Tecsys Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
December 1, 2023

There are 5 speakers on the call.

Operator

Good morning, everyone. Welcome to Texas Second Quarter Fiscal Year 20 24 Results Conference Call. Please note that the complete second quarter report, including MD and A and financial statements, were filed on SEDAR 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/investors.

Operator

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 1, 2023 at 8:30 am Eastern Time. I would now like to turn the conference over to Mr. Peter Brereton, Chief Executive Officer at Texas.

Operator

Please go ahead, sir.

Speaker 1

Thank you, and good morning, everyone. Joining me today is Mark Butler, 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 2nd 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.

Speaker 1

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 3. 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 healthcare industry is well established.

Speaker 1

Recently, we were included in the inaugural Value matrix for warehouse management system technology by Nucleus Research earning a spot in our 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 the 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 very improved.

Speaker 1

A key highlight was our remarkable lineup of customers and partners. We heard from supply chain leaders at Mayo Clinic, Nissan 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.

Speaker 1

In fact, we formalized our focus on innovation at the user conference with our announcement of the Texas Innovation Lab. R and 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. 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 the consolidated service center and industry best Practice that Texas largely established with projects in several of the top healthcare organizations in the U.

Speaker 1

S. The depth of our portfolio in the healthcare vertical Means that 1 new logo carries years, if not decades, of expansion opportunity into basic 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 offering.

Speaker 1

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 not has been not to just enter these spaces, We believe that the consolidated pharmacy service center carries that potential with Baptist Health, Parkview Health, St. Luke's Health and others. We have early momentum in the market, a trusted position in the healthcare sector, a solid customer base to mind.

Speaker 1

Early pipeline indications are that there's certainly healthy demand for these solutions. That momentum continued this quarter with a 7 figure base account deal that expanded to include pharmacy. Additionally, both 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.

Speaker 1

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 proving to be among the best cloud based solutions available in the markets we serve. We have the people, the partners, the products and the client to capitalize on these emerging market We continue to add new hospital networks and global brands to our repertoire of customers. We are seeing an expanded pipeline of new SaaS opportunities, And we see a very solid path for shareholder value creation.

Speaker 1

Before turning back to results, wanted to take a moment to welcome Andrew Kirkwood to our Board. Andrew's global leadership experience at high growth supply chain organizations like Bluejay Solutions, Louie 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 Q2 financial results as well as financial guidance on several key metrics.

Speaker 2

Thanks, Peter. We're pleased with the sustained performance in our Q2 ended October 31, 2023. I'm going to start with Slide 4 and talk a bit more about SaaS. SaaS continues to be a key driver for our growth and we believe the key driver for value creation. Reported SaaS revenue growth in Q2 of fiscal 2024 was 37%, reaching $12,100,000 in the quarter.

Speaker 2

At the end of Q2 of fiscal 2024, SaaS ARR represents 63% of our total ARR and recurring revenue in Q2, so that's SaaS Plus maintenance and support represented just over 50% of total revenue for the first time ever. Q2 SaaS ARR growth was 35% year on year on a constant currency basis. SaaS bookings were $3,700,000 in the quarter, which is up 34% compared to the Q2 of fiscal 2023. SaaS Remaining Performance Obligation or SaaS RPO was $146,700,000 at the end of Q2 fiscal 2024 and that's up 34% from $109,500,000 the same time last year. On a constant currency basis, that growth was 32%.

Speaker 2

So yes, we are excited about SaaS. Moving on to Slide 5. Total revenue for the quarter was $41,500,000 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.

Speaker 2

But first, I want to point out the decline here in license revenue, down about 800,000 compared to Q2 of last year. This is really the back end of our transition to SaaS and is an important driver in our year on year For the Q2, total gross profit was up 10% Compared to the same quarter last year, that's about $1,700,000 of additional contribution in the 2nd quarter And SaaS 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 SaaS, maintenance, support and professional services gross profit margin For the 3 months ended October 31, 2023 was 47% and that was up compared to 46% and the same period in fiscal 2023 and that was in spite of lighter professional services margin.

