Good morning, everyone. Welcome to Tecsys Second Quarter Fiscal 2023 Results Conference Call. Please note that the complete second quarter report, including MD&A and financial statements, were filed on SEDAR after market close yesterday. All dollar amounts are expressed in Canadian currency and are prepared in accordance with international financial reporting standards. Some of the statements in the conference call, including the question and answer period, may include forward-looking statements that are based on management's beliefs and assumptions. Actual results may differ materially from such statements. I would like to remind everyone that this call is being recorded on Thursday, December 1st, 2022 at 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. Our company began fiscal 2023 with strong growth, underscored by solid SaaS bookings. That momentum continues into Q2. Bookings included base accounts as well as new accounts in the U.S., Canada, and Australia. Our SaaS offering is proving to be a system of choice for organizations grappling with outdated technology and supply chain complexity. Since our last results call, we announced implementations at the distributor AMG Medical and the University of Miami Health System, each of which pointed to Tecsys software as the digital enabler of their supply chain strategy. With nearly 20 projects or renewals landing in the quarter, we are seeing traction for the Tecsys value proposition across all industries in which we do business, within a market that is highly engaged.
As much as I'd like to say that the pandemic is behind this, the effects of it are not. Labor and supply issues continue to affect many companies. That said, our ability to get in there and install a system that puts them on a path for success is what we do really well, and this gives us confidence that the momentum we are seeing will only continue to gain speed. Before turning to the second quarter results, I wanted to take a moment to speak about a transition that is underway in our HR leadership. Patricia Barry, who has led our HR team for more than 20 years, will be retiring over the next few months. She has much to be proud of. She's been a key part of our success. We'd like to express our appreciation and wish her all the best.
I'd also like to welcome Nancy Cloutier to the position of Chief Human Resources Officer. I've spoken before about the important role our talented people play in the development and delivery of our software. Nancy brings her HR experience from much larger organizations to us and is now leading the effort to prepare our HR team and the company as a whole for the growth ahead. As our team expands and our business continues to grow, we are excited to have Nancy on board. Getting back to Q2 results, I'd like to take a moment to summarize the key events of the second quarter of fiscal 2023 and the results of operations. Mark will then walk us through the financial results in more detail. Finally, I'll comment on our outlook, followed by a Q&A session.
There are a couple of key indicators I'd like to highlight, which are contributing to our continued track record of stable growth as a SaaS organization. First, our revenue model continues to move in a positive direction. Our SaaS revenue model provides greater revenue visibility and makes it easier for new and existing companies to buy our software solutions. Notwithstanding our total record revenue, up 11% in the quarter compared to the same period last year, the real headline is that our SaaS revenue is up 34% year-over-year, which results in the achievement of an important milestone in this quarter, in that SaaS revenue now represents over half, 52% to be specific, of total recurring revenue.
That means that in the last four years, we have built a SaaS business that is driving more recurring revenue than our legacy on-prem business built to over the previous 35 years. We are extremely proud of this achievement. Second, our SaaS ARR bookings are up 30% in the first half of this fiscal year compared to the same period last year. Bookings included base account expansions as well as new SaaS accounts. As mentioned in Q2, we added two new major healthcare IDNs in the U.S., as well as new complex distribution and converging commerce accounts outside of the U.S. These bookings also reflect continued partner involvement in our pipeline and in our closing activity. It is extremely difficult to manage today's supply chain complexity without a properly integrated digital supply chain platform.
We're finding that as companies try to patch together an agile supply chain by adding on to old- style monolithic systems, at some point they conclude that the core software they are using was never designed to do what they now need it to do. Tecsys is proven to be among the best cloud-based solutions available in the markets we serve, and we have the people, the products, and the plan to provide what the market demands. Mark will now provide further details on our second quarter and first half financial results.
Thank you, Peter. Starting with our second quarter, we're pleased with the strong performance in our quarter ended October 31, 2022. Total revenue was CAD 38.1 million. That's 11% higher than CAD 34.3 million reported for the same period last year. Total revenue excluding hardware increased 9% compared to the same period last year, or 6% on a constant currency basis. As many of you know, a significant portion of our revenue, about 70% this quarter, is denominated in U.S. dollars. As a result, movements in currency exchange rates have an impact on our reported revenue and growth.
We continue to experience strong and steady revenue streams underpinned by a 34% increase in SaaS revenue, up from CAD 6.6 million in Q2 2022- CAD 8.8 million in Q2 of this year. On a constant currency basis, SaaS revenue was up 30% compared to the same quarter last year. SaaS remaining performance obligation, also known as RPO or SaaS backlog, was CAD 109.5 million at the end of Q2 fiscal 2023. That's up 51% from CAD 72.7 million at the same time last year. On a constant currency basis, that growth was 43%. Maintenance and support revenue for the three months ended October 31, 2022 was CAD 8.1 million, down 1% compared to the same quarter last year, or down 3% on a constant currency basis.
The general decline in the quarter compared to the same period last year is consistent with our shift to SaaS. We expect as current customers migrate to our SaaS offering, maintenance and support revenue will continue to decline over time. Professional services revenue for the second quarter was CAD 13.5 million. That was up 4% from CAD 13.1 million reported for the same quarter last year, but flat on a constant currency basis. As we've noted the last few quarters, we're starting to see the impact that our transition to SaaS will ultimately have on our professional services revenue line. We're seeing a continued reduction in custom development work as customers opt for a more out-of-the-box approach to platform implementations. We're also continuing to experience the increased collaboration of our partner ecosystem in helping to implement our systems.
