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Edited Transcript of TCS.TO earnings conference call or presentation 5-Dec-19 1:30pm GMT

Q2 2020 Tecsys Inc Earnings Call

Montreal Jan 13, 2020 (Thomson StreetEvents) -- Edited Transcript of Tecsys Inc earnings conference call or presentation Thursday, December 5, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mark J. Bentler

Tecsys Inc. - CFO & Secretary

* Peter Brereton

Tecsys Inc. - CEO, President & Director

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Conference Call Participants

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* Amr Ezzat

Echelon Wealth Partners Inc., Research Division - Analyst

* Andrew Brice McGee

National Bank Financial, Inc., Research Division - Analyst

* Daniel Rosenberg

Haywood Securities Inc., Research Division - Analyst of Technology

* Edson Lai

Stifel Nicolaus Canada Inc., Research Division - Associate

* Gabriel Leung

Beacon Securities Limited, Research Division - Research Analyst of Technology

* Gavin Fairweather

Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research

* Nick Agostino

Laurentian Bank Securities, Inc., Research Division - MD, Head of Research & Diversified Technology Analyst

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Presentation

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Operator [1]

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Good afternoon, everyone. Thank you for standing by. Welcome to the Tecsys Second Quarter Fiscal Year-End 2020 Results Conference Call. (Operator Instructions)

Please note that the MD&A and financial statements were filed on SEDAR after market yesterday, December 4, 2019. All dollar amounts are expressed in Canadian currency and are prepared in accordance with International Financial Reporting Standards.

Some of the statements in the 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 Thursday, December 5, 2019, at 8:30 a.m. Eastern Time.

I would now like to turn the conference over to Mr. Peter Brereton, Chief Executive Officer of Tecsys. Please go ahead, sir.

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Peter Brereton, Tecsys Inc. - CEO, President & Director [2]

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Thank you, and good morning, everyone. We appreciate you joining us for today's call. Yesterday, we issued our second quarter fiscal 2020 financial results. As already stated, a copy of those results is available on SEDAR and on our website at tecsys.com.

Joining me today is Mark Bentler, our Chief Financial Officer, who will walk us through the financials in more detail in a moment. I will start by summarizing the key events of our second fiscal quarter and reviewing our performance.

After Mark's comments, I will close with some comments on our outlook, followed by a Q&A session. For those new to our story, Tecsys is a global provider of transformative supply chain solutions. We equip growing organizations with industry-leading services and tools to achieve operational greatness.

Our products resolve complex challenges for commercial distribution networks for thousands of customers around the world.

Tecsys is the market leader in North America for health system and hospital supply chain solutions. And in addition, we provide omnichannel solutions for manufacturing, e-commerce and general distribution organizations.

In the last year, we have announced that Tecsys is transitioning to a SaaS revenue-based business model and away from its traditional perpetual license-based model. You will see from our results today that the speed of the transition is gaining momentum, and we believe that it is beginning to show up in our reported earnings.

In addition, our acquisition of OrderDynamics continues the positive momentum, having signed 2 new customers in the quarter, including an Australia-based retailer as well as a large multinational brand in the U.S.

This success, combined with our restructuring of the OrderDynamics business during Q1 of fiscal 2020, has shifted the business to breakeven, a significant improvement over prior results and ahead of our plans.

Our other recent acquisition, PCSYS, showed very strong results in Q2 of fiscal 2020, and we expect continued positive contribution from this business in the future.

Our second fiscal quarter results reflect a continued broad general strengthening of our business over the past several quarters. Higher margin cloud, maintenance and subscription revenues grew 47% year-over-year, which shows accelerated sequential growth over the 40% reported in Q1 of 2020.

Our momentum should continue because during the quarter, we booked another $2.4 million of annual recurring revenue, and both our pipeline and backlog remained robust.

Mark will now provide some detail on our financials for the quarter.

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Mark J. Bentler, Tecsys Inc. - CFO & Secretary [3]

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Thanks, Peter. Total revenue in the second fiscal quarter of 2020 was $26.0 million, up 43% compared to $18.2 million reported for Q2 fiscal 2019. Of this, OrderDynamics and PCSYS contributed approximately $6.9 million of combined revenue.

For the first half of fiscal year 2020, total revenue was $50.3 million, a 46% increase from $34.5 million of total revenue reported for the first half of fiscal year 2019.

OrderDynamics and PCSYS contributed $12.5 million in revenue, while our organic business was up 10% compared to the same period last year.

If you adjust for the transition to SaaS, the organic business was up about 19%. Recurring cloud, maintenance and subscription revenue grew as Peter mentioned earlier by 47% year-over-year to $10.1 million for Q2 fiscal 2020, with 13% growth from our organic business.

Annual recurring revenue run rate, also referred to as ARR, is $40.5 million at the end of Q2 fiscal 2020, compared to $27.6 million at the same time last year and up $2.2 million or about 6% from $38.3 million at the end of Q1 of fiscal 2020.

SaaS subscription bookings were the driver of this sequential ARR increase, and we expect this to continue in the future.

Year-to-date for the first half of fiscal year 2020, recurring cloud, maintenance and subscription revenue grew by 44% to $19.8 million from $13.8 million reported for the first half of fiscal year 2019.

The increase is the result of $4.5 million of contribution from the acquisition of OrderDynamics and PCSYS as well as 11% growth in our organic business, driven primarily by SaaS.

Professional services revenue was up 47% to $10.2 million from $6.9 million recorded during Q2 fiscal 2019.

Organic professional services revenue growth was 22%, mostly due to backlog conversion and also continued strong demand. The balance of the increase was acquisition-driven.

We see strong continuing demand for services, with professional services bookings of $9.7 million in the quarter compared to $7.4 million last quarter. We expect to continue to show healthy professional services revenues in the coming quarters.

Proprietary product revenue decreased 30% to $1.7 million compared to Q1 2019 -- Q2 2019 that is, primarily due to a decrease in proprietary software license revenue influenced by our shift to SaaS licensing.

