Hello, welcome to our fiscal 2021 Q3 earnings call. I'm Bill Wood, Sylogist President and CEO. On the call with me today is Xavier Shorter, our Chief Financial Officer. We'd like to walk you through our performance in the third quarter, which ended on June 30th. Before we get into it, I should note that this call may contain forward-looking statements related to the future operations and profitability of the company, any of which are subject to risks, uncertainties and assumptions, and actual events or outcomes may differ materially from those we contemplate here.
Any such forward-looking statements are made as of today, and except as required by law, we have no obligation to revise them. I'd also like to direct your attention to the Q&A button at the bottom of your screens, which you can use to submit questions throughout this call. Xavier and I will aim to answer questions today as time allows after our comments on the quarter, and we will otherwise follow up with you offline. I'd like to start by revealing key elements of the strategy we shared with you previously and discuss where we find ourselves today.
As I stated when I first joined, Sylogist has a great deal of growth potential, and unlocking it required a few things. Namely, strategy, alignment, investments, and time. We made substantial progress toward the company's growth readiness this quarter by strategically investing in talent across the customer-facing product and development teams, reorganizing the company to break down silos, completing the integration of the Municipal Accounting Systems acquisition, and finalizing our transition to an agile development methodology. We've put in place important foundational capabilities to more effectively meet our customers' needs, earn their advocacy, and bolster our competitive advantages.
With clarity on strategy, we have also started to invest in go-to-market capabilities, including sales and marketing talent and resources that will enhance our market awareness and presence and help drive growth across our product lines. The board, management, and the team members are united behind the strategy and energized by the material changes that have been made across the company.
Growth doesn't materialize overnight from the constrained posture that was in place when I joined. It's also been materially impeded by the unprecedented impact COVID-19 has had on the public sector markets we serve. For some time now, we've been telling you to expect our growth investments to begin showing more clearly toward the end of this calendar year, if not before. We have every reason to believe that this timeline remains on track. Both our organic and inorganic growth pipelines are stronger than ever.
New bookings and project discussions that were stalled due to the pandemic are now starting to be committed to paper. The pandemic's abatement has freed up cycles among our nonprofit customers, and they are starting to think about their technology needs again. More specifically, add-on projects, additional subscriptions and new modules, and their upgrade to our cloud offerings. A talented and motivated team is critical to delivering on our commitments, delighting customers, and achieving our goals. That means attracting, retaining, and investing in talent across the company. That's why the pillars of our go-forward strategy included a new employee performance management framework, which we've now fully implemented company-wide. Under this performance management system, all employees set individual goals under the umbrella of three strategic company objectives: organic growth, customer wellness, and operational excellence.
Employees are now aligned with and have a direct stake in our value creation objectives and the company's success with a variable compensation component formulaically tied to both their performance and that of the company. This replaces the previous arbitrary approach in which bonuses were concentrated amongst a handful of senior management and not necessarily aligned with value creation. I'd like to emphasize that the new performance management framework is not a response to any retention or other HR issues. To the contrary, the board and I see it as long overdue proactive investment in our team members, our power source for the future. I'd also like to touch on M&A or inorganic growth for a minute. The market continues to be active, and our deal pipeline is in very good shape.
We've added to the M&A team recently and are moving quickly in this active market to source and engage in strategic deal discussions directly, as we did with the recent MAS acquisition, as well as explore broker deals we think are strategically relative to value creation. I want to assure you that our customer retention and wellness remains strong and is improving due to the strategic investments to increase proactive customer connections, product quality, and innovation. What may appear as year-over-year base revenue contraction was predominantly tied to delays, delayed projects due to COVID-19, and even more significantly this quarter, the U.S. Canadian exchange rate, which accounted for nearly CAD 900,000 alone on a Q3 2021 versus Q3 2020 basis. More dramatically, FX reduced revenue by almost CAD 1.3 million year-to-date.
While our revenue is impacted by this FX reality, it should not be interpreted as erosion of our base business, which as I've stated, is stable and an important component of our growth plan through strong customer referrals, customer wallet share expansion with new innovation, and the pull-through of complementary IP. I should emphasize that while we are not yet where we intend to be, we are where we expected and planned to be, aside from the increased FX headwinds which are out of our control. Especially in these extraordinary times, executing against our plan and hitting its important milestones in a timely manner is very material. Our core business is stable, and we have made foundational investments to accelerate growth and drive value creation.
