Sylogist Ltd

TSX:SYZ

Earnings Call Transcript 2023-Q2

[Operator]

Good morning, ladies and gentlemen. Welcome to the Sylogist Q2 2023 Earnings Call. I would now like to turn the meeting over to Ms. Jennifer Smith of Odra Advisors. Please go ahead, Ms. Smith.

[Unknown Executive]

Thank you, Patrick, and good morning. Joining me today to discuss Sylogist's Q2 fiscal 2023 results are Bill Wood, Sylogist's President and Chief Executive Officer; and Sujeet Kini, Chief Financial Officer. This call is being recorded live at 10:30 a.m. Eastern Time on August 10, 2023.

Our Q2 press release, MD&A, financial statements and accompanying notes have all been issued and are available for download on SEDAR please note that some of the statements made on the call may be forward-looking. Actual events or results may differ materially from those expressed or implied, and Sylogist disclaims any intent or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

The complete safe harbor statement is available in both our MD&A and press release as well as on sylogist.com. We encourage our investors to read it in its entirety. We are reporting our financial results in accordance with International Financial Reporting Standards or IFRS. As before, we will also discuss non-GAAP performance measures, which should be viewed as supplemental. The MD&A contains definitions of each one used in our reporting.

All of the dollar figures expressed on this call are in Canadian unless otherwise noted. I'll turn it over to Bill first for opening remarks, then Sujeet, will review our Q2 financial performance, after which, Bill will conclude with scripted remarks with an outlook on our business and market at which time, we will open it up for questions. So with that, I'll hand it over to Bill.

[William Wood, executive]

Thank you, Jenny and good morning, everyone. As most of you already know, the Sylogist's a Software as a Service or a SaaS company that provides mission-critical solutions to over 2,000 customers worldwide. Primarily in 3 public sector verticals, education, nonprofit and government. We help mid- to upmarket public sector organizations, more effectively fulfill their mandates with flexible advanced SaaS solutions that address their unique needs.

Our platform scale, deliver clear ROI and provide user-friendly and highly secure technology to our customers. We delivered another quarter of strong profitable organic growth in Q2. The results we achieved were due to a talented dedicated workforce, industry-best 100% SaaS solutions, a customer-centric mindset and a data-driven culture to measure and adjust the execution of our strategy. With our continued momentum, our total revenue reached a new record of $16.6 million in the quarter. That's a year-over-year organic growth rate of 21% or 18% on a constant currency basis.

Recurring revenue was strong in Q2 at $9.7 million, up 8% year-over-year, and this was led by our SaaS subscription revenues, which were up 9% year-over-year. As this organic growth is supported by a solid foundation of profitability as evidenced by a Q2 EBITDA margin of 26%. In short, we continue to execute our profitable growth plan effectively, culminating in an overall posture of 47 against our Rule of 40 benchmark or 44% on a constant currency basis. New bookings in Q2 were $6.1 million.

We're very pleased with the quarter's booking achievement given the typically slower seasonal deal contracting period of Q2. When the public sector is consumed with fiscal year-end close activities and awaiting new budgets to become available July 1. Before handing it over to Sujeet to review our Q2 numbers in more detail, I'd like to draw your attention to a couple of important points and provide an update on our key initiatives that we expect will continue to make positive contributions to our top and bottom lines in future quarters.

First, the strategic R&D and go-to-market investments we've made are unquestionably driving our strong organic growth results. Our marketing and sales motions are creating high-quality, Ideal Customer Profile or ICP leads and our win rate in Q2 was stronger than at any time since I joined the company. I also want to point out that our spend on R&D has largely plateaued and that our marketing and sales investments remained sub 10% of total revenue, underpinning the effectiveness of the investments we're making to deliver the impressive profitable organic growth that we've achieved over the last 3 quarters.

Additionally, as I highlighted over the last couple of quarters, building out a high-performing partner channel has been a top priority as a means to increase our awareness and expand our sales and delivery capacity in a leveraged manner. To that end, partners in bookings increased 3x in Q2. An indicator that our strategy is taking hold and beginning to pay dividends.

Secondly, I want to share a quick update with respect to the nonprofit, government and education markets. As expected, the SylogistMission pillar of our strategy has driven the majority of the organic growth we've seen to date. Our thesis to offer an industry-first 100% SaaS, what we integrated. Microsoft-based fundraising and finance solution is driving an uptick in combined ERP and CRM opportunities. The SylogistMission platform gives us the flexibility to sell to the customer's pain point and then pull through the rest of our platform once they see the benefits it represents and come to value us as a trusted partner in their success.

