TECSYS Inc.

Good morning everyone. Welcome to TXC's third quarter fiscal 2023 results conference call. Please note that the complete third quarter report including MD&A and financial statements were filed on CEDAR after market closed yesterday. All dollar amounts are expressed in Canadian currency and are prepared in accordance with international financial reporting standards. Some of the statements in this conference call, including the question and answer period, may include forward-looking statements that are based on management's beliefs and assumptions. Actual results may differ materially from such statements. I would like to remind everyone that this call is being recorded on Thursday, March 2nd, 2023, at 8.30 a.m. Eastern Time. I will now turn the conference over to Mr. Peter Barrington, Chief Executive Officer at Texas Please go ahead, sir.

Thank you. Good morning, everyone. Joining me today is Mark Bentley, our Chief Financial Officer. We appreciate you joining us for today's call. Now, before getting into our third quarter results, I wanted to take a moment to welcome Shannon Carl to the position of Chief Marketing Officer. Shannon comes to us with an impressive reputation at organizations like SAP, IBM, and PricewaterhouseCoopers. As we scale up our sales and marketing efforts, we're excited to have Shannon on board and look forward to the positive impact she'll have on our marketing pipeline and demand generation activities. Our company began fiscal year 2023 with strong growth underscored by solid SAS bookings, and that momentum accelerated in Q3. This quarter, SAS bookings at 5.8 million set a new record. Bookings in the quarter span both new and base accounts, the latter of which included six significant SAS migration and expansion deals. highlighting the ongoing value that our existing customers see in the Texas platform. We also added another healthcare IDN. In fact, we have had 15 healthcare networks either buy into or expand their engagement with Texas SaaS so far this fiscal year. Our SaaS offering is proven to be a system of choice for organizations grappling with supply chain complexity. I'd like to take a moment to summarize some of the key announcements that we made during the quarter on partnerships as well as a product launch. and then the key events of the third quarter of fiscal 23 and results of operations. Mark will then walk us through the financial results in more detail. And finally, I will comment on our outlook, followed by Q&A. Since our last results call, we made two notable partnership announcements. With respect to healthcare, we announced our certified integration status with Workday, an important milestone that supports the work we do at customer sites like Prisma Health, South Carolina's largest health system, and Corwell Health, the Michigan-based merger of Spectrum Health and Beaumont Health. With respect to warehouse automation, we also announced our partnership with SVT Robotics, a key technology partner that provides integration software which will give our customers broad access to new and emerging robotics solutions as these technologies become more and more important to be competitive in industry. We also officially launched our Warehouse in a Warehouse e-commerce fulfillment solution designed for the converging distribution market. This is a warehouse management solution that helps run an e-commerce fulfillment business inside a wholesale or distribution warehouse already running a more traditional pallet and case-oriented software package. We are pleased to share that we have implemented this model for a global luxury cosmetics retailer whose existing ERP wasn't agile enough to handle their growing e-commerce business. There are a couple of key indicators I'd like to highlight, which are contributing to our continued track record of stable growth as a SAS organization. Last quarter, we highlighted an important milestone when our SAS revenue became our most dominant recurring revenue stream, representing over half of total recurring revenue. We're now reporting a 36% increase in SAS revenue for this quarter compared to the same quarter last year. Based on bookings in Q3, we expect SAS revenue to exceed $10 million in Q4, another interesting milestone. And we feel like this is just getting started. On top of that, our gross and net retention levels remain very robust. Our SAS ARR bookings are up 152% in the quarter and up 68% for fiscal 2023, year-to-date through three quarters compared to the same period last year. Due to strong bookings in the quarter, our professional services backlog at $38 million is up about 29% from the same time last year. We believe that this is another leading indicator of where revenue growth is heading. With growing SaaS backlog and many major delivery projects in the backlog, we are seeing traction for the Texas value proposition across all industries in which we do business within a market that is highly engaged. Texas is proving to be among the best cloud-based solutions available in the markets we serve. And we have the people, the products, and the plan to provide what the market demands. Mark will now provide further details on our third quarter and first nine months financial results.

