Tecsys Inc.

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 third quarter, we delivered excellent results fueled by strong demand for our solutions and the continued success of our transformation. Our customers are not only staying with us, they are growing with us and transforming their own businesses.

In Q3, I’m thrilled to say that we continue 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, and Mark will walk us through the financial results in more detail.

And 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’ve 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 this 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.

And we’ve realized a significant milestone in the introduction of an AI-driven augmented cluster building applications at our customer, Werner Electric. This application intelligently groups together picks various orders and simulates multiple pick pads, and then chooses the optimal combination to reduce travel time and boost efficiency.

We expect to see a 15% to 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 realized the people of Texas are the most critical access – I’m sorry, 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 third quarter 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 third quarter ended January 31, 2022.

Total revenue was a record $35.4 million, a 11% higher than $31.9 million reported for Q3 of 2021. As many of you know, a significant portion of our revenue, about 65% is denominated in U.S.

dollars. And as a result, movement and currency exchange rates has an impact on a reported revenue and growth.

During Q3 fiscal 2022, currency exchange movements negatively impacted our reported revenue, as the value of the U.S. dollar was weaker compared to the same quarter last year.

In fact, on a constant currency basis using fiscal 2022 currency rates, our third quarter 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 $4.7 million in Q3 2021 to $7.0 million in Q3 2022.

On a constant currency basis, SaaS revenue was up about 56%. Also, I 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 a 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 31, 2022 was $59.5 million, up 17% from $50.8 million at January 31, 2021.

On a constant currency basis, that increase was about 19%. Professional services revenue for the third quarter was $12.9 million, up 5% from $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 $2.3 million in Q3 2022 compared to Q3 2021, which is at $1.0 million. 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 $9.3 million, down 11% compared to $10.5 million in the same quarter last year.

We had some professional services bookings slip into Q4, about $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 $78.5 million at the end of Q3 fiscal 2022, 36% from $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 second quarter of fiscal 2022, that’s 6% constant currency.

The increase is driven by significant multi-year SaaS bookings during the quarter. Professional services backlog at the end of Q3 fiscal 2022 was $29.5 million, that’s down about 22% compared to $37.8 million at the same time last year, and down from $33.1 million on 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 third quarter, total gross profit was $15.2 million, that’s down $0.2 million compared to $15.4 million in Q3 of 2021. As a percentage of revenue, gross margin was 43% compared to 48% in 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 $0.9 million, or $0.06 per fully diluted share compared to $1.8 million in Q3 last year, which was $0.12 per fully diluted share.

Adjusted EBITDA was $2.7 million in Q3 22, compared to $4.0 million in Q3 2021. The decrease in profit and adjusted EBITDA compared to the third quarter last year was primarily due to an unfavorable foreign exchange impact of approximately $1.6 million.

Turning now very briefly to our results for the first nine months of our fiscal 2022, our total revenue was $102.9 million, up 13% compared to $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 $19.2 million, up 41% from $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 $1.9 million or $0.13 per fully diluted share compared to $5.2 million, or $0.35 per fully diluted share in the same period last year.

Adjusted EBITDA was $8.4 million in the first nine months of the current fiscal year compared to $12.3 million for the same period last year. Foreign exchange movements had a negative impact of approximately $4.6 million on profit and adjusted EBITDA in the current nine month period compared to the same period last year.

We ended the third quarter with strong balance sheet position. At January 31, 2022, we had cash and cash equivalents and short-term investments of $36.9 million compared to $45.9 million at year-end.

And we had debt of $8.7 million compared to $9.6 million at year-end. Cash provided by operations was $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 Texas 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 change in 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 chalky 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 to overcome – adaptable enough to overcome purples [ph].

Texas 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 about our three key operational themes for the remainder of fiscal 2022, which have not changed from our previous analyst calls we entered 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 improve 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 in the opportunities coming at us.

We also continue to expand and refine our omni-channel business platform to serve as 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.

Oh, hi, good morning. I thought we could start out on the healthcare side.

