TECSYS Inc.

Good morning, everyone. Welcome to Texas fiscal year 2026 second quarter 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. 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, December 4, 2025, at 8.30 a.m. Eastern Time. I would now like to turn the conference over to Mr. Peter Burton, Chief Executive Officer at Texas, please go ahead, sir.

Thank you. Good morning, everyone. I'm joined today by Mark Bettler, our Chief Financial Officer. We appreciate you joining us for today's call. I'm pleased to report second quarter fiscal 26 results with SAS revenue up 22% and total revenue up 15% from the same quarter last year. We also had record adjusted EBITDA in the quarter, which was up 71% compared to the same quarter last year. These results highlight the strength of our elite healthcare solutions and a primary driver of SAS ARR. As indicated in our earnings press release, while facing headwinds from the US healthcare policy environment and government shutdown, as well as uncertainty created by shifting tariffs, we believe these results demonstrate our disciplined execution and the scalability of our business. During Q2, we saw these headwinds manifest in extended decision cycles and elongated procurement processes Against this backdrop of near-term headwind, our SAS pipeline continues to grow and has never been stronger, with our healthcare pipeline up about 60% compared to the same time last year, and with accelerating traction in pharmacy and key markets within general distribution. This quarter, bookings were led by expansions in our healthcare and life sciences business, including hospital networks. We also had an exciting new logo win with a marquee healthcare and life sciences brand, and a migration in our general distribution business in Europe. As we have discussed in prior calls, our migration bookings will continue to become a smaller component of our SaaS ARR growth. Growth will be driven by new logos and expansion of existing customers. This quarter marked an important milestone. Our lead platform is now available on AWS Marketplace. This is an important step in our cloud strategy because it helps shorten the path from interest to implementation. It reduces friction in the buying process and makes it easier for customers to realize value from Texas Elite platform more quickly. It also broadens our reach and strengthens our relationship with AWS, a key partner as we help organizations modernize their supply chain operations in the cloud. During the quarter, we published a case study that illustrates the impact of our solutions. Texas Children's Hospital partnered with Texas to deploy an RFID-enabled, fully automated pharmacy inventory system integrated with Epic Willow. The results have been remarkable with the hospital network achieving approximately $14 million in annual savings, and there is more potential ahead. This demonstrates how we continue to focus our product development and go-to-market efforts on strengthening our competitive advantage as a true end-to-end healthcare supply chain management platform. We're aiding these efforts by a growing portfolio of referenceable healthcare customers whose results continue to validate our approach. Mark will now provide further details on our Q2 results, as well as financial guidance on several key metrics.

Thank you, Peter. As a reminder to everyone, our second quarter ended October 31st, 2025. I'll start with SAS. As Peter mentioned, SAS revenue growth was 22% reaching $19.7 million in the quarter. SAS ARR was 81.1 million at the end of Q2 fiscal 26, which was up 16% from the same quarter last year. Our elite SAS ARR, which is our core product and the predominant contributor to total SAS ARR, grew by 21% over the same period. Sequentially, SAS ARR increased by $1.8 million in Q2 fiscal 2026 compared to prior quarter, As new bookings and the favorable impact from foreign exchange were partially upset by attrition in a small group of non-core customers. In our core elite customer base, we're quite pleased that attrition over the last 12 months was less than 2%. SAS RPO was 240.4 million at the end of Q2 fiscal 26. That was up 18% from the same time last year. Foreign exchange did not have a material impact on that reported growth number. Professional services revenue for the second quarter was up 20% from the same quarter last fiscal year to a record $17 million. Professional services backlog remained robust at the end of Q2 fiscal 2026. It was up 14% compared to Q2 last year. but at downs 10% sequentially from the prior quarter after record level professional services revenue in Q2 fiscal 26. Based on our PS backlog heading into Q3 and general seasonality, we expect Q3 PS revenue to look more like Q3 last year. That was around $14 million versus Q2 of this year. For the second quarter of fiscal 26, Gross margin was 52% up 400 basis points compared to 48% in the same period last year. The key drivers here are increasing SAS margins, as well as strength and professional services margins in the current quarter. Net profit in the quarter was 1.8 million compared to 758,000 in the same quarter last year. Basic and fully diluted earnings per share were $0.12 in Q2 this year compared to $0.05 in Q2 of last year. Adjusted EBITDA was $5.0 million in Q2 fiscal 26. That compares to $2.9 million same quarter last year. On the last 12-month basis through Q2 of fiscal 2026, adjusted EBITDA is up 47%. Turning briefly to our year-to-date highlights, SAS revenue for the first half of fiscal 26 was $38.8 million. That's up 23% from the same period last year, or 22% growth on a constant currency basis. Our total revenue reached $94.6 million, a 12% increase from last year. That was up 10% on a constant currency basis. And if you exclude hardware, overall revenue grew by 14% or 13% on a constant currency basis. For the first half of fiscal 26, our adjusted EBITDA increased to $8.3 million. That was up from $5.5 million in the same period last year. And fully diluted earnings per share for the first half were $0.17 compared to $0.10 first half last year. We ended Q2 with a solid balance sheet. We had cash and short-term investments of $30.5 million and no debt. We used about $2.8 million of cash in the quarter to buy back shares under our NCIB and also paid out about $2.5 million in dividends during the quarter. Additionally, the board yesterday approved a quarterly dividend of $0.09 a share. Turning to financial guidance. We are maintaining full-year fiscal 26 guidance for SAS revenue growth of 20% to 22%, total revenue growth of 8% to 10%, and adjusted EBITDA margin between 8% and 9%. I'll now turn the call back to Peter to provide some outlook comments.

