Pivotree Inc.

Good morning. Welcome everyone to Pivotree's second quarter 2023 conference call. Before we begin, Pivotree would like to remind listeners that certain information discussed today may be forward-looking in nature. Such forward-looking information reflects the company's current views with respect to future events. Any such information is subject to risks, uncertainties, and assumptions that could cause actual results to differ materially from those projected in the forward-looking statements. For more information on the risks, uncertainties, and assumptions relating to the forward-looking statements, please refer to Pivotree's public filings, which are available on CDAR. During the call, we will reference certain non-IFRS financial measures. Although we believe these measures provide useful supplemental information about our financial performance, they're not recognized measures and do not have standardized meanings under IFRS. Please use our MD&A for additional information regarding our non-IFRS financial measures, including for reconciliations to nearest IFRS measures. Now I'd like to turn the call over to Pivotry CEO, Bill DiNardo.

Thank you, Dennis. And good morning, everyone. Thanks for joining us on our second quarter 2023 conference call. With me today, as usual, is Mo Ashour, our Chief Financial Officer. As we normally do each quarter, we've published a CEO letter in conjunction with our earnings results that's available on our website, filed on CDAR. You'll find a lot of my comments today will be reflected in the CEO letter that I tend to circulate. I've also mentioned in the past the interim quarterly letters are going to be shorter than they have been historically, and our focus is really going to be on a larger annual assessment. But again, I give some insights and some color in some of these results. So, We delivered our third consecutive quarter of positive adjusted EBITDA in Q2, despite some of the revenue being down from the previous quarter. The team is highly focused on driving those operating efficiencies in the business, and we took some additional restructuring actions this quarter and identified an additional $10 million in annualized cost savings. To be clear, identified and took action on in Q2. This will give us some room to invest in our product initiatives while driving the additional operating efficiencies to come in Q3 and Q4. And again, we have stated this since mid last year that we remain committed to driving a model of sustained profitability as we exited last year and continue it into this year. And again, the key word there was sustained and we are delivering on that as expected. Our focus this year is to continue to adapt to these uncertain economic conditions, ensure that we're right-sized to remain on a path to sustain that profitability. But the other key factor we've articulated since the start of the year is being able to invest in the new products and the recurring revenue streams. Our ARR of 43 million makes up nearly half of our revenue. And because there's some seasonal consumption trends in our ARR, we also look at it on a trailing four-quarter or 12-month basis. And by that measure, it's the highest it's ever been at 45 million. We continue to work closely with our customers over periods that span years. And we've been transitioning our PS work that we do at the beginning of a relationship into ongoing managed services. And all of our processes and efforts this year in particular have shifted increasingly towards recurring and product-based revenue. But I've been consistent in my communication around the macroeconomic headings that we've seen. And in the second quarter, we saw this particularly impact the time to close new logos. Existing customers continue to form a really strong foundation, but particularly on the professional service side of the business, the new logo closings have continued to be delayed. Now, while professional service revenue in the second quarter is down from the record high in Q2 of last year, managed service revenue has grown in each of the last six quarters and was up 7% in the second quarter. Now, looking at our bookings, the areas that are showing signs of progress, again, are in the recurring revenue in the managed service. Our sales pipeline had the largest increase in MRR and product-based opportunities. And our ARR bookings of 1.9 million is the best quarter since Q4 of 2021. Now, this is being driven largely by supply chain managed services and the recent accelerated uptake of our control tower solution. A number of folks and some of our investors and analysts have been able to participate in our product days, and they can see the progress that's being made on this front. And we're starting to see that show up in both the pipeline and the bookings. What really pleases me is the demonstrated creativity in the go to market strategies with our teams. They are leveraging the existing customer base to introduce these products. And really what for us is an important factor isn't just the revenue, but the insights that come from customer driven roadmapping. And Control Tower is a great example of that. We've had some really quick uptake in our existing customer base. We just landed a brand new retail logo, a big global brand on managed service. And they've been consuming Control Tower and look like they're going to be a major part of roadmapping that product with some already really insightful initiatives that are coming out with that product. So, again, you can see the linkages between how we get a customer started with us and our ability to introduce the products and start to scale the products with them. The pipeline of qualified opportunities in this area doubled in data and supply chain between Q1 and Q2. And we expect Q3 and Q4 to continue the progress on AR bookings and product expansion. Now, on the professional services side of the house, we've seen continued impact with deal elongation, lengthier reviews, and new logo softness that's impacting the enterprise software and services industry. We've also seen a change in behavior around the procurement process. Again, we've been talking about these delays, but one of the things we've really seen, again, is this taking longer to sign contracts. They stay in or turn into an extended procurement decision. But also because we are trying to introduce product and recurring revenue into the mix, it's taking a little bit longer in the explanation and the contracting around those. Now, the other observation, and we had highlighted, I think in our record booking last year, a very large client that gave us four or five quarters of visibility on PS. At that time, we thought this might become a new trend. We're seeing in this environment, it's actually mostly the opposite. We're seeing our clients are breaking the projects up into smaller measurable projects, essentially following more of an agile development principle with a shorter time to benefit. So that, you know, Q4, very large PS bookings seem to be more of an anomaly than a trend. And the trend we're seeing now is more discovery phases, more proof of concepts, smaller chunks. And as a result, it's taking a little longer to get to the larger contracts. What I will tell you, though, is, you know, we did finally start to see some of the things this past quarter that had been in those discovery phases start to sign their larger contracts. So, you know, again, the trend we're seeing is seven figure contracts are being preceded by six figure discovery phases. Those are profitable phases. It's not that they're money losing, but they are smaller contracts initially and successful completion leads to the bigger contracts. We actually probably have our highest number of discovery phases and proof of concept phases going on right now than we've seen in our history. Again, I said this earlier, we're seeing our existing clients continue to do work with us, and this will set the stage and the foundation for a return to growth. Again, we link some of the new logo delays to, again, some of the market uncertainty. And as the market continues to regain confidence and budgets open up, we expect to see the new logo wins. It's not that there are