And I think last quarter, your referenced kind of 20 IDNs have been roughly identified and it feels like [pending work] [ph] in the pipeline. I know those deals can be kind of unpredictable and how they move or any color on how those deals are maturing and moving in the pipeline?

Sure. Like overall, Gavin, that – like overall 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.

The – it’s interesting. I feel like the biggest change in a way in the last year is we 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 shoes on the other foot, the Board’s are asking the management teams, sort of what they’re doing about supply chain and how soon they’re going to get a good platform in place.

So 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 probably a little less than two months long.

The Omicron wave came through and it hit different areas of the country at different, slightly different times. But basically, the bulk of our clientele and healthcare were massively distracted for anywhere between one-third and half in the quarter.

So we felt like it was – we felt like a very short quarter from the standpoint of actually getting deals done. But the – and you saw that in some of the deals slip into, Mark referred to.

I mean, the professional services bookings, big chunk that signed in just in the first week of February, that normally would have been Q3 stuff, and even the additional network that signed in the first week of February that would – that normally would have been Q3 stuff, but it was all just sort of Omicron shortening up the quarter. But overall, to answer your question, the activity in that market is stronger than we’ve ever seen.

That’s very helpful. And then maybe I thought we could zero in on the services side and I know it’s kind of the holiday quarter.

And I think your referenced Omicron impacting some projects. Do you have a sense of the amounts of billings that may be slipped from your third quarter into future quarters and need to expect to catch up there?

Yeah, we actually expect a bit of a catch-up. It’s hard to quantify exactly how much slipped.

I mean, if I were to put a number on it, I would say it was at least a 1.5 million half or something like that. We just had too many projects where we suddenly got to mid-December or whatever, and they – customer calls and says, what we’re in the middle of Omicron wave, half our staff is sick, 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 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.

So we’ve added headcount in that on our professional services side, but the supply is not infinite there. So, we certainly expect our – the strong Q4 in pro Services, as – it largely seems like the – seems like whatever the vaccinations didn’t get Omicron got to.

It seems like we’re kind of out of the woods on this now. But I would guess, Mark, I don’t know if you would agree.

I feel like maybe a 1 million, maybe a 1.5 million, it’s somewhere in that range.

Yeah, I think that’s reasonable.

That’s great. And then maybe I thought we could just chat on the lab’s module, which commercialize, I guess, in January.

We haven’t talked about it a ton in the past. Can you maybe just walk us through how you think about the market size, the distribution for that module and overall what’s your thoughts on [indiscernible]?

Sorry, Gavin, I didn’t pick up which module you’re referring to.

The lab module, the clinical labs module?

Oh, okay. Sure.

Yeah, I mean, that that’s still very early stage. I don’t, I mean, I would say, you’re probably not going to hear much from us about labs for – in any significant commercial way, for probably another year or two.

I mean, our focus is, at this point, is more getting continuing to gain traction in the pharmaceutical module, the – for in hospital pharmacy. In fact, our goal, if you look at what we’re trying to get done, we’re saying, we want to sign get to 100 IDNs, within the next few years.

And we want to 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 the entire customer base and add in the pharmacy module. So that’s our goal.

I mean, this market, as you know, is a pretty cautious market. So 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. And then lastly, before I pass the line, I know you’d be doing work to kind of internally to optimize your software for running on a SaaS delivery native.

Can you just provide a bit of an update on that project in terms of timelines, and maybe just touch on how that might influence your stuff gross margins?

Sure. I mean, there’s – the – from a standpoint of project to make our – take our software to be sort of much more SaaS native, that work continues.

And 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 a product. I still think of is brand-new.

We developed the 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. And it’s just – it’s the nature of the rapidly evolving sort of cloud space that some of this stuff changes all the time.

But it certainly looks to us as though the heavy lifting will be done pretty much by the end of this calendar year. I mean, we’re – we’ve introduced all kinds of new security capability.

We’re shifting the underlying database to run off a much lower cost database, so that we will be able to support the Postgre database in AWS. So – and we’re – 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. And it’s performing very, very well in the cloud.

