Tecsys Inc. (TCS) Earnings Call Transcript & Summary

Hello, and welcome to the Annual and Special Meeting of Shareholders of Tecsys Inc. Please note that today's meeting is being recorded. If you participate in today's meeting and disclose personal information, you will be deemed to consent to the recording, transfer and use of same. If you disclose personal information or another person in today's meeting, you will be deemed to represent and warrant to Computershare and the corporation that you first obtained all required consents for the disclosure, recording, transfer and use of such personal information from all appropriate persons before your disclosure. At the end of the meeting, we will have a question-and-answer session. [Operator Instructions] It is now my pleasure to turn today's meeting over to Mr. Dave Brereton of Tecsys Inc., Chairman of the Board. Mr. Brereton, the floor is yours.

Thank you very much, and good morning, ladies and gentlemen. Welcome to the 2024 Annual and Special Meeting of Shareholders of Tecsys. My name is Dave Brereton, and I'm the Executive Chairman of the Board of Tecsys. Allow me to proceed with some introductions. With me today are Peter Brereton, President and CEO; and Mark Bentler, CFO and Secretary of Tecsys. The directors of Tecsys are also with us virtually today. [Foreign Language] According to the bylaws of the corporation, I am authorized to act as Chairman of the meeting; and Mark Bentler, in his capacity as the Secretary of the Corporation, will act as Secretary of the meeting. As this meeting is held in a virtual format with attendance via live webcast, we think it is necessary to set out a few rules for the orderly conduct of the meeting. Questions in respect of a motion can be submitted by any registered shareholder or duly appointed proxy holder. Click the question icon at the top of the voting platform page, type in your question in the text box at the bottom of the messaging screen, and then click the send button. Our moderator will view the questions and send to review for the Chairman to address them during the meeting. When asking a question, please indicate your name, which entity you represent, if any, and confirm that you are a registered shareholder or a duly appointed proxy holder. Questions will only be addressed during the question period at the end of the meeting, provided that questions regarding procedural matters or directly relating to the motions before the meeting may be addressed during the meeting. Voting can be completed at any time from now until the end of the formal business of the meeting. If you have already voted and do not wish to change your vote, you do not need to vote again during the online meeting. If you vote again online, your vote will revoke the proxy you previously submitted. For those who have not yet voted, we encourage you to log on to the platform and vote. We will now proceed with the formal portion of today's meeting. To expedite the formal part of the meeting, I will move and second all motions. In today's meeting, I would like us first to deal with all the procedural matters and close the Annual and Special Meeting of Shareholders. Following that, Peter Brereton will make his remarks on the last fiscal year. Then, Mark Bentler will present the financial highlights of that year. Later today, after market close, we will be releasing Q1 fiscal '25 results for the quarter ended July 31, 2024, and then tomorrow at 8:30 a.m. Eastern time. Peter and Mark will be conducting an earnings call to discuss the results of Q1 fiscal '25. We invite you to attend that call tomorrow morning, and separate dial-in instructions for the call are being provided later in the presentation. The earnings call dial-in instructions have also been posted on SEDAR. Next, we have the slide on forward-looking statements. The statements in this presentation relating to matters that are not historical facts are forward-looking statements that are based on management's beliefs and assumptions. Such statements are not guarantees of future performance and are subject to a number of uncertainties, including, but not limited to future economic conditions, the markets that Tecsys serves, the action of competitors, major new technological trends and other factors beyond the control of Tecsys, which could cause actual results to differ materially from such statements. All names, trademarks, products and services mentioned are registered or unregistered trademarks of their respective owners. Now for the nomination of scrutineers. With the consent of the meeting, I have designated as scrutineers, Pina Pacifico and Teresa DeLuca, employees of Computershare Investor Services, registrar and transfer agent of Tecsys. Notice of the Meeting: The Secretary has submitted a copy of the notice of this meeting as sent to the shareholders and the accompanying material as well as the affidavit of a transfer officer of Computershare confirming that the notice of the meeting and proxy form were duly sent to shareholders of record on July 19, 2024. These documents will be filed with the records of this meeting. Report of the Scrutineers: The scrutineers have submitted their report showing that quorum has been reached, and they confirm that 82.61% of the holders of the outstanding common shares of the corporation are present or represented at this meeting. Therefore, I declare this meeting duly called and constituted to deal with any