TECSYS Inc.

to Texas fourth quarter and fiscal year 2022 results conference call. Please note that the complete annual and fourth quarter report, including MD&A and financial statements, were filed on CDAR after market closed yesterday. All dollar amounts are expressed in Canadian currency and are prepared in accordance with international financial reporting standards. Some of the statements in this conference call, including this 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, June 30, 2022, at 8.30 a.m. Eastern Time. I would now like to turn the call over to Mr. Peter Barreton, Chief Executive Officer at Texas. Please go right ahead, sir.

Thank you. Good morning, everyone. Joining me today is Mark Butler, our Chief Financial Officer. We appreciate you joining us for today's call. As most of you have likely seen in the results issued last night, fiscal year 2022 was a transformational year underscored by strong organic growth. Amid ongoing global crises from the end wave of COVID, to labor shortages and to war, supply chains have been in the eye of the storm. I believe strongly that what we do empowers our customers to set new benchmarks for success by driving excellence through their supply chains. This is not a new belief. For decades, Texas has been advocating that the supply chain is a strategic lever for competitive differentiation. But never in the history of this company has the world been so ready to invest in supply chains. I'd like to take a moment to summarize the key events of fiscal 22 and the results of operations. Mark will then walk us through the financial results in more detail. And finally, I'll comment on our outlook followed by a Q&A session. First, I'd like to highlight that our Q4 SaaS bookings were the highest quarterly SaaS bookings in our history. And this naturally adds to the continued positive impact of our growing SaaS customer base. We've also seen continued momentum in existing customers migrating to our SaaS offering. Indeed, the pace at which our SaaS business has expanded is a healthy blend of new accounts, expansion of existing SaaS customers, and some base accounts choosing to renew their engagement with Texas and convert to SaaS. Our SaaS approach has strengthened the quality of our revenue streams and it is making it easier for both new and existing clients to buy our software solutions. We have a strong pipeline and our SaaS revenue growth is fantastic, solidifying our thesis for value creation. Full year SaaS revenue was up 47% on a constant currency basis. It is a milestone year for Texas in that all but one new major account and every major account upgrade has been a SaaS deal. Overall, 91% of software bookings were SaaS in fiscal 22 versus 82% last year. In the fourth quarter of fiscal 22, SaaS revenue represented 49% of total cloud maintenance and subscription revenue. up from 40% at the same time last year. We see this as a strong endorsement of our SaaS offering and more holistically of our sustained value to our customers. I also want to take the opportunity to highlight our strengthening partner ecosystem. We committed to investing in developing a world-class strategic alliance program and we've seen excellent momentum on this front in the form of co-marketing, accreditation tools and training and supporting resources. All of this is translating into positive new SaaS account acquisitions and expansions, with 50% of new logos in fiscal 22 having been partner influence, a significant jump from 22% just two years ago. Our customer base continues to expand across verticals. Throughout the year, we have secured several meaningful add-on bookings as platform rollouts expand across the customer base. Some notable wins announced this year include Australian retail chain Politix, distributor American Woodmark, and McLeod Health in South Carolina. We have also added household brands in the healthcare space, automotive industry, apparel and footwear industry, and we continue to expand our relationship with one of the world's largest cosmetic retailers. The accelerated market opportunity has been most prominent in the healthcare sector. where we have seen significant new opportunities for us to win new business with both new and existing customers. Texas proved to be the best supply chain solution available to that market, and our SAS approach has made it easier than ever for healthcare systems to buy and deploy efficiently and effectively. We are pleased that we have capitalized on this market opportunity in fiscal year 22, with SAS conversions and new logos, including eight new health systems or IDNs, including the two that joined us in the fourth quarter. I'd like to take just a minute to talk about what adding eight new IDNs really means. Because of how well developed our end-to-end offering is in the healthcare market, there is greatest value to our customers to invest in our broader suite of solutions. As a result, our healthcare customers tend to represent a substantial lifetime value, whatever that first engagement looks like, from the warehouse to the OR suite. What sets us apart from the competition is that we can uniquely deliver value exactly where an IDN is struggling the most, and then expand on that value progressively through our relationship with that customer. So these eight newly signed IDNs are our first touchpoint, but they represent so much more. Between them, there are about 50 hospitals, more than 400 OR suites, and over 12,000 hospital beds. Collectively, they spend over $3.8 billion on medical and surgical supplies annually and over a billion dollars in pharmacy supplies. And we have proven solutions that control and optimize that spend. When we welcome a new IDN into the Texas fold, we start to collaborate with that IDN's leadership to deliver the full value of our end-to-end supply chain platform, selling into other areas of their logistics operation over time. Those eight IDNs that signed on with Texas in fiscal 22 will continue to show their value as long as we continue to deliver ours, as we have with longtime partners like Mercy Health, Parkview Health, Orlando Health, and others. Looking at this from an overall perspective, with our new bookings this fiscal year, our total health care customers alone now provide care at roughly 100,000 beds and record over $170 billion in total revenue. To put that in perspective, that's twice the revenue of FedEx and more than half of the total healthcare spend across all of Canada. With every dollar that moves through these health systems, there is a business case for optimization and supply chain sits at the very center of that discussion. Retail has been undergoing a bit of a renaissance where digital shopping and in-person shopping have converged into this new blended commerce model where consumers expect to be able to shop anywhere and get their purchases how they choose. Traditional retailers are ill-equipped with legacy technologies to effectively orchestrate that blended commerce model, and this is driving investment in new software that is capable of handling this level of complexity. The complex distribution market remains a consistent source of base account revenue with positive momentum towards SaaS conversions. In addition to a national US government organization, New bookings have underscored our competitive stance with third-party logistics providers, the automotive industry, electrical distributors, as well as traditional distribution organizations. All three sectors are contributing to our performance this year, spanning expansions and renewals by existing customers and new account growth. The pro services slowdown that we witnessed in the third quarter has continued in the fourth quarter, and we expect it to continue into the first quarter. Many projects were impacted by Omicron as executive staff and supply chain staff were hit in large numbers. That is over, but it takes a while for these projects to ramp back up. We are also seeing more of our project work being carried out by our partners. This is what is enabling our SAS revenue to grow at over 40%, while our PS revenue grows at a much slower rate. We are pleased with this development and see it as the beginning of a shift that will lead to a higher margin mix for our business. Mark will now provide further details on our financial results for the fourth quarter and the fiscal year.