During Q2 2020, SaaS subscription bookings added $2.4 million of ARR compared to $0.1 million recorded in Q2 of fiscal 2019.

As Peter noted, our Q2 SaaS bookings have been solid, with the new hospital network added together with several new distribution and retail clients. For the first half of fiscal year 2020, SaaS bookings were $2.7 million in comparison to $0.1 million reported during the first half of 2019.

Total gross profit increased [to] $13.1 million, up 37% from $9.5 million in Q2 2019, driven by higher service margin of $3.5 million. Gross margin was 50% compared to 52% in the prior year, with expansion in services gross margin offset by lower product margin due to lower mix of license revenue.

As previously indicated, lower license revenue, driven by the overall shift to SaaS, will have a negative short-term effect on our margins, and we saw this in Q2 2020.

For the first half of fiscal year 2020, gross profit totaled $24.6 million, a 44% increase over $17.1 million reported for the first half of 2019.

Operating expenses increased 10.8 -- to $10.8 million, higher by $2.2 million or 25% compared to $8.7 million reported in Q2 fiscal 2019.

The increase in year-over-year expenses is directly related to the acquisitions. Total operating expenses were stable sequentially from Q1 2020, declining slightly by about $0.2 million or 2% from $11.0 million, including the result of onetime OrderDynamics' restructuring cost of $0.4 million recorded in Q1 of fiscal 2020 and a onetime PCSYS' earn-out adjustment cost of $0.2 million recorded in Q2 of fiscal 2020.

We believe that operating expenses will increase slightly in the coming quarters as we increase investment in research and development as well as sales and marketing to take advantage of what we believe to be significant market growth opportunities.

Adjusted EBITDA was $3.7 million in Q2 of 2020 compared to $1.7 million in Q1 and Q2 of 2019.

Q2 2020 adjusted EBITDA was also up sequentially over $2 million, $2.0 million that is, recognized in Q1 of 2020. Recall that Q1 of 2020 had proprietary products revenue, mostly license revenue of $0.4 million versus $1.7 million in Q2 2020. While SaaS is clearly becoming the driving influence in our business, lumpiness in license revenue will continue to impact adjusted EBITDA and revenue in the medium term. For the 6 months of fiscal year 2020, adjusted EBITDA grew by 159% to $5.7 million as compared to the first 6 months of fiscal year 2019, when we reported $2.2 million of adjusted EBITDA.

Profit from operations was $2.2 million compared to $0.8 million in Q2 of fiscal 2019 and $0.5 million reported in Q1 fiscal 2020. For the first 6 months of fiscal 2020, total operating profit was $2.7 million, a 275% improvement over the first 6 months of fiscal 2019. This was driven by the impact of annual recurring revenue associated with cloud, maintenance and subscription licensing and by higher-margin professional service revenue associated with strong demand.

Net profit in Q2 fiscal 2020 was $1.4 million or $0.11 per share compared to profit of $0.6 million or $0.05 per share for the same period in fiscal 2019. Total backlog at October 31, 2019, was $87.0 million, up from $76.4 million at July 31, 2019, a 14% sequential improvement. This includes annual recurring revenue of $40.5 million and professional services backlog of $22.1 million.

Total contract bookings in Q2 of fiscal 2020 increased 72% to $27.9 million over the $16.2 million reported for the same period last fiscal year. The increase was primarily the result of OrderDynamics and PCSYS bookings, along with a 17% increase in organic bookings.

For the first half of fiscal 2020, total contract bookings were $41.9 million, a 56% increase over first half fiscal 2019 bookings of $26.9 million. We ended Q2 fiscal 2020 with a strong balance sheet position with cash and cash equivalents of $12.2 million and debt of $11.4 million.

And with that, I will now hand the call back to Peter.

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Peter Brereton, Tecsys Inc. - CEO, President & Director [4]

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Thanks, Mark. I'm happy to report that we are performing extremely well across all business units. While the acquisitions are contributing well after completion of integration, our transition to SaaS-based recurring revenue is accelerating, and we believe that the transition is beginning to show up in the operating leverage that is evident in our earnings.

As a sign of our sales traction, the company signed 10 new accounts with a total contract value of $15.6 million during the second quarter of fiscal 2020 compared to 6 new accounts with a total contract value of $1.3 million in Q2 of 2019.

We are continually securing higher win rates against our competition. Further testament to the growing customer traction is the overwhelming response to our recent user conference held in Arizona at the end of September. The conference had the largest attendance in Tecsys history, with attendees representing a myriad of industries. Our partner ecosystem was well represented during the conference as we continue to invest in solidifying those relationships to bring our customers the best possible solutions.

Taking a minute now to survey our different market spaces, let me start with healthcare. After several years of investing in software for the operating room, cath lab and the pharmacy, this business is now moving along very well. We are adding a new network or 2 every quarter and finding large opportunities in our base accounts.

We have never been more confident about our healthcare business. Our pipeline in healthcare is significant. On the complex distribution front, we are winning. We are seeing our agile platform win market battles again and again. We are competing against some really old stuff in the market space, with a flexible agile platform that deploys in the cloud. We are winning regional businesses and global players.

In retail, we are seeing significant momentum. We signed 3 new accounts recently, one in Canada right at the end of Q1 and then one in the U.S. and one in Australia during Q2. We are now breakeven in retail and moving quickly into the black while our backlog is growing. We processed $60 million worth of business during the Black Friday period, up from $40 million last year.

Our marketing team is working on expanding our pipeline in this space, and we have added to our dedicated retail sales team. We are playing at the higher end of the ecosystem in e-commerce fulfillment. The customers we are signing are primarily winning global brands with millions of e-commerce orders annually.

So in summary, all 3 marketplaces are humming. We are responding with increased investments in our professional services teams as well as R&D. In the coming quarters, you can expect to see a measured increase in the expenses in these areas. We anticipate a slight reduction in professional services margin, probably by a couple of percentage points but no reduction in gross margin dollars.

On the R&D front, while the dollars invested will be rising, we expect that the next 12 months compared to the trailing 12 months will show flat to slightly declining as a percentage of revenue.