Speaker 2

The main component of the increase in gross profit margin was SaaS 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 $18,700,000 higher by about $3,100,000 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 Net loss, adjusted EBITDA and earnings per share in the Q2 of fiscal 2024 were impacted by higher operating expenses, which were partially offset by higher margin contribution.

Speaker 2

Net loss in the quarter was $340,000 compared to $715,000 net profit in the same quarter last year. Adjusted EBITDA was $1,000,000 in Q2 2024 that compared to $2,800,000 in the same period last year. Relative to the Q2 of fiscal 2023, Despite solid growth in our SaaS business, lower professional services and license revenue negatively impacted current quarter profitability, which is a good transition to Slide 6. Professional services revenue for the Q2 was $12,900,000 That was down 5% from the $13,500,000 reported for the same quarter last year. Despite a sequential temporary dip in professional services revenue this quarter due to project scheduling and swift growth of our partner ecosystem, we maintain a strong backlog.

Speaker 2

In fact, professional services backlog was a robust $40,300,000 at October 31, 2023 and that's up 27% from $31,900,000 at We are adequately staffed to drive $15,000,000 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 $83,500,000 that was up 15% compared to $72,300,000 in the same period last year, and that's 11% growth on a constant currency basis. SaaS revenue for the first half of fiscal twenty twenty four was $23,600,000 that's up 40% from $16,800,000 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 'twenty four was $4,200,000 compared to $4,300,000 in the same period last year. Basic and fully diluted earnings per share were $0.06 in the first half of fiscal 'twenty four compared to $0.05 same period last year.

Speaker 2

We ended fiscal 2024 with a solid balance sheet position. We had cash and short term investments of $33,600,000 and no debt. Q2 net cash provided by operating activities was $4,200,000 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 then moving on now to slide number 7.

Speaker 2

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% 9%. We are also affirming our guidance for SaaS revenue growth in a range between 35% 37% for fiscal 2024, and we are affirming our guidance for total revenue growth in a range between 10% 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.

Speaker 1

Thanks, Mark. Texas Seamal growth continues through the Q2 of fiscal 2024 with a strong balance sheet and a robust backlog in sales pipeline. 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 dynamics driven by factories like aging legacy systems, Digital adoption and a realization that heightens consumer expectations are here to stay.

Speaker 1

And so after an impressive fiscal 'twenty three, we are pleased that the first half of Fiscal 'twenty four continues to 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 2024 is on track to continue growing shareholder value. In summary, I want to remind analysts and investors some key things for fiscal 2024 and beyond.

Speaker 1

First, a sustained commitment to our Expanding SaaS revenue model, which will drive changes in the way we deploy solutions and delight 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. 3rd, an emphasis on advancing and deepening our healthcare vertical covering both MedSurg and Pharma. We continue to solidify our position as the go to provider for healthcare supply chain solutions.

Speaker 1

Lastly, a continuous evolution of our distribution and omnichannel business platform that takes advantage of innovative technologies and the power of data, Now with the support of our new innovation lab. The final point, I'd just like to stress across our markets, we will place emphasis on customer success. We have long stood 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.

Operator

Thank you, Our first question comes from Amir Ezzat with Echelon Partners. You may proceed with your question.

Speaker 3

Peter and Mark, good morning. Thanks for taking my questions. 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 The read through for us, this is purely on professional services?

Speaker 2

Yes. Absolutely, Umer. You nailed it. And as I mentioned, Yes. SaaS, as indicated in my prepared remarks, our SaaS margin expansion is really on track with our plan.

Speaker 3

Fantastic. Then is there like any color you could give us The slightly lower like professional services, you're sort of running close to that $50,000,000 capacity, then a bit of a dip This quarter, is there anything for us to sort of think about for the next couple of quarters?

Speaker 2

Yes. I think I mean,

Speaker 1

Amram, we see it as a temporary jump. I mean, It happens to us every few years. Like most quarters, you've got I mean, typically, we're running 50 to 60 projects at a time, right? And typically, 5 or 6 of them were kind of the big ones. And usually, every quarter, you have 1 or 2 empty ending and 1 or 2 starting and You don't even sort of see the transition down and the transition up.

Speaker 1

It seems like every 2 or 3 years, we end up in 1 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, creates a bit of lumpiness.