Thank you, Peter.

Starting with our fourth quarter results, total revenue was $34.3 million, 6% higher than 32.4 million reported in Q4 of 21. As many of you know, a significant portion of our revenue, about 65%, is denominated in U.S. dollars. As a result, Movement in currency exchange rates has an impact on our reported revenue and growth. During Q4 fiscal 22, currency exchange movements negatively impacted our reported revenue as the value of the U.S. dollar was weaker compared to the same quarter last year. On a constant currency basis using fiscal 22 currency rates, our fourth quarter revenue grew by about 8% compared to the same quarter last year. We continue to experience strong and diverse revenue streams underpinned by a 40% increase in SAS revenue, up from $5.5 million in Q4 of 21 to $7.7 million in Q4 of 22. On a constant currency basis, SAS revenue was up 43% compared to the same quarter last year. Maintenance and support revenue for the three months ended April 30th, 2022 was $8 million. That's down 4% compared to the same quarter last year. There was a one percentage point impact here due to currency movements, but the general decline in the quarter compared to the same period last year is consistent with our shift to SaaS. We expect as current customers migrate to our SaaS offering, maintenance and support revenue will continue to decline over time. SaaS remaining performance obligation, also known as RPO or SaaS backlog, was $94 million at the end of Q4 fiscal 22. That was up 43% from 65.7 million at the same time last year. On a constant currency basis, that growth was 39%. Professional service revenue for the fourth quarter was $12.9 million. That's up 6% from 12.2 million reported for the same quarter last year. Again, currency movements created headwind on revenue growth here, which would have been 8% on a constant currency basis. Professional services revenue was basically flat sequentially from Q3 of this year. In spite of robust backlog and growth in our delivery capacity, we experienced client-side project slowdowns resulting from lingering effects of Omicron, especially as hospital networks have continued to deal with labor shortages with clinical staff. Additionally, we believe we are starting to see the impact of our transition to SAS, which will ultimately, we are starting to see the impact that our transition to SAS will ultimately have on our professional services revenue line. That is, we're seeing a continued reduction in custom development work as customers opt for a more out of the box approach to platform implementations. We are especially seeing this within our healthcare vertical. which is a growing part of our business. We are also seeing, and have been talking about this for some time, growth in our partner ecosystem. This includes partners that are involved in helping to implement our systems. We expect that over time, this will ultimately moderate our professional services revenue growth in the future. License revenue in the quarter was 0.6 million. That was down 46% compared to 1.0 million in the same period of fiscal 21. While this number may continue to be lumpy from quarter to quarter, we expect the general trend of declining license revenue to continue over time, and this is in line with our shift to SAS. Hardware revenue in Q4 fiscal 2022 was $5.1 million, a decrease of $0.2 million compared to the same period last year, and a decline of $1.3 million sequentially compared to $6.4 million in Q3. By way of reminder, we sell primarily third-party hardware to our customers for warehouse operations and in-hospital point-of-use storage and tracking this part of our business tends to be lumpy and revenue recognition here is tied to delivery delivery timing in in in recent past has been impacted by global supply chain issues and we expect this to continue in the near term That said, our hardware backlog remains strong, driven primarily by hospital network point-of-use orders. SAS bookings are reported on an annual recurring revenue basis and increased by 29% to a record $4.5 million in Q4 of 2022, compared to $3.5 million in Q4 of 21, which was frankly a pretty solid comp. SAS bookings were highlighted by the addition of two new hospital networks a new complex distribution customer, and significant base business, in particular with strong add-on business and a migration from our healthcare base. Professional services bookings were 14.8 million. That's up 70% compared to 8.7 million in the same quarter last year. This is up sequentially from 9.3 million in Q3 of this year. And this highlights, again, the lumpiness and impact of timing on reported quarterly bookings. As I indicated last year, last quarter, we still like bookings as a metric because over time we believe it provides a good leading indicator of business performance and growth prospects. For the fourth quarter, total gross profit was 15.1 million. That was down 4% compared to 15.7 million in Q4 of 21. Our license and hardware gross profit contribution was the main driver of this decline. As a percentage of revenue, Gross margin was 44% compared to 49% in the same quarter last year. Let me unpack that gross margin decline a bit. Foreign exchange accounted for about one percentage point of the decline in the quarter compared to the same period last year. Combined SAS, maintenance, support, and professional services gross profit for the three months ended April 30th, 2022 was 46% compared to 52% in the same period in fiscal 21. The non-foreign exchange-related portion of this decline was primarily from lower professional services margins, as existing delivery capacity was underutilized during the quarter. This resulted mainly from the timing of project rollouts, as noted previously. Professional services backlog remained solid at 33.4 million at April 30, 2022. Excluding the impact of foreign exchange, SaaS maintenance and support gross profit margin was down slightly from the prior quarter as the company continued to add investments to scale the business. License and hardware gross profit margin decreased to 32% from 36% in the prior year quarter. This decline was primarily the result of a revenue mix driven by lower license revenue, which is of course in line with our shift to SaaS. Switching now to our expenses for the fourth quarter, operating expenses increased to $13.8 million. That's higher by $0.7 million, or 6%, compared to $13.1 million in Q4 of fiscal 21. Operating expenses increased compared to the same quarter last year, primarily as a result of our expanded investment in sales and marketing. Importantly, research and development expense in this particular quarter benefited from a $0.6 million federal non-refundable scientific research and experimental development tax credits generated in prior periods. Moving on to net profit, net profit for the quarter was 2.6 million or 17 cents per fully diluted share compared to 2.0 million or 14 cents per share for the same period in fiscal 21. Net profit was positively impacted in the three months ended April 30th, 22, as a result of the recognition of approximately 1.9 million net deferred tax assets and the recognition of $0.6 million gain on a remeasurement of a lease liability. The latter resulted from our decision not to renew an expiring office facility lease. Adjusted EBITDA was 1.7 million in Q4 of 22. compared to 3.9 million in Q4 of 21. Net profit and adjusted EBITDA were both negatively impacted by an unfavorable foreign exchange impact of approximately $0.7 million in the quarter. From an investment standpoint, we believe our existing professional services capacity is adequate for the near term. We believe that our investment in sales and marketing put us in a solid position to grow as productivity continues to improve, and expect only moderate increases to sales and marketing expenses in the near term. Our investment in research and development during the fourth quarter will impact Q1 of fiscal 2023, but we expect investment to moderate beyond that point. Turning now briefly to our results for the full year, fiscal year 2022, our total revenue was $137.2 million, up 11%. compared to $123.1 million in the same period last year. That's up 16% on a constant currency basis. SAS revenue for fiscal 22 was $26.9 million, up 41% from $19.2 million in fiscal year 21, and up 47% on a constant currency basis. Our SAS bookings for the year are up 25% to $11.9 million, compared to $9.5 million in fiscal 21. I just want to point out, and we take a lot of pride in the fact that this is another year of very strong SAS revenue growth and record SAS bookings. Our net profit for fiscal 22 was $4.5 million compared to $7.2 million in the same period last year. I noted above the positive impacts on the current year net profit from some tax accounting and lease obligation accounting, foreign exchange movements had a negative impact. of approximately $5.2 million on profit and adjusted EBITDA compared to the same period last year. Adjusted EBITDA was 10.1 million in fiscal year 22 compared to 16.2 million for the same period last year. Finally, we ended fiscal 22 with a strong balance sheet position. On April 30, 2022, we had cash and cash equivalents and short-term investments of $43.2 million. compared to $45.9 million at the same time last year. And we had debt of $8.4 million compared to $9.6 million at the same time last year. Cash provided by operations was $4.9 million in fiscal 22, and our DSOs or day sales outstanding in accounts receivable was 49 at the end of 22, compared to 47 at the same time last year.

