Good morning, everyone. Welcome to the Tecsys Q3 fiscal 2022 results conference call. Please note that the complete Q3 report, including MD&A financial statements, were filed on SEDAR yesterday. All dollar amounts are expressed in Canadian currency and are prepared in accordance with International Financial Reporting Standards. Some of the statements in this conference call, including the question and answers period, may include forward-looking statements that are based on management's beliefs and assumptions. Actual results may differ materially from such statements. I would like to remind everyone that this call is being recorded on Thursday, March 3, 2022, 8:30 A.M. Eastern Time. I would now like to turn the conference over to Mr. Peter Brereton, Chief Executive Officer at Tecsys. Please go ahead, sir.
Thank you. Good morning, everyone. Joining me today is Mark Bentler, our Chief Financial Officer. We appreciate you joining us for today's call. In the Q3 , we delivered excellent results, fueled by strong demand for our solutions and the continued success of our transformation. Our customers are not only, pardon me, staying with us, they are growing with us and transforming their own businesses. In Q3, I'm thrilled to say that we continued to deliver another great quarter with double-digit ARR growth, solid backlog, and a strong pipeline across all industries. We continue to solidify our mission of equipping our customers with supply chain excellence. Although we did experience some delayed projects due to Omicron, I'm very proud of the work our team did by closing out the quarter strong, expanding on the depth and breadth of our platform, and as always, investing in our people and culture.
Today, I'll start by providing some additional color on the results, then Mark will walk us through the financial results in more detail. Finally, I'll share what I'm looking forward to this year and beyond. We'll follow that up with a Q&A session. There are two key indicators that I'd like to highlight, which despite currency headwinds, are contributing to our track record of solid growth. Revenue, where I'll touch on growth and quality, and our pipeline, where I'll touch on market conditions. First, it's important to note that we have had consistent consecutive growth on a quarterly basis for the last three years. As we continue to emphasize, SaaS revenue is scaling up relatively quickly due to our ongoing strategic shift to SaaS in all of our markets.
As we continue to mature the SaaS revenue model, we will increasingly create greater revenue visibility and improve the long-term quality of our revenue. This leads to my second point, our pipeline. The strong revenue performance is fueled by the continued strength of our pipeline. Companies in every sector are working diligently to digitize their supply chain to maintain competitive advantage, and we are there for them. If the last few years have taught us anything, it's that the supply chain is absolutely critical. Companies are now taking this knowledge and bolstering technology to become nimbler in the face of new potential future uncertainties, and we are seeing the effect of that trend, not only with new prospects, but the growth in utilization from our existing base of customers. With that said, we continue to invest in innovative solutions to further drive benefit to our customers.
We've realized a significant milestone in the introduction of an AI-driven augmented cluster building application at our customer, Werner Electric. This application intelligently groups together picks of various orders and simulates multiple pick paths, and then chooses the optimal combination to reduce travel time and boost efficiency. We expect to see a 15%-20% cost saving just in travel distance alone. We believe this to be very timely as our customers continue to be challenged with labor shortages. As we mature our AI strategy, we see ample opportunity to take full advantage of the data our system generates to create customer value. Our momentum is strong, and to maintain this, we realize the people of Tecsys are the most critical asset we have, and we are allocating higher expenses for retention as well as recruiting efforts in attracting new employees.
Mark will now provide further details on our financial results for the Q3 and the first nine months of our fiscal year.
Thanks, Peter. As indicated at the beginning of the call, our financials and MD&A are available on SEDAR. I'll focus my summary here just on a few of our key metrics and areas where I will provide some additional color. We're pleased with our strong performance in our Q3 ended January 31, 2022. Total revenue was a record CAD 35.4 million, 11% higher than CAD 31.9 million reported for Q3 of 2021. As many of you know, a significant portion of our revenue, about 65%, is denominated in US dollars. As a result, movement in currency exchange rates has an impact on our reported revenue and growth. During Q3 fiscal 2022, currency exchange movements negatively impacted our reported revenue as the value of the US dollar was weaker compared to the same quarter last year.
In fact, on a constant currency basis using fiscal 2022 currency rates, our Q3 revenue grew by about 16% compared to the same quarter last year. We continue to experience strong and diverse revenue streams underpinned by a 49% increase in SaaS revenue, which was up from CAD 4.7 million in Q3 2021 to CAD 7.0 million in Q3 2022. On a constant currency basis, SaaS revenue was up about 56%. I also want to note again that we're at the precipice of a significant milestone in our transition as a SaaS business, with our SaaS revenue currently representing 46% of our total recurring revenue streams in Q3 fiscal 2022, and we have line of sight to SaaS crossing over the 50% threshold within a matter of months. That's about a three-year timeframe into our SaaS transition.