I want to close out with our outlook for the remainder of fiscal 2020. First, we will maintain a laser focus on developing and growing our SaaS revenue model and annual recurring revenue generation. Secondly, we will continue to expand our partner ecosystem. This is key for us, and we now have partners working with us in both North America and Europe. We'll keep you posted. Thirdly, we will continue to expand our omnichannel business platform. We continue to see exciting opportunities in the convergence of retail and distribution supply chains.

Remember, change is what drives our business, and this is a monumental change that continues to turn the traditional supply chain on its head.

Finally, we continue to have a strong focus on improving our margins. This will take some time as we undergo the transition to SaaS and also invest in R&D and sales and marketing to take advantage of market growth opportunities. We continue to believe that a growing SaaS business in these exciting markets will provide great value for shareholders.

In closing, I draw your attention to our decision to increase the quarterly dividend by $0.005 to $0.06 per quarter, a strong vote of confidence by our Board in our performance.

With that, we'll open up the call for questions and back to the operator now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Amr Ezzat with Echelon Partners.

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Amr Ezzat, Echelon Wealth Partners Inc., Research Division - Analyst [2]

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Congrats on a very solid quarter. Guys, I'd like to start with the performance of OrderDynamics and PCSYS, again, another impressive quarter of sequential growth. Last quarter, when I asked you, you mentioned that the outperformance last quarter was due, in part, to the ebbs and flows of hardware sales at PCSYS. Was that still the case in Q2? And what should we expect, I guess, going forward?

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Peter Brereton, Tecsys Inc. - CEO, President & Director [3]

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We -- Amr, we think PCSYS did truly have an exceptional quarter in Q2. Sort of a lot of things really came together for them. Their professional services business outperformed. Their hardware business did very well. Some software that they had sold earlier actually shipped in Q2. So there was a variety of factors.

At the same time, our confidence in sort of the steady and relatively stellar performance of PCSYS continues to grow. They're doing very well in their markets. They're signing additional third-party logistics customers. Some of their 3PLs that they're signing are using the PCSYS platform to become more competitive. And as a result, they're winning more business, which in turn, they give back to PCSYS. So there's a very good positive cycle running there within PCSYS, which we expect to result in continued solid contribution to the business.

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Amr Ezzat, Echelon Wealth Partners Inc., Research Division - Analyst [4]

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Great. That's great to hear. Maybe, Mark, the 19% organic growth which you said was adjusted for SaaS -- the SaaS transition, was that a year-to-date number or a quarterly number?

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Mark J. Bentler, Tecsys Inc. - CFO & Secretary [5]

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That was a year-to-date number. And it's basically just -- it's a calculation to demonstrate that there is an impact on the growth rate that we're -- the headline growth rate here because of the shift to SaaS. And the math there is essentially taking the bookings that are SaaS bookings and sort of modeling what would revenue have looked like had those sold as license instead of SaaS. So that's where that number's coming from.

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Amr Ezzat, Echelon Wealth Partners Inc., Research Division - Analyst [6]

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And is this still the same ratio that you guys mentioned in the last couple of conference calls, right? I think it was 2 or 2.5.

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Mark J. Bentler, Tecsys Inc. - CFO & Secretary [7]

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That's right. It's a 2 -- it's a sort of a 2x license number.

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Amr Ezzat, Echelon Wealth Partners Inc., Research Division - Analyst [8]

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Understood. Then maybe I'd like to get a better sense of the dynamics on the organic growth side, how much of it is new accounts versus existing clients adding the modules, then when we're thinking about the verticals, it's -- Peter, you suggested that you're sort of firing on all cylinders. Do you have like a split for us of complex distribution versus healthcare?

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Peter Brereton, Tecsys Inc. - CEO, President & Director [9]

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I couldn't give you that split off the top of my head. I -- we did -- as we mentioned on the call, it was the -- (inaudible) I mean all around here. But out of the roughly $28 million in bookings, roughly $16 million came from new accounts. And the bulk of that, the vast majority of that is software and pro services. So it would be the balance of the $12 million of bookings that was a mix of base account bookings and some hardware bookings.

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Amr Ezzat, Echelon Wealth Partners Inc., Research Division - Analyst [10]

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Great. Maybe on the OpEx, a couple of thoughts there. I was actually surprised to see it flat sequentially despite the user conference. And Mark, you mentioned in your prepared remarks that we should expect a bit of an increase going forward. I'd like to get maybe an update on your current headcount and a sense of where you're sort of adding.

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Mark J. Bentler, Tecsys Inc. - CFO & Secretary [11]

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Yes. So we're -- I mean right now, we're thinking about in terms of additions, the focus is going to be on research and development as well as professional services. And the latter is really around -- really strong robust -- what we see as really strong robust demand and backlog in our professional services business.

And we're looking ahead at pipeline and thinking about that as well. And we're seeing customers that are queuing up a little bit to have services delivered quickly, and we just need to hire into that on a professional services side.

On the R&D side, I think it's -- again, it's market opportunity that's driving our necessity to invest there. So that's where we see the main investment, although there will also be some investment in sales and marketing.

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Amr Ezzat, Echelon Wealth Partners Inc., Research Division - Analyst [12]

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Great. Maybe one last one. Maybe I'd like to get a sense, I guess, of your appetite for M&A. Now that both PCSYS and OrderDynamics seem to be [coming].

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Peter Brereton, Tecsys Inc. - CEO, President & Director [13]

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Yes, I think -- I mean we're -- we continue to look for M&A. We actually -- as we know -- as you know, Berty moved into the role of leading the M&A effort.

He's actually also now taken on the challenge of continuing to work on building out our partner ecosystem. But the list of -- the file that Berty is working on continues to build in terms of potential acquisitions.

At the same time, we are in a virtually net 0 cash position at this point if you look at our debt versus our cash in the bank. So we're not anxious to end up with a highly strained balance sheet. So at this point, we continue to pay down the debt, manage the cash well. But at the same time, we know we've got financial partners out there and sort of enough appetite around the stock for both stock and debt that if we came across the right acquisition, we certainly wouldn't hesitate to make a move. I mean these last 2 acquisitions have sort of settled in and become a very productive part of the company ahead of schedule. So it does sort of free us up from just a mind share and focus standpoint and so on to be ready for the next one if the right opportunity truly presents itself.