We expect that over time, these factors will continue to moderate our professional services revenue growth in the future. License revenue for the quarter was CAD 1.1 million, compared to CAD 1.0 million in the same period in fiscal 2022. As we've stated before, with most of our software bookings now SaaS, we expect license revenue to decline in general over time. Hardware revenue in Q2 of fiscal 2023 was CAD 6.6 million. That was up 22% from CAD 5.4 million in the same period last year, and an increase of CAD 2.8 million sequentially compared to CAD 3.8 million in Q1. By way of reminder, we sell primarily third-party hardware to our customers for warehouse operations and in-hospital point of use storage and tracking.
This part of our business tends to be lumpy, and revenue recognition here is tied to delivery timing. That said, like last quarter, our hardware backlog remains strong, driven primarily by hospital network point of use orders. Turning now to bookings. SaaS bookings are reported on an annual recurring revenue basis and can be somewhat lumpy due to the timing of quarterly deal closings. SaaS bookings were down 31% in the quarter to $2.8 million, compared to $4.0 million in Q2 of last year. I'd point out that it's helpful to look at a longer- term period to get a real understanding of what's happening with momentum on SaaS bookings.
We've been seeing some sustained momentum with SaaS bookings up 30% year- to- date compared to the first half of last fiscal year. Up 40% in the last 12 months through Q2 fiscal 2023 compared to the prior 12-month period. Professional services bookings were CAD 15.0 million in the quarter, down 16% compared to CAD 17.9 million in the same quarter last year. Up 55% sequentially compared to Q1. This highlights the lumpiness and impact of timing on reported quarterly bookings. A reminder that we do see our transition to SaaS and strengthening partner ecosystem tempering professional services growth in the long term. That said, professional services backlog remains solid at CAD 31.9 million at October 31, 2022. For the second quarter, total gross profit was CAD 16.7 million.
That was up 7% compared to CAD 15.5 million in Q2 of last year. That was led by higher gross profit contribution from SaaS maintenance and support, as well as license and hardware. As a percentage of revenue, gross margin was 44% compared to 45% the same period last year. Combined SaaS maintenance, support, and professional services gross profit margin for the 3 months ended October 31, 2022 was 46%, compared to 49% in the same period in fiscal 2022, but flat sequentially compared to Q1 fiscal 2023. We generally expect services margins to flatten out in the coming quarters of fiscal 2023, and we expect to see services margin improvement into fiscal 2024 and beyond.
We believe this will result as the business continues to scale and as we focus development and operational energy on optimizing platform efficiency. We see this as a multi-year journey with incremental benefits building over time. Switching now to our expenses for the quarter. Operating expenses increased to CAD 15.6 million. That was higher by CAD 1.7 million or 13% compared to CAD 13.9 million in Q2 fiscal 2022. Operating expenses are up compared to the same quarter last year, primarily because of higher research and development costs, as well as higher sales and marketing costs. Compared to Q1, research and development costs were up 3% on a sequential basis.
We expect research and development costs to be relatively flat sequentially in Q3 compared to Q2. Sales and marketing costs were up sequentially in Q2 on higher marketing program spend, seasonal sales and marketing events, and travel. We expect an increase in sales and marketing costs sequentially in Q3 that will be slightly more modest than the increase we saw in Q2. Net profit for the quarter was CAD 715,000 or CAD 0.05 per earnings per fully diluted share, compared to CAD 708,000 or CAD 0.05 per share for the same period in fiscal 2022. Net profit in the current period benefited from a lower effective tax rate. Adjusted EBITDA was CAD 2.8 million in Q2 fiscal 2023, compared to CAD 3.2 million in Q2 of last year.
Net profit and adjusted EBITDA were both positively impacted by favorable foreign exchange of approximately CAD 0.8 million compared to the same period last year. Turning now just briefly to our results for the first half of fiscal 2023. Total revenue was CAD 72.3 million. That was up 7% compared to CAD 67.5 million in the first half of last fiscal year, and that's up 5% on a constant currency basis. SaaS revenue for the first half was CAD 16.8 million. That was up 37% from CAD 12.2 million in the same period last year and up 34% on a constant currency basis. Our SaaS bookings are up 30%, as I previously mentioned, to CAD 6.7 million, compared to CAD 5.1 million in the first half of last year.
Our net profit for the first half was CAD 755,000, compared to CAD 952,000 in the same period last year. Foreign exchange movements had a positive impact of approximately CAD 1 million on profit and adjusted EBITDA compared to the same period last year. Adjusted EBITDA was CAD 4.3 million in the first half of fiscal 2023, compared to CAD 5.7 million last year. We ended fiscal 2023 with a strong balance sheet position. On October 31, 2022, we had cash and cash equivalents and short-term investments of CAD 41.8 million. That was down CAD 1.5 million compared to CAD 43.2 million at the end of fiscal 2022, but up sequentially from CAD 37.5 million at the end of Q1.
Finally, we had debt of CAD 7.8 million at quarter end, compared to CAD 8.4 million at the end of the fiscal 2022. I'll now turn the call back to Peter to provide some outlook comments.
Thanks, Mark. Tecsys' stable performance continued through the second quarter of fiscal 2023 with a strong balance sheet and a robust backlog and strong sales pipeline. We are seeing widespread buyer intent across target markets, solid opportunity cycles, and a highly capable sales team with the tools and talents they need to capitalize on a market ready to invest in new technology. Our increasing market share in healthcare, supported by an increasingly robust partner network and growing acceptance of the clinically integrated supply chain and consolidated service center model, together with our expanded healthcare sector offering, gives us confidence that the healthcare sector will continue to serve as an important revenue stream for us. Turning to converging distribution, we continue to hone our sweet spot there and carve out our share of a massive market opportunity driven by fundamental changes to the supply chain industry.