Sylogist will remain guided by the rule of 40, and we aim to grow our top-line revenue at a run rate in the high single digits, if not higher. With value creation as our North Star, the strategic changes and investments we've made and will continue to make are crucial, and we are well down the path to seeing them begin to pay off. I'd like to now turn things over to Xavier to take us through the financials in more detail.
Thanks, Bill. I'm Xavier Shorter, Sylogist's Chief Financial Officer. I'd like to start by re-emphasizing what Bill highlighted. Our core ARR, subscriptions, and maintenance is strong. If you remove the impact of the MAS acquisition and changes in FX, recurring revenue was essentially flat. Retention is high and the sales pipeline is very promising. We should start to see benefits of growth investments pay off later this calendar year. We faced three major revenue headwinds this quarter, exchange rates, MAS' purchase accounting, and COVID-19. As Bill mentioned, exchange rates were by far the most material. In Q3 last year, the average exchange rate for USD to CAD was 1.39. For Q3 this year, the average exchange rate was 1.23. With well over three-quarters of our revenue coming from the U.S., this had a significant impact.
In fact, if this quarter's exchange rates were the same as those in Q3 last year, revenue would have been over CAD 900,000 higher, or roughly 4% above the previous year. A volatile economic environment has led to sharp quarter-over-quarter swings in the average exchange rate. This does not reflect the underlying business's performance and strength. The second headwind was the MAS purchase accounting. MAS' billing cycle runs from July 1 to June 30th, we inherited a deferred revenue balance when we bought the business. IFRS rules require us to recognize this deferred revenue, not based on the actual customer contracts, but based on the cost-plus approach from a perspective of a generic market participant. MAS' high margins means that this perspective forced us to take a 20% revenue haircut due to the IFRS accounting rules.
If MAS' revenue had been fully recognized in our Q3, it would have added approximately CAD 360,000 in both revenue and EBITDA. However, starting July 1st, MAS customers came onto Sylogist's contracts, and we're now able to recognize 100% of the revenue they produce. More generally, we're very pleased with the MAS integration. There are no surprises, and we're confident in the upside opportunities we've discussed on previous calls.
The third headwind was COVID-19, which continues to put pressure on our professional services revenue and new bookings. Many nonprofits and NGOs are directly involved in the pandemic response or treading cautiously due to the uncertain environment, so many have delayed implementation. For instance, in Q3 last year, we successfully completed a multi-year, multi-country NFP implementation that was contributing over CAD 200,000 per month. Due to COVID-19, there are no replacement projects of comparable size that would have normally occurred.
Our professional services are lumpy and unpredictable by nature. COVID-19 exacerbated the norm unlike anything we've seen. As Bill highlighted, we are seeing improved activity and strengthened pipeline as North America returns to a more normal footing. These headwinds, together with growth investments, compressed margins. Adjusted EBITDA in Q3 was CAD 3 million, down from CAD 5.7 million last year. This was mainly due to FX. For FX alone on a year-over-year constant currency basis, Q3 adjusted EBITDA would have been approximately CAD 3.7 million. The other main driver of lower EBITDA was the employee bonus accrual. As Bill Wood mentioned, a company-wide performance management system was just recently approved by the board and its compensation committee. This required us to book a year-to-date catch-up accrual for FY 2021 of the estimated bonus expense covering the first three quarters.
Talent and motivated employees are our company's power source. We expect this plan to help align people behind shared goals and value creation by giving all team members a stake in Sylogist's success. Our gross profit margins for the quarter were 70%, down from 73% in Q3 2020. This is mainly due to the acquisition of InfoStrat's relatively service-oriented business in April 2020. Operating expenses were up somewhat as investments in growth started to come online.
We have strategically added talent over the past several months, principally in the customer-facing product and development teams, engaged offshore contract resources, and are now adding talent in sales and marketing. We will continue to make strategic investments to support go-to-market, customer wellness and retention, innovation, and scalability and operational excellence, all aimed at accelerating overall value creation. In total, Q3 profits were essentially breakeven, down from CAD 3 million in Q3 2020.
Earnings per share was zero, down from CAD 0.13 last year. Returns to investors remained strong. We distributed CAD 3 million in dividends to shareholders, up from CAD 2.6 million in the same period last year. Quarterly dividends remains CAD 0.125 per share. Our balance sheet is likewise strong. We finished Q3 with CAD 22.3 million in cash, plus CAD 56 million accessible in our credit facility.