Speaker 1

But Got it. So our view is that those projects will be winding up again in the Q3 and we have full strength in the Q4.

Speaker 3

Fantastic. So no real lead to you like that. Then just on Mark's comments, I mean year to date SaaS, you're up 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 Your numbers, are you expecting a deceleration in the second half of the year?

Speaker 3

Or how do you sort of think about that?

Speaker 2

Well, I mean, I think if you see our expanding SaaS revenue line, it takes 1 more bookings To grow that to increase that growth number, we see some really solid Opportunity in the coming quarter, we've got really strong pipelines. So 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'll See a significant increase in SaaS revenue and landing in that 35% to 37% ranges. Yes. I mean, we could guess the likely outcome.

Speaker 3

Okay. Do you guys have an updated number for us on the cost of the user conference?

Speaker 2

I mean, we don't really disclose that number. But if you look at the Our overall marketing

Speaker 3

spend in

Speaker 2

the quarter, there's Rough order of magnitude, there's $500,000 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 P and L, but that's sort

Speaker 3

of the order that I can do. So that added up to the $500,000 that you're talking about? Yes. Okay. Got it.

Speaker 3

It's good because sales and marketing is higher than $1,000,000 like quarter on quarter. And I recall last quarter, you said it was 500,000 So on the EBITDA margin outlook 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, the Professional services that you spoke to, is there anything else that we should be thinking about Outside of that? No.

Speaker 2

No. That's it. That's the number, Amr. I If we had $14,000,000 almost $15,000,000 $14,900,000 of professional services in Q1 And the timing dip that we had that we saw in this quarter, that's like $2,000,000 lower Than that than what we're staffed for essentially, right? So as Peter indicated, we expect that, Yes.

Speaker 2

It's definitely a temporary dip. So we're going to be getting that level is going to be going up in the coming quarters. But we're not going to do $17,000,000 to make up For the dip, you know what I mean? So that's coming through the margin.

Speaker 3

Great. Thanks and congrats on fantastic fast growth numbers. Okay. Thanks,

Speaker 2

Simon.

Operator

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

Speaker 4

Hey, good morning, guys, and thanks for taking my questions. 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 these customers, are they existing or new, their size and timing of their final implementation?

Speaker 1

Yes, 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. When we look at the overall market TAM, we haven't yet adjusted our TAM slide to really reflect that. But it certainly looks as though overall it probably adds another

Speaker 3

Sort of

Speaker 1

$300,000,000 to $500,000,000 to the TAM kind of thing. And the payback on it is nothing short of fantastic. It's And this is not I mean, sometimes when you look at these things, you have to look at sort of some hard payback, some soft payback. It Makes people's lives easier. It helps the clinicians.

Speaker 1

It frees up time to spend more time with patients, etcetera. In addition to some hard savings On the pharmacy side, there's just a massive amount of hard savings across 340B price management, 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 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 we've been sort of working away at it for Probably 5 years now and I got to tell you by the end of the 4th year, I was starting to wonder if it was ever going to take off.

Speaker 1

Well, I think we finally connected all the right thoughts And I have the right ROI backing to show this thing really paid off and it we're pretty excited about what we're seeing.

Speaker 4

Okay, got it. So much discussion has been around the health care side of the business. And we're just wondering if you could Comment on the complex distribution opportunities in 2024 and perhaps beyond?

Speaker 1

Sure. That market I mean, interesting market. It's a very large market. There's We estimate 12,000 companies in North America in that market for us. And if that market was picking up speed in 2018 2019 definitely hit the brakes through the pandemic.

Speaker 1

The pipelines began waking up about a year ago In the at the very top end of the funnel, sort of queries coming in and so on. It began moving into the main part of the pipeline in 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 has really picked up. We are just starting to see deals getting to final decision points.

Speaker 1

So we're sort of waiting to see, is this thing our Board is actually going to There's still a lot of caution in the market. People worried about recession and economic slowdowns and 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 time for Y2K. And a lot of them are feeling like I really can't wait anymore.