Thank you, Peter. We're very pleased with the strong performance in our third quarter ended January 31st, 2023. Total revenue was a record $38.9 million, 10% higher than $35.4 million reported for the same period last year. Total revenue excluding hardware increased 12% compared to the same period last year, or 10% on a constant currency basis. As many of you know, the significant portion of our revenue, in fact about 68% this quarter, is denominated in U.S. dollars. As a result, movements in foreign currency exchange rates have impact on our reported revenue and growth. We continue to experience strong and steady revenue streams underpinned by a 36% increase in SAS revenue. up from $7.0 million in Q3 2022 to $9.5 million in Q3 2023. On a constant currency basis, SAS revenue was up 33% compared to the same quarter last year. SAS remaining performance obligation, also known as RPO or SAS backlog, was $128.3 million at the end of Q3 fiscal 2023. That's up 63% from 78.5 million at the same time last year. On a constant currency basis, that growth was 58%. Maintenance and support revenue for the three months ended January 31st, 2023 was 8.4 million, up 2% compared to the same quarter last year, or flat on a constant currency basis. Maintenance and support revenue generally follows the trend of license revenue, and we expect that as current customers migrate to our SaaS offering, maintenance and support revenue will decline over time. Professional service revenue for the third quarter was $13.6 million, up 5% from $12.9 million reported for the same quarter last year, or 2% on a constant currency basis. As we've noted the last few quarters, we're 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 more out-of-the-box approach to platform implementations. We're also continuing to experience the increased collaboration of our partner ecosystem in helping to implement our systems. While we expect that over time these factors will continue to moderate our professional services revenue growth, we had a very robust professional services bookings quarter, which I'll get to in a second. As we discussed in our published MD&A, we expect total services revenue, so that's combined SAS, maintenance, support, as well as professional services, ranging between $32.5 million and $33.5 million per quarter in the short term. License revenue in the quarter was $1.1 million compared to $0.9 million in the same period in fiscal 22. As we've stated before, with most of our software bookings, now SAS, We expect license revenue to decline in general over time. In the current quarter, we did book one new logo license deal. We certainly don't see this as a trend. And we had some user count expansions on the base. Hardware revenue in Q3 fiscal 2023 was $6.4 million flat compared to the same period last year. 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 timing. That said, like last quarter, our hardware backlog remains strong, driven primarily by hospital network point-of-use orders. Turning now to bookings, SAS bookings are reported on an annual recurring revenue basis. As Peter mentioned, SAS bookings were up 152% in the quarter to a record $5.8 million. compared to 2.3 million in Q3 last year. I would point out that while SAS bookings can be somewhat lumpy due to the timing of quarter deal closings, it's also helpful to look at a longer term period to see the positive trend on SAS bookings. We have been seeing some sustained momentum with SAS bookings up 68% year to date compared to the same period last year. Of course, this is a leading indicator of SAS revenue growth. Professional services bookings were 19.8 million in the quarter, up 112% compared to 9.3 million in the same quarter last year. And that's up 6% year to date compared to the first nine months of fiscal 22. This highlights the lumpiness and impact of timing on reported quarterly bookings. As Peter noted, professional services backlog was a robust 38.2 million at January 31st, 2023, up 29% from the same time last year. For the third quarter, total gross profit was 17.0 million. That's up 12% compared to 15.2 million in Q3 of last year, led by higher gross profit contribution from SAS maintenance support and professional services. As a percentage of revenue, gross margin was 44% compared to 43% for the same period last year. Combined SAS maintenance support and professional services gross profit margin for the three months ended January 31st, 2023 was 47%, flat compared to the same period in fiscal 2022, but up sequentially from 46% compared to Q2 of fiscal 23. We expect to see continued services margin improvement in the coming quarters as the business continues to scale and as we focus development and operational energy on optimizing platform efficiency. In fact, we added a new slide to our investor presentation, which is available on our website, that provides some directional indication of where SAS and combined services margins would end up under certain projection assumptions. As I said last quarter, we see this as a multi-year journey with incremental benefits building over time. Switching now to our expenses for the quarter, Operating expenses increased to $16.0 million, higher by $2.1 million, or 15%, compared to $13.9 million in Q3 of fiscal 22. Operating expenses are up compared to the same quarter last year, primarily because of higher sales and marketing costs and higher research and development costs, including the impact of unfavorable foreign exchange rates. Sales and marketing costs were up sequentially in Q3 on higher marketing program spend and employee-related costs. We expect an increase in sales and marketing costs sequentially in Q4 that will be slightly more modest than the increase we saw in Q3. I'd also draw your attention to another new slide we added to our investor presentation that provides some insight into how we measure sales and marketing efficiency by comparing customer acquisition costs to lifetime value of expected margin contribution. Now moving to research and development costs. Compared to Q2, research and development costs were down slightly in Q3. Q3 actually benefited from a $0.4 million true-up of R&D tax credits and e-business credits. As a result of this and increasing run rate costs, we expect Q4 research and development costs to increase relative to Q3. Net profit for the quarter was $888,000 or $0.06 per basic and fully diluted share compared to $940,000 or $0.06 per share for the same period in fiscal 22. Adjusted EBITDA was $2.8 million in Q3 of 23 compared to $2.7 million in Q3 last year. Net profit and adjusted EBITDA were both positively impacted by a favorable foreign exchange of approximately $0.2 million compared to the same period last year. Turning now very briefly to our results for the first nine months of fiscal 23, our total revenue was $111.2 million, up 8% compared to $102.9 million for the first three quarters of last fiscal year, and up 6% on a constant currency basis. SAS revenue for fiscal year 23 year to date was $26.3 million. That was up 37% compared to $19.2 million in the same period last year. And that's 33% growth on a constant currency basis. Our net profit for fiscal 23 year to date was $1.6 million compared to $1.9 million in the same period last year. Foreign exchange movements had a positive impact of approximately $1.2 million on profit and adjusted EBITDA compared to the same period last year. Adjusted EBITDA was $7.0 million for the first three quarters of fiscal 23 compared to $8.4 million last year. We ended Q3 fiscal 23 with a solid balance sheet position. We repaid our long-term loan in December of 2022. And as a result, we're now debt free. On January 31, 2023, we had cash equivalents and short-term investments of $27.9 million. That was down $15.3 million compared to $43.2 million at the end of fiscal 22. The decrease results primarily from the repayment of long-term debt, seasonal working capital fluctuations, and payment of dividends. I'll now turn the call back to Peter to provide some outlook comments.