I'd like to conclude by emphasizing the business's strength. Shortly after Bill joined, the executive team and board aligned on a growth strategy that involved making fundamental investments in the business through the remaining of the fiscal 2021 and targeting to see them begin to pay off toward the end of this calendar year. This was always going to involve near-term margin compression, driving medium-term increases in the business's growth rate in a rule of 40 posture. We are confident in our plan. We are on the execution of that plan. We are excited about the path forward. Thank you for your time and interest in Sylogist. Bill and I will now take a few questions. If you do so, please provide your name and institution you are with.
Great. Thank you, Bill and Xavier. Our first question is from Jim Byrne of Acumen Capital Partners. Bill, Jim would like to get your thoughts and comments on the recent LINQ deal with Allio and eGrants, as well as possible read-throughs for Sylogist and the sector, commentary on industry dynamics today, and whether or not things are heating up in terms of M&A and putting pressure on multiples.
Hey, good morning, Jim. The deals that are out there are attracting interest from all corners. That ultimately was consummated through a PE-backed firm that LINQ has been quite inquisitive in looking at opportunities. It was an opportunity that we were aware of, that had actually gone somewhat quiet, surprisingly to us, and seemingly the impetus for them to strike that deal was as compelling that they didn't feel they needed to reach out further. Overall, the landscape in the space, I think continues to lend itself to opportunities. It is a mix of regional players with legacy systems that I think have been particularly challenged during the COVID period. We certainly look at like opportunities within our pipeline and conversations continue with those.
Thank you. Next question is from Gavin Fairweather of Cormark. On professional services, what are you seeing in the backlog and sales funnel? Do you think Q3 will be the trough for billings, and any sense of notable projects in the backlog?
Yeah, my view there, Gavin, good morning, is I think the project services are largely triggered by two things: the customers feeling like they have better handle on their budgets, and their stability to be able to engage for add-on projects, modules, new services, as well as their upgrades, as I mentioned in my comments, to our SaaS offering. Those are more active than I've seen since I've been here, and so I think that's a very positive sign. In terms of the project services to replace the likes of the project that Xavier commented on, that we wrapped up in the latter part of last year, those are tied to these large deals that have been in the pipeline, in our pipeline for some time.
As I mentioned in my comments, I'm very pleased with the activity of those conversations and seeing some of those actually headed toward matriculation and paper. I do feel that our project services will return more to a norm that we'd seen in the past in the near future.
Thanks, Bill. Next question, also from Gavin. The press release referenced a return to the rule of 40 posture. Should we expect EBITDA to directionally move lower near term ahead of returns building over fiscal 2022?
Yeah, I do believe our investments continue to need to be made around the strategy. To that end, I mentioned the kind of steady state posture that we're in took an infusion across the company to be able to return it to a go-forward posture. That's people, processes, alignment, and reward in terms of the bonus structure that we put in place. Those investments are foundational for our growth and sustained growth over time.
I am feeling that those investments need to continue to be made through this year and into the latter part of the calendar year. We'll certainly be working through our strategy and budget as we come together here over the next 60- 75 days to be able to finalize that and present it to the board. There is no hesitancy on behalf of the board in discussions we've had to continue to invest in the business to accelerate growth and drive value creation.
Thanks, Bill. Gavin also asks, "On MAS, what are the gating items before we can take the WenGAGE platform to other states?
Great question. I answer it through two lenses. A, we wanted to make sure that we are in a position to be clear about our go-forward strategy relative to the IP that they bring to the table vis-a-vis our existing IP. We wanted to make sure that we had significant conversation with our customer communities in the K through 12 space so that we understood their needs. We've done several focus group discussions with those communities to orient them to the MAS offerings, vis-a-vis what they currently enjoy from us.
To that end, our existing customer community, we wanted to make sure we were very much in touch with and aligned with relative to the go forward and accelerating MAS's visibility to them. Secondly, there are hurdles in each and every state relative to covenants about the process of introducing technology in those states. We have curated those over the last 75, 80, 90 days as part of diligence and then beyond to make sure that we understand what states seem to be most amenable relative to our fit and the hurdles are maybe less, while at the same time, where we see material opportunity, if we need to go through the review and accreditation process, we would, and we are. To that end, it's largely about the entry to those states and understanding the nuances from one to another.
Thank you. Final question from Gavin Fairweather. "One adjacency you've highlighted is not-for-profit payments. Can you provide an update on this initiative?
The payment side of our business, we had to inventory where and what are transacting within our customer communities already and using third parties to do that. We've now taken a good look and have a good understanding of where opportunity lies there. In some of those areas, we see some opportunity being postponed, such as within the MAS customer community. The state of Oklahoma has waived all fees associated with lunches for the upcoming school year because of the continuing impact of COVID-19. We're looking at it customer community by customer community.