Changes spurred by aging existing systems, digital adoption, and a realization that heightened consumer expectations are here to stay. We are pleased that this first half of fiscal 2023 continues recent trends. It isn't hard to see that accelerated change is on the horizon when it comes to supply chain management, and companies are starting to invest in that change. We believe that the remainder of fiscal 2023 is tracking well against our internal KPIs, and we are well- positioned to expand our footprint in this growing market. In summary, I'd like to remind Analysts and our Investors of our key themes for fiscal 2023. First, we'll continue to maintain a laser focus on expanding our SaaS revenue model. Second, we will continue to deepen and strengthen our partnership ecosystem. This is key for us to scale rapidly into North American and international markets.
Third, we will continue to expand and refine our distribution and omnichannel business platforms to service evolving needs in both of our Healthcare Supply Chain and Converging Distribution Market segments. Across all 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 fast, stay connected, and expand on the value delivered. With that, we will open the call back up for questions. Thank you.
Thank you. If you'd like to register a question, please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. One moment, please, for the first question. Our first question is from Amr Ezzat with Echelon Capital Markets. Please proceed.
Peter, Mark, thanks for taking my questions. My first one's on the economic environment. You know, like, it's ever weaker, and I'm just wondering how conversations with clients are evolving. It seems like your product is still getting good traction, but wonder, you know, like, if you're seeing some reluctance from net new accounts to engage in conversations at all, or?
Amr, overall, it seems to be a multi-speed situation. I mean, we're in a lot of different markets. You know, the healthcare market, for instance, the hospital market is completely unaffected. I mean, that market right now is just go, go. Frankly, it is hotter than we have ever seen it. The retail side, I would say is actually doing surprisingly well. There's a lot of talk of, you know, recession and our, you know, our consumer spending habits changing and all that kind of thing. We're not seeing that in the retail markets we serve. You know, we just came through Black Friday, Cyber Monday. We saw through our Room Management Solution platform, we saw some pretty good, you know, order flows running through that platform.
And certainly we're seeing continued investment from that from that market. You know, I mean, we're keeping an eye on that. That, you know, that could yet slow down. Certainly at this point, the actual transaction flows and interest and, you know, we added a couple more accounts in the quarter in that market, seems to be clicking along quite well. The, you know, general distribution, I would say, is the one that is more hit and miss. There are accounts, I mean, there are subsegments in general distribution that are clearly slowing down a little bit and are being more cautious. There's other segments that are not.
You know, that's where when we look at our overall, you know, overall across the board, we look at the mix of healthcare and general distribution and retail. We're seeing, you know, overall total pipelines very strong. No question, though, healthcare is the strongest. I would say retail is probably next. Complex distribution is probably last. Even there the pipeline's, you know, still reasonable. We continue to sort of watch what's going on out there, but so far not seeing any impact on slowing down the pipeline.
Great. Thanks. Mark, appreciate all the color on costs and margins in your prepared remarks. If I were to sort of sum up margins in and around the same levels in fiscal 2023, with an improvement in fiscal 2024, I wonder whether fiscal 2024 is a year that looks like fiscal 2021, where you guys were double-digit EBITDA margins. Is that fair or is that, like, too aggressive?
No, I think that's, I mean, that's a sort of a different question. When I was talking about margins, I was really talking about, you know, services gross margins. I'm thinking about.
You extrapolated, I guess.
You know. And that we have to be a little bit careful about that extrapolation because our, you know, our stated intent and our philosophy has always been that if we see real market opportunity for growth and taking market share, we're gonna invest into that. You know, we'll continue to monitor that. You know, at least if we see markets and potential and pipelines like they look right now, I think our propensity in the intermediate term, you know, will be to invest into that in sales and marketing, in R&D. You know, let the EBITDA margin expansion, you know, happen a little bit later as long as there's real opportunities to invest in growth.
Fantastic. It's too early to call a proper inflection point on EBITDA margins.
I would say, keep an eye on, you know, keep an eye on gross margins.
Fantastic. Fantastic. Maybe one last one for me. Can you update us on the capital allocation strategy and M&A in light of your strong balance?
Yeah. I mean, we continue to look out there, but nothing really has changed. I mean, you know, we're clearly pretty conservative buyers. You know, the opportunities we've looked at, still have ended up sort of priced above a level that we think is reasonable to go in and spend Investors' money on. We continue to, you know, look. We're looking in Western Europe, we're looking in the U.S. market, we're looking for the right fit, and good opportunity. So far, we're still seeing pricing pretty high. We're still seeing private equity companies with a lot of dry powder willing to pay more than we're willing to pay. Our--
You know, at the same time, the organic growth we have in front of us, we think is, you know, tremendous. So feel that we don't want to, you know, unless we find the really right fit, we'll stay focused on organic growth.
Great. Thanks for the color. I'll pass the line.
Thanks.
Thanks for the questions, Amr.
Our next question comes from Andy Nguyen with Raymond James. Please proceed.
Hi, Peter Brereton and Mark Bentler. This is Andy Nguyen on for Steven Li. When you mentioned the deal pipeline in the complex distribution vertical, it's kind of reasonable. Can you give us some more color on your outlook in that specific segment? Should we expect any changes for the rest of the year or next fiscal year, in that sense?
No, no real changes. I mean, you know, we have always continued to run. Well, not always, but I guess for probably 15 years now, we've run with sort of two primary verticals, the general distribution vertical and the hospital vertical. You know, they have taken turns to some extent, being hot. You know, you may remember a few years ago we had talk of tearing up the Affordable Care Act in the U.S., suddenly the U.S. hospital market went quite flat for a couple of years. Meanwhile, the general distribution side was actually, you know, quite robust. You know, right now it's clearly the hospital side. I mean, as they went through the pandemic and came out the other side.
