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.