Our annual recurring revenue at January 31st, 2022, was CAD 59.5 million, up 17% from CAD 50.8 million at January 31st, 2021. On a constant currency basis, that increase was about 19%. Professional services revenue for the Q3 was CAD 12.9 million, up 5% from CAD 12.3 million reported for the same quarter last year. Again, currency movements created headwind on revenue growth here, which would have been 9% on a constant currency basis. Moving on to bookings in the quarter. SaaS bookings are reported on an annual recurring revenue basis and increased by 133% to CAD 2.3 million in Q3 2022 compared to Q3 2021, which was at 1.0.
SaaS bookings were highlighted by the addition of a new hospital network, as well as significant base business from our customers across all verticals. We also signed another new hospital network in the first days of Q4. Professional services bookings were CAD 9.3 million, down 11% compared to CAD 10.5 million in the same quarter last year. We had some professional services bookings slip into Q4, about CAD 4 million signed in the first few weeks of Q4. This highlights again the lumpiness and impact of timing on reported quarterly bookings. We still like bookings as a metric because, over time, we believe it provides a good leading indicator of business performance and growth prospects.
SaaS remaining performance obligation, also known as RPO or SaaS backlog, was CAD 78.5 million at the end of Q3 fiscal 2022, up 36% from CAD 57.6 million at the same time last year. On a constant currency basis, that growth was 37%. SaaS backlog was up 8% sequentially compared to the Q2 of fiscal 2022. That's 6% constant currency. The increase was driven by significant multi-year SaaS bookings during the quarter. Professional services backlog at the end of Q3 fiscal 2022 was CAD 29.5 million. That's down about 22% compared to CAD 37.8 million at the same time last year and down from CAD 33.1 million at October 31, 2021. As noted above, timing, especially in large deals, can have a pretty significant impact on reported backlog at any point in time.
Our professional services backlog remains robust, and we expect our delivery team to continue to be very busy in the quarters ahead. For the Q3 , total gross profit was CAD 15.2 million. That's down CAD 0.2 million compared to CAD 15.4 million in Q3 of 2021. As a percentage of revenue, gross margin was 43% compared to 48% the same quarter last year. That decline was a result of unfavorable exchange movements, changes in the revenue mix, and investment to support growth. Net profit for the quarter was CAD 0.9 million or CAD 0.06 per fully diluted share, compared to CAD 1.8 million in Q3 last year, which was CAD 0.12 per fully diluted share. Adjusted EBITDA was CAD 2.7 million in Q3 2022, compared to CAD 4.0 million in Q3 2021.
The decrease in profit and adjusted EBITDA compared to the Q3 last year was primarily due to an unfavorable foreign exchange impact of approximately CAD 1.6 million. Turning now very briefly to our results for the first nine months of our fiscal 2022. Our total revenue was CAD 102.9 million, up 13% compared to CAD 90.7 million in the same period last year, and that's up 19% on a constant currency basis. SaaS revenue for the first nine months of fiscal 2022 was CAD 19.2 million, up 41% from CAD 13.7 million in the same period last year, and that's up 49% on a constant currency basis. Our SaaS bookings are up 23% compared to the first nine months of last fiscal year.
Our profit for the first nine months of fiscal 2022 was CAD 1.9 million or CAD 0.13 per fully diluted share, compared to CAD 5.2 million or CAD 0.35 per fully diluted share in the same period last year. Adjusted EBITDA was CAD 8.4 million in the first nine months of the current fiscal year, compared to CAD 12.3 million for the same period last year. Foreign exchange movements had a negative impact of approximately CAD 4.6 million on profit and adjusted EBITDA in the current nine-month period compared to the same period last year. We ended the Q3 with a strong balance sheet position. At January 31, 2022, we had cash and cash equivalents and short-term investments of CAD 36.9 million compared to CAD 45.9 million at year-end.
We had debt of CAD 8.7 million compared to CAD 9.6 million at year-end. Cash provided by operations was CAD 0.9 million in Q3, and our DSOs or days sales outstanding and accounts receivable remain reasonable at 58 versus 47 at year-end and 45 at the same time last year. Recall that our Q4, so that's next quarter for us, tends to be a high point for cash from operations due to some seasonality in our non-cash working capital, in particular related to annual tax credit refunds. I'll now turn the call back over to Peter to provide some outlook comments.
Thanks, Mark. The positive growth trends are continuing for Tecsys as we move through fiscal 2022. Our consistent strong financial performance, new accounts, and the expansion of our existing accounts, and most notably, our solid pipeline are continuing. The market conditions give us confidence that we are well-positioned to continue capitalizing on this opportunity. As mentioned earlier, we are laser-focused on retaining the great people we have while attracting new talent to stay ahead of this changing market. We continue to see demand for adding additional talent, and we are starting to see what appears to be some potential positive signs in the labor market after what has been a fairly choppy past number of months. We are mindful of our delivery capacity, and we continue to invest on that front. We are also continuing to invest in our channel relationships.