So we’re pretty happy with where we’re at on that. And we, as I say, we think the heavy lifting on kind to 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 somewhere around 3 to 5 percentage points of margin to the SaaS – to our SaaS numbers, but really only on new accounts. It will take more time to move existing accounts over onto that.

So – but still that – we believe that’ll start to show up significantly by the end of our next fiscal year. The other margin shifts that I think you’re going to see in the coming couple of years, is we’ve probably only got another maybe six months, probably a couple of quarters, I’m going to ask Mark to comment on this when I’m done.

But another couple of quarters of continuing to build out the bench on our cloud and DevOps support team. So that’s what keeps suppressing the margins at this point is even though the revenue is growing pretty significantly, 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 operate – the offering 24/7. We’re a couple of quarters away from having that pretty much done.

So at that point, the cost starts to flatten out and the revenue just continues to rise. So, Mark does that done?

Yeah, I think that’s right, in the next – I think that’s right. We’ve got this quarter and probably the first half of next year to get to that place.

And the other thing that’s going on in there is investment in security that’ll be going on over that time period as well. Of course, we’re faced with some pretty difficult – a pretty difficult hiring environment, too.

But so timing may be impacted by that. But I think that’s right, our plan is to bring in those resources and have the skill created by the first half of next fiscal.

Got it. That’s super helpful.

Thanks so much.

Great. Thanks.

Hi, it’s Amr. Peter, Mark, good morning, and thanks for taking my questions.

My first one is on...

Hi.

So my first one is on your capital deployment strategy. The stocks come off quite a bit since December despite I think it’s 12 quarters of like record revenues now.

You’ve got a decent cash position under levered balance sheet. So, like, I’m wondering what’s the Board’s thinking on buybacks versus maybe increasing the dividends and M&A?

Can you share some thoughts there?

Yeah, I mean, I think we’re – I mean, the focus of the Board and our management team is basically hang on to the word test and look for the right acquisition. I mean, we continue to generate enough cash to continue to slowly add to our cash pile as well as pay the dividends.

But our – the – a lot of that money was actually raised at $17 a share. So, even though the stocks come down from – in the 60s, I mean, it’s obviously come down, along with everyone else.

Misery loves company. So I tried to make myself feel better by looking at other people’s stock.

But it – we feel like the opportunities for acquisitions are getting a little bit better. The private equity market has not cooled off to the same extent that the public markets have.

But there’s still sort of a little bit more realism creeping into that side as well. So even though our stock is down, we think there may be some potential opportunities on the horizon.

So it’s really – I know, we’ve sort of sat on that cash for quite a while. But it’s – we do feel like it’s – it needs to be there to be ready to deploy for the right acquisition.

Okay, no, that’s good color. And just a follow-up on the current question.

Here you mentioned during COVID, there was obviously an increase openness and urgency to have conversations on supply chain management software and investing in supply chain. And I’m wondering, with COVID pressures 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, like in the past few quarters of the height of COVID?

I mean, the – I mean, I think you’re sort of asking sort of as 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 is in fact your business can almost fall apart if you don’t know where your stuff is and when it’s coming in and have the ability to manage it real-time and react in real-time and so on.

So we’re seeing, I mean, if we just look at our pipeline, like our pipeline is up massively compared to this time last year. And this time last year, we were already a year into pandemic.

So it doesn’t seem to be slowing down, it seems to be of anything accelerating. Healthcare is moving the fastest rate, though, in that they seem to have already sort of said, okay what, we can’t wait for the pandemic to end, we just got to get this stuff moving.

So there we’re seeing actual deals sign and so on. In complex distribution and retail, the – 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.

But at the same time, they’re looking at the – 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.

In some cases, their landed costs, because of the cost of moving container across the water, their landed cost is higher than the retail selling price. So there’s all kinds of issues they’re dealing with.

So it’s not the time for some of them to also swap out their core operating platform. But they’re trying to get ready to swap out their core operating platform, because they can see it’s not handling sort of the new world we’re in.

So we’re anticipating, I mean 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 pretty rapid acceleration on the complex distribution retail side.