no new logo wins. In fact, we had a terrific new logo in Q1. It's the quantum of new logos that has been down versus previous quarters. Again, I mentioned previously the number of proof of concept and discovery phases. We actually are embracing this process because we believe that it is the pattern of behavior that we will see as we make the shift towards product. There is very much a show me mentality when it comes to buying software these days. And again, I think that show me mentality is also starting to happen in some of the PS work that we're doing. So again, this is not a bad thing for us. It's a bit of a transformation. It changes the way we manage our sales process and the way we demonstrate value faster. I think these are all good things for long-term health of both our business and our clients. But we are working with the right clients and getting the right initiatives. And we've seen this process play out over the last couple of quarters with some great extensions. Good example of that is our Psycho Bunny win last year. They started with a small project and since become one of our larger customers and are working with all three of our business units and leveraging a lot of the products that we've been talking about. This is a really good example of building deep relationships and intimacy on professional services and being able to use that to develop product roadmaps on how to best serve our customers beyond just the professional services. We saw this proof of concept, particularly in commerce, and we've highlighted, you know, that's one area that's been slow to recover for us. But that dynamic of POCs, I mean, they probably have the greatest number of discovery phases and POCs going on right now in the business. And a lot of their contracts really are these six figure discovery. Make sure the requirements are right phase. But they are linked to quite a large number of seven figure contracts to take these projects through completion. So there's a little bit of a pig in a python for our our commerce team. And it's been a number of these projects that have been sitting on the five yard line as we call that. As we start to see that open up, I think we're going to see the turnaround that we've been expecting in commerce. A number of these actually are also recurring revenue and next generation managed services. Again, I think you'll start to see over time some of the products that we've been building like Control Tower are finding their way into our broader managed services portfolio. In data management, we had four cross-sell wins in the quarter where we sold managed services to professional service customers. We also had sequential growth in data bookings, and it continues to be an area of relative strength for us. So, again, data is continuing to be a strong category for us. It's also the biggest category for using our enabling technologies. We've talked for some time about the importance of enabling tech, whether that's cloud, which has been on a rapid growth trajectory for many years, something we use extensively with our clients, machine learning and AI. Our data management team is probably the most advanced of the group using machine learning and generative AI in solving customer problems. So again, good progress, lots of promise in that category. Where we've seen the most recent momentum around product is really in supply chain. As I mentioned earlier, we had several ARR wins for our new control tower solution, and it was connected to a number of managed service wins. So again, there's real progress with supply chain on product. Folks who've been to our product day can see these are the traditional products you can touch feel. They look like enterprise software. They're not hard to communicate what it is that they do. And as a result, This team is having some great success. We're getting more at-bats and more opportunities to, again, evolve their roadmap to long-term success. And look, I think one of the things that folks have questioned for a while about, are we a PS business? Are we a managed service? Are we a product? We're really trying to demonstrate with clarity that the PS business is a critical part of our business. It drives revenue. It drives gross margin and contributes to our cash flow. But more importantly, it creates client intimacy and it gives us the information and the knowledge we need to affect our product roadmap. And so for us, it's critical that part of our business is healthy, but not the least of which is for the product insights we gain from our client intimacy and our client relationships. So again, this is important. We're going to continue to push for success in that business, but ultimately it's to drive our product wins and our product successes. And again, I think we're seeing the evidence that that is in fact working. Now, these two charts will point to the positive long-term progress that we've made with our strategy and how we intend to grow underlying value through the economic cycle. Our focus on gross profit and gross profit per share is a result of continued optimization on labor. And we've been setting a foundation to expand margins as our digital products gain traction. Again, a number of the changes that you saw us make in Q2, you will again see play out in our Q3 numbers, particularly around gross profit and obviously driving the EBITDA. Now, we've continued to maintain positive EBITDA for the past three quarters, and our commitment is to get a place of sustained profitable growth. The transformation we've been making on the way we operate, we believe is now reaching the more optimal level relative to the size of the business and the growth rate. The key now is to start to generate that growth in PS again as we're growing the product side. So you'll notice we had approximately $800,000 of restructuring charges impacting our reported EBITDA, but the annualized impact of that restructuring is closer to $10 million in annualized savings. One of the things I'm not going to do is give you guidance on just how much of that is going to stay the bottom line. Because again, our strategy is produce our own cash in order to invest in our products. And again, as our products are starting to gain traction, we are looking at investing more into them. We have much more control over the cash flow in that and the IRRs than, as you'll hear from my M&A update, than we can get from some of what we're seeing in the acquisition marketplace. So Mo will talk more about those financials in a moment. But again, this continued improvement for profitability is an absolute necessity of what we would consider the phase one to our phase two of product investment growth. I don't have a lot new to report for you on M&A. We continue to be active with a number of opportunities in the pipeline. I will tell you we've modified our M&A approach in order to help identify more closeable opportunities. So what I can share with you is it hasn't been for a lack of interest in the pipeline. We've had a number of deals that we've moved through various stages of diligence, but inevitably the gating hurdle that we keep getting caught at is getting to a valuation that makes sense for us. and for the counterparties. And so part of the shift is how we find the right deals that are closable. And we are modifying some of our tactics in that regard. M&A continues to be a key part of the mission and vision. We look at it as a way of filling strategic elements of our product offering set. I think you will see less of acquisitions in professional services that aren't specifically related to some of the product initiatives that are underway. Again, the key, though, is finding closable deals. The good news continues to be we have cash on our balance sheet. We have a great line of credit and a good relationship with our financial institutions that will see that maintained. And probably most importantly, articulated through the last couple of slides, EBITDA production is paramount to controlling our destiny in this regard. So, you know, continuing to produce EBITDA and cash flow makes acquisitions possible in the future. So with that, I'm going to turn it over to Mo to provide an overview of our financial performance.