In both cases, we're taking proactive steps to manage for continued growth. While we're optimistic that the worst of the pandemic is behind us, it has taught all of us to be prepared for the unknown and to be adaptable enough to overcome curveballs. Tecsys has never been in a stronger financial position to weather future sudden market volatility if it were to occur. In summary, I want to remind analysts and investors of our three key operational themes for the remainder of fiscal 2022, which have not changed from our previous analyst call as we enter the fiscal year. First, we'll continue to maintain focus on developing and growing our SaaS revenue model. We will likewise continue to optimize our internal processes and resources to complement this shift to SaaS to maintain high levels of customer satisfaction. Secondly, we'll continue to expand our partnership ecosystem.
This is key for us to scale rapidly into the market opportunities that I mentioned earlier. We now have partners working effectively with us in both North America and Europe. We'll continue to invest so that we can enable them more quickly. From accelerated training programs to improved onboarding tools, we are determined to continue to make our SI partners more and more successful. Thirdly, we plan on investing in all of our sales channels to exploit the momentum and the opportunities coming at us. We also continue to expand and refine our omni-channel business platforms to service evolving needs in our healthcare supply chain, converging distribution, and retail market segments. These efforts will help us to not only minimize customer churn, which is already very low, but will also help us to expand revenue from current clients as we saw happening again this quarter.
With that, we'll open up the call for questions. Thank you.
Our first question comes from the line of Gavin Fairweather of Cormark. Please go ahead with your question.
Well, hi, good morning. I thought we could start out on the healthcare side. You know, I think last quarter, your reference was some kind of the next 20 IDNs had been, you know, roughly identified and deals sort of being worked in the pipeline. I know those deals can be, you know, kind of unpredictable in how they move, but for any color on, you know, how those deals are maturing and moving into the pipeline.
Sure. Like, overall, Gavin, the healthcare market is almost on fire these days. We are seeing a lot of activity in that segment. We're seeing a lot of deals moving through the pipeline. It's interesting. I feel like the biggest change in a way in the last year is we've moved from sort of management teams trying to convince the board that they need to do this and invest in their supply chain technology to now the shoe's on the other foot. The boards are asking the management teams sort of what they're doing about supply chain and how soon they're gonna get a good platform in place. It's turned around and accelerated.
This quarter was weird from the standpoint that, especially for healthcare, to some extent across all segments, but especially for healthcare, this quarter was really only, you know, probably a little less than two months long. You know, the Omicron wave came through, and it hit different areas of the country at different, you know, slightly different times. Basically, the bulk of our clientele in healthcare were massively distracted for anywhere between one-third and half of the quarter. We felt like it was, you know, it felt like a very short quarter from the standpoint of actually getting deals done. You saw that in some of the deal slippage that Mark referred to.
I mean, you know, professional services bookings, you know, big chunk that signed in just in the first week of February, that normally would've been, you know, Q3 stuff. You know, even the additional network that signed in the first week of February, that normally would've been Q3 stuff. It was all just sort of Omicron shortening up the quarter. Overall, to answer your question, the activity in that market is stronger than we've ever seen it.
That's very helpful. Then maybe I thought we could zero in on the services side. I know it's kind of the holiday quarter impacting some projects. Do you have a sense of the amount of, you know, billings that may be slipped, you know, from your Q3 into future quarters and to be expected not to
Yeah. We actually expect a bit of a catch-up. It's hard to quantify exactly how much slipped. I mean, if, you know, if I were to put a number on it, I would say it was at, you know, at least CAD 1.5 million or something like that. We just had too many projects where we, you know, suddenly got to mid-December or whatever, and they'd, you know, customer calls and says, "You know what? We're in the middle of Omicron wave. Half our staff is sick. You know, everybody go home, and we'll see in a month," kind of thing. So we just had a lot of that. Now the challenge of course is, you know, while we do expect some catch up in Q4, to some extent we can only catch up so much because of course we're capacity constrained.
You know, we've added headcount in that, you know, on our professional services side, but you know, the supply is not infinite there. We certainly expect a strong Q4 in pro services, as it largely seems like whatever the vaccinations didn't get, Omicron got. It seems like we're kind of out of the woods on this now. I would guess, Mark, I don't know if you would agree. I feel like maybe CAD 1 million, maybe CAD 1.5 million. It's somewhere in that range.
Yep. I think that's reasonable.