Thank you, Mark. Our current theme this quarter was industry validation. In November, Gartner published its Healthcare Supply Chain Top 25. Texas customers accounted for 10 providers on the list, with two more recognized in the Master's category. We congratulate AdventHealth, Corwell Health, St. Luke's, Intermountain Health, Vanderbilt Health, and all of our customers recognized in the report. And we are honored by their continued trust and partnership as they set the benchmark for supply chain excellence. Also this quarter, for the second year in a row, Texas was recognized as a leader in the 2025 WMS Technology Value Matrix, published by Nucleus Research, a global technology research and advisory firm. The Nucleus report highlighted our expanding influence in healthcare, noting that our solution provides end-to-end visibility and control over hospital and clinical supply chains, supporting centralized inventory management, surgical kit preparation, and automated replenishment. Nucleus specifically praised our commitment to innovation, which remains core to our business model. It's that spirit of innovation that we're continuing to invest in AI, and in particular, agentic AI. Agentic AI has the potential to drive efficiency and business value by enabling greater flexibility, adaptability, and automation, closing the gap between human decision-making and machine execution. This summer at our user conference, we introduced Texas IQ, a unified data layer built on the Databricks data intelligence platform that integrates directly with the Texas ecosystem. Interest was immediate, and several customers have since joined our new product introduction program as early adopters. Our development team is now focused on expanding Texas IQ with new capabilities as we continue to identify priority use cases. We have also advanced AI-driven innovations across our portfolio, including a content pack for point-of-use inventory optimization and enhancements to our mainline platforms, such as the warehouse AI assistance for Elite WMS. This commitment to innovation and continuous improvement sets Texas apart from the narrower solutions on the market. Between continued feature innovation in our Elite solution and the initial availability of Texas IQ, We have a solid foundation for reliable long-term value creation. And so in summary, I want to remind you of our key themes this quarter. Long decision cycles slowed our bookings this quarter, but our pipeline remains stronger than ever, and we're confident in both our fiscal 26 and our long-term outlook. New features and innovation, our availability on the AWS marketplace, and our demonstrable customer success will help us to increase dual velocity. We've continued to invest in our leadership position across the end-to-end healthcare supply chain, and the industry is increasingly acknowledging Texas as a trusted partner. This growing recognition and rising brand visibility position us well to win new business. We're responding to market demand for solutions that connect people, data, and decisions, and our AI-driven Texas IQ unified data platform is set to be a key driver of value and innovation. We believe these pillars will enable us to continue delivering consistent, profitable growth and shareholder value. With that, we'll open up the call for questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. To ask a question, you may press a star followed by the number one on your telephone keypad. If you're using a phone, please pick up your handset before pressing the keys. To withdraw your question, please press the star followed by the number two. Once again, please press the star line to join the queue. Your first question comes from Amir Izzat with Ventum. Please go ahead.

Peter, Mark, good morning, and congrats on a strong quarter. Great. Thanks, Anna. First one is on, I mean, I look at your ARR. It's up 16%, SAS 22%, RPO a nice 18%. It all paints a consistent picture, but I wanted to unpack the ARR ads for the quarter, and I do appreciate that it can move around a lot quarter to quarter. But on the pacing of ARR ads, you know, like is there anything structural that we should be mindful of on the macro sides? and maybe you can give us a bit more color or maybe quantify the non-core attrition you spoke to.