Great. Thanks, Bill. So I'll start with the revenue as usual. The blue bar shows the managed service revenue, which has shown steady progress with six consecutive year-on-year growth. It demonstrates the progress that we've made to offset some of the churn and melt that's illustrated with our 89% net revenue retention rate. It points to the solid underlying organic growth we have seen for new managed services and products and includes professional services that are now managed services, which is offsetting the declines of Oracle and Legacy that's still within our business. We are also pleased with the progress we're seeing, as Bill mentioned earlier, the pipeline that we're building in digital products and feel good about the foundation we're building for setting ourselves up for future ARR growth. You can see professional services in Q2 at 12 million, which is down in comparison to the record levels that we set in Q2 of 2022. Some of it is the results of projects being delayed, and some were put on pause to reevaluate some scope. And we also saw a reduced number of new customer, new logo wins, as Bill alluded to, which typically are there and important to replace some of natural ramp down on professional services. The volatility in this environment will likely persist for the second half of the year, as we've been describing. And as Bill said, the qualified sales pipeline remains strong for us. And we continue to remain focused on progressing and converting that pipeline to revenue in a manner that supports our customers in this environment. We go to the next time, P&L. Gross margins were 45.5%, an improvement from the 45% we delivered last year at Q2. Managed services contributed significantly to this, with gross profit margins improved to 56% in comparison to last year's 50%. And we continue to remain focused on optimizing costs and driving more profitable recurring business. Professional services growth margins declined to 36% versus last year's 41%, largely driven by the professional services revenue ramp down and decline, which is obviously resulting in lower utilization rates. With the restructuring and the actions that we've taken in Q2, we expect utilization rates to improve going into Q3 and improve our margins and get them back to the 40% range. Operating expenses were $12.9 million. As you can see on the slide, it includes $800,000 in restructuring, which is compared to a $14.7 million operating expense for the same quarter last year. This affects improvement of $1.8 million, which includes, again, the restructure charge as well. As Bill said, we've identified up to 10 million of annualized cost saving off of the levels we were running in Q1 through various initiatives. Some of that was realizing Q2 to deliver the results to help offset the revenue decline, and we expect additional benefits going into Q3 and Q4 through those initiatives. Adjusted EBITDA was a positive 37,000, which includes a $400,000 FX loss With that FX loss, it's still a year-on-year improvement of $150,000. So while revenue contracted, we have adjusted our costs in a timely manner to continue to deliver positive EBITDA results and the year-on-year improvement. We'll remain focused as Bill highlighted. It is critical for us to continue to manage our EBITDA and free cash flow. Starting with the balance sheet, the primary use of cash in Q2 was related to working capital charges, and there was some catch-up in seasonal payments that typically fall in Q1, but they did move in Q2. This is something we pointed out when we reported our Q1 results last quarter. Aside from this, cash used in operating activity was fairly neutral and includes the charges we took in the restructuring activity. We expect adjusted free cash flow to improve through the second half of the year. We ended the year with $11 million of cash. We have not tapped into our credit facility, and we do not plan to do so until the right assets become available, and we are comfortable generating positive free cash flow, which we believe we're on track to delivering. We are also in active discussions to highlight to renew the credit facility as it approaches maturity in Q4. While the right acquisition opportunities might have been hard to come by to deploy our capital, we believe our stock is trading at a significant discount to its intrinsic and future value. And those that have been following our filings and press releases would notice and would understand that we've been more aggressive in buying our own stock. We will continue to deploy our cash to NCIB at the right discount levels. Year to date, we've acquired over 230,000 shares at an average price of $2.47. So that's just over half a million of cash deployed to the NCIB this year. So I'll turn it back to Bill for a closing summary.