The platform itself is ready to go. We have basically adapted it into a plug-and-play capability that sits part and parcel with our different offerings. That piece of the puzzle is completed. It's now the rollout strategically as to where we see there's opportunity. That doesn't preclude us leaning in where the space that the current technology is used in the fuel area. We have a business plan that's been newly created relative to what our opportunities are, both within our customer base and within current customer fuel community and outside that as to where our technology through partnerships and direct to market, we feel we can go.
Thank you, Bill. Next question is from Amr Ezzat of Echelon Partners. "Can you give us a sense of your M&A pipeline? Specifically, how many MAS-like targets are there out there, and how much capital are you comfortable deploying into M&A?
Hey, good morning, Amr. The pipeline is as strong as I've seen it, and kudos to the team, and as I said, we've added resources to the team to be able to get more lines in the water and have more direct outbound activity. We are tracking well over 120 opportunities. That is constantly being refreshed and evaluated relative to strategy and goings-on in the marketplace. I've said I like to try to reach out using our connections and network to see if we can motivate a target that we feel is strategic through direct conversations that maybe don't see themselves as for sale or in a process. To that end, those conversations are as much in earnest as I've seen since I joined to the credit of the team.
The size, I do feel that MAS is generally representative with a plus or minus factor because there's usually hurdles to those kind of companies where they get from that CAD 5 million-CAD 15 million in run rate basis, and then they're running into blocks of some sort, their technology or just capital to go forward and expand. The pipeline overall and the market, I feel, is strong, and I think we're in a very good position to continue to look at opportunities and secure opportunities in the future.
Thank you. Next question, also from Amr. Where does your dividend strategy sit in light of a heavier investment profile into M&A?
The dividend is a longstanding value component relative to our shareholder community. While it's not the cherished golden egg, it is something that we respect and look at with each passing quarter. Obviously, we want to look at use of capital in terms of is the dividend, and what it represents, value to the degree that it could be counterbalanced with use of capital elsewhere? That is conversations that we'll continue to have going forward, but overall, our commitment to the dividend at this time remains strong.
Final question from Amr. On the MAS implementation, can you give an update on where you currently sit? Can you touch on some of your cross-selling efforts?
As I mentioned in my comments, we had an integration plan that included north of 185 tasks that touched all aspects of the business, from HR, people, processes, systems, marketing, sales. It was a multifaceted playbook that ultimately we needed to bring to the table because it largely was not the priority of that integration level in the past. I can not only say that it was embraced, but it was really effective in the speed and efficiency with which we moved the companies together.
The people together, and not in a brute force kind of way, but in a way that included listening and collaboration, making sure that we really could build off of what we learned in diligence and then execute on those learnings and the realities of all the work that comes with bringing our development teams together, meshing our product teams, and teams across the board.
I'm very pleased, and I think it is a shining light of success for the company to have secured an acquisition like that, but more importantly now really brought it into the fold, setting the stage and proving to ourselves that for many companies, acquisitions become real drains on resources where there isn't a good process, and they can be orphaned or really take a lot of attention away from what the other activities are. While it's no easy task, I do feel that it was a huge success for the company and sets the stage and confidence for us to be able to look at acquisitions going forward.
Thank you, Bill. We've had one final question come in from Amr Ezzat just now. Are you facing any issues recruiting and/or retaining talent?
I never take it for granted, but I will say proudly that I feel that our team is more energized and more excited than I've seen. I think the communication, our commitment to transparency internally has gained trust, and also having a strategy that ultimately speaks to the idea of how important the customer is in that, how important product quality is, and innovation has energized a lot of people that have been here for some time and are excited about where we're going and the investments being made to get there. That is not something of resting on our laurels at all, and I think that the performance management structure we put in place was a crucial component to proactively making sure that people clearly see that we're investing in them and their career paths with Sylogist.
On the attracting side, Sylogist is an interesting company, and actually we're not only because of the markets we serve, but I think for the investments and the innovation and the products that we have, we touch a lot and actually I feel bring an interesting mix of attributes that ultimately would attract both young and seasoned professionals to us. I'm feeling now that when we do post positions, we are getting very good candidates and ultimately are willing to look at comp packages now with the bonus component that I think is competitive to the landscape.
Great. Thank you, Bill. That's it for questions. Thank you everyone for attending this morning. We appreciate your time and your interest in Sylogist.