Many of them realize how weak their supply chain solutions were that they were, you know, existing with. It's become a, you know, an even hotter market than it was before. That's clearly where a lot of the excitement is right now. At the same time, the general distribution market, you know, still represents 55% of our revenue. It's an enormous market. There's 12,000 companies in that market. I think it was Gartner Group that just came out with a statement that said they believe close to 50% of the companies in that space will be shopping for new solutions within the next few years. You know, these are systems that all went in in time for Y2K, and they're getting pretty old.
That market continues to be quite interesting. We'll, you know, we will prioritize investments in healthcare right now 'cause that's the hottest market for sure. At the same time, we will continue to do a great job of serving the other market as they come through this, the current distractions they're in. I mean, it's largely still distractions around labor availability and transportation availability as well as, of course, the shutdowns in China impact that market a fair bit. We've got to get through those. That's probably gonna take another couple of quarters before that market really completely warms back up again. Even so, it, you know, it's still good enough, frankly. It's still a pretty decent market. No real changes on our side.
We'll continue to pursue them both and fully expect that market to come back up to a more normal operating temperature within a couple of quarters.
Gotcha. Thank you. Maybe just a question for Mark. You had a really decent quarter in terms of capital from operations generation. Should we expect a similar level for the remainder of the year comparing to, like, fiscal 2022?
Yeah, I mean, I think we had a kind of a light Q1 on cash flow, which is kind of a little, it's seasonal for us. You know, that kind of is our historical trend. That's kind of a low point, tends to come back a little bit in Q2. Our bigger cash, you know, generating quarter tends to be in our Q4. I think, you know, I expect the back half of the year to be generating more cash flow than the first half of the year.
Perfect. Thank you. I'll jump back in queue.
Yeah. Thanks for the questions.
Our next question comes from Gavin Fairweather with Cormark. Please proceed.
Hey, good morning. I wanted to talk about, you know, healthcare. Obviously, your comments were quite bullish on what's going on in the pipeline. You know, obviously you added two new networks this quarter. By my count, you should be, you know, maybe a tick over 60. Obviously, to hit the 100 target, we'll need to see an acceleration in the number of kind of quarterly additions to hit that. Maybe just discuss kind of how many logos in the pipe, how the sales cycles are going, and any other KPIs and color there, which are kind of backing up your bullish comments.
Yeah, I mean, if you look at total in the pipeline, we've got--i t was actually a couple weeks ago, I looked at that, but I think we've got in the low 20s, 23, 24 accounts in the pipeline right now. A lot of the change is just the velocity in the pipeline. I mean, they're moving through quickly. You know, if you talk to our sales teams, you know, right now, their main complaint is, you know, the speed of the legal process. You know, by the time the contracts have to go through legal review it, at, you know, on the one side, you know, on the client side or on our side, it takes some time. It's pretty strong.
I mean, if we look at our total pipeline, it's, you know, more than 2/3s of our pipeline right now is actually new account healthcare opportunities. It's very, very strong. You know, in terms of reaching 100, you know, we're quite confident we're gonna hit it. I mean, we, you know, we've come through a couple of really weird years that we're sort of hurry up and wait and sort of lots of pipeline, but too distracted to do anything, and so on. That seems to have ended. I mean, at this point it really is, you know, rolling. You know, we sort of look at it and say, "Yeah, we've, you know, we've signed five in the first half.
You know, can we, you know, by next year, could we be at a run rate of sort of 12-15 in the year? Yeah, we think so. You know, we're looking, we're looking at it over the next couple of years and feeling, you know, like we're pretty well right on track to hit that 100 mark on schedule. We're feeling good about that. I mean, I think the question we're starting to think about is sort of, okay, what comes after that 100? You know, there's obviously 300 in total. How many in total can we get? You know, can we end up with 150? I've sort of said 150 is the minimum long-term goal.
You know, at the same time, the market acceptance is growing so rapidly, it's quite possible we could push that to, you know, more like 200. There's also the, in effect, almost the verticals within the hospital space. You know, we're still just in the early stages of, you know, growing the pharmacy piece. This last quarter, we had a pharmacist, a U.S. based pharmacist join our sales team. She's now an active part of our sales team, helping to sort of explain our solution to the markets and so on. You know, that, we think that's gonna have a very positive impact. There's just lots of growth within the accounts we already have, plus, you know, we still see a pretty good runway for new accounts.
Awesome. That's great color. Maybe for Mark, you know, your comments on services gross margins were interesting. You know, been trending in kind of the mid-forties. Sounds like they're gonna stay there in the back half. Curious maybe for a longer-term target on that front. I mean, the SaaS revenue is scaling, and you're doing some work to kinda optimize the platform on the back end, and you're pushing more services work out to partners. How do you think about kind of the longer term potential for that gross margin line on services?
Well, I mean, I think it's, you know, I think when we look at the cloud componentry in there, where we're sort of in the, sort of high 50s right now, you know, it's sub-optimized and if we look down the road and sort of see a dot on the wall and aim for it, you know, it's 10%+ expansion on that, on that line. The question for us is, you know, how quickly can we move the needle there, and how much scale, you know, does the business need to have in order to get there?
We're doing quite a bit of work on, you know, on figuring out and running initiatives that are currently underway that we expect will have a positive impact on margins over time. You know, those are focused on, you know, reducing public cloud infrastructure costs, you know, making the platform more efficient to operate and support. The other dynamic in there, of course, is, you know, larger average deal sizes here typically will tend to support higher margins. The bigger our deals are, the higher the margin, you know, the higher additive margin is and then how, you know, that has a positive effect on moving up the averages.