Thanks, Bill. To reiterate what we've said all year, our focus is on the things we can control, and that is to run the business for profitable growth. The team has done a great job in finding ways to operate more efficiently while making the investments that set the stage to grow product and recurring revenue business. And we're seeing the right positive leading indicators here. Customer behaviors have shifted to dividing projects into chunks. The total contract values haven't changed and our qualified sales pipeline remains the largest in our history. So again, the customer need is there. The timing for them to get their approvals and budgets released is probably one of the challenges, but nothing's changed, we believe, from the sector tailwind, which is there's a lot of digital transformation still going on and required for companies to meet their objectives. Through our BU orientation and digital products initiatives, we've strongly positioned to execute against these opportunities and show value at each step. While M&A continues to be part of achieving our mission and vision, we will continue to adapt our approach to find and close the right deals at the right price. And particularly, while our stock is one of the best deals on the market, it always is a challenge in deciding where best to deploy capital. In the absence of those opportunities, as Mo said, we will continue to buy. For those that want to give us their stock back at the kind of prices they're at, we will happily take it back. And at the end of the day, we've been... pretty consistent about the things we have said are important. We're continuing to execute on those things. And I think one of the biggest challenges that's in front of us is the transformation to a product company. And again, I'm really pleased with the way the team is making that transition. It will affect our sales cycles without a doubt, but we're maintaining great customer relationships. We're seeing them be buyers of all the things that we do and giving us great insights and into how we build those products most efficiently and effectively. So I think we're on the right track and I'm excited about the next 24 months of where the business can go. I'm also looking forward to the recurring threat of a recession and everything that comes with it to finally be over so we can get back to more of a business as usual environment. So thank you for taking the time to attend our call and I look forward to updating on our progress next quarter. And with that, we'll turn it over to our analysts for their questions.