Do you want to take that one, Mark? Yeah, sure. I mean, I would sort of paint the triangulation on that SAS era movement as follows. I mean, there was a meaningful impact from ethics during the quarter, and the way that you should think about that is, you know, we marked that. SAS ARR number at the spot rate at the end of the quarter. So, you know, a lot of our ARRs in U.S. dollars, you know, about 80%, you know, 80% roughly. And that spot rate moved, you know, between 1.5% and 2%, you know, from the end of Q1 to the end of Q2. So that had a pretty large impact. And that was a bit of tailwind there. From the churn side, you know, kind of going the other direction, just kind of help you triangulate there. Like that churn impact was bigger than the FX impact. And I can appreciate you might need to kind of go do some math a little bit to help you triangulate on those numbers. But the point being that the churn number is bigger, more material than the FX impact. And then, you know, in terms of that churn, you know, being driven by non-core product, you know, that was very significant. That was like 96% of the churn in that quarter was from non-core product, which is, you know, why I mentioned particularly in my prepared remarks that, you know, our core platform has really, really low churn, you know, less than 2% of the list. last 12 months. So that's, I think that's kind of the, that's how I would, that's the information I think I would provide here to help you triangulate on bookings. And I don't know, Peter, if you want to talk a little bit about just the more macroeconomic picture of them.

Maybe before we go to Peter, just when you say like it's larger than the FX Are we talking, like, magnitude larger? Like, you're saying the effects impact 1.5% to 2%. Are we talking, like, 3%, 4%?

Well, I'm just saying it's materially larger than the effects impact.

Then maybe, like, on the macro, but, like, can you also give us more detail when you guys say non-core – Like are we talking about customers that just don't fit your sort of ICP that you guys wanted to get rid of or was it driven by the customers themselves? That's non-elite.

First of all, it's non-elite customers, right? It's non-elite. So that's the first point. And the other point is that sort of what we're considering in that non-core group is less than 10% of our ARR.

I'll let Peter speak to the macro.

Yeah, on the macro side, I mean, we kind of commented in our prepared remarks, but I mean, in the U.S. right now, you've got a combination of factors. You've got, of course, tariffs that are generally distracting people in the broader supply chain market. You know, it's the unpredictability of them that's the issue. In a certain sense of the tariffs would become predictable. I didn't take a plan of businesses around it, but as it is, it's kind of hard to plan. So that continues to be just a distraction for the general supply chain market. And then more specifically in the hospital space, you know, at this point, you know, the plan calls for cuts to Medicaid as well as a pretty dramatic reduction in subsidies to the Affordable Care Act. So, you know, people are looking at their health care insurance costs rising by, you know, in some cases for a lower income family, you know, $600 or $700 a month come January. For a higher income family, that can be a couple of thousand dollars per month in rising health care insurance premiums. So, It's very significant. So the hospitals are looking ahead and knowing that, you know, if these people are uninsured, it's not that the hospitals stop caring for them. They'll continue to care for them. They just won't be able to collect on, you know, for services rendered. So it's a challenge for the industry. We saw this happen, this kind of thing happened back in 2016 when there was a threat to tear up the Affordable Care Act and sort of hospital deals kind of went on hold. In this case, they haven't really gone on hold, but they've definitely, careful they're reanalyzing their plans for next year, deciding what to prioritize and so on. So we're in this, you know, interesting position, and believe me, we've been here before, where you have a healthcare pipeline that's rising nicely. I mean, our pharmacy pipeline is up literally 3x over this time last year. We've got a number of situations where we've been notified that we're vendor of choice and they're moving into contract, but the contracting and approval process is more cautious right now. So we're, you know, this will catch up. I mean, we can see the pent-up demand building up in the pipeline. And we can also see, to some extent, some of the political winds starting to shift in the U.S. towards, you know, finding a solution to the funding, the health care funding from government. So we'll see how that plays out. We're watching how it plays out. You know, in the meantime, we continue to grow our SAS revenue in spite of it. So it... We're still looking for a pretty exciting year as we enter calendar 26.

Fantastic. And, you know, as you were speaking to the pharma solution and the pipeline there, and I want to just revisit a question that I asked you three or four quarters ago, and I'm not sure you'll have an answer for me, but among the IDNs that initially came to you for pharma, have any expanded or are in discussions to expand into your broader solutions? I'm just trying to understand the expansion roadmap, if you will, for pharma.

Yeah, interesting question. I mean, there's two of them that are in those discussions right now. Nobody has actually signed up to expand right now, but we've got two potential deals in the pipeline where they started with pharmacy and now they're looking to, you know, expand and add other capabilities. We probably have more, though, going the other way, which are accounts that started, you know, have been with us in the past for general supplies or OR, cath lab, et cetera, that are now in active discussions to add pharmacy. So that's probably the more significant trend.

That's fantastic. Then maybe one last one on the PS side. I mean, you guys, like, have talked in the past about capacity topping out at around $60 million, yet now we're at $17 million. I do appreciate that Q3 is seasonally weaker and appreciate the color that you guys gave, but how should we think about Q4, which is typically a strong sort of PS quarter from a run rate perspective? Maybe you could update us on the headcounts or any sort of planned additions there, or are you guys, like, just driving utilization at pretty unsustainable levels this quarter. Yeah.