matters appearing on the agenda. The Secretary will file the report of the scrutineers with the records of this meeting. Unless there is any objection, I will dispense with the reading of the minutes of the last meeting of shareholders held on September 7, 2023. I direct that the minutes of the last meeting of shareholders be taken as read and approved and signed as accurate. Copies of the minutes are available with Tecsys' Corporate Secretary. The next order of business on the agenda is the presentation of the financial statements for the financial year ended April 30, 2024, and the auditor's report thereon. A copy of the annual report containing such financial statements and the auditor's report thereon has been sent to every shareholder of record on July 19, 2024, who requested a copy in accordance with the applicable regulatory requirements and copies are available with Tecsys' Corporate Secretary and on SEDAR. Consequently, I asked the Secretary to produce the annual report in filing with the records of this meeting. Election of Directors: The next order of business on the agenda is the election of directors. The management of Tecsys has proposed in the management information circular, 9 nominees for the shareholders to consider today. The directors appointed at this meeting will serve as directors of Tecsys until the next Annual Meeting of Shareholders or until their successors are appointed. The proposed nominees are David Brereton, Peter Brereton, David Booth, Andrew Kirkwood, Vernon Lobo, Kathy Miller, Steve Sasser, Sepria Deniger and Stephany Verstraete. Are there other nominations? If you have a nomination, please type the name in the instant messaging service of the virtual interface. Since there are no other nominations, I move and second a motion to close the nomination period. I now also move and second a motion to nominate the following persons as directors of Tecsys: Dave Brereton, Peter Brereton, David Booth, Andrew Kirkwood, Vernon Lobo, Kathy Miller, Steve Sasser, Sepria Deniger and Stephany Verstraete. Unless there are any questions, I will move to the next item of business. Appointment of Auditors: We shall now proceed with the appointment of auditors for the ensuing year and with authorizing the directors to fix the auditor's remuneration. The Audit Committee of the Board of Directors of Tecsys has approved, subject to shareholder confirmation, the appointment of KPMG LLP, Chartered Professional Accountants as the auditors of Tecsys. I move and second that KPMG LLP, Chartered Professional Accountants, be appointed auditors of Tecsys until the next Annual Meeting of Shareholders. Unless there are any questions, I will move to the next item of business. Approval of Unallocated Options: The next item of business is to consider a resolution ratifying and approving unallocated options under Tecsys' 2018 amended and restated stock option plan. Pursuant to the policies of the Toronto Stock Exchange, the unallocated options under a security-based compensation arrangement, such as the stock option plan, must be approved by shareholders every 3 years if the plan provides for a number of options to purchase common shares based upon a percentage of outstanding shares from time to time. The full text of the resolution is set out under the section "Approval of Unallocated Options" in the management information circular. I will now move and second that the resolution, the text of which is provided under the section "Approval of Unallocated Options" of the management proxy circular be adopted. Unless there are any questions, I will move to the next item of business. Adoption of Advance Notice Bylaw: The next item of business is to consider a resolution to adopt the advance notice bylaw. The advance notice bylaw sets out a clear process for shareholders who intend to nominate directors at a shareholders meeting, providing reasonable time frames for shareholders to notify the company and disclose sufficient information concerning the proposed nominee mandated by applicable securities laws. The Board will better be able to evaluate the proposed nominees' qualifications and shareholders will be able to make well-informed decisions about director nominees. The full text of the resolution is set out under the section "Adoption of Advance Notice Bylaw" in the management information circular. I will now move and second that the resolution, the text of which is provided under the section "Adoption of Advance Notice Bylaw" of the management proxy circular be adopted. Unless there are any questions, I will move to the next item of business. As we mentioned, voting today will be conducted by electronic ballot for a registered shareholder or duly appointed proxy leader. The polls are open. All registered holders and proxy holders who have properly logged in with their control numbers or invitation code and wish to vote will be able to see on the screen all motions being brought forth at this meeting. Please register your votes by accessing the voting page and selecting the for or against buttons next to the name of each proposed director, selecting the for or withhold button next to the resolution with respect to the appointment of KPMG LLP, Chartered Professional Accountants as Tecsys auditors, selecting the for or against buttons next to the resolution with respect to the approval of allocated options and selecting the for or against button next to the resolution with respect to the advance notice of bylaw. No question has been submitted on the voting procedure. We will provide registered shareholders and duly appointed proxy holders approximately 10 more seconds to complete the electronic ballots. Once the electronic balloting closes, the voting page will disappear and your votes will automatically be submitted. [Voting]