Thank you, Bill. We'll now take questions from the analysts. To ask a question, please click on the icon to raise your hand. Our first question comes from Robert Young at Canaccord Genuity.

Okay, hopefully you can hear me. Okay, so I guess the first question for me would just be to dig deeper into, is this delay? Is it pause? Lengthening proof of concept? Are there actually any cancellations like are you you know other than the the legacy oracle atg uh like are there clients that are disengaging or is this really just pause and lengthening

Yeah, honestly, Rob, the reason I'm remaining as confident as I am is we aren't losing deals. I think we are seeing pressure. I think we've seen even deals we've signed where customers have come back and asked to restructure them or to look at different alternatives to break them up. And so I think we're seeing the pressure on our customers is really about justifying spend to the C-suite. So, yeah, I would say some of the big changes, even internally, that we've been working through is training and teaching our sales force around ROI calculations and business case making. You know, for a period of time there, those were not as important to get deals closed. And I would say it's probably now the exception where that isn't being done. Um, you know, even some of the bookings from this quarter past slid into this quarter and we thought would happen quickly. Um, they've come, but they've come even four weeks later than we expected because a CFO or a CEO injected into the process, the business case gets made and it gets approved, but it is, uh, it's so far, all the evidence points to delays and tightening of process rather than cancellations.

Okay. Okay. And then, um, The proof of concept or discovery phase, that isn't a competitive situation where customers are looking at you versus other alternatives. Is this after they've chosen Pivotree as a partner? Maybe you can just explain the dynamic there, like how confident you are that those fall into revenue or it's just timing.

No, I think this is... This is in situations where we've won and been chosen. We're seeing that the first phase is let's do a discovery. Let's prove the things that we've been told as a client in some micro scale form. Give us confidence in the outcome. And I think one of the biggest shifts, to be honest, Robert, is I think we're seeing businesses that are becoming more cynical about promises being made by software vendors, not to solve a technical problem, but to solve the business problem. And I think those are getting harder to be able to demonstrate in proof of concepts. How do we prove that this is actually going to solve the business problem rather than just the technical? The tests in the past might have been, can you finish on time and on budget? Those are increasingly becoming tertiary questions. when you're finished, is this going to do what we think it's going to do? And I think that's part of the extensions. And I think part of that is, you know, software for decades has been selling the promise and has often met, you know, the trough of disillusionment. And I think CFOs and CEOs in this climate are taking less risk on those outcomes. So it's a, it is an extension of show me, don't tell me.

