Sylogist Ltd
TSX:SYZ

Watchlist Manager
Sylogist Ltd Logo
Sylogist Ltd
TSX:SYZ
Watchlist
Price: 9.1 CAD 0.55% Market Closed
Market Cap: 213m CAD
Have any thoughts about
Sylogist Ltd?
Write Note

Earnings Call Analysis

Q4-2023 Analysis
Sylogist Ltd

Sylogist Reports 16% Organic Growth and Solid Financials in 2023

In 2023, Sylogist celebrated a significant year, achieving a full SaaS posture for its strategic platforms and meeting its financial targets, with organic growth at an impressive 16.1%. The company's Q4 revenue reached $16.2 million with an organic growth rate of 5.4%, and a year-over-year growth in SaaS revenue of 16%. The adjusted EBITDA for the quarter was $4.8 million at a margin of 29.4%, and the annual adjusted EBITDA was $17.3 million, with a margin of 26.3%. Project Services revenue decreased by 4% in Q4 but rose by 26% for the year. Sylogist repurchased 343,600 shares for $2 million and ended the year with $11.6 million in cash. Looking ahead, SaaS is expected to compose up to 70% of total revenues by the end of 2024.

Sylogist's Remarkable SaaS Transition and Strong Organic Growth

In 2023, Sylogist outperformed expectations with critical achievements, notably attaining a full SaaS posture for their strategic platforms: SylogistMission, SylogistEd, and SylogistGov, with customers already active on each. Capital allocation towards market expansion, especially within partner communities, strengthened Sylogist's position, leading to a financial triumph marked by a notable organic growth of 16.1%.

Record-Breaking Recurring Revenue and SaaS Expansion

Recurring revenue soared to a record $10.5 million for the quarter, representing a 9% year-over-year increase. SaaS revenue, the driving force behind this growth, expanded by 16% year-over-year in Q4, underscoring Sylogist's accelerated shift to a SaaS model and dedication to their profitable growth strategy.

Sturdy EBITDA Margins and Effective Partner-Driven Strategy

EBITDA margins remained robust at 29.4% for Q4, showcasing strong profitability even as SaaS Net Revenue Retention (NRR) hit 104%. The partner-driven approach multiplied bookings by over eight times since Q1, reflecting the momentum of the partner strategy and its increasing importance in growing the company's Annual Recurring Revenue (ARR).

Annual Figures Indicating Sustained Growth and Market Penetration

Sylogist's annual revenue growth of 16% culminated in a $65.5 million revenue for the year, energized primarily by a 14% uptick in SaaS subscription revenue and a 26% leap in Project Services. The company's focus on sectors like education and government through SylogistEd and SylogistGov is paying off, as reflected by the 11% year-over-year growth in ARR, which stood at $42.2 million.

Maintained Gross Profit Margin Balanced by Operating Expenditure Increases

While maintaining a gross profit margin of 60% for Q4, the full-year margin marked a slight decrease due to increased Project Services revenue. Sales and marketing investments rose notably, nearly doubling the full-time employee headcount in this area to support strategic initiatives and grow the sales pipeline.

Adjusted EBITDA and Capital Management Strategies

Sylogist reported an adjusted EBITDA margin of 29.4% for Q4 and a full-year margin of 26.3%, signalling a minor decrease from the previous year. Despite this, the company demonstrated prudent capital management through a share repurchase of over 343,000 shares using $2 million and ended the year with $11.6 million in cash.

Expectations of Growth Cycles and Future Success

Sylogist anticipates stronger growth in the latter half of the year due to the cyclical nature of budgets in their markets. They forecast full-year growth remaining in the mid-teens range, underscoring the company's confidence in its business model and trajectory.

Commitment to Organic Growth as the Primary Value Driver

Management articulated that their primary focus remains on fuelling organic growth through capital investment in sales and marketing efforts. This commitment is seen as the most potent lever for creating shareholder value, suggesting that Sylogist will maintain its current trajectory without relying heavily on mergers and acquisitions for expansion.