I'll now turn the call back to Peter to provide some outlook comments. Thank you, Mark. Sorry about that.

I had my mute button turned on. Texas enters fiscal 23 with a strong balance sheet and robust backlog and sales pipeline. On the healthcare front, our own pipeline is providing us with all of the data we need. Between the growing acceptance of our point of view solutions and the failing grade of many existing hospital supply chains demonstrated during the pandemic, our market space is definitely showing indicators that they are ready to invest. Turning to converging distribution and to understand the scale of the market, you have to consider the massive transformation currently underway. The digital adoption is here to stay and consumers now expect that supply chains are modern and connected. And so in fiscal 23, we plan to leverage the market opportunities that are emerging as a result of this accelerated digital transformation. We see a growing pressure in the market for strong cybersecurity, and we feel well positioned to answer the call for heightened sensitivities and demands in this area. This is an area where we will continue to invest. In summary, I want to highlight the key themes for fiscal 23. First, We will continue to maintain a laser focus on expanding our SAS revenue model. Second, we will continue to deepen our partnership ecosystem. This is key for us to scale rapidly into North America and the international markets. Third, we will continue to expand and refine our distribution and omnichannel business platforms to service evolving needs in both of our healthcare supply chain and converging distribution market segments. Across our markets, we will place emphasis on customer success. We have long stood by the philosophy of customers for life. And a big part of that formula is to deliver value fast, stay connected, and iterate on the value delivered. With that, we will open the call up for questions. Thank you.

Thank you very much. And if you'd like to register a question, just press the one pulled by the four on your telephone. Your three-tone prompt to announce your request. If question has been asked to draw your illustration as the one, pull by the three. Once again, I see one for any questions or comments. One moment please for our first question. And we'll get to our first question on the line from Andy Nguyen from Raymond James. Go right ahead.