I have been advised by the scrutineers that based on the preliminary results received by the scrutineers, the proxies deposited for the meeting have been voted in favor of the resolutions. Each of the 9 nominees have been elected as directors of Tecsys to serve until the next Annual Meeting of Shareholders or until their successors are elected or appointed. The resolution appointing KPMG LLP, Chartered Professional Accountants, as the auditors of Tecsys and authorizing the directors to fix the auditors' remuneration has been approved. The resolution with respect to the approval of the unallocated options has been approved. The resolution adopting the advance notice bylaw has been approved. I would ask that the scrutineers compile the final report regarding the results of voting on all business matters. The results of the poll will be included with the minutes of this meeting, and the results of the voting will be announced in a press release in accordance with the policies of the TSX and filed on SEDAR. We have now completed all procedural matters. I would like us now to terminate the Annual and Special Meeting of Shareholders, and then we shall continue with the other presentations. I move and second that this meeting now terminate. If there is no further business to come before the meeting, I declare the formal part of the meeting to be concluded. I will now turn the meeting over to Peter Brereton, the CEO of Tecsys, for the presentation of his remarks on fiscal year 2024.

Good morning. I'll now take us from the -- as Dave said, from the formal part of the meeting to some comments on fiscal year '24. And reminder in terms of what Tecsys does and what our business is all about, we are all about supply chains. And our -- as the slide says here, our story is all about our customers, but the focus is equipping supply chain greatness. We have customers that are in supply chain operations to bring some of their own great products to market. And in that case, the supply chain really underpins the core business that they provide or that they're in. In other cases, in many ways, supply chain is the business. Some of our customers are third-party logistics organizations or large distributors that don't really have any of their own product, and their competitive weapon is the effectiveness and efficiency and reliability of their supply chain. So we supply both of those types of clients. So as we say here, our mission is to equip supply chain greatness and give good companies the space to thrive. I'm going to keep my comments pretty brief. I know attendance at these virtual annual general meetings tends to be quite small. So we'll keep them high level. And as always, if you have questions, always feel free to reach out to either Mark or myself. But moving on to talk about the health care market opportunity. This continues to be our leading market opportunity. We pursue health care networks, hospital networks. These are -- we call them IDNs, integrated delivery networks is the industry term. And they represent the bulk of the American hospital community. There's about 550 health systems in the U.S. We're targeting the largest 373, which are networks that have more than $1 billion in net patient revenue. If you look at the opportunity within each of those networks, it goes all the way from forecasting and demand planning to warehousing, managing the inventory right at point of use, which could be at the nursing station or in the operating room or the cath lab as well as more recently pharmacy, and I'll talk about pharmacy in a bit. But that is adding up to about a $1.2 billion total market opportunity in terms of annual recurring revenue, okay? And it's important to note that, that $1.2 billion is an annual recurring revenue number. So we are, in many ways, just scratching the surface of that market, even though, in fact, we're the market leader in this space. So it's a fascinating space. Our win rates are super high in this market, tend to range between 80% to 100% in any given quarter in terms of win rate. And the -- we've got about 16% of the names in that market are part of our client list. But within the names that we've already signed, we're approximately 25% penetrated. So we estimate that there's an extra $194 million of annual recurring revenue opportunity in the accounts that we already have. This is because they may have started in the OR, and they haven't done any of the rest of the network, but they're planning to -- they may have started more recently, they may have started with pharmacy, and they would plan to expand from there. So there's great opportunity both on the new name side and on the base account side in this market. Interesting to note, we added new accounts every single quarter in fiscal '24 in this market. We had at one point said we wanted to get up to adding sort of 20 new accounts a quarter in this market. We've kind of come off that a little bit as we've realized the size of the opportunity within each account. So our overall SaaS numbers are growing very well in this market. We're tending to add more like 10 to 12 