Earnings Call Transcript

Earnings Call Transcript
2023-Q4

from 0
Operator

Welcome to the Sylogist Limited Fourth Quarter and Full Year 2023 Results Conference Call and Webcast. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]. I would now like to turn the conference over to Jennifer Smith with LodeRock Advisors. Please go ahead.

J
Jennifer Smith

Thank you, [Indiscernible], and good morning. Joining me to discuss Sylogist's Q4 fiscal and full year 2022 results are Bill Wood, Sylogist's President and Chief Executive Officer; and Sujeet Kini, Chief Financial Officer. This call is being recorded live at 8:30 a.m. Eastern Time on March 14, 2024. Our Q4 press release, MD&A, financial statements and accompanying notes have been issued and are available to download on CAR Class. 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. And before, we will also discuss non-GAAP performance measures, which should be reviewed as supplemental. The MD&A can be used definition [Indiscernible] not reporting. All of the dollar that is expressed on this call are Canadian, unless otherwise noted. I'll turn it over to Bill. First, for opening remarks, then Sujeet will review our Q4 financial performance, after which, Bill will conclude with scripted remarks, at which time, we will open it up for questions. With that, Bill.

W
William Wood
executive

Thank you, Jen. Good morning, everyone, or good afternoon to those of you listening overseas. 2023 was a great year for Sylogist across the board, one in which several key milestones were achieved each underpinning the continued value creation we see ahead. To highlight just 3 of those milestones. First, we gained a full SaaS posture and market-ready position for our 3 strategic platforms. SylogistMission, SylogistEd and SylogistGov with customers now live on all 3. Second, we allocated capital to accelerate our go-to-market and delivery expansion, both internally and within our growing partner community and saw results. And third, we hit the financial targets we laid out at the beginning of 2023, most notably organic growth at 16.1%, in line with the mid-teens growth we signaled. With increasing tailwinds, we're seeing building momentum from the strong early stage execution of our go-to-market plan with all 3 of our purpose-built platforms now in market and the enthusiastic reaction they're receiving. We're seeing a notable uptick in interest from prospects, customers and partners alike. In Q4, Sylogist achieved revenue of $16.2 million, an organic growth rate of 5.4%. At the same time, recurring revenue reached a record $10.5 million in the quarter or 9% year-over-year growth, even better and as planned, revenue growth was led by our SaaS revenue, which expanded by 16% year-over-year in Q4. We see our continued SaaS ARR growth acceleration as a key indicator of our successful transformation to a full SaaS posture in just 2 short years and how well we're executing our profitable growth strategy. We booked $7.6 million in new business during Q4 and $29.4 million for the year and pushed our backlog or RPO up to $31 million at year-end. More ICP or ideal customer profile, sales qualified opportunities are filling our pipeline and existing opportunities continue to track and close at a high win rate. To quantify the ROI we're achieving on our R&D investments and increased sales and marketing spend for you. Our sales qualified pipeline grew over 170% in 2023. And even more exciting is the traction we're starting to see within the Sylogist go-to-markets. Traction we expect will accelerate and begin to matriculate in the back half of 2024 and into 2025. I also want to highlight that EBITDA margins were strong at 29.4% in Q4 and SaaS NRR was 104%. The build-out of a high-quality, closely aligned partner community is trending ahead of schedule and is expected to be an increasingly important component of our profitable growth strategy in 2024 and beyond. Our growing partner community is already increasing our reach, driving new customer wins and expanding our RPO delivery capacity and in turn, ARR growth. As further proof that our partner strategy is taking hold, on our Q3 earnings call, I shared that our partner-driven bookings had increased 5x from Q1 of 2023. I'm pleased to share that our -- that in Q4, partner-driven bookings have now increased by more than 8x over Q1. We are also seeing increased traction from focused marketing and sales, displacement programs aimed at targeted competitors. And as we get further into those programs, we're realizing increasing displacement momentum and economies. Exiting 2023, I'm confident that the building blocks for continued success are in place and future value creation for our shareholders looks very bright. I'll pause here and turn the call over to Sujeet Kini, our CFO, to go through the financial -- key financial details of Q4 and full year 2023. Sujeet?