Thank you, Mark. My first question is on the addition of new IDNs. Given the investment you guys made into the sales team What's holding the addition of new IDN from accelerating at a passive pace?

I mean, a lot of it is really just the speed with which IDNs move. I mean, we have a, you know, our pipeline in the healthcare space is up by a very significant margin to where it has been at any time in the past. We're very excited by what we see in that pipeline. Hospital networks generally move slowly. You know, I can tell you there's one account, for instance, that gave us a, you know, congratulations, you're the selected vendor letter back in, I think it was November. And we're still working through contracts. So there's just a general, you know, it's a very cautious, conservative sector. And so there's quite a significant time lag between the growing opportunity in that market, our growth of our sales team to grab a hold of that opportunity and, you know, the time that they actually, you know, come through to contract. But so, I mean, I think that's the primary reason. I mean, there is a certain factor in this market, too, that, you know, as we often discuss with our board, there's this question of how fast do you expand the sales organization in this market? You can't You can't push the market to go faster than the market is inherently willing to go. We want to continue our evangelism in the market, promoting what we can do with supply chains and promoting the gains, but until boards are ready to actually move and commit money to it and so on, you can't move that faster than a certain pace. the events in the market over the last couple of years, we're certainly seeing that resistance fading away. And we think the bottleneck is really more now on the contractual side.

Thank you. And I just have a quick follow-up on the staff booking. So what percentage of healthcare contribute to the staff booking of 4.5 in the last quarter?

Yeah, it was significant. It was for the year, And it was approaching 70% healthcare. 68, I think, is the number.

Okay. Yeah. Thank you. Thank you, Peter and Mark. I'll pass it on.

And in the Q4, it would have been a significant number as well.

Thank you.

Thank you very much. We'll get to our next question on the line. This is Nick Agostino with Allure Chain Bank Securities. Go right ahead.

Yes, good morning. Sorry, just jumping on that IDN question from the previous analyst. Peter, what's your comfort? I think in the past you said that you think you can get up to 20 IDNs over the next year and a half in terms of new add-ons. That would suggest, obviously, a sizable increase, let's call it, for fiscal 2023. Just giving your comments on the momentum, the bookings on the hospital side, and the fact that they're coming back post-COVID, or at least hopefully post-COVID. Are you comfortable with that type of target over the next year and a half?

Yeah, I would say... we are i mean you know that's obviously that's quite a number we'd be you know over a year and a half you'd be looking at sort of moving from you know two a quarter to three and a bit quarter uh to get uh you know 20 accounts done in 18 months um and you know certainly at this point i mean anything you know sort of things can change times can change uh you know etc but certainly based on what we're seeing in our pipeline that looks very doable um we have uh You know, the expansion we've done with our sales organization is working. Some of these new accounts that are coming in now are being brought in by some of the new account executives that we've added over the last couple of years. So it's not sort of the same, you know, the original team doing all the delivery of contracts. So we're seeing that benefit beginning to kick in. And, you know, as I mentioned earlier, we've never seen a pipeline like this one. measuring a pipeline precisely is sometimes tough just because when a pipeline is poor, people's natural optimism tends to make them score accounts perhaps a little higher than they should. And when a pipeline is really full and really active, they tend to be almost more cautious about calling it. So it's sometimes hard to be overly precise about it. But I would say both qualitatively and quantitatively, this is the most exciting pipeline we've ever seen in healthcare. We're pretty happy with where it's at.

And I would add on to that, Nick, that, well, new IDN networks is definitely the game plan and the folks, et cetera. We did experience some very nice, interesting expansion of our healthcare base, you know, in particular in this last quarter. But even over the course, you know, over the course of the year of the healthcare bookings that we did this year, of the bookings we did this year in SAS, 68% were healthcare. And roughly half of that was expansion of existing customers in healthcare and a migration of an existing customer from on-prem to SAS. So there's a lot of movement happening in there that isn't just a new IDN network.

Okay, I appreciate that color. Just going back to the hardware sales and stuff like that, I think, Peter, you alluded to supply chains having somewhat of an impact on these deliverables. In prior quarters, you had alluded to supply chains having a minimal impact. Just wondering if the supply chains are starting to have obviously an impact on your business

and maybe give us some an idea as to maybe the revenue impact that you probably would estimate for this current quarter yeah mark would probably be able to give you a better number there yeah yeah yeah so let me think um nick the the supply chains are the the issues are real there and and and some of it's around you know the third-party hardware that we that we order from suppliers and then we're sort of bound by the delivery timelines of those suppliers. And then we also have the proprietary technology that we sort of get some parts and have fabricated and delivered to, you know, for in-hospital, you know, point of use measuring and tracking. And the parts on some of that stuff are taking longer to get a hold of. The lead times are still long. So that is kind of extending out, you know, extending out the revenue picture there. It's been a bit lumpy in the last couple of quarter quarters. Like if you look at the last few quarters, you know, it's been hardware revenue has been, you know, over 6 million. You know, this last quarter was closer to 5 million. And I think, you know, in the next quarter, if we look ahead and it's a little bit hard to hit because, you know, you're subject to not only supply chain side delivery stuff, but also just the timing of when we're actually going to, you know, ship to customers. But I think some number that's sort of closer, you know, maybe closer to 4 million next quarter is, is kind of what we have in line of sight. I don't think it'll be lower than that, but it's in that sort of zip code.