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Operator [14]

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Our next question comes from the line of Nick Agostino with Laurentian Bank.

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Nick Agostino, Laurentian Bank Securities, Inc., Research Division - MD, Head of Research & Diversified Technology Analyst [15]

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First, congrats on the quarter, very well done. Just clarify, Mark, you said 19% organic, excluding the SaaS year-to-date. That's on the overall business? I just want to be clear on the last part, overall business?

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Mark J. Bentler, Tecsys Inc. - CFO & Secretary [16]

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Yes, that's right.

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Nick Agostino, Laurentian Bank Securities, Inc., Research Division - MD, Head of Research & Diversified Technology Analyst [17]

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Okay. And then just on the questions, I know you guys have been talking about OrderDynamics ahead of schedule, PCSYS, same thing. Can you just dig in slightly deeper based on the performance that you guys are experiencing? At the time of the acquisition, if I recall, OrderDynamics was probably growing in around 30%. Is that still the case? Are you guys seeing that rate of growth accelerating? And then on the PCSYS side, again, at the time of the acquisition, if I recall, margins were maybe in around 15%. Is that still what that business is delivering? Or you seeing some benefits there already?

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Peter Brereton, Tecsys Inc. - CEO, President & Director [18]

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On the OrderDynamics side, I'm just trying to think where that's at. We have to do a little bit more precise calculation there. I would think that business at this point is growing at or around the 30% mark. The 30% we actually referred to at the time we acquired it was we were referring to the growth rate of the distributed order management platform, which was the growing platform.

They had 2 components to their business. One was sort of the actual e-comm website kind of business. And that business was very flat, even slightly declining. But the piece we were interested in was the distributed order management piece, and that was the piece that was showing 30% growth. At this point, it would be around that overall, I would think. And...

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Mark J. Bentler, Tecsys Inc. - CFO & Secretary [19]

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And I would also point you on the growth side to the ARR growth, which is something that we track pretty specifically. And those deals that Peter mentioned in his opening remarks and the 3 new signings that we've done at the end of Q1 and then in Q2 have added pretty significantly to that ARR. I mean they're sequential ARR, and that business is up 16% just in the quarter.

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Peter Brereton, Tecsys Inc. - CEO, President & Director [20]

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Yes. So that was doing very well. PCSYS, I think, overall, is -- like long term, I still think of that as a 15% EBITDA business.

The Q2 was definitely a little bit spiky. But long term, I think if you look at the mix of business that they do and so on, it's around -- it continues to be roughly a 15% EBITDA business.

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Nick Agostino, Laurentian Bank Securities, Inc., Research Division - MD, Head of Research & Diversified Technology Analyst [21]

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Okay, great. And then just second question. Obviously, another IDN win in the quarter. Lately, Workday has been bringing you guys some solid healthcare transactions. Can you just qualify or quantify whether the IDN win in the quarter was from Workday or not? And also where Workday sits as far as what their pipeline looks like. And whether they're making any traction within the complex distribution market.

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Peter Brereton, Tecsys Inc. - CEO, President & Director [22]

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Sure. Yes, on the Workday front, we continue to have a very active pipeline with Workday. We've got opportunities both in healthcare and in complex. The opportunity that we signed in the quarter was not directly driven by Workday but is -- Workday is still in play in that account.

There's -- as we look forward, though, we see -- as I say, across both complex distribution and healthcare, we continue to see a great pipeline there.

On the implementation front, our first true joint go-lives with Workday look like they'll be happening sort of sometime in late spring, early summer.

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Operator [23]

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Our next question comes from the line of Gavin Fairweather with Cormark.

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Gavin Fairweather, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [24]

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When I look at the new accounts signed in the quarter, it looks like the average value per new account jumped quite significantly. I'm just curious if that's kind of skewed by the big hospital network that you referenced and also the -- perhaps the OrderDynamics multinational win?

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Mark J. Bentler, Tecsys Inc. - CFO & Secretary [25]

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I think it's skewed by a couple of things. If you look at kind of those numbers that we've reported historically, number one is the mix of SaaS in that sort of total contract value headline number is significant. So those are multiple year SaaS deals that are in the number now where -- as you look -- if you're looking at those numbers a year ago, there wouldn't have been that much in there in terms of multiyear SaaS deals, so that's number one. A lot of that new businesses is new SaaS customers.

And number two, I think, more to your point, are we seeing more uptake on larger customers? I think the answer there is absolutely. We signed a couple of deals in the quarter that were sort of new high-water marks on ACV, on an annual contract value on SaaS deals. As we look at the pipeline, I think we're seeing that trend and expecting it to continue.

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Gavin Fairweather, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [26]

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Okay, that's great to hear. And then you referenced the win rate moving a little bit higher. Curious if that is more so on the distribution side. And if you could maybe just discuss kind of -- what kind of win rate and where it's kind of moved to since layering OD and PCSYS into the business?

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Peter Brereton, Tecsys Inc. - CEO, President & Director [27]

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Yes. That has been sort of a continuing trend, that's -- but it's moved up quite a bit in the last, I'd say, the last 3 quarters. If you look at -- in healthcare, we've always had a very strong win rate. So to your point, Gavin, it's really -- that comment is really more to do with complex distribution.

And in distribution, we're now seeing win rates in the -- sort of in the low to mid-40s, which is a very interesting number for us. Because the way we look at that business, given the cost of sales and marketing, given the cost of landing an account, a win rate even in the 20% range works perfectly fine for that business in terms of running it profitably.

So to have the win rate up in the low 40s is a pretty exciting place to be. So that's where we've seen the big movement. I would say, OD and -- the OD business and the PCSYS business are not that -- not really impacting that number one way or another yet.