I also want to highlight that Microsoft originated leads are being funneled our way in an increasingly material manner. Which is a very good sign in terms of our expanding strategic relationship with Microsoft and their partner ecosystem. Our SylogistGov beta customers will be transitioning to our new gov platform in early Q4. Realities were such that we decided to push the cutover to SylogistGov out approximately 60 days from the originally planned date due to the customers' limited bandwidth during their fiscal year-end close.

Feedback from users have been exceptionally positive, and they're looking forward to cutting over to the new SylogistGov platform very soon. We expect these early successes were after the catalyst for the next wave of new and existing customers to move forward with SylogistGov in the first half of '24. Also on the Sylogist Down Front, we are now weeks away from another state going live on our [ go ], the leaf, victim notification solution.

This is noteworthy because it positions us well to win additional large multiyear contracts in other states going forward. On the SylogistEd side, following the successful lifting shift of our software platform from Oklahoma to North Carolina, in the top 10 school district in North Carolina, having gone line on [indiscernible], live on SylogistEd, right on schedule. We are seeing several other districts leaning into follow suit. I see us is very well positioned to accelerate in North Carolina over the next 12 months and elsewhere in the back half of '24.

As I've said before, we're just getting started in the SylogistGov and SylogistEd markets. and the value creation opportunity we see ahead is large, very large. I'd like to now turn things over to Sujeet to go through our Q2 financial performance in more detail. Sujeet?

[Sujeet Kini, executive]

Thank you, Bill. It's been a busy and exciting few months since I joined Sylogist. I met my head down wrapping up on my understanding of Sylogist business and operating model, reviewing the metrics we discussed and disclosed I'm listening to feedback from the Street. In June of this year, I have a unique pleasure on it to and the rest of our management team of speaking with many of our investors and analysts at our Investor Day.

I look forward to continuing its outreach in increasing Sylogist across the financial community. Let me now take you through the highlights of this quarter's financial performance. Q2 have demonstrated again the successful execution of our profitable growth plan. Revenue was $16.7 million, up $2.9 million or 21% relative to Q2 2022 and 18% on a constant basis. Recurring revenue grew 8%, driven by increases in both and subscription revenue and maintenance and support revenue.

The increase in cash revenue was driven by growth in Pivotal submission, including implementations and upwards to our SaaS offerings and continued growth in our SylogistEd and Sylogist offerings. The increase in maintenance and support revenues was driven primarily by Sylogist Services and SylogistMission. Logic services revenue grew by 44%, primarily due to customer upgrades and new implementations in SylogistMission I will point out here that Project Services revenue but match to our software was at 64%, up significantly from 59% at the end of Q1 2023.

Our backlog continues to be strong at $28.9 million compared to $28.1 million in Q1 '23. Our gross profit margin was 61% compared to 60% last quarter. Total OpEx was 36% in revenue, the same as last quarter. And we continue to make investments in our sales and marketing team with a focus on go-to-market initiatives, including partner-related expansion and enhancing our spending on sales and marketing related [ uplink ]. Adjusted EBITDA was $4.2 million, resulting in an adjusted EBITDA margin of 25.7%, up from 24.1% in Q1 '23.

We believe these results demonstrate our strategic ability to continue investing in our duty while at the same time growing at a sustainable rate. With the combination of an improving -- through the combination of an improving EBITDA profile, visibility on our backlog of future revenues and increased confidence in exceeding organic revenue growth in the mid-teens, we expect to see operating leverage and efficiencies of scale by mid-2024. At the end of Q2, we had $9.8 million in cash, which is in line with the seasonality of [ ones ] and our customer renewal cycle. We maintain a strong investment balance sheet with debt holding [$1.2] million.

We will continue to allocate capital in a measured and thoughtful way and that is its highest and best use, including buying back our stock when advantages to our shareholders. With that, I will hand the call back to Bill for some final thoughts. Back to you, Bill.

[William Wood, executive]

Thanks, Sujeet. In closing, it said that 3 data points make a trend. To that end, Solidus has now posted 3 consecutive quarters of strong profitable growth. As a result of the strategic investments we've made, a pivot to a customer-first orientation in everything we do. And an unwavering commitment to delivering nothing less than industry best, highly secure 100% SaaS offerings and impressively strong execution. Over the last 2 years. We've effectively gone from a company that was backsliding in terms of organic growth to neutral to slightly positive. to now a third quarter of 20% organic growth, all while keeping EBITDA margins in the mid-20% range.