Okay, that’s all great color. On professional services, I mean, three quarters running a new record levels, and you mentioned your capacity constraint.

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.

But it’s an interesting thing that after, I think, the first week, months of the year, our fiscal May to December, we really struggled to add heads. We added some waves to various resignations come through and so on, a lot of people were restless and moving around, and so on.

And suddenly in January and February, that seems to have turned. And even as we’re heading into March, it seems to be remaining very positive.

So suddenly, we’re able to recruit, retain, and really build up those teams. So we don’t know if the wave of restlessness is kind of just subsided or did we get smarter?

I don’t think it’s really that. We did adapt some of our strategies, but somehow something shifted in the market.

And we’re finding it’s suddenly easier again, to add talent. But I’d love to, Mark, give you some of the numbers there.

Yeah. So I’m worried about 240, 245 professional services team size right now.

And that would be up about 20 heads from the beginning of the year. As Peter mentioned, we had our quarter one and our quarter two were kind of bumpy.

We had some – we did have some attrition. We had people leaving.

We were hiring, but our headcount growth was kind of slow in the first couple of quarters. It almost feels like kind of since – even since the first year, that we’ve done some things.

We’ve reacted to that. We’ve looked at comp.

We’ve become as competitive as we think we need to be to retain and hire the right people. And it feels like the winds of change have stopped blowing there a little bit.

And 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 our headcount growth in the last couple of months has been out of pace with what we saw in the first sort of eight months of our fiscal.

So reason to – reason for some positive – in a positive outlook on our ability to scale up that business a little bit more rapidly in the coming quarters.

And where do you want to take that 245 number in the next couple of quarters?

Yeah, we would increase that by another 30 heads in a heartbeat, and then up from there.

Great. Then maybe one last one, I mean, you guys touched on margin and a couple of moving parts over the next few quarters.

OpEx is slop from last quarter, which surprises me. I’m wondering how we should be thinking about your investment in the business going forward, as well as like you guys spoke inflationary pressures, specifically on the next couple of quarters, what’s a good sort of member teams?

Yeah, we think we’re going to continue that investment that you’ve seen. I know, it didn’t change a lot in the last quarter.

But it has been inching up quarterly across the year. And as we look ahead and think about what we’re doing and think about investing in the product and investing in the sales and marketing team and programs, we expect that part of the OpEx to continue to pick up, like you saw in earlier quarters.

Great. I’ll pass the line and congrats on a strong quarter.

Thanks, Amr.

Yes. Good morning.

I guess first question, just make sure I heard correctly. Peter, did you say that…

Yeah.

Sorry, yeah.

I think, Nick..

Sorry. Can you guys hear me?

Yes, we can. Yeah.

Kind of breaking up a bit, Nick.

I’ll try to speak closer to the mic. 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 going to be two. But at the last minute, there was, again, some distraction in one of the IDNs we’re about to sign and it’s slipped into the first week of February.

So there was one truly in the quarter and one just outside the quarter.

Okay, great. And then on the commentary you guys made earlier and in the press release with regards to Omicron impacting December and January.

You’ve given the color on the healthcare side. Was there any – were you observing the same impact on the other segments of the business?

Or was that commentary wholly skewed just to healthcare?

No, it was right across the Board. Like, really 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.

It’s only people with Omicron. So that whole projects slowed down massively.

So it was pretty well right across the board. 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. And then going back to the commentary you provided, you said the focus is on the pharma module getting traction there.

First, just make sure I heard correctly, you said you hope 10 of the next 100 IDN wins include pharma module, or was it – and of when you get to 100 IDNs, that you hope that initial 100 includes those 10 or included 10?

Yeah, it’s when we get to 100, we’re currently sort of just flowing past 50 kind of now. So, if – we’re hoping that by the time we get to 100, we’ll have at least 10% of them will be running the pharmacy module because we’re really seeing, I mean, we look at this overall market and we say okay, there’s 311 IDNs were directly targeting.

So call it, a $620 million ARR market. We – as we look out over the long haul, we’re kind of saying, it’s probably not reasonable to expect that we’ll win more than half of the market.