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Gavin Fairweather, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [28]

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Okay, great. And then just lastly for me before I pass along. Can you just give us bit of an update on your new pharmacy solution in healthcare? Not sure if you've gotten any kind of data points out of the initial go-lives? And maybe just touch on the pipeline and interest in the client base for that solution.

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Peter Brereton, Tecsys Inc. - CEO, President & Director [29]

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Sure. We're still working on the data points. I actually have a trip out to see the first account, I'll be up there in 2 weeks to sort of tour their sites and sort of talk to some of the people and see how it's going.

We've got -- our second account is going live on that product line in February, and that implementation project is on track and doing well.

So we really expect it will be sort of -- sometime in the next couple of months, we'll be starting to get the hard data points back out. I mean some of what we're providing with this pharmaceutical solution is simply allowing the pharmacy team in a hospital network to actually, finally -- in many cases, sort of the first time in their history, actually know where all the drugs are in the hospital, where they are, when they're going to expire, where the expensive stuff is, what needs to be moved around so it gets used before expiration, where the shrinkage is happening, if they've got drug shrinkage in the network.

So some of it is sort of basic blocking and tackling for supply chain but which due to all the regulatory issues in the pharmacy has been difficult for them to address. And the shortage of drugs in pharmacy, too, has been very distracting for a lot of these pharmacy supply chain teams. So it's -- we're excited with where it's at. These projects are always long and slow in healthcare, but we think we're getting to the point where that's finally going to start to really see some traction.

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Operator [30]

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Our next question comes from line of Andrew McGee with National Bank.

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Andrew Brice McGee, National Bank Financial, Inc., Research Division - Analyst [31]

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First question is I'm just kind of looking at your cloud and maintenance and subscription line. I just wanted to ask whether or not there was any one-offs that we should be considering in the quarter that would relate to any particular license deal. Any thoughts on the strength and whether or not you think that'll continue? Or if we should consider anything looking forward?

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Mark J. Bentler, Tecsys Inc. - CFO & Secretary [32]

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Yes. I mean I think that if I look at what happened in that quarter, I mean we have business that's signing, and depending on when it signs in the quarter, you know that it contributed into the quarter that just passed at a full level or not. There's that sort of dynamic going on.

And there's also the dynamic of transaction volume pricing that we do on the DOM platform. So you can't have situations where you trip transaction volume triggers that result in additional invoicing and revenue recognition. But that's something that's going to happen quarter-to-quarter as well.

And our expectation there is those transaction volumes, and there's a lot of retail in there, so the transaction volumes there around the holiday season, we -- our expectation is that's sort of a higher-water mark just generally as we look at seasonality in there. But those are the main -- I think, the main dynamics to think about in there.

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Andrew Brice McGee, National Bank Financial, Inc., Research Division - Analyst [33]

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Okay, great. And then just kind of looking at the gross margins, we've seen a little bit of volatility in the last year on the product side. And I'm wondering if you can help us dig into kind of what's pushing and pulling that? I know that PCSYS has a bit of a lower margin profile than your core business. But as we think about that maybe on a full year basis, how should we kind of think about the year-over-year metrics and where it should settle?

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Mark J. Bentler, Tecsys Inc. - CFO & Secretary [34]

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So I mean, I think to get to that, you almost need to start thinking about the crystal ball of what's that license number going to be, and where does that kind of settle in over time, and it's a hard one to call as we go, in particular, through this transition. Because that product margin is a combination of the license products and also hardware products. The latter having sort of an in the 20s margin level and the former, obviously, having a very significant margin profile.

So if we look at what happened in the last 2 quarters, sequentially, in Q1, we had about $400,000 of license revenue. And then in Q2, we had about $1.7 million of license revenue. So I think that's the thing that's going -- it's going to kind of swing around the mix number of between hardware and license and move that margin percentage.

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Andrew Brice McGee, National Bank Financial, Inc., Research Division - Analyst [35]

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Okay, that's helpful. And then, Peter, you mentioned the pipeline is quite robust. And I'm wondering if you can kind of give us an order of magnitude on how much that might be up on a year-over-year basis. And specifically, the pocket of the strength, I know Gavin was asking more about the pharmacy. But in the healthcare or the complex side, I'm wondering if you can kind of give us maybe some more data points in healthcare. Is it specific rooms that you're kind of seeing really an accelerated traction? Any color there would be helpful.

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Peter Brereton, Tecsys Inc. - CEO, President & Director [36]

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Probably the -- I mean the most significant event we're seeing in healthcare is the move towards some networks that are looking at putting agreements together with us to implement the entire suite right across the network.

We signed one of those about a year ago, that's in implementation now. That was one of our first ones that literally -- sort of brand-new account came to us and just said, "Yes, we want to do the whole thing." Actually, they wanted to do the whole thing, except for pharmacy. They decided to leave pharmacy until it was sort of further proven out in the market space. But in terms of Operating Room, Cath Lab, nursing station, warehouse management, transportation sort of end-to-end supply chain. And that -- those are probably the most significant elements in the pipeline right now in healthcare as we're seeing sort of very large multiyear deals for hundreds of operating rooms, many, many Cath Labs, et cetera.

So that's probably the biggest swing. I mean we've always, in the past, seen networks that say, "You know what, we'll start with this one area. And then 2 years later, we'll add another area and so on." There's more urgency in this space now to deal with the supply chain issue.

I mean the networks that are successfully managing their supply chains are tending to be the winners that are ending up acquiring other networks.

So there's definitely more urgency to get this addressed, and that's the biggest factor we're seeing in the pipeline.

So from an order of magnitude, we were actually just looking at it -- the Board yesterday. I mean it's up another 30%, 40% from 6 months ago. So it's a very, very healthy pipeline. On the complex distribution side, again, it's a size thing that's happening. It's not so much quantity of accounts, but we're getting some very large accounts coming into that pipeline and where we're competing, and it certainly looks like we're in a winning position on a number of them. So -- and again, these are sort of multiyear SaaS engagements, but in many case, multiyear rollouts as well because there's sort of many sites, many users, et cetera.

