TECSYS Inc.

Good morning, everyone. Welcome to Texas second quarter fiscal year 2024 results conference call. Please note that the complete second quarter report, including MD&A and financial statements, were filed on Cedar Plus after market closed yesterday. All dollar amounts are expressed in Canadian currency and are prepared in accordance with international financial reporting standards. The company has added a companion presentation to today's call, which is available on their website at www.texas.com slash investors. Some of the statements in this conference call, including the question and answer period, may include forward-looking statements that are based on management's beliefs and assumptions. Actual results may differ materially from such statements. I would like to remind everyone that this call is being recorded on Friday, December 1st, 2023 at 830 a.m. Eastern Time. I would now like to turn the conference over to Mr. Peter Brereton, Chief Executive Officer at Texas. Please go ahead, sir.

Thank you, and good morning, everyone. Joining me today is Mark Mettler, our Chief Financial Officer. We appreciate you joining us for today's call. As many of you saw in our results posted yesterday, our company closed our second quarter with continued overall revenue growth, underpinned by 37% SaaS revenue growth. Our SaaS bookings for the quarter were up 34%, and we have a healthy RPO, also up 34% over the same time last year. Our customer count continues to grow, and we've added new lenders in both Canada and the U.S., spanning commercial and government entities. I wanted to take a moment to highlight some key accomplishments in Q2 and how we see them laying the foundation for value creation. If you're following along on our company or companion presentation, I'll be speaking to slide three. Our market position and presence continues to strengthen. Our history of positive recognition from Gartner remains solid and our status as a leader in the health warehouse management system technology by Nucleus Research, earning a spot in their expert quadrant. This independent analysis is yet another validation that the solutions we are bringing to market are valuable to the audiences we serve. When it comes to an enthusiastic customer base, we saw this on full display at our user conference in September. It was our first since the pandemic, and the enthusiasm for its return was clear. We had a record turnout, 40% higher turnout than in 2019. And the number of partner organizations represented at the conference more than doubled, highlighting that the investment we have made in growing our partner ecosystem is bearing fruit. A key highlight was our remarkable lineup of customers and partners. We heard from supply chain leaders at Mayo Clinic, Mesa in North America, at Intermountain Healthcare, among many others. We shared the stage with AWS, Rise Now, Zebra Technologies, and more. and we had the opportunity to celebrate some remarkable milestones during our awards ceremony, where we recognized McLeod Health, Werner Electric, and Texas Children's Hospital. Every session, panel, and keynote at the conference was an opportunity to showcase best practices and innovations. In fact, we formalized our focus on innovation at the user conference with our announcement of the Texas Innovation Lab. R&D has always been a key investment for Texas, representing more than 15% of our annual revenue. We are building on that past investment. With a focus on AI, machine learning, data science, process modeling, and other advanced technologies, this research-driven group is committed to addressing real-world business challenges through co-innovation and rapid prototyping. We are already seeing some interesting use cases emerge in both the general distribution and healthcare sectors. Regarding the healthcare sector, those who have been following our story for some time will know that we are the market leader in North America for health systems and hospital supply chain solutions with an end-to-end value proposition that is second to none. At the heart of our offering is a consolidated service center and industry best practice that Texas largely established with projects in several of the top healthcare organizations in the U.S. The depth of our portfolio in the healthcare vertical means that one new logo carries years, if not decades, of expansion opportunity into base account white space. We are particularly excited by one new white space initiative that is certainly heating up. You may have noticed our recent announcement on Baptist Health. It's a great new logo for Texas and an important new entry for our healthcare offer. Baptist Health is amongst an early tranche of customers who have turned to Texas to transform their pharmacy supply chain. This emerging market has demonstrated problem in managing their inventory. and Texas is uniquely positioned to serve them. Our history has been not to just enter these spaces, but to redefine them, and we believe that the Consolidated Pharmacy Service Center carries that potential. With Baptist Health, RQ Health, St. Luke's Health, and others, we have early momentum in the market, a trusted position in the healthcare sector, and a solid customer base to mine. Early pipeline indications are that there is certainly healthy demand for these solutions. That momentum continued this quarter with a seven-figure base account deal that expanded to include pharmacy. Additionally, with our white space opportunities and new business pipeline in our existing healthcare and distribution sectors continues to show positive momentum. We are seeing excellent activity in our base accounts around conversions, including a large elite ERP SaaS migration deal this quarter. We believe our continued momentum is a testament to our clarity of vision and sustained investment in technology, as well as an obsession with customer success. We also launched a normal course issuer bid this quarter, which we continue to execute to buy back shares at an attractive value. We have confidence in our business outlook, and we believe that this initiative allows us to use excess cash effectively to enhance shareholder value. As we continue to invest in the solutions we sell and the manner in which we sell them, Texas is proven to be among the best cloud-based solutions available in the markets we serve. We have the people, the partners, the products, and the plan to capitalize on these emerging market opportunities. We continue to add new hospital networks and global brands to our repertoire of customers. We are seeing an expanding pipeline of new SaaS opportunities, expansions, and conversions, and we see a very solid path for shareholder value creation. Before turning back to results, I wanted to take a moment to welcome Andrew Kirkwood to our board. Andrew's global leadership experience at high growth supply chain organizations like Blue Day Solutions, Blue Yonder, Red Prairie, and Manhattan Associates will be instrumental in developing our continuing growth strategy. Andrew is based in the UK. I will now hand it over to Mark to provide further details on our second quarter financial results, as well as financial guidance on several key metrics.