And would that be, I guess, a bottom type run rate until things improve? Any visibility there?

I mean, I think so. Again, it's kind of hard to call. I think so. But if you look at our backlog and we're making orders for this stuff and we kind of kind of start to understand the lead times. They tend to move around a little bit, but I think so.

Okay, and then just one other question and maybe just a quick follow-up. It's just staffing. Obviously, you guys have to keep adding to your healthcare sales force and stuff like that and just give it all the market typically. Are you able to staff uh, specifically on the sales side, also on the R and D side at the rate that you guys are wanting to see? Cause I think in the past that was, uh, it was your staffing at a slower rate. Is that improving in any way?

Yeah, Nick, in fact, like in Q4, we basically caught up. Like it was amazing. I mean, we ran the first, we ran from May to December. uh, sort of low on heads in a variety of areas. I mean, we needed professional services people. We needed R and D people. We were, I mean, right across the board, it was hard to hire staff. Uh, that wind shifted massively in mid January. Uh, and in sort of late January, February, March, April, we pretty much caught up. Uh, and it's one of the things you see reflected in the expenses for Q4 that we just released is that, you know, the, um, the expense, both on the service side, as far as sort of the cost of it sold as well as on the, you know, R and D and other areas that are part of OpEx, uh, you know, it sort of caught right up to where we, we felt we needed to be. Uh, and that's why we sort of included some indicators in the, in the press release that, that we think we're kind of at a, you know, I mean, because some of those people joined during Q4, you don't have the full, uh, expense run rate shown in Q4. you know, that'll more show in Q1, but we're really feeling that by and large, we have the heads we need for the year in front of us. You know, we may end up adding some more heads towards the end of the year. We're still going to continue to grow the marketing side, the sales and marketing side of the house, because we think the opportunity right now is, you know, is really, really strong. So we want to continue to grow the sales and marketing side, but you're really going to see a moderating in the growth of the OPEX and pro services expenses this year compared to last.

Okay, that's good color. Everything all ties in. And just one last quick question. I'm not sure if you called out earlier, but what was the partner contribution, whether it's on wins or whatever the case is, if you call that out?

Yeah, we did, Nick. It was 50% of the new SAS wins in the year were partner-influenced. And I think you'll see we put up the investor deck last night or this morning too. And the partner influence in the pipeline is about 25%. Okay.

Okay, great.

Thank you.

I'll pass the line.

Thank you very much. We'll get to our next question on the line. It is from Maxim there in Cormac Securities. Go right ahead.

Hi there. Thanks for taking my question. I first wanted to start off on the strong performance you've been having on the healthcare side and the progression of the ARR from healthcare. So I was wondering if you can give any color on how you see that progressing and where you see that plateauing as a percent of total ARR.

Yeah, that's a tough one. I mean, the beauty to health care, of course, is that it's such a defined market, right? So we know we're targeting about 300 networks. We're now around 50. We think we can grow that to 100 within the next few years. And beyond that, we don't see any reason why we couldn't get to 150. But as you look at that, that implies kind of at 100% penetration rate growth. you know, you'd have a maximum sort of market size. I mean, the 10 is 600 million, but you know, we're never going to get a hundred percent of the town. So, you know, maybe you can get to 300 million. So there's, there is some ceiling on that at the same time. There's no question it is on fire right now. And it is growing very quickly. It's driving the growth. It's dominating our pipeline. And, you know, looks like it will continue to be a larger and larger piece of business. I think just in the last year, it's grown from, what Mark, 36% of SaaS to 40% of SaaS. Am I getting that right? Yeah, I think it was even sub 36, just under 36 to now 40%.

Yeah. Yeah.

So I would not be at all surprised if within 12 months or so it gets close, very close to the 50% mark. So it's got some real legs under it. The other markets, the much larger general distribution, complex distribution market, in effect has no ceiling on it, but is moving more slowly at this point in time. A lot of interest, a lot of tire kicking, a lot of top of funnel activity. But a lot of those players are still very distracted by current supply chain challenges, you know, via toxic containers, goods stuck offshore, goods not coming out of China. I mean, they're having trouble sourcing the product, moving the product, and handling the product. So that, you know, while ultimately that drives changeover to new system, in the middle of a crisis, it's very distracting. So that's what we're seeing in those different markets. uh but you know coming back to healthcare uh i would certainly expect that it will uh it will dominate our growth for the next uh at least the next year and probably beyond gotcha okay that's helpful and i guess just a follow-up on the complex distribution side uh how have you seen customers respond to the new warehouse management system that you guys recently launched uh By that, I'm sure you're referring to Omni. We're seeing a lot of interest in that. It's always the challenge when you want something brand new and that's quite different. I mean, that's a system that is aimed at micro-fulfillment, this sort of small warehouse with the objective being that you can deploy it in less than 60 days, deploy at a very low cost. It's incredibly intuitive, so it does not require that much training, and the setup as well is much simpler. So it's aimed at a very particular market. The challenge, as always, is no one wants to go first. So we're in discussions with a number of different players around potentially being the first account. We've got over in Denmark, of course, they've already got it deployed in a number of sites, but on the North American side, They're saying no one wants to be first. We'll see how that goes. Certainly from an investor standpoint, though, I would not anticipate that product having much effect on our overall revenue numbers for another couple of years. I mean, we've got to make some noise in the market on the marketing side to stir up interest in it and begin to drive opportunities to it. But from an investor standpoint, I would say it's a couple of years out before it gets interesting.