Okay. And then one more for me, and I'll pass the line. The, you said you have a commitment to positive EBITDA. What does that mean exactly? Does it mean you're going to seek cost reduction to make sure you're a positive EBITDA? Or are you saying that the $10 million in cost reduction you've identified this quarter? I think that's brand new. I think you've said that a couple of times. I just want to absolutely confirm that. It's brand new for everyone listening. And what does the commitment mean?

Yeah. So let me just clarify and Mo can jump in because to be clear, like this is an initiative Mo's been working the hardest at with the leadership team consistently to size the business to where we are. I think, you know, we've talked about this in the past. We were sized coming out of the IPO into where we wanted to be and to, you know, build towards profitability. We've said in particularly in this climate, that's no longer acceptable. We have to be sized to where we are. That 10 million, again, I want to clarify, it's not identified. It's been executed on. So we identified it previously. We were starting to execute Q2. We put the full throttle down on we need to get there now. And you see the outcome of that is the restructuring charge. But you can expect that that 10 million is now coming out of the business and an annualized 10 million has come out of the business. You'll see it take effect over Q3 and Q4 as some things are rolling off. But the reality is identified, executed and expect to start seeing it in the results. Mo, I'll let you kind of elaborate further.

Yeah, I mean, our COGS and OPEX essentially was running on a $25 million business in Q1. So looking at our Q1 COGS and OPEX, we've gone through and adjusted that for the reduction of revenue that we saw and to also drive EBITDA and reinvestment back in the net. Off of the Q1 levels, 10 million annualized is coming off through that level of spend throughout this year. I mean, again, a portion of it, you'll see if you take our COGS and OPEX and compare it to Q2, you've already seen we've realized some of that benefit, but it's still not a 10 million annualized. So expect more in Q3 and Q4 as those initiatives close out. They have been identified, actioned, and it's just the timing of when the benefit would start to be realized.

I think the key, Rob, to reflect on this is we've brought the business through one-time changes and a number of process improvements, some renegotiations with vendors. We've brought the business to what we believe is a sustainable profitability level. And the goal will be, regardless of what the revenue outcome is in any given quarter, that we sustain that EBITDA. So as the business grows, we actually think there's not a lot of additional costs we're going to have to push into the business to achieve that revenue growth. You know, the 25, 26 million a quarter level, which means our EBITDA should expand even further. But the reality is we have better levers now and we are being much more disciplined now. around maintaining EBITDA to the revenue levels. So no more, I don't think we're going to see many more one-time large changes, but you will see the business constantly adjust to what is the current revenue posture. Okay, thanks. That's very clear. I'll pass the line.

Thank you. Our next question comes from Daniel Rosenberg from Paradigm Capital. Please go ahead.

Hi, good morning, everyone. My first question was around the legacy business. I know in the past you'd mentioned some people are hanging on and to your benefit longer than expected. Are you still seeing those trends or any changes in behavior?

Yeah, we're still seeing them. And I think the, you know, we've talked about this in the past, Daniel, it's a very long tail. These are what's left in that business is large, complex, generally, you know, billion or multi billion dollar revenue values on these platforms. Some of them have re-upped for another two years. Some of them are moving to cloud. We're getting most of them out of data centers, which will probably, again, extend the life of those platforms. But again, make no mistake, they are transitioning. Probably the best news that we're seeing right now is the biggest and the most important ones are now working with us on the transition plan to us taking them to that destination platform and providing managed services on it. Again, you know, don't want to get way out on our skis, but I expect over the next few quarters, you're going to hear about a number of these customers that are staying with us on MRR, but changing the platform that they're running on. And there's some really good signals in the commerce group that our net revenue retention should maintain decent levels, but on different platforms. And that was always our thesis. But I think we're finally starting to see that come to fruition.

And then on the behaviors you're seeing on the customer front with some delays or longer decision process, is there anything to say about the geographic mix of these customers? US versus Canada versus...