Thanks Peter. We're pleased with the sustained performance in our second quarter ended October 31st, 2023. I'm going to start with slide four and talk a bit more about SAS. SAS continues to be a key driver for our growth and we believe the key driver for value creation. Reported SAS revenue growth in Q2 of fiscal 2024 was 37%, reaching $12.1 million in the quarter. At the end of Q2 of fiscal 2024, SAS ARR represents 63% of our total ARR. And recurring revenue in Q2, so that's SAS plus maintenance and support, represented just over 50% of total revenue for the first time ever. Q2 SAS ARR growth was 35% year on year on a constant currency basis. SAS bookings were $3.7 million in the quarter, which is up 34% compared to the second quarter of fiscal 2023. SAS remaining performance obligation, or SAS RPO, was $146.7 million at the end of Q2 fiscal 2024, and that's up 34% from $109.5 million the same time last year. On a constant currency basis, that growth was 32%. So, yeah, we are excited about SAS. Moving on to slide five, total revenue for the quarter was $41.5 million. That's 9% higher than the same period last year. On a constant currency basis, total revenue growth was 6%. I'm going to come back to professional services revenue on the next slide, but first I want to point out the decline here in license revenue, down about $0.8 million compared to Q2 of last year. This is really the back end of our transition to SAS and is an important driver in our year-on-year adjusted EBITDA result comparison in Q2. For the second quarter, total gross profit was up 10% compared to the same quarter last year. That's about $1.7 million of additional contribution in the second quarter. and SAS was the key driver. As a percentage of revenue, gross margin was 44%. That was flat compared to the same period last year. However, combined SAS, maintenance, support, and professional services gross profit margin for the three months ended October 31st, 2023 was 47%, and that was up compared to 46% in the same period in fiscal 2023, and that was in spite of lighter professional services margin. The main component of the increase in gross profit margin was SAS margin expansion, and we're pleased to report that this is tracking as planned. Switching now to our expenses for the quarter, OpEx increased to $18.7 million, higher by about $3.1 million, or 20%, compared to Q2 of fiscal 2023. The largest component of the increase was sales and marketing costs, which included ongoing investment as well as costs related to our user conference in the quarter. Research and development costs were also higher on ongoing investment, despite having benefited from an increase in tax credits recognized in the quarter. Net loss, adjusted EBITDA, and earnings per share in the second quarter of fiscal 2024 were impacted by higher operating expenses, which were partially offset by higher margin contribution. Net loss in the quarter was $340,000 compared to $715,000 net profit in the same quarter last year. Adjusted EBITDA was $1.0 million in Q2 fiscal 2024. That compared to $2.8 million in the same period last year. Relative to the second quarter of fiscal 2023, Despite solid growth in our SAS business, lower professional services and license revenue negatively impacted current quarter profitability, which is a good transition to slide six. Professional services revenue for the second quarter was $12.9 million. That was down 5% from the $13.5 million reported for the same quarter last year. Despite a sequential temporary dip in professional services revenue this quarter due to project scheduling and the swift growth of our partner ecosystem, we maintain a strong backlog. In fact, professional services backlog was a robust $40.3 million at October 31, 2023, and that's up 27% from $31.9 million at the same time last year. We are adequately staffed to drive $15 million plus of professional services revenue per quarter. And our intention is to maintain current staffing levels as we grow into that level of revenue. Turning now briefly to our results for the first half of fiscal 2024, our total revenue was $83.5 million. That was up 15% compared to 72.3 million in the same period last year. and that's 11% growth on a constant currency basis. SAS revenue for the first half of fiscal 2024 was $23.6 million. That's up 40% from $16.8 million in the same period last year, and that's 36% growth on a constant currency basis. Our adjusted EBITDA for the first half of fiscal 2024 was $4.2 million compared to $4.3 million in the same period last year. Basic and fully diluted earnings per share were six cents in the first half of fiscal 24 compared to five cents same period last year. We ended fiscal 2024 with a solid balance sheet position. We had cash and short-term investments of $33.6 million and no debt. Q2 net cash provided by operating activities was $4.2 million. And during the quarter, we used $673,000 to repurchase shares under our NCIB. Additionally, the board yesterday approved an increase in our quarterly dividend to $0.08 a share. Only with respect to financial guidance, and I'm moving on now to slide number seven, as a result of the temporary slowdown in professional services revenue, we are adjusting our short-term adjusted EBITDA margin outlook to provide a range between 4% to 6%, while affirming our adjusted EBITDA margin guidance for fiscal 2025 in a range between 8% and 9%. We are also affirming our guidance for SAS revenue growth in a range between 35% and 37% for fiscal 2024. And we are affirming our guidance for total revenue growth in a range between 10% and 15% for fiscal 2024. Please note that it is our confidence in our rising revenue and margins that is supporting our confidence in rising profit and free cash flow, and that in turn is supporting our decision to fund the NCIB and the dividend increase. I will now turn the call back to Peter to provide some outlook comments.