So it feels like the market ceiling is maybe around 150 IDNs kind of thing. So we want to 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 requirements, that we’ve got a second wave to go to ready to roll as this wave starts to sort of wind down whatever that would be five, six years from now, kind of thing.

So we’re saying, let’s make sure that we don’t lose sight of the fact that we want to have a solid pharmacy base within the next few years. So that we can start that, that second sort of path back through these networks following the wave we’re in now.

Okay. But I guess maybe if you can just expand on, is there an overhang here, so something that that is stalling?

Maybe the take up on that pharma module, you guys have certainly been developed product for quite a few years. That commercial rollout, I think is at least one year on – has been in existence [ph] role, or getting close to one year.

Is there a sense that things are maybe stalled out for certain reason, maybe for the pandemic? And – or the observations you’re making on the pharma side, very similar to what you would observed – observe, sorry, on the med search 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. They’re 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 happy and saying good things. And then even then it took a couple of more years before people were ready to adopt it for themselves.

So it is following that same pattern. At the same time, there’s no question that pandemic has affected it.

The – our second pharmacy client that was – is rolling out the pharmacy module. The pandemic has delayed their project by probably 12 to 15 months.

So the pandemic is definitely affecting it, but it – overall, it’s following the same kind of pattern we’ve seen in the past.

Okay. And then maybe just some commentary, you alluded to expanding your size, supporting your size.

Can give 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, continues to grow. And 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 dollar you’re 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. But we’re now seeing activity in a number of counts again with them.

There’s – 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 with those 21% partner influenced in our pipeline.

And 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. So your percentage of one deals ends up being more partner influenced than your pipeline actually is.

But 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.

We’re having really good success with right now in the healthcare space. We’ve mentioned accounts companies like Deloitte and KPMG that are working with us in healthcare.

And we’ve got – and, of course, we’ve got the Workday relationship and we recently signed a partnership agreement even with [indiscernible] used to be sort of more of a competitor to us in the healthcare space. And we signed a partnership agreement with them to cooperate in the space.

So that is going very well. Retail, we’ve always had partners around the world, European, North American, even Asia- Pac partners there, is a complex distribution spaces, this space where I think we still lag in terms of partners and something that our partner team is putting a really focused effort into is to try to build out more of an SI network around complex distribution.

So we’re probably, I would say, we’re two years behind healthcare, in where we are in complex distribution.

Okay. I appreciate the colors.

Thanks for the questions – thanks for the sponsors.

Thanks.

Hi, this is Andy on for Steven Li. I just want to start with questions on if there’s any metrics you can share that show the impact of the investment in sales and marketing, as we’re not seeing the significant impact on the earnings in Hilltown [ph] yet?

Yeah. I mean, Andy, I think probably what you want to focus on there, what we focus on is really around SaaS ARR bookings.

And those are up 23% this year compared to last year for the nine-month period. So once you start looking at enough quarters, they’re the sort of the lumpiness goes out, and you kind of sort of start to see the trend.

So that’s number one. Number two, and Peter mentioned this during his comments a bit.

We’re seeing some really robust pipeline and pipeline activity. And we invested quite a bit, particularly in healthcare and in our sales and marketing, bringing in AEs for healthcare, et cetera.

And we are starting to see these called the newer AEs successfully closing deals. We’ve had a couple of closed in a couple of recent quarters from newer AEs that have been around for less than two years.

And if we look in our pipeline right now and focus on 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 in the last – within the last few years that are driving a nice chunk of that pipeline growth. So it’s building.

We see it and growth in pipeline, and we’re seeing it in results in SaaS ARR bookings.

Yeah. Thanks, Mark.

Just touching on that pipeline point, what percentage of the pipeline is influenced by the partner?

Yeah, it’s – I think, Peter mentioned 27%. I think it’s actually slightly maybe we’re rounding there, but I think it’s slightly higher.

It’s 28% right now and that’s up from low 20s a couple of quarters ago.

Yeah, thank you. And my last question.