S
Sujeet Kini
executive

Thank you, Bill, and good morning, everybody. Our Q4 results demonstrate the momentum we've built during -- throughout 2023, in transforming Sylogist into a SaaS leader in the public sector, while staying focused on the successful execution of our profitable growth plan. Total revenue for the quarter was $16.2 million, up $0.8 million or 5% relative to Q4 2022. This growth was primarily driven by our SaaS subscription revenue, which grew by 16% over Q4 '22. On a full year basis, revenue grew to $65.5 million or 16% year-over-year. Year-over-year revenue growth was driven primarily by SaaS subscription revenue up 14% and Project Services up 26%. We also note that SaaS subscription revenues came in at 67% of total recurring revenues for Q4 2023 compared to 62% for the same period last year. This increase was driven primarily by growth in SylogistMission, supplemented by early green shoots growth in SylogistEd and SylogistGov. ARR came in at $42.2 million, growing at 11% year-over-year with the increase understandably coming primarily from SylogistMission. As we had signed last quarter, we saw a modest slowdown in Project Services revenue growth in Q4. This being -- this due to the seasonality impact of the U.S. Thanksgiving and the December holiday period. Project Services revenue decreased by 4% in Q4 compared to the same period in the prior year. However, Project Services revenue for the year -- for the full year 2023 increased by 26% or $22 million compared to 2022. This growth was driven primarily by SylogistMissions acceleration. Our gross profit margin for Q4 2023 remained stable at 60%. For the year, gross profit margin was lower at 60% compared to 63% for 2022, primarily on account of a higher level of project services revenue in '23, which came in at 34% of total revenues compared to 31% in 2022. Total operating expenses for Q4 '23 were stable at 30% of revenue compared with 31% during the same period last year. On a full year basis, OpEx as a percentage of revenue was 34% in 2023 compared to 32% in 2022. This increase being primarily driven by higher levels of planned go-to-market expenditures in 2023, as Bill mentioned. G&A of $2.5 million in Q4 '23 was consistent with the corresponding period last year, coming in at 15% of revenues compared to 16% of revenues in Q4 2022. On a full year '23 basis, G&A expenses were up by $2.1 million. This increase is largely attributable to the increased company-wide employee bonus plan that was tied to our strong 2023 organic performance, our costs relating to our first ever Investor Day in June 2023 and higher levels of professional season. However, as a proportion of total revenue, G&A was relatively stable at 19% compared to 18% for the same period last year. Sales and marketing costs for Q4 2023 were $1.6 million or 10% of revenue compared to $1.1 million or 7% of revenue in the same period last year. On a full year 2023 basis, sales and marketing expenses were $6 million or 9% of revenue compared to $3.8 million or 7% of revenue for 2022. The increases for both Q4 and the full year in sales and marketing expenses were due to strategic investments made in additional sales capacity and marketing activities. Our sales and marketing full-time employee head count has increased by almost 100% to 2023, that is 23 people at the end of December 31, 2023, from 14 people at December 31, 2022. Product development expenses for Q4 '23 were $0.8 compared to $1.2 million for the same period last year. And on a full year basis, product and development expenses were $3.7 million compared to $4.2 million for the same period last year. The decreased level of product development expenses are attributable to higher levels of capitalized development in relation to R&D activities and team expansion tied to crucial fit and finish and Q&A reading our SylogistEd and Gov platforms for market. Absent the impact of capitalized development expenses, gross product development costs as a percentage of revenues have continued to stay in the 13% to 14% of revenues range. Adjusted EBITDA for Q4 2023 was $4.8 million, resulting in an adjusted EBITDA margin of 29.4%, down slightly from 31.5% in Q4 2022. Adjusted EBITDA for 2023 was $17.3 million, resulting in an adjusted EBITDA margin of 26.3% compared to 30.4% for 2023. The decrease in adjusted EBITDA margin for both periods was on account of planned higher levels of sales and marketing expenses and a slight compression in gross margins on account of higher proportions of Project Services revenue. Consistent with our capital allocation strategy, we repurchased a total of 343,600 shares for $2 million using our NCIB during the 2023 year. At the end of 2023, we had $11.6 million in cash. This level of cash is in line with the seasonality of our business and our customer renewal cycles. Our revolving credit facility balance was $17.2 million at the end of the year. Before I hand back to Bill, I will touch very briefly on a few disclosure-related items. As you will recall, we changed our fiscal year from a September 30th year-end to a December 31st year end in 2022. As a result of this change, we are required to compare the results of our operations for the 12 months ended December 31st, 2023, to the 15 months ended December 31, 2022, both within the financial statements and the MD&A, which we have done. Additionally, though, by way of supplementary disclosure, we have included in our MD&A tabular and narrative disclosure comparing the 12-month periods ending December 31, 2023 and 2022, so as to provide for a more symmetrical comparison of our year-over-year results. With that, I will hand it back to Bill for some final thoughts. Back to you, Bill.