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Andrew Brice McGee, National Bank Financial, Inc., Research Division - Analyst [37]

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Okay. And then the last question I have is just regarding the pickup in OpEx? I know you mentioned that sales and marketing is going to be a focus. And in the past couple of years, you've increased your quota-carrying sales reps. Is there any regions that you're specifically targeting? Is it still North America? Or are you starting to think a little bit more in Europe?

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Peter Brereton, Tecsys Inc. - CEO, President & Director [38]

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We're trying to get further in Europe with a combination of sort of the PCSYS reach that's there as well as some partners. So we're in discussion with partners about Europe. We're trying to use a combination of PCSYS and partners over there for now.

On the -- in the North American market, the biggest area where we know we're just undercovered still is healthcare. It's a very large market. We're the market leader in the space. And we just still don't have enough reps covering that.

So right now, the backlog is so large that sort of it doesn't seem to make a lot of sense to put a lot more money into sales. But as we ramp up the services side and get more of the backlog rolling, then our expectation is to begin to increase that further to get better coverage across healthcare.

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Andrew Brice McGee, National Bank Financial, Inc., Research Division - Analyst [39]

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Okay. Actually, I have one more question. Just regarding the size of the backlog and how it's kind of really building momentum. As you think about the pro services side, do you feel that you're adequately covered? Or do you see any potential where you're going to start having to kind of reach out to other partners to help with the implementations?

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Peter Brereton, Tecsys Inc. - CEO, President & Director [40]

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We are reaching other partners to help with the implementation, and we intend to do that more. The challenge we're running into at this point is that sort of so far, the partners that we have -- sort of we now have ongoing sort of successful arrangements with, they're actually adding to the backlog more than they're helping with the backlog because the -- what's ending up happening is what -- once they're set up as partners and they understand what our platform does and the problems it can solve is they're bringing us into opportunities that we would not otherwise have got into. We're ending up winning deals with them. And then they do some of the services, there's no question. They are a major help with change management and testing and so on -- interface work and so on.

But the core sort of installation configuring super user training, all that kind of stuff, that still comes back to us at this point in time. The user -- the partners are coming up to speed, but that takes time for them to really get there. So until they get there -- and we think it's probably for another couple of years. Until they get there, the partners are actually adding to the backlog rather than helping to whittle it down.

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Operator [41]

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Our next question comes from the line of Edson Lai with GMP Securities.

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Edson Lai, Stifel Nicolaus Canada Inc., Research Division - Associate [42]

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I want to go back to Workday. And on their earnings call recently, they said they're seeing some delays in the cloud-based software deployment. I was wondering how that is impacting Tecsys, if any? And what are you guys seeing on the macro environment itself?

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Peter Brereton, Tecsys Inc. - CEO, President & Director [43]

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We're not -- I mean a number of the projects we've signed jointly with our -- or we've signed a long side work there, really, I should say, I mean, there's no sort of financial connection there, we signed directly with the client, and so does Workday. That -- they can't really kick into high gear from an implementation standpoint until sort of all the interfaces are done and complete.

Some of the implementation work can start. But as you get closer to go live, you really need those interfaces finished. Our R&D team is working very hard on making sure that we've got a good clean interface into Workday, Workday has delivered largely. I think there's still a little bit left to be done. But they have largely delivered what they need to deliver from their side for us to be able to have a good clean interface into their platform.

So that has been -- our expectation is that will be finished by February. And we'll be ready to sort of get those rolling. So I don't know what they would have been referring to in terms of sort of delays in cloud deployment. It may just be, again, a resourcing issue around services. I mean the whole industry right now is tight on pro services. It's -- they're -- good pro services people are hard to find and hard to hire and so on. So that may just be the challenge they're running into, but I don't know, not sure what they'd be referring to.

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Edson Lai, Stifel Nicolaus Canada Inc., Research Division - Associate [44]

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Okay. Okay, that's definitely helpful. So I'm going to move on to some of the targets that you guys talked in the past. I think you guys have targeted 8% to 12% annual growth and a return to 10% EBITDA once you guys cross the $100 million revenue line. How do you guys feel about those targets today? And what do you -- what should we expect in the next 12 to 18 months?

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Peter Brereton, Tecsys Inc. - CEO, President & Director [45]

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Yes. Funny; we're asking ourselves the same questions. If you look at this quarter on a normalized basis, once you normalize for the transition to SaaS, the business is effectively growing at about a 20% growth rate right now.

If you look at EBITDA in the quarter, it was closer to 15% than 10%. So you're looking at that, we're adding that up. I mean our goal had been to become a -- sort of a 30% company, adding up growth rate and EBITDA. And we know that everyone dreams of being a Rule of 40 company, but a lot of the Rule of 40 companies also have much higher churn than we do.

Our software tends to be sort of a long -- longer -- more costly sales cycle, a longer, more costly implementation cycle. But once it's in, it's in virtually forever.

Our net churn rate over the last 12 months is running about 100 -- or sorry, our net renewal rate is running about 106%. So we're -- we effectively have no churn in the base.

And in fact, there's more growth and expansion in the base than there is loss. So when we look at all that, we're saying -- to have a Rule of 30 company would be phenomenal. We obviously blew past that this quarter.

So we're looking ahead, and we're saying, okay, we think that EBITDA was higher than we will be expecting going forward in the near term. But we do think that we've got a real tailwind happening right now on the growth side with -- I mean take the $2.4 million worth of annual recurring revenue we signed in the quarter, I mean, none of that turned into revenue in the quarter. But that now just sort of drops into future quarters and become sort of $600,000 a quarter of locked-in revenue moving forward.

So these are all good signs to say that it looks like the growth rate is moving up quite significantly, but it is going to drive investment that we think is going to pull EBITDA back down to probably something closer to the target that we've had.

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Edson Lai, Stifel Nicolaus Canada Inc., Research Division - Associate [46]

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Okay. And in terms of the SaaS perpetual pricing crossover, I think in the past, you guys said it's 40 months. Has that changed recently? Or is it still roughly the same where the revenue for these SaaS subscriptions exceeds perpetual?