That's great. Maybe I thought we could just chat on the labs module, which commercialized I guess in January. We haven't talked about it a ton in the past. Can you maybe just walk us through kind of how you think about the market size, you know, the distribution for that module and overall just your thoughts on growth for that module?
You know what? Sorry, Gavin, I didn't pick up which module you're referring to.
The labs module. The clinical labs module.
Oh, okay. Sure. Yeah, I mean, that's still very early stage. I don't. I mean, I would say you're probably not gonna hear much from us about labs for, you know, in any significant commercial way for probably another year or two. I mean, our focus is, at this point, more getting continuing to gain traction in the pharmaceutical module, you know, the for in-hospital pharmacy. In fact, our goal, if you look at what we're trying to get done, you know, we're saying, you know, we wanna sign, get to, you know, 100 IDNs within the next few years. We wanna make sure that at least 10 of those IDNs are deploying our pharmacy module.
Because our feeling is that if we can get at least 10 of them deployed using our pharmacy module, that will sort of set us up for a second wave to go back through, you know, the entire customer base and add in the pharmacy module. That's our goal. I mean, this market is, as you know, a pretty cautious market. It's really, I would say the pharmacy module is taking up the bulk of our attention in terms of trying to get some real traction there.
Got it. Lastly, before I pass the line, I know you've been doing some work kind of internally to optimize, you know, your software for running on a SaaS delivery model. Can you just provide a bit of an update on that dev project, in terms of timelines and maybe just touch on, you know, how that might influence your SaaS gross margins as that ramps up?
Sure. I mean, from the standpoint of the project to make our software to be sort of much more SaaS native, that work continues. There's a way in which you're always wrestling with technical debt, right? I mean, that's just the nature of the software development space, right? It sometimes drives me nuts. Sometimes we have product that I still think of as brand new. We developed a product within the last three years, and I start hearing from R&D that there's some technical debt that they have to go back and work through. It's just the nature of the rapidly evolving sort of cloud space that some of this stuff changes all the time.
It certainly looks to us as though the heavy lifting will be done, you know, pretty much by the end of this calendar year. I mean, we're, you know, we've introduced, you know, all kinds of new security capability. We're shifting the underlying database to run off a you know much lower cost database so that we will be able to support the PostgreSQL database in AWS. We've added all kinds of scalability capability. We've got a very large go live that happened in January, over 1,000 users at a single site. It's, you know, performing very well in the cloud. We're pretty happy with where we're at on that.
We, as I say, think the heavy lifting will kind of be done by the end of this calendar year. From the standpoint of impact on margins, the shift in database will, over the next year, we think add, you know, somewhere around, you know, three-five percentage points of margin to the SaaS, you know, to our SaaS numbers, but really only on new accounts. It'll take more time to move existing accounts over onto that. But still that we believe that'll start to show up significantly by the end of our next fiscal year. The other margin shift that I think you're gonna see in the coming couple of years is we've probably only got another maybe six months, probably a couple quarters. I'm gonna ask Mark to comment on this when I'm done.
Another couple of quarters of continuing to build out the bench on our, you know, cloud and DevOps support team. That's what keeps suppressing the margins at this point, is even though the revenue is growing pretty significantly, you know, up more than 50% this quarter, constant currency, we're continuing to build out that bench and get a deeper and deeper bench of expertise and capability to, you know, operate the offering 24/7. We're a couple quarters away from having that pretty much done. At that point, the cost, you know, starts to flatten out, and the revenue just continues to rise. Mark, does that
Yeah. I think that's right.
Does that go with what you're seeing?
In the next, you know, I think that's right. You know, we've got you know this quarter and probably the first half of next year to get to that place. The other thing that's going on in there is you know investment in security that'll be going on over that time period as well. Of course, we're faced with some pretty difficult you know a pretty difficult hiring environment too, but so timing you know may be impacted by that. I think that's right. You know, our plan is to bring in those resources and have the scale created by the first half of next fiscal.
Got it. That's super helpful. Thanks so much.
Great. Thanks.
Thank you. Our next question comes from the line of Amr Ezzat of Echelon Partners. Please go ahead with your question.
Hi, it's Amr. Peter, Mark, good morning, and thanks for taking my question. My first one is on your capital deployment strategy. The stock's come off quite a bit since December, despite, I think, 12 record quarters of, like, record revenues now. You've got a decent cash position and underlevered balance sheet. You know, like, I'm wondering what's the board thinking on buybacks versus maybe increasing the dividends and M&A. Can you share some thoughts there?