accounts a year kind of thing, but the opportunity within each account is very sizable. We now have hospital networks that are in the $4 million to $5 million range in terms of annual recurring revenue. So great opportunity here. We continue to focus on it, and it's key to our plans for fiscal '25 and beyond. Moving on to the distribution market. This is a much broader market. We call it the distribution convergence market because this market used to be very cleanly divided into manufacturers, distributors, retailers, et cetera. That's all kind of converging as everybody battles to sort of own the direct consumer relationship and the consumer doorstep. And that change is driving the need for new systems and new technology. There's about 12,000 of these companies in North America that fit our customer profile, typically ranging from $200 million in revenue to $10 billion in revenue. And our win rate is significantly lower in this market. At the same time, the number of accounts, as you can see is much, much higher. So this is a market that was very slow for a number of years after Y2K. They all put in new systems in time for Y2K. It started opening up again just before the pandemic, kind of slowed down again -- well, substantially slowed down again during the pandemic, but it seems to be really coming back now. So our success in this market really started to pick up speed again in fiscal '24, and we're pretty excited about the opportunities here in fiscal '25. In this market, by the way, at the lower end of the market, we tend to provide a complete platform in effect, the ERP and the warehouse management. As you move higher into this market and get up into the multibillion-dollar organizations, we're often providing really supply chain execution. So planning, warehousing and in some cases, the order-to-cash piece. So if you look at the next slide here in terms of what were the big highlights of fiscal '24, I'm, really summing it up here, but it was across 4 major areas. Pharmacy is an area in health care that we have been pursuing for a number of years. We first began poking at pharmacy, I think it was 6 years ago. And it was slow to start. It's a very conservative market. But in fiscal '24, it really began to take off. We added a number of new accounts. I think we're up to 6 or 7 accounts now putting -- rolling out the pharmacy platform. Some of them are very substantial projects. And this manages the movement -- the purchasing and the movement of drugs throughout the entire health systems from deciding what to buy and when to buy it, buying the pharmaceutical products, getting them into a central warehouse and then pushing them out, in many cases, on a daily basis based on patients and beds that have certain needs. So you don't end up storing drugs in hospitals that end up expiring on the shelf because you're literally replenishing inpatient dosages every day. The savings are very substantial. It also manages 340B pricing, which is a unique American requirement. So this market is looking pretty interesting for us. It's a whole new segment for us in the hospital space. And again, we seem to have significant first-mover advantage in that space. The partner ecosystem continues to expand. If you look at our last -- fiscal '24, substantial growth in SaaS revenue, up sort of in the 40-ish percent level, and yet professional services revenue is hardly growing at all. Well, why is that? It's because Deloitte and KPMG and RiseNow and Avalon and other partners are picking up more and more of the services work. This is good. This expands the ecosystem and drives additional opportunities into our pipeline. It also, in many ways, takes the speed limiter of our growth since we've often been held back by our ability to grow our Pro services organization. 3PL opportunities. I mentioned that a bit earlier. This is a market that continues to be quite strong for us, particularly where 3PL crosses over into health care. So these are third-party companies that do fulfillment on behalf of other companies. And we've got a wide variety of players now in this space across mail order, direct-to-consumer fulfillment, direct-to-hospital fulfillment, et cetera, but not only in health care. We're also in hazardous materials and consumer goods and so on. But it's a market where the strength of our supply chain platform really equips these companies to be highly competitive. And the last thing I'll comment on is our SaaS margin growth. You can see the chart on the right. Back in 2022, we were at 44% gross margin on SaaS. And we had a projection for you as to where that would go. We -- so far, we have slightly beaten that projection ending fiscal '24 with 57% overall SaaS margin for the year. I mean, this is what is powering the growth of the business. It's the SaaS revenue growth and the margin growth in that revenue that is really powering everything. I mean, hardware bounces around. If you remember, Q1 of fiscal '24 over a year ago, had super strong hardware numbers as we caught up from a chip shortage that had happened during the pandemic. Pro services revenue bounces around a little bit, but this is the engine. SaaS margin and overall SaaS revenue is just growing at a terrific speed, and we are delighted with that. And with that, I will turn it over to Mark, who's going to walk you through CFO -- I'm sorry, to walk you through the fiscal '24 financial results in a little more detail. Over to you, Mark.