The scaffolding to support continued profitable growth is in place, and we're just hitting our stride. With each passing quarter, we are increasingly better positioned to continue seizing opportunities and to growing both organically and inorganically through strategic acquisitions that makes sense and [ don't ] not necessarily dilute our focus away from the high ROIC organic growth opportunities that we teed on.

Above all this, the successes we're achieving a result of having the most experienced incredibly talented and dedicated management team in the business. They are the reason the transformation that's taken place over the last 2 years has happened and for the material value creation upside ahead. Delivering results that reflect our commitment to profitable organic growth, disciplined capital allocation, strong self-funding capability in a Rule of 40 plus posture combined with expanding well-regarded analyst, providing third-party research coverage and buy ratings. We look forward to a strengthening share price that better reflects the results we're delivering and the strong value creation opportunity ahead of us.

I want to end by again personally thanking our customers for their confidence in us, our shareholders for their support, our Board of Directors for their trust and guidance and every team member of Sylogist for their incredible commitment and energy. I'm extremely proud to represent you every day. Jen, let's go to the question at this time once

[Operator]

[Operator Instructions] First question is from Gavin Fairweather from Cormark.

[Gavin Fairweather, analyst]

Just wanted to start out on the recurring revenue line kind of flat sequentially, although I understand some of the seasonality around the budget cycle. So I guess the question is, what are you hearing from your customers and the availability of budget for the year ahead? What are the spending priorities on their end? And then what is your pipeline telling you around your ability to accelerate recurring revenue growth?

[William Wood, executive]

Again, good morning. We're not seeing any pullback relative to what we're hearing from prospective customers and customers, the number of RFPs that we're are being made available in the markets as well as our positioning in those is strengthening. And budgets overall, they're feeling very good about their dollars being targeted towards the digital transformation that I talked about previously and queuing those up for the '24, '25 year and that's really reflected in the strength of our pipeline. It's strong or stronger than it's been since I joined and the blend of deals in terms of our core focus areas, which is mid-market and upmarket are perfectly aligned with what we've been trying to do, and I think those will matriculate effectively here over the coming quarters.

[Gavin Fairweather, analyst]

That's great. And then maybe just on the partner channel. I appreciate the commentary in terms of the number of partner influenced deals. Maybe if you can just speak to where we are in the process of building up that partner channel how you're attacking partner enablement now just in general, that ecosystem is developing.

[William Wood, executive]

Yes. Overall, I give a lot of credit to the team overall in terms of what they've been able to do to identify the kind of partners that we feel are going to fit with us and have routes and relationships in the markets we're looking to expand on and into what we have been doing, and I kind of hear this a little bit at Investor Days, we have developed and refined our own playbook and implementation playbook relative to what we're asking them to spin up on. So that is being done by them shadowing us over these first few deals in combination so that they understand kind of what our voice is, what our priorities are and the ability for us to represent our software with them in front of the customer.

So the building block for the early customers, we feel are for the early partners are in place, and we see many others that are now knocking on our door with interest out of the Microsoft ecosystem and beyond to be able to now want to lean and get access to the availability to represent our solutions. So we think the foundation that we've laid, the motions that we've put in place that are repeatable, the ability for now has 3 more resources aligned with the partner channel in terms of sales engineers, relationship managers to make sure that they have the information that they need to be successful and then the ability to -- in the near term, have a dedicated implementation specialists aligned with them that can bring in the appropriate resources to make sure that we're successful.

[Gavin Fairweather, analyst]

Okay. Great to hear. And then on margins, it's nice to see the EBITDA margins bounce back this quarter. Maybe just thinking about the commentary that was provided by Sujeet there. Should we think about progressive expansion over the back half of the year? Or do you really see that reacceleration and operating leverage kicking in, in '24 as you turn on more of these customers in your pipeline there?

[William Wood, executive]

Sujeet, did you want me to take that?

[Sujeet Kini, executive]

Yes. Gavin, yes, so our general sense is more that the benefits from an operating leverage perspective as well as gaining the efficiencies and scale will be seen more going into 2024, and I mean kind of more mid-2024. That's our general sense in terms of the efficiencies kicking in.

[Operator]

The next question is from Bob Shah from Canaccord Genuity.

[Unknown Analyst]

I want to dig a little bit deeper into the pipeline and trying to understand to get a sense about how recurring revenue versus professional services is trending? And any other color you can provide there on Mission versus Golf the mix there? Any color there would be helpful.