Yeah. I mean, I think, Amr, I mean, the focus of the board and our management team is basically hang on to the war chest and look for the right acquisition. You know, I mean, we continue to generate enough cash to continue to slowly add to our cash pile as well as pay the dividends. A lot of that money was actually raised at 17 bucks a share. You know, even though the stock's come down from, you know, in the 60s, I mean, it's obviously come down along with everyone else. Misery loves company, so I try to make myself feel better by looking at other people's stock. We feel like the opportunities for acquisitions are getting a little bit better.
You know, the private equity market has not cooled off to the same extent that the public markets have. There's still sort of a little bit more realism creeping into that side as well. Even though our stock is down, we think, you know, there may be some, you know, potential opportunities on the horizon. It's really you know, I know we've sort of sat on that cash for quite a while, but we do feel like it's, you know, it needs to be there to be ready to deploy for the right acquisition.
Okay. No, that's good color. Just to follow up on Gavin's question, you know, like, Peter, you mentioned during COVID, there was obviously an increased openness and urgency to have conversations on supply chain management software and investing in supply chain. I'm wondering, with COVID pressure easing, do you feel these conversations with new potential clients are still very constructive, or is the strong level of activity we are currently seeing coming from conversations initiated, you know, like in the past few quarters at the height of COVID?
Yeah. I mean, I think you're sort of asking sort of is the urgency accelerating or decelerating? I mean, it seems to us that sort of a whole generation of business leaders has just learned all about how important supply chain is, and that in fact your business, you know, can almost fall apart if you don't know where your stuff is and when it's coming in and, you know, have the ability to manage it in real time and react in real time and so on. We're seeing. I mean, if we just look at our pipeline, like our pipeline is up massively compared to this time last year. You know, this time last year we were already a year into pandemic. It doesn't seem to be slowing down.
It seems to be, if anything, accelerating. Healthcare is moving the fastest right now, in that they seem to have already sort of said, "Okay, you know what? We can't wait for the pandemic to end. We just gotta get this stuff moving." There we're seeing actual deals signed and so on. In complex distribution and retail, we're starting to see more deals moving toward a close, but a lot of the activity is still top of funnel there, where it's companies that have realized that their existing platforms are not capable of dealing with what they now have to handle.
At the same time, they're, you know, they're looking at the, you know, all the distractions going on in their business, not only directly COVID, but this completely screwed-up supply chains they're trying to manage, as we get through these next number of months. I mean, they can't access containers. Cost of containers has tripled or quadrupled. You know, in some cases, their landed cost, because of the cost of moving a container across the water, their landed cost is higher than their retail selling price. So there's all kinds of issues they're dealing with. It's not the time for some of them to also swap out their core operating platform. They're trying to get ready to swap out their core operating platform 'cause they can see it's not handling sort of the new world we're in.
We're anticipating, I mean, you know, I mean, crystal ball gazing is already always dangerous, but if judging by our pipeline, we're expecting sort of healthcare to be in the lead for another couple of quarters and then a pretty rapid acceleration on the complex distribution and retail side.
Okay. That's all great color. On professional services, I mean, three quarters running at new record levels, and you mentioned that your capacity constrained. Can you maybe give us or remind us of your headcount in professional services and how many, how much staff are you adding?
Let me pass that one over to Mark. We've got a lot of open positions, that's for sure. It's an interesting thing that, after I think the first eight months of the year, our fiscal May to December, we really struggled to add heads. You know, we added some, so we had some waves of resignations come through and so on. A lot of people were restless and moving around and so on. Suddenly in January and February, that seems to have turned. Even as we're heading into March, it seems to be remaining very positive. Suddenly we're able to recruit, retain, and really build up those teams. We don't know if the wave of restlessness has kind of just subsided or, you know, did we get smarter?
I don't think it's really that. You know, we did adapt some of our strategies, but somehow something shifted in the market. We're finding it's suddenly easier again to add talent. Let's let Mark give you some of the numbers there.
Yeah. Amr, we're at about 240-245 professional services team size right now. That would be up about 20 heads from the beginning of the year. As Peter mentioned, we had you know our quarter one and our quarter two were kind of bumpy you know. We did have some attrition. You know we had people leaving we were hiring. Our headcount growth was you know kind of slow in the first couple of quarters. It almost feels like you know kind of even since the first of the year that you know we've done some things we've reacted to that. We've you know we've looked at comp.
We've you know, become as competitive as we think we need to be to retain and hire the right people. It feels like it. It feels like the winds of change have stopped blowing there a little bit. At least in the last couple of months, we've seen what seems like a more stable recruiting environment for us, and a more stable retention environment, so that, you know, our headcount growth in the last couple of months has been out of pace with what we saw in the first, you know, sort of eight months of our fiscal.
Reason for some, you know, positive outlook on our ability to scale up that business a little bit more rapidly in the coming quarters.
Where do you wanna take that 245 number in the next couple of quarters?