They're North America. And again, remember, most of our revenues are US based, right? The majority of them are US. So, you know, when you look at new logo delays, it would probably be US again. We don't rely heavily on Canadian revenue, but our Canadian clients have continued to be the same Canadian clients for many years. um and uh and are continuing to spend with us we've talked about this in the past too they move the spend you know i think we've seen probably the greatest movement between our bus in some of our canadian customers um but no i i think this these delays we're seeing are primarily us-based um maybe just a couple more for me so on the product pipeline i mean you're you're

It seems to be kind of continuously introducing new features and functions. You know, any early indicators or things you're excited about in the near term or coming down the pipeline on the product front? And then the last one, just one for Mo on the working cap. There was a kind of swing to your detriment on the year over year in that slide you showed. Just how should we think about working cap in the next couple of quarters? And I'll pass the line. Thanks.

Do you want me to start on the working capital bill? You can take the product. Yeah, sure. Go ahead. Yeah, I think this Q1, we fared significantly better on a working capital perspective because we were managing our payables a bit differently. This was catching up. So I think Q2 is an anomaly. If you look at the accounts payable line specifically, that's the one that was kind of anomaly. There was a bit of catch up in there. And we also had the severance payments from last year's restructuring starting to close out and get cleared out as well. So that was really the impact. And I would call it an anomaly in the accounts payable line. And I expect that to stabilize and get closer to a better trend line and connection to our EBITDA and free cash flow metrics over the rest of this year.

On the product side, I would say, Daniel, the one that's got me excited, but again, their early days, is Control Tower. I mean, Control Tower is gaining traction. It's got a low price entry point. The ability to prove value is pretty quick with it. And part of it is just the business insight it can extract from the applications running underneath it. The time to benefit is pretty fast. So part of what we've seen is where we've injected it into relationships and customers start to use it, they are coming back with more requirements and requests, which is helping drive a more insightful roadmap on it. We're actually starting to layer Control Tower into other parts of our business. And all of our BUs are actually seeing Control Tower with the potential to drive the connective tissue between all of our business units. Some of those managed service contracts I was describing, you know, from our Oracle to NextGen switch, Control Tower is becoming a part of that conversation as well. So I would say that one holds a great deal of interest into the group. I think it also demonstrates the most capital efficient product realization that we've had in the company. It has not been a capital intensive spend. It's really leveraged existing client relationships and existing team to drive that one forward. In fact, it probably has the lowest invested capital so far. I don't think it's going to stay that way because the early traction we're seeing with it is inspiring a lot of confidence all the way up to the board. But again, just like on our M&A, we're really disciplined on our product stuff as well until we really feel like we've cracked the nut on understanding customer issues and challenges that we're solving. And we see real evidence of uptake and customer driven roadmap. We're being careful about how we throw our investment dollars into product. Great. Thanks for taking my questions.

Thanks, Daniel. Our next question comes from Jesse Pitlack from Cormark Securities. Please go ahead.

Hey, good morning. I think in the past you kind of indicated towards maybe 200, 300 basis points of gross margin expansion because of the larger contract sizes that you were seeing earlier this year. With kind of a shift to bringing things up into these proof of concepts and discovery phases, does that outlook change now?

I'll let Mo answer it because he's a beast on managing these things.

Yeah, I don't know if that's a compliment or... Yeah, no, Jesse, I think we're still focused on the 200 basis point improvement. So I think that's still on track. We're still heading there, obviously, with the clear line of sight on how we can improve our Q2 results given the PS margins. I don't feel concerned that we can improve it over the remainder of the year. So still on track. That doesn't change it. Obviously, longer-term contract does help with visibility and managing utilization, but the team still has a path to continue to accelerate and drive that improvement for us.

Okay. And then maybe just one other question. Just in terms of the delays you are seeing and some of the changes in behavior, is it pretty uniform across your customer base? Are there any similarities, differences based on who your customers and customers are?

Ask that question again. I want to make sure I answer it correctly, please.

Just kind of wondering if based on these new behaviors and the delays, is it pretty uniform across all your customers or is it really kind of dependent on who their customers are?