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Peter Brereton, Tecsys Inc. - CEO, President & Director [47]

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Yes, it's about the same. That really hasn't changed. That math is pretty well locked in. And in some ways, we're seeing -- I mean we've looked at some of what our competitors are doing, that almost seems to be -- at least in our game, that seems to be almost just an industry number. That's about where it crosses over.

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Edson Lai, Stifel Nicolaus Canada Inc., Research Division - Associate [48]

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Okay, great, perfect. And then last question for me. I think in the financials, you said that the services revenue will range between $19 million to $20 million based on the backlog per quarter. And this quarter, for services only, it's only around $10 million. How fast can you get to the $20 million number? And what are the margins on that?

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Mark J. Bentler, Tecsys Inc. - CFO & Secretary [49]

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Yes. So that number is total services, including the cloud and the professional services. So we're basically about at that level. We're about at that level right now, if you look at our P&L. And that's what we were attending -- that's what we were intending to signify or to -- yes, that's what we were intending to say in that sort of forward-looking guidance was these levels are sustainable to growing.

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Operator [50]

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Our next question comes from the line of Daniel Rosenberg with Haywood Securities.

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Daniel Rosenberg, Haywood Securities Inc., Research Division - Analyst of Technology [51]

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Just a couple of more for you guys. I was wondering on the OrderDynamics acquisition, you mentioned being ahead of schedule and achieving breakeven margins. I was just wondering if that's changed your outlook at where those margins could go and the timeliness of getting there.

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Peter Brereton, Tecsys Inc. - CEO, President & Director [52]

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We're still learning a lot about that sort of business in that market space. What we are seeing is that it is a -- I mean it's a very exciting market space. I mean if you look at some of the players that we have, even some of the deals that we've signed in the last quarter or 2 as I mentioned, these are large global brands where in many cases we're in -- they've decided to put one of their brands on our platform, and that's already a nice sort of sizable opportunity. And yet, in fact, they've got 3, 4, 5 or in some cases, 70 or 80 other brands.

So there's -- we're seeing that is a very interesting space. We're planning to increase the R&D related to that platform. We want to make it more micro-service enabled, more scalable. We want to add more in-store capability for sort of as they call it, endless aisle sales support and so on and really allow these -- either these retailers or these sort of brand owners, manufacturers that are converging onto the consumer doorstep the capability to use their entire supply chain as an asset to fulfill consumer needs.

So where that can go is kind of anybody's guess. It's a hot space. It's exciting. We're -- we thought it would take 18 months to get it to breakeven. We're not even quite 12 months, and we're already breakeven. The growth rate is higher than we anticipated. So it's all good and exciting times. But I would say we're still early in our learning cycle about sort of how to really sort of master that market space.

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Daniel Rosenberg, Haywood Securities Inc., Research Division - Analyst of Technology [53]

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As a follow-on to that, in terms of a cross-sell opportunity between kind of warehouse management systems and OrderDynamics customers, obviously, it's early days, but what do you see -- when do you see the synergies starting to take grip in a meaningful way?

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Peter Brereton, Tecsys Inc. - CEO, President & Director [54]

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It's -- that is something that is still sort of moving along. We now have -- well, we're actually a couple of weeks away from having our warehouse management platform and the OrderDynamics platform truly integrated.

We'll be launching at our NRF in January. So we'll see where that goes. We've had some good interest at the user conference out of our existing customer base, looking at the DOM platform and sort of potentially applying it to various situations on the -- in the Tecsys customer base -- existing Tecsys customer base, but we'll have to see where that goes.

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Daniel Rosenberg, Haywood Securities Inc., Research Division - Analyst of Technology [55]

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Okay...

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Mark J. Bentler, Tecsys Inc. - CFO & Secretary [56]

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And I think in terms of synergies, I would add perhaps that the scale and size of Tecsys relative to OrderDynamics pre-acquisition, we're seeing that in quite a synergistic way. That is to say, the customer base there with -- in some of these, like Peter said, have multiple brands. Maybe they're on the OrderDynamics DOM platform just in a one geography, and they're looking at this new company that's part of this much bigger organization and seeing that as a business that's more likely to support a big growing multinational brand company.

So I think there's probably -- from my perspective, it seems like there's more synergistic growth opportunity just in that scaling picture there, which is interesting.

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Daniel Rosenberg, Haywood Securities Inc., Research Division - Analyst of Technology [57]

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Okay, great to hear. And last one for me. I was just wondering about the plans for the partner ecosystem. Today, how does the partner ecosystem look? Is it really one partnership that's driving that channel? Are there -- how many partners do you have? And where do you want that to go?

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Peter Brereton, Tecsys Inc. - CEO, President & Director [58]

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We have -- right now, we're at a stage where we have some -- we have formal partners and we have some informal partners. So on the formal partner front, we are seeing more and more traction. Avalon continues to be a great partner. They're relatively small partner but based here in Canada, now doing some work out into the U.S. We did another deal with them in Q2. And they're out doing implementation work on a number of our projects.

But we're also seeing sort of informal partnerships developing with regional teams from Deloitte, KPMG, Accenture, et cetera, as we get into some of these larger projects and get them rolling. So they're -- in many cases, they're already embedded in those accounts, but they're starting to get their heads around our platform and get involved in those deployments.

We also have a great ongoing partnership with OSF around the DOM platform. So we're working with them in France as well as in North America on a number of projects.

So it takes time. We're continuing to build it out. I think with us moving -- adding that area of business over to sort of Berty's portfolio as well. He's sort of jumped into that with both feet and is reenergizing that push to build out that ecosystem. So I think we're finally getting some traction there. I know I've been saying that for a while. But every quarter, there's more happening with partners than the quarter before.

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Operator [59]

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Our next question comes from the line of Gabriel Leung with Beacon Securities.

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Gabriel Leung, Beacon Securities Limited, Research Division - Research Analyst of Technology [60]

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A couple of really quick things. So first, just on the revenue side of things, Mark, maybe you can help answer this. The $2.4 million in annualized SaaS bookings, was any of that reflected in the fiscal Q2 results? Or should we expect that to largely flow into the fiscal Q3 so maybe $500,000 or $600,000 of quarterly SaaS revenues coming in Q3?