Thanks, Mark. Texas' stable growth continues through the second quarter. We're seeing widespread buyer intent across our target markets, solid opportunity cycles, and a highly capable sales team with the tools and the talent to capitalize on a market that's ready to invest. Our expanded healthcare sector offering and growing footprint gives us confidence that the healthcare sector will continue to serve as an important growth engine for us. Our converging distribution business presents a significant market opportunity amidst shifting supply chain and a realization that heightened consumer expectations are here to stay. And so after an impressive fiscal 23, we are pleased that the first half of fiscal 24 continues the trend. We are demonstrating dominance in our key markets and seizing on emerging opportunity in growth markets. As we continue to celebrate Texas' 40th year in business, we continue to invest strategically so that we remain at the cutting edge of our industry. Based on these principles and a clear vision of our market opportunity, we believe the remainder of fiscal to continue to grow shareholder value. In summary, I want to remind analysts and investors some key things for fiscal 24 and beyond. First, a sustained commitment to our expanding SaaS revenue model, which will drive changes into maybe deploy solutions and delay customers. Secondly, a continued strategic partnership approach characterized by deeper and stronger alliances. This helps us tap into new opportunities and fuels our scalability around the world. Third, an emphasis on advancing and deepening our healthcare vertical, covering both med-surg and pharma. We continue to solidify our position as the go-to provider for healthcare supply chain solutions. Lastly, a continuous evolution of our distribution and omni-channel business platform that takes advantage of innovative technologies and the power of data, now with the support of our new innovation lab. For the final point, I'd just like to stretch across our markets. by the philosophy of customers for life. And a big part of that formula is to deliver value quickly, stay connected, and then expand on the value delivered. With that, we'll open the call up for questions. Thank you.