Great. Thanks, Peter. So I'll be talking about the financial results. Briefly, I'll turn the call back over to Peter at the end, and then we'll have time for a question-and-answer period after that. So I'm going to be focusing on growth, the financial strength of the business and take a quick look at our dividend history and stock performance as part of my presentation. Starting first with revenue growth. We achieved $171 million -- just over $171 million of revenue in our fiscal 2024 and that was 12% reported growth versus 2023. So it was a solid year of performance. That was 9% on a constant currency basis. And the big driver in our growth, as Peter mentioned, was SaaS revenue. So our recurring revenue is growing quickly, and SaaS revenue is the growth driver in that picture. In fact, in the last year, in 2024, our SaaS revenue exceeded $51 million, almost $52 million, and grew 39% compared to fiscal 2023. This is an interesting slide. If you look at what's going on here, I mean, that blue area in the slide is SaaS revenue. And you can see here from 2022, in just 2 years, that revenue number has doubled. So we're really, really excited about the growth in that business. And looking forward a little bit into the future, SaaS remaining performance obligation, this is RPO, which is the contractual value of all the committed SaaS revenue that we have currently contracted. So that represents the revenue that will roll out over time as those SaaS contracts roll out their multiyear commitment contracts. And at the end of fiscal 2024, we had $197 million of committed revenue in that RPO, what we call backlog. That was up very substantially, 43% from the prior year-end at fiscal '23 year-end. And that's showing you what's going to be driving SaaS revenue growth in the future. Looking at profitability briefly. Our EBITDA -- our adjusted EBITDA was $9.6 million in fiscal 2024. And we had profit from ops of $1.9 million. The decline that you see there in profit from ops really resulted from the fact that in our Q4 of fiscal '24, we had a -- we underwent a restructuring and incurred about $2.1 million of costs in that restructuring. So that sort of -- that more than explains the decline there. But we've been investing over these years in developing sales and marketing in our product to set us up to continue to grow top line revenue and in particular, to drive our SaaS expansion. So we feel like we're in a really good position now. And as we've provided some forward-looking financial guidance, we feel like we're in a position now to really start growing that profitability. So looking forward to that growth in the future. Stopping just a moment here on the balance sheet. We have a very solid cash position and good liquidity. At the end of fiscal 2024, we had $35.6 million of cash and short-term investments and no debt. So a very safe balance sheet, the kind of balance sheet we like to operate against. And I'll also highlight that we used some excess liquidity during fiscal 2024. We have a normal course issuer bid underway, and we're buying back shares. And during fiscal 2024, we actually repurchased 204,500 common shares. We spent about $7.2 million of cash buying back those shares. Another thing we did with our cash during the year is we continued our long history of dividend payments and continue to pay out dividends during fiscal 2024. The last slide I'm going to talk to is just briefly our historical share price performance. The red line here is Tecsys' historical value over time on a constant index compared to S&P TSX value. So you can see our share price has been performing very strongly versus the TSX. I'm going to turn the call back over to Peter now to announce the conference call, and then we'll move into Q&A.

Thank you, Mark. And as Mark has said, we are -- we look forward to announcing our Q1 results tonight after market closes with a conference call tomorrow morning to discuss those results. You should see the number up there on the screen. We hope you can join us for that call tomorrow morning. But again, the results of Q1 released after market close tonight. I'll now turn it back over to Dave, our Chairman, for any closing questions.

Thank you, Peter. I ask now that all attendees who would like to ask a question use the question feature at the top of the voting platform page of the virtual interface to do so. We will answer as many questions as time permits. When asking your question, please state your name, the entity you represent, if any, and confirm you are a registered shareholder, a duly appointed proxy holder. Please limit your questions to topics relating to today's subject matter and keep your questions short and to the point. I will now give attendees a moment to type in their questions. For each question we answer, we will summarize the question, read it aloud, the name of the person who asked that question, and if applicable, the entity such person represents. We would like to remind you that questions which were already answered or that are redundant or repetitive will not be published or answered. It looks like we have not -- we are not receiving any questions. So I confirm that we've not received any questions from shareholders. And so this is all for today. Thank you to everyone who attended our virtual meeting.

This concludes the meeting. You may now disconnect. Goodbye.