. So it continues to be over $40 million of backlog, which for us historically is still a very robust number. So we think that probably bodes pretty well for the upcoming quarters. In terms of partner engagement and partner involvement, I guess, Peter mentioned, we've got a whole -- we've got just a great stuff happening on that front. We continue to add interested SI partners. They're more and more involved in our deals. They're more and more involved in -- on the front end, on opportunities. And that game is getting -- yes, it's getting -- the names that are in that group are getting bigger and the participation is getting more fulsome. So we're pretty excited about what's happening there.

Now just to quickly recap in case I missed it. I think you mentioned that you guys won 2 additional IDN wins this quarter. What are your expectations for the year? Is it still around 12?

It's a great question. We debate that all the time. I mean we are seeing ever larger opportunities. At the same time, we are seeing quite a large number of opportunities. Our average deal size continues to sort of slowly increase. So where that number will land, it's hard to call. We certainly are investing in the sales organization and structuring the sales organization to continue to drive that number up, and we would like to see us get in the 12-ish range for the year, and continuing our markup our plan is just to get to the point where we can add 20 networks a year, which we'd like to get to within a couple of years. But we're not -- that's not a firm forecast. That's just what we're trying to accomplish.

Last one for me. Can you just update us on the current demand environment for the [indiscernible] distribution side? And have you seen any changes in urgency from a customer this quarter?

No, not really change in urgency. We are seeing deals starting to flow on that side. We've got -- I think we'll see more signed deals probably in this quarter on that side. We'll -- we did see some activity in the first quarter on that side. So it seems like that marketplace is starting to get out of panic mode. The inventory is flowing, the ports are wide open, the factories are open. The things are just generally returning to normal and as they return to normal, we're kind of back to where we were in 2019, which is that whole sector realizing that they're running platforms that were implemented in time for Y2K. And it's -- they're not really designed for today's world at all. So we are seeing action on that side. And I think -- as I think I said in the spring, we kind of expected that it would be sometime this fall that the deal flow would actually begin. And I think we're still tracking to that.

Our next question comes from Steven Li with Raymond James.

I may have missed it, but the SaaS growth of 40%, did you say how much came from the current customers and how much from new logos?

Yes. We didn't say that. In the quarter -- the bigger driver there this quarter was expansion business.

And also on the -- on your bookings, what would be the split between health care and complex?

I don't -- we didn't really disclose that one either, Steven, but it would have been -- actually, it would have been tipped. It would have been -- it's actually pretty even because the expansion deals had included some nice complex distribution customers. So those -- I think it would have been -- it would -- in fact, it was slightly tipped towards health care, but complex was definitely contributing to that one as well, but slightly more than 50% health care.

And then -- and when you – when we're talking about bookings here, it applies to both ARR and TS, right, Mark?

No, I'm talking SaaS.

And then just, Peter, your comment earlier, I heard you say your total pipeline in health care is up 50%, but then the number of IDNs you won was 2. Does that mean conversion is very lumpy? Can you talk about conversion rates?

Yes. I mean conversion rates are now lumpy bits.

In health care, we don't have that much conversion left to do. I mean, most of the -- maybe not most, but I mean a significant portion -- I'm trying to think now off the top of my head, but Mark, we're probably at a point where what, 75% of our health care clients are already on SaaS.

Yes, it's even more.

Something like that. Even more. So there's not that much conversion left to do there. What you're mainly seeing there is that the expansion in existing SaaS hospital clients is continuing to be quite strong. So when we look at our pipeline, our pipeline includes some very significant opportunities, but that are from existing customers. So they don't become -- they don't [Audio Gap] building out the SaaS customer basis [indiscernible] say that the sort of [indiscernible] .

When we think of significant opportunities with existing customers, is the cycle quicker, shorter?

Yes, for sure, it is. For sure it is. I mean, we already have a relationship. We've already got trust built up. We've already got a good understanding of our platform and how to use it. We've usually built up an internal team that knows how to support our platform internally from an end-user standpoint. So it's definitely quicker. I mean, there's agreements. I'm just thinking like in Q1, for instance, we signed a fairly substantial expansion and extension of contracts -- SaaS contract, and that whole process took less than 90 days.

And last one for me. And again, I probably missed it, but did you say how much is your partner-influenced deals in the quarter.

Yes. What we did disclose there, Steve, is the percentage of our pipeline that's partner-influenced at the end of the quarter, and that number was 30%.

Gentlemen, there are no further questions at this time.

Okay. Well, thank you, everyone, for joining us. And as usual, if you have any additional questions, please don't hesitate to reach out to Mark or I, and we will talk to you at the end of Q2. Thanks again for your time and bye for now.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day, everyone.