You know, that's a really good question because we've been plowing through our customer profiles and looking for similarities and differences. But, you know, I can think of now a few examples in discrete categories, whether it's B2B, B2C, you know, in a variety of different industries. And I would actually say it's a fairly consistent behavior across all of them. I'll give you an example, Jesse. We, in our data business, with one of our biggest B2B well-known distributors, have had a consistent delivery over many years with them. We actually plowed through their data requirements that were expected to take a year. We completed them in about seven months. We did more than they expected. A lot of this has to do with our enabling technology. Project finished. And then the team went to go and get budget to bring forward to continue moving through. And they got paused. They were told, you're going to wait until the end of the quarter. You delivered this year's. We're not looking for any more right now. And they couldn't free the budget up. And I think that, you know, as an example of we over delivered in some areas, you know, our customers are excited about what we're doing, but they're still getting held back at upper levels around everybody's need and drive to improve profit. So I think this has been a universal behavior change in the industry. Everybody is focused on bottom line and it is changing people's buying patterns and behaviors constantly. across all industries. I don't think anybody is not subject to a stronger profitability lens. So, you know, our take is no, I don't think it's their end customer. I think it's, you know, who's in charge of budgets and that's increasingly now CFOs on even technical decisions.

Okay. That's interesting. Thank you.

Thanks, Jesse. Our next question is from John Chow at National Bank. Please go ahead, John.

Good morning, guys, and thanks for taking my questions. Regarding your ARR bookings this quarter, how much are they tied to the professional services customers and how should we think about the future conversion from PS revenue to MS revenue?

Yeah, I think part of what you can't see in the numbers is some of the conversion is install base. And it's not going to show up in big revenue and big bookings right now. And almost all of those product initiatives are linked to an existing customer taking a new service from us like Control Tower. And so you won't see that as quite as evident. But the existing customer base is having a big impact on our ability to get our early stage products getting used. So it's a very strong link on leading indicators. But again, I can tell you just in one example, a customer's got five control tower installs and they are looking at a 30x increase on the installation base in the coming months. And that was a managed service and partially professional service implementation that led to that. So strong linkage in our opinion, John, and again, strong evidence that our initial strategy of use PS to get the customer, get them on to manage services and then product overlays. You know, it never happens as fast as we would like, but we are seeing evidence that that strategy is in fact working.

Okay, thank you, Bill. And one more question. How should we think about your partner ecosystem at this point and any opportunity we can expect from that space?

I think that's a terrific question. And you saw us highlight a number of things that have started to happen too. So as we become more product oriented, new channels are opening up for us. We've got a pretty strong relationship with AWS now. Our products are starting to move into their ecosystem and their marketplaces. We are developing joint go-to-market strategies with them. We're actually pulling some of our other ISV partners into a collective go-to-market attacking certain verticals. So it is changing the way we're trying to sell as well. Again, our history has relied heavily on our ISV partners bringing us into deals. We're now much more focused on changing that dynamic of identifying market needs and opportunities and going direct to them. I think it's going to change the kind of partner relationships we have. So an AWS is a really good example, but we're also in negotiations with a number of the large consulting firms who tend to have the kind of customers we're interested in. And now we have unique products to go to market with them. So early days, again, lots of try before you buy, lots of POCs with partners. and getting them better acquainted with our features and capabilities. So I think this is the evolution. It's going to take a little time before they're very productive for us, but we're seeing what you would expect to see in the early innings, interest, engagement, POCs, and trials together.

Okay, thank you so much. I'll pass the line.

Thanks, John. Thank you. I don't see any further questions, Bill. And just for the listeners on the call, if there's anybody that does have future questions for us, please contact us at investor at PivotTree.com. And we'd be happy to get back to you. I'll turn it over to Bill to close.

Thank you again for joining our second quarter earnings call. Let us know your feedback after the call. We're always happy to continue improving what and how we report. And we really look forward to bringing forward some good news in Q3. And we'll see everybody then. Be well.