So I’m looking at the free cash flow year-to-date. And I know, I think you guys touched on the primary reason for the decrease in free cash flow was the timing of the ARR.

But I think year-to-date is down by 76% compared to last year. So I’m just wondering, like, why is it down so much?

And could we expect Q4 to be muted as well?

Yeah, I think I mean, I think if you look back and you see those DSO numbers that I quoted and you look at back at our history, they’re a little bit – there was – a year ago, we were in these – we were in this sort of, I would say unsustainably low DSO level in – kind of in the 40s. And so we – in order to go – before that, we were – DSOs were up and – six months before that, three quarters before that DSOs were up in the high 60s and into the low 70s.

So you saw last year that that kind of decrease in DSOs went from 70, down to the mid-40s. So, you had this kind of one-time influx of cash, and that’s the comp that you’re looking at, that’s the last year comp you’re looking at.

Right now, our DSOs are in the high – mid, high 50s, which is – I mentioned it, I call it a reasonable level. We’d like to bring – we’d like to see the number down in the low 50s rather than in the mid, high 50s, but still a reasonable number.

But it’s grown up from the mid, high 40s up to the high 50s. And so that’s consumed some cash along the way.

We don’t feel like we have any kind of an ARR problem. As we look at the balances and our expectations for collections and right off history has been just phenomenal.

So we don’t see any issues there. We, like I said, I would expect that DSO number comes back down into the lower 50s, that’s going to create some less strain on usage and we’re in working capital.

And then the seasonality of our Q4 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 that comes from those tax credits is in our Q4.

Gotcha. Thank you.

I’ll come back.

Thanks.

Hey, good morning, guys. I just have a quick question on the hardware revenue, 17% quarter-over-quarter increase, that looks really decent.

So I’m just curious, how should we read about this quarter-over-quarter increase given the fact that the supply department is still fragile today?

I missed the very beginning of that, John, which – were you talking about revenue line there?

Hardware revenues, the 17% quarter-over-quarter increase? Just how – yeah, how do we look into that number?

Yeah, that’s – it’s a tricky one, John, and it’s a tricky one for us to call. That was a big outsized quarter for us.

If you look at our history, it was a large outsized quarter. We have still have some pretty robust pipeline there and some pretty robust, I should say, we have some pretty rubbish backlog there.

Some of that stuff is – we do have some, I would say, some trickiness with supply chain 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 still there. And we have supply chain – some supply chain issues on that.

So it’s kind of hard – it’s kind of – it’s even hard for us to determine with a level of accuracy when that backlog is going to ship. So I think 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. Another question on the – it’s – on the gross margin 43% for the quarter, which is down from 45% from last quarter.

So I’m just curious, how should we see both – how should we see the trend of the gross margin in the upcoming quarter? And how much is this quarter’s gross margin declines related to the FX?

Yeah, yeah. So 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. If – so I dissect that in a couple of different ways.

Number one, if you look at our SasS maintenance, support and professional services margin, it’s – it was about 47% in that quarter. So just like in an absolute sense, it’s a higher number.

It’s a more robust number. That sort of level, I think, is probably – we’re still sort of investing there.

So I don’t think that’s an unusual margin level for the near-term there. What is going to make the thing move around was the mix, so that 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 that profit margin down to 43%. And then 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 cost increase investment. And if you look at how those contributed out 5%, FX is about 2% of that 5%, 2 percentage points of those 5%, revenue mix is about 2 percentage points of those 5%, and cost investment is about 1 percentage point of those 5%.

Okay, thank you so much. I appreciate the color.

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 stock market has continued and the investment community has continued to sort of shift priorities to growth to profitability, and with probably more recent emphasis on profitability and maybe less on growth and so on, that sentiment tends to move around a little bit.

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 growth in the top line, and particularly solid growth in the SaaS numbers, while trying to respect a reasonable level of profitability. So that continues to be our strategy.

We continue to hold the line on that. And certainly, 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, that concludes our call, and thank you for joining us.

And as always, if you have additional questions, please do not hesitate to give Mark or I a call. Thanks, and have a great day.