W
William Wood
executive

Thanks, Sujeet. In summary, we're very pleased with the ROI, we're already recognizing from the R&D investments we made over the last 2 years relative to our SylogistMission, Ed and Gov platforms and from our increased investments in both our direct and indirect go-to-market motions. With our revenue per employee metric rising 12% year-over-year to $326,000. We're clearly driving growth and value creation efficiently. And while many competitors are only at the early stages of integrating their siloed products just starting to figure out their AI strategy and facing the myriad risks and financial pressures related to their shift to fully SaaS offerings. SylogistMission, Ed and Gov are already there. And the 100% SaaS SylogistMission, Ed and Gov platforms offer our customers unmatched data security, availability and scalability, given they completely reside in Microsoft's industry-leading Azure cloud environment. Our internal theme at Sylogist for 2024 is maximizing efficient repeatability and scalability of everything we do without compromising outstanding customer service. We see low to mid-teen year-over-year organic top line growth exiting 2024 and ARR as a percentage of overall revenue increasing further in the latter part of 2024 as we ship more of the project service delivery to partners. That's exactly the result we want from our partner strategy. And with that, let's take some questions.

Operator

We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Doug Taylor with Canaccord Genuity.

D
Doug Taylor
analyst

One primary question. I wanted to get a little bit more color on. You had some very exciting things to say about your pipeline across your units, and you said you expect that to translate to accelerating ARR build in the second half of the year. So I think implicit in those statements is the expectation of improving pipeline conversion and deal closure momentum as we work through the year. So can you speak to what gives you your confidence about that here in the coming quarters? Is it pipeline maturity? Is there some seasonal elements? Any help there would be appreciated.

W
William Wood
executive

Yes, -- it really is -- your question is best answered by some of the comments that I shared. Our platforms now are in a position where I think they are industry-leading. So therefore, the desirability of the innovation, the usability, the full staff posture that they now have put us in a stronger and stronger position relative to the competitive landscape and the ability to win business. I think our customers at advocates, as I've always said, is our key driver for success has never been stronger. And with the kind of pipeline expansion for ICP targets, there's just no doubt, as I see our go forward as strengthening ability for us to convert leads coming in, both in combination with our direct efforts as well as our partner efforts and the attachment rate we're seeing and increasing velocity of our partners, bringing deals to us and in concert with us. I just -- we just feel very good about the -- as the buying cycles kick in for our markets, really strengthening in that back half of the year even more so than we saw in 2023.

D
Doug Taylor
analyst

Okay. And then as we think about the gross margin potential for your platform now that you've got some heavy well, I mean R&D, but now that the platform has been fully built out, do you want to maybe talk a bit more about the -- what you'd see as the upside potential from -- for your SaaS revenue line for gross margin as you start to scale here and the contribution margins would be another way to potentially shinglight on that.

W
William Wood
executive

So as I mentioned in my prepared remarks, we see SaaS revenue as a percentage of our overall revenue accelerating and for the reasons that I shared, both in terms of increasing deal velocity and count as well as shifting the project services portion, which has lower margin to our partners and enthusiastically doing so, both in terms of transitioning those as well as the partners that are excited to deliver those to with us. And so those 2 levers working together really creates leverage for our margins as we go forward as we get more of the high profitability related to ARR contributing to our overall profile. Sujeet, anything you want to add to that?