At 17, it's kind of toppy. That's kind of what our full out, you know, what our full out team can do. You know, we previously said, you know, we could kind of sustain at 15 to 16. You can always run a little bit hot, but you can't run hot, you know, forever. we're trying to be very, very practical and careful on hiring because when you go to that team, you know, it's pretty inelastic. So we're pretty careful about that. And our expectation is to, you know, maintain the current team. We expect, you know, utilization rates will dip down in Q3 on seasonality and backlog. But we also expect that, you know, Q4, you know, our expectation right now is that utilization is going to increase, it typically does, you know, in our Q4s. And, you know, if we just look at our pipeline and general activity, that's our expectation. We don't expect to be hiring, you know, we don't expect to be adding to that headcount any time in the near future.

Fantastic. Congrats again on the quarter. I'll pass the line. Thanks, Amber. Thanks, Amber.

And your next question comes from Sutan Sukumar with Steeple. Please go ahead.

Hey, guys. Good morning. This is S.A. speaking on behalf of Steeple. First question for me, just maybe to double-click on pipeline growth. It looked like it was strong. I was curious to know how things are going with respect to sales cycles and dual sizes and What changes are you seeing quarter over quarter and over last year? And how that might translate to further pipeline growth, pipeline to building this translation over the second half and beyond?

I mean, the deal cycle, I would say, is, you know, on the pharmacy side, it has been shorter over the last, you know, year or so. Part of it is just the payback in pharmacy is more significant. And in some ways, the upset to existing business model is less. Most of them are already largely running their own pharmacy supply chain. We're just giving them better tools to do it. Whereas often on the general supply side, they really weren't running their own supply chain before we come in with a platform. So there's a lot more change management to handle. you know, right now the combination of some of these macro issues that I discussed with the, you know, U.S. healthcare environment. And add-in, putting this add-in AI is another challenge. You've got, you know, most organizations are now introducing an AI governance committee, which also has to approve any new software platforms and approaches to data management and so on. So we are seeing elongated deal cycles right now. And, you know, hence the, sort of very large pipeline that, you know, on the one hand, it's fun to have a very large pipeline. You know, part of our job is to try to get rid of that pipeline and turn it into book revenue. So those deal cycles are definitely elongated with a combination of distraction in the market and concern about funding next year and some of these other distractions we discussed.

Thank you. Yeah, that's helpful. I guess second question, maybe on pro services and partners in that dynamic, you know, is there any notable difference between your internal pro services capabilities versus deals that may be partner-led?

It would seem not really at this point. I mean, we always see that where one of our partners is involved in a project, you know, the certainty of the win rises and the certainty of timing also rises. I mean, you know, partly just because, of course, what that, you know, typically means is that they're, in effect, already spending money on the initiative. I mean, they're already working with the consultant. They've already got things rolling. They've already got some budget to get going. They've really already committed to do something. So we often see, you know, if we look at our pipeline and we see 25% of the pipeline is partner-influenced, And then we look back and we realize that 35% or 38% of the deals we closed were partner-influenced. So you see the impact of partners on the whole deal cycle. But in terms of are they sort of moving ahead, are they unaffected by the macro environment? No, they're also affected. you know, continues to be some caution around that.

Got it. Got it. Thank you. And just, I guess, to quickly follow up on that, on partners and partner engagement, was that right in hearing that it was 30% deals partner influence or something along those lines?

Yeah, I mean, that number moves around for a bit, right, because we just don't do that many deals. I mean, when you're looking at total SaaS revenue in the range that we're in and total SaaS bookings in the range that we tend to be in, and yet a deal can be anywhere from 400,000 a year of SaaS up to 2.5 million of SaaS. We've seen initial deals that size. So one deal, because we measure on dollars, not on quantities of deals, not on numbers of deals. but on the dollar side. So one deal can swing that number pretty wildly. So, you know, we look at it quarter to quarter, but we also look at it on a trailing 12 basis to try to get a, you know, larger sample set to see what's happening.

Got it. Thank you.

It is right around 30% influence right now.

Yeah. Okay. Got it. Got it. Thanks so much, guys. I'll pass the line. Thanks.

And once again, if you would like to ask a question, you may press the star one on your telephone keypad. And I'm showing no further questions at this time. I would like to turn it back to Mr. Peter Veritan for closing remarks.

Great. Thank you. Thank you for joining us today. And as always, if you have additional questions, please don't hesitate to reach out to Mark or myself. And we will look forward to talking to you after Q3 towards the end of February or early March. Thanks. Have a great day. Bye for now.

And this now concludes today's conference call. Thank you all for joining UME Now Disconnect.