Like I said, we're doing a lot of work in this area and, you know, we think there's a lot of potential and, you know, that's kind of the 10 points out there. It's a question of, for us, it's a question of when and where's the top.
That's helpful. Then maybe just on professional services. I mean, I know you made, you know, some additions to the team there, and it sounds like the load that's being absorbed by your partners continues to increase. How should we be thinking about this revenue line going forward? Are the partners kind of taking on more of their work than perhaps you were thinking? Should we be looking for pretty modest growth in the services line? Maybe just help us out with some updated--
Yeah.
thoughts on that.
Yeah, it's interesting. I mean, our that line is moving, it's moving pretty. You know, it's the growth line there seems to be changing pretty dramatically, just in terms of the--, you know, we measure the attach rate, so the bookings that are coming in on professional services, you know, as deals happen, you know. When a new SaaS deal happens, how much services is attached to it. That evolves over time because those initial implementations, you tend to, you know, you tend to do a deal, there's some services to do the core implementation, and then there's some additive work that comes off. It's not completely scientific, but we have seen those attach rates sort of declining and we pointed a couple different things for that.
One is, as you said, you know, the partner ecosystem development and how the partners are taking some of the surrounding professional services, not necessarily very specific product, you know, configuration, you know, core implementation stuff, but some of the surround stuff. Oftentimes the sort of stuff that we think about is more kind of client-side services that sometimes clients engage us to help them with. We have partners right now that are doing work in that area. That's tamping down that attach rate. The other thing is, you know, I mentioned it in my remarks, this notion that, you know, as we shift more and more to SaaS, just that shift itself, you know, the market is starting to say, "Hey, wait a second.
If we wanna really take advantage of SaaS and upgrade ability in the future, we wanna make sure we stay as clean as we can on the stack and really get rid of, you know, custom mods and modification work that, you know, would otherwise be services revenue for us and stick with, you know, the core platform. We're kind of, you know, we're kind of encouraging more so now in the SaaS world than previously for our new prospects and customers to stay on that clean path because, you know, there is more value in the end for them to be on a clean upgrade path.
That's happening, even more dramatically as healthcare becomes a bigger part of our bookings, which we've seen in the last, you know, in the last number of quarters. Healthcare becomes a bigger part of our bookings, and those deals tend to be very, you know, very sort of modification light. You know, oftentimes we're going into an opportunity where we're not necessarily replacing a system, we're putting in a system. Oftentimes the networks are very keen to say, "Hey, what's the best practice here? You know, Tecsys' has this end-to-end solution." We say, "Well, this is it. You know, put this in just like this and you'll benefit. And here's the ROI.
You don't need to do a lot of, you know, I had this old system that was doing this, and I'd like it to go do this." You know, those kind of conversations aren't happening, you know, nearly as much in the healthcare side. That's tamping down, you know, the amount of services or custom work that happens around implementation. You know, we think that's probably gonna moderate, you know, moderate growth on professional services. Frankly, Gavin, I'm not sure where that's gonna land, you know. I mean, I think it's you know, it's--i n my head, it's clearly single-digit growth, you know. Is it mid-singles? I think time will sort of tell.
Okay. That's helpful. Just maybe a quick one. I saw in the MD&A around the SaaS revenue, you said that there was a bit of a drag from cancellations in the quarter. Did you see maybe a little bit of churn in somewhere in the business there?
I mean, you know, we do see some churn. That's not a new comment. It's kind of meant to be a kind of an all-encompassing, you know, here's the stuff that makes that, you know, that number move around. If you're trying to loop the bookings through to the-- you know, to what was reported as last quarter's revenue and, you know, plus bookings and, you know, what's showing up as revenue this quarter. You know, the dynamics there are, you know, attrition or cancellation is one of the dynamics, and the other dynamics is timing. You know, sometimes we sign a deal, and it doesn't necessarily start right away. It might start, you know, two months later or even three months later.
Quite often times it does start, you know, very quickly. There can be a bit of a time delay there. We have, you know, over the course of, you know, over the course of our of time, you know, we've had some cancellations happen.
Appreciate all the color. Thanks so much.
Our next question comes from Nick Agostino with Laurentian Bank. Please proceed with your question.
Yes, thank you, and good morning, everybody. I guess, Peter and Mark, just trying to understand the hardware revenue. I think it was a record number that you guys printed this quarter. If I recall correctly, last quarter you were somewhere around CAD 4 million, and you suggested that maybe you'd be down at that level in the near term or in the short term just because of supply chain constraints. Just trying to understand how, like, how you were able to source a stronger number. Was there anything you guys did differently? Is that something that you can carry forward, or should we expect maybe a drop back down to that low CAD 4 million?
Yeah, it's a great question, Nick. That was, you know, that was a big quarter. A little bit, I mean, didn't quite see that much coming. We did see some. Remember, right, these deals can be pretty lumpy, so you can have a half a million dollar shipment, you know, come through here or more and it, you know, kind of falls into one quarter versus another quarter. There is just that delivery timing, and that's why, you know, we always mention that in the prepared remarks and in the MD&A because it's very real.
In terms of what's going on in our book there, we still have very significant backlog. It does come down to a question of how quickly can we deliver this. You know, expectations around the PropTech side here, we're still having some. You know, it seems like it's loosening up now, but we're still, you know, we're still kind of burdened a little bit by our own supply chain issues with you know, with chips to build out those smart panels. We see that kind of loosening up. You know, whether that's gonna impact, you know, this year or into sort of Q1 of next year, that backlog's gonna start releasing here eventually.