S
Sujeet Kini
executive

Yes, absolutely, Bill. And Doug, I guess, back to your question, there will be contribution margin coming from the pure fact that we will have additional SaaS revenues. However, the one comment we will make and Bill did talk about in his preamble comments, the fact that we are transitioning to a partner-led delivery model does cause from a professional services perspective does cause us to maintain a continued level of strength on the PS side from an internal bench perspective. And this is in connection with using our internal bench to train the partners as they get onboarded and they provide project services delivery. So the comment we're making here is, yes, there will be an increase in gross margins from the fact that there will be more SaaS revenues. However, the impact on an overall gross margin will be muted because there will be -- there will continue to be some level of heaviness on the PS side as we maintain a bench and then eventually transition to -- or pivot to a full partner-led delivery model.

D
Doug Taylor
analyst

And maybe just share from my understanding on that a little bit more for partner-led SaaS, leaving the professional services aside, which I understand is more significantly different. But in terms of the SaaS margins is -- can you help us quantify if there's a difference in terms of the revenue share on the software part, just to help us understand the scale -- the potential gains from scale versus the margin pressure compression associated with having a higher degree of partner-led?

S
Sujeet Kini
executive

Yes. Maybe the best way for us to answer that would be currently SaaS and these are -- this is on an annualized basis. SaaS as a percentage of total revenues is currently at the end of fiscal '23. So on an annualized basis, SaaS as a percentage of recurring revenues in that 65% range. In terms of the leaning in from a SaaS perspective, we do expect that percentage to go upwards into kind of the high 60s, close to 70% range for the end of 2024.

Operator

The next question is from Amr Ezzat with Echelon Partners .

A
Amr Ezzat
analyst

Can we first start with your comments on 2024. So you're calling for momentum to continue, but pointed that it will be a stronger latter half and Bill, I believe you specifically said low-to-mid-teen growth exiting the year, does that imply for the full year, we should look for single-digit growth then for 2025, double-digit growth given that you're exiting in the teens. Is that a fair statement.

W
William Wood
executive

No. To unpack that, good mporning first Amr, bit. I just want to be clear. On the latter half, it's just the nature of our buying cycles of our markets and when budgets are approved. We -- the activity that we see in the first part is really accelerated by deals coming into our pipeline and then matriculating with budgets becoming approved and available for procurement in the -- usually in the July time frame. And so there will be a stronger ARR acceleration in overall growth acceleration in the back half than the first half by the nature of the cycles of our market. But ultimately, we see that full year still being in that mid-teens, low to mid-teens range as we not only it to the end of '23, but then the velocity carrying us into next year. Does that answer your question?

A
Amr Ezzat
analyst

Yes, better than I thought. So like how do you marry the new metrics you guys started to release and we appreciate it, I think, in backlog, RPO, given that the new metrics you're releasing, there seems to be a bit of, I guess, like a disconnect between the year-on-year growth in backlog and RPO, which looks a little muted relative to the growth we are seeing in ARR and revenues and what you're suggesting before 2024. Is there a lot of variability in these numbers? Or just like help us reconcile?

W
William Wood
executive

Yes, it's a great question, and thanks for asking it. As a matter of fact, we don't want that backlog to grow at the same percent the ARR. We want a churn, and we want to -- and as I mentioned, we've built capacity internally as well as through our partners now to deliver that RTO and deliver that backlog at a higher clip. And so therefore, the -- I would suggest that is a very good factor that we are getting through that backlog in a more efficient manner than we were able to in the past, whereas we're not allowing that to build up leading to customers waiting in line, if you will, or delivery of services. So that really is a reflection of the maturing of our business in terms of our delivery capacity. So I think looking to keep that in that range that we are and really having that $700,000 addition in RPO vis-a-vis the overall ARR acceleration in top line is the good thing. The other thing I'll mention here is that our ARR based on a contractual change within our major markets is now more closely tied to the signing of the contracting agreement than it was in the historical past where it was delivered at the end or lit up at the end of project services. We're bringing those 2 much closer together from the standpoint of when our ARR starts to light up closer to the contract signing and the provisioning of the platform for the customer.

A
Amr Ezzat
analyst

Fantastic. That's actually very helpful to understand these dynamics. If we go to the dynamics by segments, can you maybe give us an update on the Ed side in North Carolina, you seem excited in your prepared remarks about the latter half of the year, you'll see on the education side. Is it fair to assume that this is like North Carolina kicking in?