Yeah. You know, we would increase that by another, you know, 30 heads in a heartbeat, and then up from there.
Okay. Maybe one last one. I mean, you guys touched on margin and a couple of moving parts over the next few quarters. OpEx has spiked from last quarter, which surprises me. Wondering how we should be thinking about your investments in the business going forward as well as, you know, like you guys spoke to inflationary pressures, specifically on the next couple of quarters, what's a good sort of number to use?
Yeah. We think, you know, we're gonna continue that. You know, that investment that you've seen, I know it didn't change a lot in the last, you know, in the last quarter. It has been inching up, you know, quarterly, across the year. You know, as we look ahead and think about what we're doing and think about, you know, investing in the product and investing in the sales and marketing team and programs, you know, we expect that part of the OpEx to continue to tick up, like you saw in earlier quarters.
Great. I'll pass the line. Congrats on that strong quarter.
Thanks, Amr.
Thank you. Our next question comes from the line of Nick Agostino of Laurentian Bank Securities. Please go ahead with your question.
Yes. Good morning. I guess first question, just to make sure I heard correctly. Peter, did you say that?
Yeah.
Sorry. Yeah. Did you say that?
I think, Nick.
Sorry. Can you guys hear me?
Yes, we can.
Kind of breaking up a bit, Nick. Yeah.
I'll try to speak closer to the mic. I just want to confirm it was one IDN win in the quarter, and then one follow-on IDN win after the quarter.
That's right.
That's right.
Yeah. We had thought there was gonna be two. At the last minute, there was again some distraction in one of the IDNs we were about to sign, and it slipped into the first week of February. There was one truly in the quarter and one just outside the quarter.
Okay, great. Then on the commentary you guys made earlier and in the press release with regards to Omicron impact being December and January, you've given the color on the healthcare side. Were you observing the same impact on the other segments of the business, or was that commentary totally skewed just to healthcare?
No, it was right across the board. Like, I mean, you know, one account, for instance, in the sort of Detroit region where, I mean, there was a full six weeks in the quarter where they were just. I mean, they could barely keep the lights on. They had so many people out with Omicron. So you know, that whole project's, you know, slowed down massively. It was pretty well right across the board. I mean, I'm not sure anybody was spared. I mean, the further south you went in the U.S., the less the impact was, there's no question. But still, I don't think there was a single sector that was spared. Our retail clients were the least affected. But of course, retail is still a pretty small segment for us.
Okay, that's good color. Going back to the commentary you provided, you said the focus is on the pharma module getting traction there. First, just to make sure I heard correctly, you said you hope 10 of the next 100 IDN wins include pharma module, or was it 10 of when you get to a 100 IDNs that you hope that initial 100 includes those 10 or includes 10?
Yeah. It's when we get to 100. You know, we're currently sort of just-
Yeah.
Blowing past 50 kind of now. You know, we're hoping by the time we get to 100, we'll have, you know, at least 10% of them will be running the pharmacy module, 'cause we're really seeing. I mean, we look at this overall market and we say, okay, there's you know, 311 IDNs we're directly targeting. You know, call it a $620 million ARR market. You know, as we look at it over the long haul, we're kinda saying, you know, it's probably not reasonable to expect that we'll win more than half of the market. It feels like the market ceiling is, you know, maybe around 150 IDNs kind of thing.
We wanna make sure that as we sort of get through that effort to take a big chunk of that market for the rest of the supply chain, you know, requirements that we've got a second wave to go to, you know, ready to roll as this wave starts to sort of wind down, whenever that would be, 5, 6 years from now kind of thing. We're saying, you know, let's make sure that we don't lose sight of the fact that we wanna have a solid pharmacy base within the next few years so that we can start that second sort of path back through these networks, you know, following the wave we're in now.
I guess maybe if you can just expand on what is there an overhang here, so something that is stalling maybe the take-up on that pharma module? You guys have certainly been developing the product for quite a few years. The commercial rollout, I think, is at least one year since we're about getting close to one year. Is there a sense that things are maybe stalled out for a certain reason, maybe it's the pandemic, or is the observations you're making on the pharma side very similar to what you would've observed on the med surg side, so we should expect a similar type of adoption curve?
It is. I think you're right on both points. It is similar. Like when we first got into, for instance, OR, we were three or four years commercial before it started turning into any kind of a wave. You know, there just... Everyone wanted to see it running for a couple of years before they were ready to adopt it, so we had to get the first couple of networks up and live and, you know, happy and saying good things. And then even then it took a couple more years before people were ready to adopt it for themselves. It is following that same pattern. At the same time, there's no question the pandemic has affected it.