What does that mean for the next couple of quarters? You know, I don't. I think we're at a high- water mark right here. I also don't think we'll probably be back down below four, you know, in the next couple of quarters. It looks like because of the backlog that we have and the delivery schedules we have right now, it's gonna be somewhere with between those numbers.
Okay. Just to follow up. I recognize the strong demand side of it. You guys called it out on the hospital side. Did you guys change anything or any change from your suppliers when it comes to the shipments? Were you able to access shipments at a faster rate for some?
Yeah, you kinda cut off at the re, but I think you're sort of, I think you're asking about, you know, are there components in there that are where there's less constraint on the, in the supply chain than?
Yeah.
Than others. That's certain. You know, some of the stuff we deliver is, you know, where we really have the, I would say, where we really have more of the supply chain constraints is around the PropTech stuff. The core storage stuff that we sell into that hospital point of view says, you know, there's not. We're able to get that stuff, and in fact, that's some of the stuff that was driving, you know, the pop there in the Q2.
Okay. That's helpful. I guess my other question is, I'm not sure if you discussed in the prepared remarks, I think you recently announced a new, I think it was rapid implementation for the order management system market. I guess a solution that can be installed faster, is a little bit easier to get guys up and running quicker, and then hopefully they do bigger deployments, if I understood that press release correctly. I'm just wondering, have you rolled that out yet, what the timeline is there? If you have rolled it out, what's been the market reception?
Yeah. Nick, we have rolled it out. We actually have, we signed two accounts with it in the second quarter. At this point, both of those accounts that we signed in the second quarter are already live. It has, it's been successful, and is, you know, proving itself in the field. We're pretty happy with that. I mean, that's very much aimed at the sort of the retail market where the implementation seasons in retail tend to be very short. You know, nobody wants to mess with the system around Black Friday, Cyber Monday or Christmas. They've then got sort of a few months in the spring.
A lot of them don't wanna do anything close to Valentine's Day or Mother's Day, they have sort of a couple of openings in there. The summertime is fairly popular, and for implementations in early fall, you've got sort of these big, big events that are sort of total blackout periods in terms of implementation. To have something that you can sort of sign a contract and be live that quickly, we think is pretty important for that market. We're pretty happy that we were able to sign two accounts and bring them live, since we rolled that out.
Okay. Maybe just as a follow-up, what's the relative, I guess, revenue versus this solution versus if somebody went with a full- on order management system alignment?
Like the SaaS revenue is the same. It's really just a highly prioritized and pre-templated approach to implement it, so that you don't sort of get hung up in trying to do a, you know, 1,000 things all at once, which is often the temptation when you're rolling out a new platform. You know, well, we're putting in a new platform, let's add four new payment methods and let's add, you know, endless aisle in the store and let's, you know, et cetera. This sort of focuses the implementation around sort of, no, let's just implement, you know, top-notch order orchestration and, you know, we'll cycle back for the rest later. It uses, you know, pre-templated interfaces.
It uses RESTful APIs, and it uses a sort of a preset workflow that just takes a lot of the guesswork and process development and whiteboarding and, you know, concept term pilots and so on, sort of takes that all down to a minimum or right out of the process entirely and just brings you live. You're immediately getting value. Your consumer experience is already elevated, then you can cycle back to add the rest, but it doesn't change the, you know, the SaaS footprint at all.
Okay. That's very helpful. My last question for pipeline, just wondering pricing increases as contracts up for renewal. Are you guys pushing through any pricing increases? If so, what percentage of your contracts have you done that with, and what's been the market reaction to that?
I mean, we're doing regular price increases with our old on-prem, you know, maintenance revenue stream. The SaaS side, we're just coming up to start seeing renewals, right? I mean, most of these contracts signed on a 5-year contract basis. We really only entered the SaaS market four years ago. We're just now starting to see sort of coming up on the horizon, like as we get into fiscal 2024, you'll start seeing some renewals, which will of course, you know, have, you know, start to impact RPO and so on because you'll have not only new accounts coming into that, but also renewals pushing out.
You know, we're just looking right now at what kinds of price increases will be, you know, will be right for the market over the next year or so. The, we do of course continue to roll out additional modules as well. I mean, some of the increases come not through just direct like for like price increases, but through, you know, added value we can provide.
Okay. Appreciate that color. That was excellent. I'll pass the line. Thank you.
Our next question comes from Ranjini Sharma with BMO Capital Markets. Please proceed.
Hello, good morning. Thank you for taking my question. I guess just specific to the SaaS revenue, I'm wondering how much of the growth was being driven by new customer wins versus expansion with existing customers. If you could also talk about maybe like the different strategies that you're using to drive growth, amongst new and existing customers.
Yeah, can you hear me?
Yes, I can.
Yeah. Okay, great. Yeah. The spread between, you know, new and existing in the quarter was, I mean, it was pretty close to 50. It was pretty close to 50/50. The other part of your question I think was, can you repeat the other part of your question?
Yeah. We're just wondering, you know, what are the differences in terms of the strategy that you're using to kind of, you know, drive greater penetration amongst existing customers versus getting new accounts in?
Yeah, I mean, I'm okay. I'll take that, Peter. For us, it's kind of a more of that approach is more of a story of which market in a way. If you look at healthcare where it's a very defined space, you know, where our go-to-market strategy there is, you know, we've got these 300 identified hospital networks, and we're very proactive about, you know, spreading our sales force out with in territories and going after named accounts or going after, you know, expansions in existing accounts. It's kind of a finite, you know, it's more finite in terms of number of hospital networks. It's a more finite population.