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Mark J. Bentler, Tecsys Inc. - CFO & Secretary [61]

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Yes, Gabriel, that's -- there would have been some of that that did hit the quarter, but the vast majority of that was -- would not have hit at all in Q2. So [I don't know] the exact number, I'm ahead of what went into the quarter but think about that as the vast majority hitting Q3 and not Q2.

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Gabriel Leung, Beacon Securities Limited, Research Division - Research Analyst of Technology [62]

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Okay, great. That's helpful. Second, this will be -- it's probably a tough one for you to answer. But if I look at the proprietary license revenue line, obviously, there's volatility there. But would you say that the sort of $1.5 million to $1.7 million might be more than norm versus the $400,000 you reported in Q1. Do you have a sense of that given what you're hearing from your on-prem guys and potential on-prem pipeline?

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Mark J. Bentler, Tecsys Inc. - CFO & Secretary [63]

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Yes. I mean that's -- it's interesting. It's sort of -- I think about where the average should be. In some ways, I think about maybe it's somewhere in between those 2 numbers is the kind of what to think about the future as. On the other hand, it's a lumpy business, right? So there's going to be quarters -- there could very well be quarters where we outperform there even on the top end of that, there's going to be maybe quarters where we come in on the very low end of that. It's really hard to say. If we look in the pipeline, there's still some deals out there that are licensed, and there's some potential deals out there in the pipeline that are potentially large license deals. But they do -- they tend to change. We have deals where we're cruising along. And it looks like it's going to be SaaS and then at the very end, it may flip to license for some customer-driven reason.

And conversely, it can flip the other way. So it's really hard for us to call right now. I mean I think the general trend is definitely SaaS is the driver, but there's going to be this lumpiness, I think and hard to call on license.

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Gabriel Leung, Beacon Securities Limited, Research Division - Research Analyst of Technology [64]

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Okay, fair enough. On the professional services side, Peter, you mentioned that you're looking to make the investments in gross margins that are -- probably get hit by a couple of points percentage-wise. Can you remind us again how many professional services billable guys you have right now? And what are you targeting for the next 12 months to get to in terms of number of billable professional services crew?

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Peter Brereton, Tecsys Inc. - CEO, President & Director [65]

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We need to add -- I mean in total, if you look across the pro services and -- which includes both the custom dev team, the interface team, technical services, application specialists, project managers, et cetera, they're quite a diverse group. That number is in the sort of the -- I think it's in the 170 kind of range right now. And in total, we're figuring we probably need to begin -- will continue. We have been ramping that team, but we need to probably be ramping that team at somewhere around 20 people a quarter at this point.

So you're -- and we've got much better than we used to be at being able to sort of rapidly train new people so we can deploy them pretty rapidly. But that's why we're saying we've now got some pretty good experience in terms of that -- scaling that rapidly when we need to. And we've modeled out what we think the impact will be and so on. And that's where we're trying to give you some -- give the market some guidance in terms of what we expect there.

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Gabriel Leung, Beacon Securities Limited, Research Division - Research Analyst of Technology [66]

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Got you. One last question for me. I'm curious to hear, Peter, you mentioned on the OrderDynamics side, obviously, your win rate's strong there. You're beating all your competitors. So maybe give us some qualitative commentary around the 2 more meaningful ones you had for OrderDynamics this quarter, what were the -- what helped you beat out the comps? And if you could talk about some of the competitors in that -- in those particular RFPs? And what helps you to deliver the, I guess, knockout punches for both those transactions?

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Peter Brereton, Tecsys Inc. - CEO, President & Director [67]

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Sure. My comment about where the win were -- win rate was up substantially was actually in general distribution, where it's moved from -- our complex distribution, it's moved from sort of in the low 20s into the low 40s over the last 9 months to a year kind of thing.

But in answer to your question about OrderDynamics, it's interesting. It seems like that marketplace is kind of split into 2 types of players. You have the really large players, Manhattan types, for instance, that have a full suite of product.

And if you want to implement their distributed order management platform, you really need to take their whole suite. So it ends up being a monster-size sale and a monster-size implementation.

You've also got other players, Salesforce.com and others that have some distributor order management capability, but it's very limited. It's not their core focus, and it's very limited.

And then at the low end of the market, you've got some sort of start-ups or sort of series A kind of companies, some of them now out for their second round of financing that are going after the space.

And they've got some cool stuff. I mean there's -- there are -- there's definitely some cool platforms out there that we compete with. But from a -- but the company itself is perceived as the risk.

They -- will they get the next round of funding, who really knows and so on. And a lot of these bigger retailers have no interest in putting, in some cases, hundreds of millions of dollars worth of e-commerce business on a platform that is directly managed. I mean these are SaaS platforms, right? So you need the company to continue to exist.

It's not like buying on-prem or even if the company dies, you still have the software. I mean it's SaaS stuff. So you need the company to be a safe place to put your e-commerce business.

And they're just perceived as too risky. So we sort of show up in the middle. We've got a very comprehensive distributor order management platform. It's very competitive. It covers everything from sort of the -- managing buy online, pick up in store, returns, sales in store, et cetera, and yet we're sort of sizable enough. We've been around for 35 years. We've got a solid balance sheet, $100 million in revenue, et cetera. And so we're sort of a safe choice in the middle but with a very comprehensive platform. So that's really how we've -- how we seem to be able to win these.

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Gabriel Leung, Beacon Securities Limited, Research Division - Research Analyst of Technology [68]

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Yes. Got you. That's great feedback, and congrats on the quarter.

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Operator [69]

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I am showing no further questions at this time.

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Peter Brereton, Tecsys Inc. - CEO, President & Director [70]

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Great. Thank you, operator. And again, thank you all for joining us on the call. And as always, if you have additional questions, please feel free to call Mark or I, and we'll look forward to talking to you again next quarter. Thanks. Bye for now.

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Operator [71]

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Thank you. That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.