[William Wood, executive]

Yes. I think [ Partha ] you for joining the call and your question. we're very pleased with where we are in terms of the project services attachment rate continuing to increase, as we highlighted on this call to now 64% of the overall project services revenue is tied to RP. So that is a -- as we mentioned in the prepared remarks, that's a very clear leading indicator of than the SaaS revenue, which takes a full 12 months to then blossom.

So the idea of what we're doing in terms of our indentation now, there's an obvious lag as a SaaS provider to be able to get the full subnets. If we were selling licenses, it would have all showed up and we would have been able to clearly associate that dollars with the services. But the indications that we're seeing is a very strong pipeline in terms of our professional services. The backlog continues to not just grow in an -- in a [ dining ] manner, we need resources and we both help to be able to deliver on the backlog that we have.

But project services right now are very much tied to the blossoming of our subscription revenue that will come over the next 12 months.

[Unknown Analyst]

That's helpful. And then maybe a little bit more about -- you mentioned higher win rates. How much of that is versus greenfield opportunities? I'm guessing there's a bit of competitive displacement there, but any information that you would like to share there?

[William Wood, executive]

We have very few deals that aren't RFP-related parts. And so to that end, these are competitive situations, we feel -- we now are very well positioned in terms of our full SaaS posture of the integration of our platform and the desirability of Microsoft in our 3 primary markets. It is turning in our favor. As I mentioned in terms of the number Microsoft originated leads being handed to us or them walking us into opportunities that they've been nurturing at a much higher rate than we've seen since I joined 2-plus years ago. And so to that end, I think it's a very good telltale in terms of our overall effectiveness of our marketing strategy, driving ICP leads, not just celebrating leads overall, but are they good fits for us, is our messaging right, are the right kind of people knocking on our door and becoming aware of us I think all those things are going on now at a much higher clip than we've seen in the past.

[Unknown Analyst]

Got it. And then just one last one for me. the North Carolina expansion. Any update there? You did mention a few new school districts. But where do you see North Carolina heading, maybe more towards Oklahoma or majority market share there or gradual progress.

[William Wood, executive]

Overall, we have solid market share in North Carolina. And as some who have been with the story for some time, they were in the process of exiting and going to some other solutions that have been anointed by the state. Well, that's not all been unwound. And to that end, we feel very solid about not only transitioning our existing customer base by growing new market share in that -- in the state of North Carolina. Because of the, I guess, the credibility that we've earned. As I've said, we wanted to take it slow there. We wanted to make sure that our successes were clear and really did not replicate the struggles that a couple of our competitors have faced in that state.

And that is to our benefit as now the stage is kind of pulled back on anointing any particular vendor. And actually, we are in very good relationship with the state and with key stakeholders in the state to be able to accelerate now on the back of the new customer that we just went up on time.

[Operator]

The next question is from Adam Wilk from Graystone Capital Management.

[Adam Wilk, analyst]

Or a question, just one for me. I appreciate the commentary surrounding the opportunity in education. Kind of answers my original question, but I wanted to maybe try to drill down on that a little bit more. Can you maybe quantify the opportunity set at this stage or provide a little more color on kind of how those talks with various states unfold. It seems like based on the channel checks I've done, it seems like there's pretty significant opportunity, as you mentioned, both in terms of white space, but also sort of given the struggles of some of your competitors. And I'm wondering if there's, again, like the ability on your end to quantify that opportunity set or maybe talk about some of the dynamics surrounding how you get your foot in the door or expand your existing customer base over time.

[William Wood, executive]

Good morning, Adam. It's a good question and one that I'll add a little color on to the degree that I can -- the -- our ability to lift and shift from the Oklahoma dominance into another state. We did thoughtfully and actually in a more expansive way than if we were just trying to get to North Carolina well. And by that, I mean, we took out all the hardwiring that was Oklahoma specific when we lifted and shifted the code into North Carolina, so that it is now relatively state agnostic.

By that, I mean it's all toggle switches and set up information that depending on state requirements, reporting requirements, so on and so forth. We now have the ability without material R&D investment as we made going from Oklahoma to North Carolina to be able to now have a platform that we can take elsewhere So I feel very good about how we're positioned. I wanted to prove -- we wanted to prove it out in another state first, not only the software, but our ability to deliver this kind of relationship that is a lot of these states have enjoyed with their legacy provider, us being one of them.