We approach it very, very directly. In terms of the complex distribution market, you know, our go-to-market strategy is much broader. We're doing a lot more sort of typical digital marketing lead generation to drive new opportunities. The base opportunities, we have people that are-- you know, we have part of the sales team that's focused on, you know, staying in contact with existing customers, keeping up to date with them on, you know, when are they planning to upgrade? What does an upgrade look like? You know, having those discussions about SaaS and when it's time to upgrade, why SaaS is the right answer.
We've mentioned before that, you know, those conversions to SaaS, you know, we're kind of at the front end of that in our history right now. We've had some customers that have, you know, migrated from on-prem to SaaS, but it's fairly limited. You know, there's about a dozen so far that have done that. As we look in the pipeline, we see building interest from the existing customer base on converting to SaaS. We've kind of got those identified, you know, customer by customer. There are two different approaches. You know, the sort of the migration discussion is a different discussion than new opportunities.
Like I said, our go-to-market strategy is slightly different between the converging distribution market and the healthcare market.
Okay. Thank you. Yeah, that's very helpful. I guess my second question is just, you know, about the environment overseas, so outside of U.S. and Canada. What are you seeing there in terms of growth? You know, are there any specific investments you're making to drive international expansion?
Yeah. I mean, nothing new or specific at this point in time. I mean, we are continuing to see actually pretty decent activity in the Scandinavian region where, you know, we have a presence there in Denmark. I keep, you know, I keep waiting to see if that market's gonna slow down given that, you know, there's a lot of sort of energy cost concerns and so on in Europe. So far, that market is doing very well. The third-party logistics market, for instance, is booming over there. A lot of the consumer goods companies are doing really well. We continue to see good business there.
The other place we do a fair bit of business outside of Canada and the U.S. is, other than, other than Western Europe, is Australia. You know, it's been interesting to see that market continuing to do quite well. You know, as I mentioned, we added two order management solution clients there in the quarter. We saw expansions with another account over there in the quarter. That market continues to do well. We have looked for a long time to find the right acquisition in Western Europe to speed up our penetration of the, you know, main part of Western Europe, sort of France, Germany, et cetera. We haven't found one.
You know, we'll need to decide at some point if we just begin to build something directly ourselves rather than, continuing to wait for, the right acquisition. We haven't made any decisions on that yet.
Okay. That's great color. Thank you very much.
Great. Thank you.
Thanks.
Our next question comes from Suthan Sukumar with Stifel. Please proceed.
Good morning, Peter.
Morning.
Well, I guess, first question, I just wanted to touch on sales cycles. Can you guys provide a little more color on what you're seeing in sales cycles across both healthcare and retail? Are you guys still seeing an elongation, or is the urgency starting to see deals get done faster?
I mean, overall, the sales cycles are actually, I mean, especially in healthcare, they feel quite compressed at this point. You know, I mentioned there earlier on the call where, you know, legal, for instance, is, you know, continuing to be a bit of a bottleneck there. You know, we're seeing sort of the financial side of the healthcare networks ready to go ahead, the operations side ready to go ahead. The C hief Nursing Officer, Chief Medical Officer, everybody's on board. It just takes time to get through procurement and legal. You know, the fact that that is a bit of a bottleneck, just highlights the fact that, you know, sales cycles right now are actually somewhat compressed.
You know, you also have the partner effect in that, you know, in many cases, by the time we're getting involved in some of these opportunities, a partner may have already been in there working for months and has already helped them go through the cost justification and sort of written up the analysis to prove that this is worth doing and so on. By the time we jump in a sense, we're halfway through the sales cycle. That makes the sales cycle feel a lot shorter as well.
Got you. On implementation timelines, I think in prior quarters, you've, you kind of talked a little bit about some of the challenges with project delivery, particularly in the healthcare space. Are there any changes you're seeing from that perspective?
Sorry, on my end, it broke up a little bit. Can you just repeat that?
Yeah. The question was around implementation timelines. I think in prior quarters, you've kind of touched on some of the challenges you've seen with kind of project delivery in the Healthcare segment. Just curious what you're seeing now.
I would say no real change there. I mean, the market. I mean, this is more of an across-the-board comment, right? Like, the market continues to be somewhat starved for good technical people, good implementation people, good project managers. You know, our customers experience that. I mean, they need some of that talent on their side for these projects. We obviously need that talent on our side. Our partners need that talent. There is still a labor shortage in the market across all of those, you know, sort of implementation professionals. You know, we don't see that. I mean, it's not as crazy as it was last year, but it does continue to be a challenge.
I mean, the, you know, every time a large tech company does a layoff it, you know, it becomes a news item. I think, you know, those people are getting sort of hired back into the market, you know, very, very rapidly. There's still a talent shortage. You know, you also still have this challenge in healthcare that most of them have never really run their own supply chains before. It ends up taking time to build up the-- in effect, the org chart, to have the right people in there to actually run the supply chain. Those challenges continue. At the same time, there are far more experienced Chief Supply Chain Officers in healthcare than there were a couple of years ago.
You know, as the markets become more aware of the need and, you know, we continue to penetrate the market, we've seen Chief Supply Chain Officers moving from one hospital network to the next and bringing their expertise with them. We see sort of glimmers of light there that we think are gonna further accelerate this space. There is definitely still an overall talent shortage. Implementation timelines, I would say, are not really changing at this point.
Thanks, Peter. That's helpful. Mark, maybe a question for you here. Just on bookings this quarter, how much of that was expansions and migrations versus net new business? How does that compare to prior periods, and how do you think this trends going forward?
Yeah, well, it was pretty close to half and half. I mean, I think what we've seen more recently, you know, if you take it bigger than a quarter, look at what's going on there and look at the, you know, look at what's in the pipeline, I think we see, you know, we definitely see a skew towards new business here. I mean, I think the pipeline is something like, you know, like 70% new business in healthcare. You know, that's kind of the, you know, the sort of the broader, you know, the broader trend and the kind of the forward outlook trend.