Okay, great. Yeah, that's helpful. And I also just wanted to ask on the services side and the capacity. So I understand you're pretty happy with where the capacity is at now, but I just want to know how much spare capacity there was in the quarter and how you see that revenue line kind of plateauing as services start moving properly through the pipe.

You want to take that one, Mark?

Yeah, sure. So, I mean, I think I think, you know, we had, um, if you look at our PS, uh, revenue line in the last, um, you know, in the last few quarters, you'll see it kind of up flirting around with, uh, kind of at the, almost at the 13, um, $13 million a quarter, uh, level, you know, it was, it was over 13 and Q2, it was 12, nine and Q3, it was 12, nine again and Q4. And, And, you know, when we were at this sort of 13 million level, we were building capacity there. And in Q4, you know, we were underutilized. So that kind of gives you a baseline that we've got excess capacity beyond 13 million. Now, can that capacity drive $14 million of revenue in a quarter? Yeah, it can. You know, can it drive 15? Yeah, that's probably getting pretty stretchy and unsustainable. But that's kind of how we're, you know, that's kind of how I'd scale those numbers.

Great. Yeah, that's helpful. I'll call it. That's all. And I'll pass the line.

Thank you very much. Our next question on the line from John Shaw with National Bank Financial. Go right ahead.

Thanks. And good morning, guys. It sounds like the PS revenue will have a lower contribution to the total revenue in the future given the SaaS transition as well as the partners. But at the same time, it also sounds like there's the honor utilization capacity within your service delivery team. So how should I think about this honor utilization issue in the future and how much would it be a drag to your gross margin? Mm-hmm.

Yeah, I think it's good. It's a good question. And I think in, in, in Peter sort of hinted at that and his comments earlier a bit when he, when he talked about, you know, what the, the slowdown and, and, and, and sort of our pipeline burn I'm sorry, our backlog burn on professional services and Q4 and that, you know, we sort of see that lingering in the, in the Q1. And, and I think if we think forward into Q1, I think it's, it is going to have an impact. on margins there. And then the question from there becomes, well, how quickly does the, you know, does the speed of the burn of the backlog pick up? We certainly expect that what we went through in sort of in Q3 and Q4 and sort of into Q1 here, the slowdown, we expect it to turn around. Starting to see the initial signs of that. But Q1 is going to be, there's going to be continued drag there on margins because we're not going to adjust capacity in the short term. We've got backlog. There's no reason to adjust capacity downward. We're going to need it. It's a question of when we get there. And, you know, if we look at, you know, if we look down the road into Q2 and Q3, we definitely expect to, you know, kind of be getting to those levels where the capacity gets, you know, the utilization levels start to climb back up.

Okay. The other question I have is I understand the staff bookings are strong this quarter. So how much of this is actually driven by the new logos versus the wallet share extension? And when I think about a growth for the next year, should I expect wallet shared extension to be a meaningful driver of growth?

Yeah, I mean, I think in the last quarter, the question was just about the quarter, right? I mean, in the last quarter, more than half of the bookings were, were, were, were based. And if you look at kind of what our year looked like, um, you know, sort of, sort of looked like that as well. Um, you know, I think the numbers were for, you know, in the, in the 40, in the, in the mid, in the high forties for, um, for new and, and balance was, uh, was based in terms of, uh, in terms of bookings in Q4 was a little, even a little bit more skewed, um, towards, uh, towards base. We had, uh, you know, we had a pretty significant migration in the hospital network business. And I think that the two vectors are both very important. I mean, there was a kind of a balance in Q4. And when you get a chance to see the deck that we put up, you'll notice, and Peter mentioned, you know, our healthcare business actually expand. You know, we actually, the penetration level in our base actually jumped up, um, a little bit markedly in the, in the quarter and like 27%, uh, penetration in our base now versus, uh, I think the number we reported last quarter was something like 22%. Uh, and that's coming from that, you know, that, that non new IDN that's coming from base business add ons and, and expansion. So there's still a lot of headroom, you know, we've only had two, um, uh, hospital networks, um, migrate so far in, in the course of our SAS, um, lifetime, you know, the last sort of three plus years. Um, so there's more there to migrate and, and, and clearly the footprint is, um, you know, is, is in our existing base is, you know, almost 60, whatever, almost 70%, well, actually slightly over 70% of the footprint is still a white space in our base.

Okay, that's great, Collier. And my last question is related to the inflationary environment. So for your existing contract with your customers, is there a price adjustment factor so you can bake in some of the increased renewal?

Yeah, typically when we contract, we do have the ability to increase pricing. In our legacy maintenance business, That is sort of an annual, usually an annual adjustment. Those contracts renew annually, and that's where they're subject to price change. A lot of the standard contracts that we have on that legacy business allow for, you know, CPI or CPI plus price increases. So they're kind of linked to inflation. In the SAS world, we tend to, you know, we tend to have longer term contracts, three to five year contracts. Those we tend to lock in for those three to five year periods. But then when they renew, they're certainly subject to price increases.