You know, our second pharmacy client that is rolling out the pharmacy module, the pandemic has delayed their project by probably 12-15 months. You know, the pandemic is definitely affecting it. Overall, it's following the same kind of pattern we've seen in the past.
Okay. Then maybe just some commentary. You alluded to expanding the SIs, supporting the SIs. Can you just give us an update on where things stand with the Workdays, with the KPMGs as far as how much of their pipeline they're contributing, it continues to grow. If you've seen, I believe Workday has been historically more healthcare-centric, and KPMG, I believe, has been more retail-centric. Has either one been successful or showing signs of cross-selling or crossing over to other markets, specifically on the Workday side?
No. I would say Workday is still predominantly healthcare, and has remained. It's actually remained more healthcare focused than I thought it would. You know, we're now seeing activity in a number of accounts again with them. In total, our total pipeline is up to about 27% now partner-influenced. Interestingly, we looked at the last year, and we can see that we entered the year about 21% partner-influenced in our pipeline. Yet if you look at closed deals, 30% of the closed deals were partner-influenced, which again sort of highlights that fact that when you have a partner involved in the account, your win rate goes up. You know, your percentage of won deals ends up being more partner-influenced than your pipeline actually is.
you know, we're seeing good headway there. We're still, I would say, though, most of our active partners are either in healthcare or in pure retail. you know, we're having really good success with RiseNow in the healthcare space. you know, we've mentioned accounts, companies like Deloitte and KPMG that are working with us in healthcare. of course, we've got the Workday relationship, and we recently signed a partnership agreement even with Infor. you know, Infor used to be sort of more of a competitor to us in the healthcare space. we signed a partnership agreement with them to cooperate in the space. that is going very well.
Retail, we've, you know, always had partners around the world, European, North American, even Asia Pac, partners there. The complex distribution space is the space where I think we still lag in terms of partners. You know, it's something that our partner team is putting a really focused effort into, is to try to build out more, you know, more of a SI network around complex distribution. We're probably. I would say we're two years behind healthcare in where we are in complex distribution.
Okay. I appreciate the colors with. Thanks for the questions, or thanks for the responses. Last line.
Thanks.
Thank you. Our next question comes from the line of Andy Nguyen of Raymond James. Please go ahead with your question.
Hi, this is Andy on for Steven Li. I just wanna start with a couple questions on if there's any metrics you can share that show the impacts of the investment in sales and marketing, as we're not seeing the significant impact on the earnings and deal count yet.
Yeah. I mean, Andy, I think probably what you wanna focus on there, what we focus on is really around SaaS ARR bookings. Those are up 23% this year compared to last year for the nine-month period. You know, so once you start looking at enough quarters there, the sort of the lumpiness goes out, and you kind of sort of start to see the trend. That's number one. Number two. Peter mentioned this, you know, during his comments a bit, you know, we're seeing some really robust pipeline and pipeline activity. You know, we invested quite a bit, you know, particularly in healthcare in our sales and marketing, bringing in AEs for healthcare, et cetera.
We are starting to see these, call them the newer AEs, successfully closing deals. You know, we've had a couple closed in a couple of recent quarters from newer AEs that have been around for sort of less than two years. If we look in our pipeline right now, and focus on, you know, who's in those deals in our pipeline and where the growth is coming from, we see a great penetration from the new AEs that we've brought on within the last two years that are driving a nice chunk of that pipeline growth. It's building. You know, we see it.
We see it in growth in pipeline, and we're seeing it in results in SaaS ARR bookings.
Yeah. Thanks, Mark. Just touching on that pipeline data point, what percentage of the pipeline is influenced by the partners?
Yeah. It's like I think Peter mentioned 27%. I think it's actually slightly higher, maybe we're rounding there, but I think it's slightly higher than 27%. It's 28% right now, and that's up from, you know, low 20s a couple quarters ago.
Yeah. Thank you. My last question is-
I'm looking at the free cash flow year to date, and I know I think you guys touch on the primary reason for the decrease in free cash flow is the timing of the ARR. I think year to date is down by 76% comparing to last year.
I'm just wondering, like, why is it down so much, and would we expect Q4 to be muted as well?
Yeah. I mean, I think if you look back and you see those DSO numbers that I quoted, and you look back at our history there a little bit, you know, a year ago we were in this sort of, I would say, unsustainably low DSO level in the, you know, kind of 40s. Before that, six months before that, three quarters before that, DSOs were up in the high 60s and into the low 70s. You saw last year that kind of decrease in DSOs went from, you know, 70 down to, you know, the mid-40s.