Okay. Great. What are you guys seeing with respect to churn and expansion renewals activity within your base? Any trends to kind of call out between healthcare and retail?
Not really, I would say. I mean, Peter mentioned before, like we have, you know, we have the cycle. We haven't had a lot of, you know, contracts coming to term. Those are three-five year deals. They tend to be more on the five -year duration than the three-year duration. We haven't had a lot of, you know, we've only been, really kind of been doing this SaaS thing for four years, you know, three-four years. A lot of the contracts haven't come to renewal yet. You know, if we look at fiscal 2024, that's where we're gonna start seeing some, you know, some activity happening there on renewals.
Okay, great. Just quickly on your outlook for any investments, it sounds like you guys are still, you know, looking to invest given the expanding market opportunity ahead. You know, we saw some modest growth in OpEx sequentially. How should we think about the pace of investment ahead? From a margin perspective, should we, you know, should we be looking at margins being range bound, or is there still some modest expansion expected?
I mean, I think in the very near term, I would think, you know, pretty range bound. That's really because, you know, when we talk about adjusted EBITDA margin, it's because our plan is to, you know, as long as we see market opportunity, and we do right now, our plan is to invest into it, you know. I provided a little bit of guidance on my prepared remarks on, you know, where we see you know, sales and marketing and R&D costs going in Q3 versus, you know, versus Q2. That was, you know, we expect the sales and marketing costs to increase slightly more modestly than what we saw in last quarter, sequentially.
On R&D, we actually expect it to be pretty flat quarter-on-quarter.
Okay, good. Thank you for the color, gents. I'll pass along.
Yeah. Thanks for the questions.
Our next question comes from John Shao with National Bank of Canada. Please proceed.
Hey, good morning, and thanks for taking my question. I just wanted to ask about your outlook for Q3. I remember last year, the January quarter was a relatively slow one given the holiday season. Do you still expect a similar pattern, or is it gonna be more organized this year?
That's a good question, John. Thanks for, thanks for the question. You know, we do, you know, sort of that question comes into the whole discussion around moderating, you know, professional services revenue and what's happening there over time. You know, as we kind of read the tea leaves for, you know, on this one for next quarter, we do think, you know, that does tend to be a quarter where you know, both on our side and on the customer side, it, you know, across the holidays, you do tend to see implementation activity, slowing down a little bit. I don't think that's gonna have a material, you know, kind of negative impact, quarter- on- quarter for us. At least that's kind of what we're seeing right now.
We're seeing something that's probably, you know, a little more flat versus down. That's just because we've got pretty robust backlog here.
Okay, thanks. My other question is, I just wanted to ask about the rapid implementation as well as the new APIs for that purpose. Do you think that those new, newly created APIs along with this new implementation practice is gonna help you grow the partnership channel, given it's more easier to roll out and more automation?
We think it will over time. I mean, that rapid implementation was specifically aimed at the retail space, right? That's the retail order management solution that fits underneath a, you know, e-commerce platform. It can fit underneath, for instance, the Salesforce Commerce Cloud platform or can fit underneath, you know, the Adobe e-commerce platform and others. It fits under there. In effect, you know, someone goes to a website, places order, and the order in effect drops down through the website and lands in our order management solution. Our OMS then figures out where to source the inventory and, you know, processes the invoice and manages loyalty points, and manages returns. If it's a buy online pickup in store, then it handles the pickup in store.
It does all the logistics after you've clicked the Place Order button on the website, right? It's that space that we aimed that rapid implementation at. That said, the newer approach to interfaces, which are these RESTful APIs, which are sort of spreading through the industry at this point, we are beginning to move those across all of our product lines, and there's no question that those are more partner friendly. You know, we may end up seeing more of that kind of work, you know, continue to move out to partners, over time.
Okay, thanks. I'll pop along.
Okay, thanks.
Our final question comes from Steven Li with Raymond James. Please proceed with your question.
Hey, thanks. Hey, Peter, Mark. The 50/50 split, and new migration, can I apply that to the CAD growth? You grew such revenues CAD 6.6-CAD 8.8. That CAD 2.2 growth in such revenues, can I apply that 50/50?
When I was talking about 50/50, I was talking about the, you know, the quarter--
Bookings.
Bookings. Yeah.
Yeah.
I'm not sure that I have that number, you know, for that revenue growth with, you know, in that quarter, what that split was between the two. I suspect that it's more tilted towards new business.
Right. Maybe Mark, I know that 50/50 was for the quarter. If I take a longer view, like LTM, I mean, what would that split be for bookings?
Yeah. I mean, I think it's, you know, I think I talked about the pipeline there and in general, you know, our, you know, kind of looking at what we have in the pipeline and from a perspective standpoint.
Yeah.
You know, we're seeing definitely more weighted to new business. There's, there's definitely growth in the pipeline too, that's coming from migration opportunities that's gonna drive that kind of expansion number, you know, that base number a little bit. You know, like we're seeing like, you know, 70% of the, you know, healthcare pipeline is new business, for example. That's looking like in the, in the intermediate term, you know, that healthcare chunk is gonna be, you know, more than three quarters of our bookings. You know, that's gonna tip things towards new business.
All right. Got it. Thanks.
There are no further questions on the phone lines. I'll turn the call back to you for closing remarks.
Great. Well, thank you for joining us today for sitting through all this detail. As always, if you have additional questions, please don't hesitate to reach out to Mark or I. We'll look forward to talking to you at the end of Q3. Thanks again.
Thanks.
That does conclude the conference call for today. We thank you for your participation and ask that you please disc onnect your lines.