Thanks, Mark. I'll pass the line. Thanks. Thank you very much.

We'll get to our next question on the line. It's from Deepak Koshal with the BMO Capital Markets. Go right ahead.

Oh, hi, good morning, guys. Thanks for taking my question. I'll try and keep it brief. You know, it's year-end, and you sometimes give us the breakdown of total revenue between healthcare and complex distribution. I was wondering if you had some metrics, because what I'm trying to get at is, you know, what's the natural growth rate that you're seeing across these two different divisions overall on a revenue basis?

Yeah, so we do split in the deck, Deepak, and welcome to the call. We do split on the deck that split of ARR between complex and healthcare. And, you know, that kind of moves around over time. But because the legacy base is, as you know, kind of skewed towards complex distribution, the sort of growth in healthcare has been a little bit muted in terms of how that overall percentage of ARR increases towards healthcare. We actually saw quite a pop in this last quarter because a big chunk of that 4.5 million ARR was in fact healthcare, a big chunk of it. So that ARR number, the percentage of our business, of our ARR business, that's healthcare, moved from 36%, like Peter mentioned last quarter, to like 40%. So healthcare is like now 40% of our total ARR. So the new business is definitely... and including base business migrations and add-ons is skewed towards healthcare. If we look at overall growth rates in the year, DPAC, I mean, you know, healthcare was growing, and this is scaled at the level of bookings. You know, healthcare was growing at 45% against complex distribution, sorry, against total, which was growing at about, let's see, it was about 27%, Yeah, 27%, 29%. So healthcare is definitely leading the growth.

Got it. Okay, that's helpful. And then, yeah, I know it's been a while since I've been on a conference call, but certainly not since we last spoke. And since we did last speak, the macro environment has changed quite a bit. And I know through COVID, you know, the priority of supply chain spending for hospitals increased.

the recession change that or you know how are hospitals thinking about inflation or potential recession impacts to spending does it change the priority of where supply chain investments stand or does it change the just the amount they're willing to spend and what are they what are they kind of signaling to you guys i mean so far to be back what we're seeing and i mean this is what i say so far that i'm talking i'm giving sort of pretty real-time feedback you know as opposed to i mean most of what we discuss in these colleges as of you know last quarter april 30th whatever whereas you know, this relates to sort of what is happening in the field right now. And what is happening in the field right now is there's an urgency in healthcare to get new supply chain systems selected and implemented like we've never seen before. You know, I think the macro environment is causing a lot of distraction in the general distribution market. But in the, you know, in healthcare itself, you know, it seems to be just go, go, go. And, you know, I've mentioned a few people. I was at a conference at the end of April where I, it was a healthcare conference with a lot of IDNs there. And that conference hadn't been held for a couple of years, these due to COVID. But it was fascinating for me. I talked to, you know, quite a number of IDNs while I was there at the conference. And every single network I spoke to was either a current Texas customer, a had us in their plans for the next couple of years. So it was just pretty exciting. I left that conference going, wow, okay, this industry is on the move. And, you know, at this point we are in, I mean, that's a small sample set. I probably spoke to 25 or 30 IDNs at the conference, but we were literally in the plans or already in the business of every single one of the networks. So it's pretty exciting in healthcare right now. The macro environment is,

doing nothing to slow it down at this point okay that's helpful for peter and mark thank you um i just have another question to follow up on margins um you know obviously on the gross margin side you know nick shift and evolution changes the gross margin um but when i look at the ebitda side you know your loved one fiscal 22 was about half of what it was in 21. the portion of that's in your control you mentioned investment are you expecting to recover that portion fully in fiscal 23 or expected to gain on that, gain more leverage on that in that OpEx portion spend in 23? How are you kind of thinking of it? And do you guys target a specific, when you budget for the year, are you targeting a specific spend level or a margin level? How should we think about your process around margins?

Yeah, I mean, there's obviously a lot of factors involved in what you're describing. I mean, in some ways, fiscal 22, sorry, fiscal 21, that's the comparable, was a bit of a windfall year because of the fact that U.S. currency was, you know, where the Canadian buck was trading at, you know, including our hedge effect, it was almost, it was around $1.40. So that just gave us a you know, a great, you know, extra padding on the margin side. This past year that just ended, in some ways, the exchange rate was more typical. It sort of averaged, what did we average, Mark, 125-ish?

Yeah.

I think around there. So that was a much more typical year. And, you know, so as we look ahead into the future, we're seeing, we expect that number to you know the ebitda margin to slowly climb back during the year uh but we're continuing to say that we want to have you know our overall philosophy has not changed and that is that we want uh we want to lead with organic growth we want to invest for organic growth we want to continue to pump money into sales and marketing and scale the business as needed uh And yet we want to maintain reasonable EBITDA so that we're not consuming investor cash in the process of growing the business. We're sort of funding our own growth as we go. It's hard to depend on the markets. The markets are up sometimes, down sometimes. We don't want to be in a position where we've got to dilute at a bad time. So that continues to be the strategy. Some years we come in above that threshold. rough guideline as in fiscal 21 some years we come in below that but that continues to be the philosophy we run with um it you know if we look at what we see in the in the headlights right now it it calls for continued investment in growth and marketing i mean in sales marketing but it it uh on the um operating side specifically cloud operations uh and to some extent R&D, we feel like we're approaching a point where we could moderate that growth. I mean, R&D growth will definitely be very moderated this year. We feel like we did a lot of catch-up in Q4, so we expect R&D spend to be relatively flat this year. And, you know, cloud ops is... Based upon exiting run rate. Yeah, based on exiting run rate, yeah. And CloudOps, we've invested a fair bit in during this past year. We know we've still got some more investment to do there, but we think that kind of by the end of this fiscal year, that Cloud Operations Group will be more or less where it needs to be. And at that point, you should start to see more benefit on the margin side, you know, as a result of growth. So, sorry, in fact, if I sound evasive, I mean, we don't give precise... you know, margin targets out to the market. But, you know, philosophically, it's focused on growth and maintain enough EBITDA margin to fund the business.