Thank you, sir. If you'd like to register a question, please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. Once again, it's 1-4 if you would like to register for a question. Our first question comes from Amir Ezat with Echelon Partners. You may proceed with your question.

Peter, Mark, good morning. Thanks for taking my question. Just looking to get color on the services gross margin, 47.5 is pretty healthy, but it's lower than last quarter's 49.6. Is the read-through for us, this is purely on professional services?

Yeah, absolutely, Amar. You nailed it. And as I mentioned, like in your SAS, yeah, SAS, as I indicated in my prepared remarks, our SAS margin expansion is really on track with our plan.

Fantastic. Then, you know, is there like any color you could give us? the slightly lower like professional services, you're sort of running close to that $15 million capacity than a bit of a dip this quarter. Is there anything for us to sort of think about for the next couple of quarters?

Go ahead, Peter.

I was just going to say, Amber, we see it as a temporary dip. I mean, this happens to us every few years. Like most quarters, you've got Yeah, I mean, typically we're running 50 to 60 projects at a time, right? And typically five or six of them are kind of the big ones. And usually, you know, every quarter you have one or two empty, you know, ending and one or two starting and you don't even sort of see the transition down and the transition up. It seems like every two or three years we end up with one quarter where like a bunch of big projects all end at once. and new projects are just starting up, and you end up actually seeing that dip between these projects. And that's what happened this quarter. We have a number of very large projects starting up. We had a number of large projects that ended, and you end up with this sort of transition that all ended in the quarter. So it will happen from time to time. It creates a bit of lumpiness, but our view is that those projects will be winding up again in the third quarter, and We have full strength in the fourth quarter.

Fantastic. So no real retreat like that. Then just on Mark's comment, I mean, year-to-date SAS, you're at 40% year-on-year. You continue to guide 35% to 37% growth for the full year. So is that a case of you guys building some buffer to your numbers, or are you expecting a deceleration in the second half of the year, or how do you sort of think about that?

Well, I mean, I think if you see our expanding SAS revenue line, you know, it takes more and more bookings to grow that, you know, to grow that, to increase that growth number. We see some really solid opportunity in, you know, in the coming quarter. We've got really, really strong pipelines. So we're, you know, we're feeling good about, we're definitely feeling good about bookings in the quarters ahead. But the impact, if you just kind of model it out, you know, you'll see a significant, you know, significant increase in SAS revenue and landing in that 35% to 37% range. I mean, we think that's the likely outcome.

Okay. You guys have an updated number for us on the cost of the user conference.

I mean, we don't really disclose that number, but if you look at the increase of our overall marketing spend in the quarter, there's rough order of magnitude. There's half a million dollars of costs in that line. There's also quite a bit of travel related to that event that's sort of peppered in throughout the rest of the of the P&L, but that's sort of the order of magnitude.

So that's added up to be half a million that you're talking about? Yeah, yeah. Okay, got it. Because sales and marketing is higher than a million dollars, like quarter on quarter, and I recall last quarter you said it was half a million. So on the EBITDA margin output for the year moving to 4% to 6% instead of 6%, if I were to think about different items that prompted that move, so obviously... Um, the professional services, um, that you spoke to, um, is there anything else that we should be thinking about outside of that?

No, no, that's, that's it. That's the, that's the number. I mean, you know, if we, if we, we had, um, you know, we had 14 million for over almost 15 million, 14.9 million of professional services in Q1. Um, and, and the timing, you know, dip that we had that we saw in this quarter, you know, that's like 2 million lower than that, you know, than, than, uh, than what we're staffed for essentially. Right. So as, as Peter indicated, you know, we, we expect that, yeah, it's definitely a temporary dip. So we're going to be getting, you know, that level is going to be going up in the coming quarters, but you know, we're not going to do 17 million to make up for, for the dip. You know what I mean? So that's, that's coming through the margin.

Great. Thanks, and congrats on some tests. That's awesome. Thank you.