And really, where others that have come in and tried to offer a shortening object have really struggled because the idea of delivering ongoing service and relationship with those customers or those in various states, has been weak, and it's been something that's created opportunity for us. Going forward, we already have some customer density in a few other states as a result of legacy software, our legacy software that exists there. So we already have outposts, not nearly to the density of North Carolina, but we've already built kind of a load around those customers. We expect to build bridges now to those states and other in that state where we've assessed the opportunity in those respective states and feel those to be material.

So we do have our sights set on 2 to 3 additional states in 24, where we'll look to penetrate beyond just North Carolina.

[Adam Wilk, analyst]

Okay. Great. That's helpful. And then as a follow-up, are the education market similar to other public sector areas where the environment is similarly collegial or how do you guys kind of look at that the opportunity across states?

[William Wood, executive]

I think there is there's always the willingness to share, I think, school districts by the nature of what they do, kind of a public and national forum, if you will, while they're [indiscernible] there's an overall initiative at a federal level to make sure that students are learning well and effectively. And to that end, I think that it in estate, it's [indiscernible], even maybe more so than states and the nonprofit space. It's very, very much on 1 lease to 3 leases to 7 leads to 9, and they largely, I think, as most of you know, once they are on a new platform and feel that the vendor is providing this kind of relationship and service and partnership that they're looking for, they stay for quite a long time in terms of just taking us not talking years, we're sometimes talking decades. And to that end, we feel good about being able to effectively leverage our very high APS within the end space as it sits right now.

It's off the charts in terms of the relationships and the trust that our customers have with us as being a partner, and we think that will play for us very well as we go forward.

[Operator]

[Operator Instructions] The next question is from [ Amer Ezzat ] from Industrial Alliance

[Unknown Analyst]

One follow-up on your comments, Bill, in your prepared remarks on R&D spend. Did you say we should expect them to decrease? Or are they potting?

[William Wood, executive]

Yes. Thanks for coming in and joining. Yes, I use the term at this point, plateauing. I still think there is quarters ahead where we see our R&D and what we want to get done as -- but we don't see those on the rise, and we do see a point in time, as Sujit has indicated and I did at Investor Day where we expect those will start to decline as a percentage of overall revenue and the leverage that we talked about in '24 starting to materialize.

[Unknown Analyst]

Fantastic. So decreasing as a percentage of revenues, then the dollar amounts might be the same is what I understand.

[Sujeet Kini, executive]

Yes, Amer, I'll quickly jump in there. That is overall an accurate assessment. In terms of R&D, the one thing I will point out this quarter is we had an element of a true-up on account of additional capital -- cap debt projects identified. So there was a, if you will, a bit of a trough from an R&D expense perspective. So it will level off going into next quarter. But the overall since we have from an R&D perspective is as a percentage of revenues, it will move downwards.

[Unknown Analyst]

Okay. Then I've got one that might be tougher for you. So like you appreciate the EBITDA uptick quarter-to-quarter. But if I'm implying correctly, your capitalized software development costs are the highest I've ever seen them, $1.2 million in the quarter versus last quarter's $700,000, so I'd like to try to get a sense of what is happening there and how should we expect your capitalized software development costs to evolve over time?

[Sujeet Kini, executive]

Right. So maybe if I sort of break it up a little bit. So [ CapEx ], as a percentage of revenue in the current quarter is around 5%. We were trending in the 8% to 9% in prior quarters. So the impact of cap the [ captive ] credit product development as a percentage of revenues was in the 12% range. Going forward, our expectation is that the 5% that you saw in the current quarter, which I indicated was on account of a true-up relating to additional projects identified.

That 5% will continue in the -- probably in the 7% to 8% kind of range. So it will tick up or it will go up versus the 5% in the current quarter, but we see it not going up to the levels that we saw at that kind of 9% range, if that helps.

[Unknown Analyst]

Okay. Sorry. So the true-up happens on the expense portion of the R&D is opposed to the capitalized portion?

[Sujeet Kini, executive]

Correct. Yes. The true-up happened. So essentially, R&D costs prior to the application of the GAAP credits were in the 12% range. And basically, there was a true-up on account of additional projects identified some of that true-up related back to projects that were started in Q1, and so we did that true-up.

[Operator]

There are no further questions. At this time, I would like to turn the meeting back over to Mr. Wood.

[William Wood, executive]

I just want to thank you all for your continuing interest in and support of our efforts to Sylogist. We're very excited about the opportunities we see ahead and sincerely appreciate the support and growing support for what we're executing on here at the company. Have a great day. Bye for now.

[Operator]

Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.