Yeah, no, that's very helpful. I understand that in the philosophical answer and the business approach is what I was going after. So that's helpful. You do have excess cash on your balance sheet. In the past, it's kind of been earmarked for acquisitions. If macro risk is increasing here, do you change that view or do you accelerate that view? How should we think of the excess cash?

I mean, we continue to see it as both a cushion for security in these markets. I mean, we need to, you know, I mean, customers that select this for their SaaS platform, I mean, in many cases, we are their core system of record. They need to know that we're rock solid financially here for the long haul. So we continue to see it as a bulwark against sort of some of the craziness going on out there right now. But at the same time, we continue to see some of it as dry powder for acquisitions. I mean, we've been watching the market, the private equity market, which is who we tend to compete with for acquisitions. And I mean, in some ways, the pricing still hasn't adjusted to what the public markets have gone through. It feels like there's often sort of a six-month lag from what the public markets do to what the private markets do. So it seems like pricing is still fairly high on the private side, but we still expect that to come down and get more in line with public markets soon. So we continue to watch that, and we'll move if we think there's some reasonable pricing out there.

Okay, that's great. Well, thank you again for taking my questions. I'll pass the line.

Great.

Thank you very much. We do have another question from the line of Stephen Lee with Raymond James. Go right ahead.

Thanks. Hey, Peter. I'm hoping you can reconcile something for me. So I heard you say it's go, go, go in hospitals. But at the same time, you did mention there's a lot of inertia. Can you reconcile the two? Thanks.

Great question. I've been trying to reconcile those two for about five years, I think. There is a lot of focus from a board level in the hospital space to say we need to implement new supply chain platforms. We need to modernize our approach to supply chain. We need to save the millions of dollars that are currently being wasted in supply chain. you know, et cetera. So a lot of that pressure is there. It's now coming from the boards. It used to be the other way around. If I go back two years, it was the management team starting to pressure the board to invest more in supply chain. Now it's the boards putting pressure on management teams to hurry up and get new supply chain platforms in place. So that's that sort of urgency that we see in the market. At the same time, nothing happens. Like by and large, this industry does not know how to do anything fast. uh so as much as there's urgency there the the contracting process takes a while the security process they all have you know audit teams to audit the security platforms make sure it passes the test uh you know that and then there's the teams that have to look at interfaces they only move at a certain speed so so that's why we end up seeing this swell in the pipeline swell in activity sales team very busy uh and yet the you know the actual growth in bookings as of yet, is not that extreme. I mean, if I look at the numbers, I mean, our staff bookings actually grew pretty nicely last year over the prior year. And given that a much higher percentage of it was healthcare, we actually saw our healthcare bookings grow at a pretty substantial clip over the prior year. And we certainly expect that to continue. So we are seeing You know, I mean, as we mentioned, our SaaS revenue up, you know, 47% in constant currency and so on. So we're seeing the growth that's coming through. But certainly, it's still not at a level that the activity in the pipeline could deliver. And so we're still seeing that as, you know, future gain that we expect to begin to come through soon.

That's helpful, Peter. And this dynamic impacts more PS than SaaS revenues, correct? Like you can start recognizing SaaS earlier, is that right?

Well, yeah, that dynamic, though, affects the, you know, to some extent, the contract closing, which then does affect the SAS revenue, right? So, you know, this is a lot of this activity I'm talking about, you know, the security reviews and all those kind of things, those all happen prior to even contract signing. So that does hold up the SAS revenue. You know, once the contract is signed, then, yes, the SAS revenue kicks in. And at that point, you know, the contract sort of the ponderous speeds a lot of these networks move at affects the professional services revenue more than the SaaS at that stage.

Okay, that makes sense. And then last one, Mark, I heard you, there's no plan for price increases on SaaS. So this is even for those coming up for renewal, say this year?

No, I think, you know, we have the opportunity to increase SAS pricing upon a renewal, but a lot of our contracts that we do on SAS, Stephen, are three to five year contracts. So we don't have a lot of them actually that are coming up for renewal right now. You know, we've only been selling this stuff for, you know, a little, you know, sort of three plus years. So we, and most of our contracts are five years. So There's not a ton that are coming up for renewal right now. The ones that are, we have the opportunity to increase them, and we expect to do that.

Got it. Thanks.

Thank you very much. And we have a number of questions on the line. So thank you very much, everyone. That does conclude the Coffee is Coffee today. We thank you for your participation. I ask you to disconnect your lines. Have a good day, everyone.