Our next question comes from the line of John Shaw with National Bank. You may proceed with your question.

Good morning, guys, and thanks for taking my question. So, Peter, could you just give us some additional colors on the demand for the pharmacy solution you mentioned in the press release? like maybe how we should think about the nature of those customers, are they existing or new, their size and timing of their final implementation?

Yeah, it is still a developing market for us, so we're having a little bit of trouble precisely sizing it ourselves. What we've seen so far is if we look at sort of what's happened in the last 12 months, we've seen a couple of new accounts and a couple of base accounts adopt the full pharmacy supply chain. So we're seeing it coming from both sides. You know, when we look at the overall market TAM, we haven't yet adjusted our TAM slide to really reflect that. But, you know, it certainly looks as though overall, you know, it probably adds another sort of $300 to $500 million to the TAM kind of thing. And the payback on it is nothing short of fantastic. You know, it's And this is not, I mean, sometimes, you know, when you look at these things, you have to look at sort of some hard payback, some soft payback. You know, it makes people's lives easier. It helps the clinicians. It frees up time for them to spend more time with patients, et cetera. You know, in addition to, you know, some hard savings. On the pharmacy side, there's just a massive amount of hard savings across, you know, 340B price management, you know, reduction in expired product, more astute buying, the payoff is quite significant. And it's in an area of supply chain that a lot of these hospitals are wrestling with drug shortages and need the ability to know exactly what they have and where they have it and be able to sort of utilize it, sort of stretch it to the max kind of thing. So we're still sort of getting our heads around how big it is, how fast it's going to move. But we are very excited about the opportunity in that space. I don't, you know, we've been sort of working away at it for probably five years now. And I got to tell you, by the end of the fourth year, I was starting to wonder if anything was ever going to take off. Well, I think we finally connected all the right dots and have the right, you know, ROI backing to show that this thing really pays off. And we're pretty excited about what we're seeing.

Okay, got it.

so much discussion has been around the healthcare side of the business and we're just wondering if you could just comment on the complex distribution and opportunities in 2024 and perhaps beyond sure that that market you know i mean interesting market you know you know it's a very large market there's uh you know we estimate 12 000 companies in north america in that market for us uh and if that market would you know, definitely hit the brakes through the pandemic. The pipelines began waking up about a year ago at the very top end of the funnel, so there were queries coming in and so on. It began moving into the main part of the pipeline in the spring, and if you look at our pipeline in that market today, it's double almost exactly double what it was a year ago. So it's, it has really picked up. We are just starting to see deals getting to final decision points. So we're sort of waiting to see, you know, is this thing, you know, our board's actually going to improve the spend. There's still a lot of caution in the market, you know, people worried about recession and economic slowdowns and, you know, interest costs are still high and so on. So there are things that would be slowing down that market. On the other hand, Most of them are running 25- to 25-year-old systems that were put in in time for Y2K, and a lot of them are feeling like they really can't wait anymore. So it looks like that sort of dam is about to burst. We're, you know, expecting that to hit sort of over the next couple of quarters. But honestly, the jury's still out on it. Like, until we see boards of directors actually approving new investment in these areas, it's sort of hard to call it. You know, Gartner is predicting a 20% annual increase in this space for the next 10 years. And I think they're right. The market is right for a massive technology renewal cycle. But we're sort of waiting to see. Our actual business in that market is growing quite nicely. You know, if we look at our SaaS revenue, for instance, it's up, you know, significant double digits over last year. activity action plan through yet.

Okay, and my last question is, in terms of the outlook for the PS revenue, how much do you think the upcoming holiday season is going to be a factor where they're trying to project a rebound in professional services in the near term?

Yeah, clearly, it's a good question, John, and that is kind of a seasonal, I mean, there's definitely some seasonality in that quarter, but what we're seeing right now is We expect the number to certainly increase from these Q2 levels because of the dynamics that Peter talked about earlier. It typically isn't that quarter with those holiday seasons, and it isn't typically our biggest professional services quarter of the year. That tends to be Q4 broadly, but we expect Q3 to be moving up from from Q2 levels for sure.