You had this kind of one-time influx of cash, and that's the comp that you're looking at. You know, that's the last year comp you're looking at. Right now our DSOs are in the high, mid-high 50s, which is, you know, I mentioned it, I call it a reasonable level. You know, we'd like to see the number down in the low 50s rather than in the mid-high 50s, but it's still a reasonable number. But it's grown up from, you know, from the mid-high 40s up to the high 50s, and so that's, you know, that's consumed some cash along the way.
We don't feel like we have any kind of an AR problem, you know, as we look at the balances and our expectations for collections and, you know, our write-off history has been just phenomenal. We don't see any issues there. Like I said, I would expect that DSO number, you know, comes back down into the lower fifties. That's gonna create some less strain on, you know, usage in working capital.
The seasonality of our Q4, you know, is such that it tends to be a high cash quarter for us, both around our billing cycles, but also because of our tax credits and the cash flow. The one time a year tax cash flow that comes from those tax credits is in our Q4.
Gotcha. Thank you. I'll come back to that line.
Thanks.
Thank you. As a reminder, to register for a question, please press the one four. Actually, we do have one question. It comes from the line of John Shao. My apologies, National Bank Financial. Please go ahead.
Hey, good morning, guys. I just had a quick question on.
Good morning.
Hardware revenue. 17% quarter-over-quarter increase, that looks really decent. Just curious, how should we read about this quarter-over-quarter increase given the fact that the supply of hardware is still fragile today?
I missed the very beginning of that, John. Which were you talking about a revenue line there?
Hardware revenue, the 17% quarter-over-quarter increase.
Ah.
Yeah, how do we look into that number?
Yeah. Yeah. It's a tricky one, John, and it's a tricky one for us to call. You know, that was a big outsized quarter for us. If you look at our history, you know, that was a large outsized quarter. We still have some pretty robust pipeline there. I should say we have some pretty robust backlog there. Some of that stuff is, you know, we do have some trickiness with supply chain, you know, getting this stuff. It's the vast majority of what goes through there is third-party stuff. We do have a little bit of proprietary stuff that we put together and sell there.
We have supply chain, you know, some supply chain issues on that. It's kinda hard, you know, it's even hard for us to determine with the level of accuracy when that backlog's gonna ship. I think, you know, long story short, I think that what you saw in that Q3 was an outsized hardware quarter, but we do have some pretty reasonable backlog for that now, still today.
Thanks. The other question is on the gross margin, 43% for the quarter, which is down from 45% from last quarter. I'm just curious, how should we see the trend of the gross margin in the upcoming quarter? How much is this quarter's gross margin decline related to the FX?
A couple of things there, like that 48, 43% sort of headline gross profit margin number compared to 48, so there's a 5% swing compared to last year. I'll dissect that in a couple different ways. Number one, you know, if you look at our SaaS maintenance support and professional services margin, it was about 47% in that quarter. Just like in an absolute sense, it's a higher number, you know. It's a more robust number. That sort of level I think is probably, you know. We're still sort of investing there, so, you know, I don't think that's an unusual margin level for the near term there.
What is gonna make the thing move around, you know, is the mix. Our headline number was 43%, but our SaaS maintenance support and professional services number was 47%. So the hardware number, which is the lower margin number, is diluting that profit margin down to 43%. Number two, if you compare the 43% to the 48%, there's like a five percentage point swing in that headline number. And as I mentioned in the comments, that's. There's three things in there. There's FX, there's mix, and there's investment. Like, there's real close to a cost increase investment. And if you look at how those contribute to that five percent, FX is about two percent of that five, two percentage points of those five.
Revenue mix is about two percentage points of those five. Cost investment is about one percentage point of those five.
Okay. Thank you so much. I appreciate the color.
Thank you. As a reminder, to register for a question, please press star one. At this present time, no one else is registered for any questions. Please continue with your presentation or closing remarks.
Thank you. Well, that concludes the question and answer session. Just one overall comment to make, I think, with regard to a number of these questions. The, you know, the stock market has continued and the investment community has continued to sort of shift priorities from growth to profitability and with probably a more recent emphasis on profitability and maybe less on growth and so on. That sentiment tends to move around a little bit. You know, we continue to run a long-term game plan here that calls for a heavy emphasis on growth, investing in growth as much as possible to drive a solid, you know, growth in the top line and particularly solid growth in the SaaS numbers while trying to respect a reasonable level of profitability. That continues to be our strategy.
We continue to hold the line on that. Certainly, you know, as you interpret these numbers and look forward to future quarters, you can know that that's what we're trying to do. Sometimes there's lumpiness, gets pushed around a little bit, but the goal is primary emphasis on growing that SaaS number, but maintain profitability at a reasonable level. Okay. With that, it concludes our call. Thank you for joining us. As always, if you have additional questions, please do not hesitate to give Mark or I a call. Thanks, and have a great day.
Thank you. That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.