Speaker 1

So it looks like that sort of dam is about to burst. We're Expecting that to hit sort of over the next couple of quarters. But honestly, the jury is still out on it. Like until we see boards of Directors actually improving new investment in these areas.

Speaker 3

It's sort of hard

Speaker 1

to call it. Gartner is predicting a 20% annual increase in this space For the next 10 years. And I think they're right that the market is right for a massive technology renewal cycle, We're sort of waiting to see. Our actual business in that market is growing quite nicely. If we look at our SaaS revenue, for instance, it's up by significant double digits over last year.

Speaker 1

But most of that Still, it's coming out of our base. There's not that much new account activity actually coming through yet.

Speaker 4

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 factored where as you're trying to project a rebound in professional services in the near term?

Speaker 2

Yes. 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. So it typically isn't our that quarter with those holiday seasons and it isn't typically our biggest Professional services quarter of the year, I mean, that tends to be Q4 broadly.

Speaker 2

But we expect Q3 to be moving up from Q2 levels for sure.

Speaker 4

Okay. Thank

Speaker 2

you. I'll

Operator

Our next question comes from the line of Gavin Fairweather with Cormark Securities. You may proceed with your question.

Speaker 3

Hi, there. Thanks for taking my question. This is Graham on for Gavin. So just my first one is on Back on pharmacy, so can you remind us the competitive landscape, what that kind of looks like in pharmacy? And maybe if you have any statistics on early win rates, that would be really helpful.

Speaker 1

Yes. 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 the whole cath lab, IR, 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 we do see players that offer Pharmacy buying solutions. So just once you know what you need to buy, they provide a portal that allows you to go and purchase the drugs.

Speaker 1

We also see there are players that just offer forecasting and event planning specific to pharmacy. But in turn And then there's players that offer pharmacy automation. So dispensing machines and sort of pill counters and bottle fillers and all that kind of thing. But in terms of an end to end platform, it goes all the way from forecasting demand planning through into a central supply areas, central distribution center The ability to do sort of just in time delivery of the hospitals with patient level doses, we don't see any direct competition at this point. So, so far and it's early, like I would emphasize it's early, but if you look at the sort of the ones we've signed in the last 12 months, Our win rate is about 100%.

Speaker 1

So obviously, we'd like to keep it there.

Speaker 3

That's really helpful. Thank you. And again, it might be too early for this, but do you have any color on kind of sales cycles in pharmacy? Like are they also under 1 year to go to overall health care? Any color would be helpful.

Speaker 1

Yes. They seem to be under a I think part of it is when you actually look at the ROI, I mean, we've seen some of these situations where Their 5 year ROI looks like it's going to be over $100,000,000 So when you're looking at that level of The project takes on some degree of urgency.

Speaker 3

Yes, that's helpful. And then just I guess the last one on complex distribution. Are there any sort of verticals where you're seeing the pipe Strengthened specifically and if you want to call any of those out?

Speaker 1

Yes. Probably the area that continues to look the most 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's it may be one of the first ones to sort of really wake up and get moving. But there's other ones. I mean, consumer goods looks like it's going to wake back up again.

Speaker 1

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. So but I would say, from what we're seeing today, it looks like Pharmaceutical Drug Distribution is going to be the front runner there.

Speaker 3

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

Speaker 1

Yes, hard to call. We added 2 in the quarter. In terms of from here, We keep thinking the number is going to rise. And what seems to happen instead is the average deal size rises and the base continues to Expand pretty dramatically. I mean, if you look at our base today, I mean, we could literally stop selling new accounts and just go after the base And get to our probably get to our 3 or 4 year goal for SAPS.

Speaker 1

I mean, 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 in the near term, I think you'll continue to see 2 to 3 quarter added. We may spike above that occasionally, but I think it's going to be in that kind of range.

Speaker 3

Perfect. Thanks so much.

Operator

And it seems we have no further phone questions at This time, sir.

Speaker 1

Great. Well, thank you, everyone, for joining us for today's call. And in case you haven't picked it up, I'm not sure we've ever been more excited about the future of this business. Last few years, we've certainly had their challenges. We'd love to get at what we see going forward here.

Speaker 1

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.

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Earnings Conference Call
Tecsys Q2 2024
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