Okay, thank you. I'll stop the line.

Thank you.

As a reminder, if you would like to register for a question, please press the 1 followed by the 4. Our next question comes from the line of Gavin Fairweather with Coremark Securities. You may proceed with your question.

Hi there. Thanks for taking my question. This is Graham. I'm for Gavin. So my first one is back on pharmacy. So can you remind us of the competitive landscape, what that kind of looks like in pharmacy?

And maybe if you have any statistics on early win rates, that'd be really helpful. Yeah, I mean, it's interesting, right? It's very similar at this point to what we've seen across the sort of med-surg and, you know, the whole cath lab, IR, you know, general supplies area of hospitals in that we don't see any competitor that is providing a full end-to-end supply chain. There is, you know, we do see players that offer pharmacy buying solutions. So just, you know, once you know what you need to buy, you know, they provide a portal that allows you to go and purchase the drugs. We also see there are players that just offer forecasting and demand planning specific to pharmacy. And then there's players that offer pharmacy automation. So, you know, dispensing machines and sort of pill counters and bottle fillers and, you know, all that kind of thing. But in terms of an end-to-end platform, it goes all the way from forecasting the land planning through into a central supply areas, you know, central distribution center with the ability to do sort of just-in-time delivery up to hospitals with patient-level doses. We don't see any direct competition at this point. So, so far, and it's early. in the last 12 months, our win rate's been 100%. So obviously we'd like to keep it there. That's really helpful. Thank you. And again, it might be too early for this, but if you have any color on kind of sales cycles in pharmacy, like are they also under one year, which is more to overall health care, any color would be helpful. Yeah, they seem to be under a year. I think part of it is when you actually look at the ROI, you know, I mean, we've seen some of these situations where their five-year ROI looks like it's going to be over $100 million. So when you're looking at that level of ROI, you know, the project takes on some degree of urgency. Yeah, that's helpful. And then just, I guess, the last one, complex distribution. Are there any sort of verticals where you're seeing the pipe strengthen specifically? And if you want to call any of those out. Yeah, probably the area that continues to look the most interesting, and it makes sense in a way because it's a little bit adjacent to our hospital space, but it's drug distribution. The drug distribution market is looking like it may be one of the first ones to sort of really wake up and get moving. it's going to wake back up again. The whole electrical HVAC kind of market looks like it's going to wake back up. 3PL, which is, I mean, 3PL is almost more of a horizontal than a vertical, but it's also looking like it's getting pretty active. But I would say from what we're seeing today, it looks like pharmaceutical drug distribution is going to be the front runner there. Perfect.

And sorry, just one more for me before I pass the line. How many IDMs did you guys add in the quarter? And what's some of the cadence that you guys are expecting for adding within sort of the next couple quarters?

Yeah, hard to call. We added two in the quarter. In terms of, you know, from here, know we keep thinking the number is going to rise and what seems to happen instead is the average deal size rises and the you know the the base continues to you know expand pretty dramatically i mean if you look at our base today i mean we could we could literally stop selling the accounts and just go after the base and and get to our you know probably get to our three or four year goal for saps i mean there's there's literally that much opportunity sitting there in the base But it certainly, if I were to hazard a guess, I would say we're going to continue for the, you know, in the near term, I think you'll continue to see two to three quarter added. You know, it may spike above that occasionally, but I think it's going to be in that kind of range. Thanks so much.

As a reminder, if you would like to register for a question, please press the one followed by the four. And it seems we have no further phone questions at this time, sir.

Great. Well, thank you, everyone, for joining us for today's call. And, Kenny, if you haven't picked it up, I'm not sure we've ever been more excited about the future of this business. You know, the last few years have certainly had their challenges. But as we look at what we see going forward here, I think we're in for a pretty exciting couple of years. So thanks for taking the time to join us. And, as always, if you have additional questions, please don't hesitate to reach out to Mark or I and we will be in touch after the end of the next quarter. Thanks, and bye for now.

That does conclude the conference call for today. We thank you for your participation, and we ask that you please disconnect your lines.