W
William Wood
executive

It is. And ultimately, our position now and the state supporting our efforts and promoting our efforts within the state vis-a-vis our competitors, I think, is a very positive signal for us as we now have successfully delivered on our first listing [Technical difficulty] North Carolina. And now we're building our pipeline from many others, both existing customers and new customers and some new market opportunity within the state, raising their hand and leaning in to participate in webinars and ultimately earnest conversations about papering and starting up. So again, because of the cycles of the school year, those largely in the back half of the year in the summer time frame when the implementation and procurement happens. But we are very positive relative to the progress we've made in North Carolina and the opportunity ahead and beyond North Carolina as we now start venturing into a couple more states and some discussions in each of us.

A
Amr Ezzat
analyst

Obviously, on the Mission side, fantastic, fantastic year. Did you mention how much of your growth comes from competitor displacements in Mission -- did I miss that?

W
William Wood
executive

No, you didn't miss it. And I don't -- we're not putting that out there now. And actually, I think the more covertly we can continue those activities, the better by not [Indiscernible] are and ultimately, the momentum we're gaining. It's just a situation where I feel like walking the walk versus talking the talk is the best way to continue to execute on that plan.

A
Amr Ezzat
analyst

Okay. So let's not dwell on it. I speak to a surprise to see your EBITDA margins jump up for the quarter. And that's even if I adjust for capitalized R&D, your quarter-on-quarter improvement is very noticeable. And it looks like mostly driven by lower G&A. I do recall you in the past couple of conference calls, commenting that you only expected margins to expand in the latter half of '24. So I'm wondering, is that a one-off improvement? Or how do we think about margins over the next couple of quarters?

W
William Wood
executive

Sujeet, would you like to take that?

S
Sujeet Kini
executive

Yes. Yes, absolutely. Amr, -- in terms of the expansion of the EBITDA margin for in Q4, and you're right, it's primarily coming from G&A. It's a combination of factors, and I'll quickly list them out. It's an equal distribution relating to 3 to 4 factors. One is, on an overall basis, our recruiting costs declined not because we were not recruiting, but essentially, we have brought in a recruiter in-house to help our HR function. So from a headcount perspective, essentially, one is seeing the impact of basically 1/4 of the cost of the recruiter versus a fairly significant reduction in recruiting costs, i.e., the usage of external agencies. The other thing that went in our favor as well was in Q4, we had a lower level of legal and professional fees. That again is just the cadence in terms of these items. It's -- there is not -- these are fairly variable and can go up and down depending on the extent to which we use external lawyers and so on and so forth. The other impact also was at the end of the year -- at the end of the year, -- just in terms of the way our vacation policy functions, we have pretty much across the company use it or lose it policy. So essentially, the bringing down of the vacation accrual back to the level that one may as an employee carry forward into the next year, does in and of itself, create a positive benefit to the EBITDA. And then the last comment I will make is on -- just at a general level across the company. We had a few departures, again, not key personnel. But basically, because of the departures happening in late September, going into October, these folks were essentially backfills that have actually got refilled and recruited in Q1 of 2024. So we had the benefit of the "benefit"if you will, of those departures in Q4. So that's pretty much high level what was going on in terms of the reduction in G&A.

A
Amr Ezzat
analyst

Okay. That's very helpful. So am I okay to assume that you still stand by your comments that margins to expand like exiting 2024? That's a fair statement, right?

S
Sujeet Kini
executive

'24 would continue to stay in that mid-20s range. We go back to our comments about the fact that from a project services perspective, we will need to maintain that bench. So there's puts and takes there, Amr. One is the continuing to maintain the internal branch from the point of view of onboarding partners. On the other side, where we will see some level of increased spend. And this we would have seen -- this we saw in the latter half of '24, we will continue to invest in expanding sales and marketing capacity. So one will see an increase in terms of spend there. And all this will get offset by savings on the G&A side. So there are puts and takes, and we're comfortable thinking about our EBITDA margins continuing to be in that mid-20s range.

Operator

Next question is from Daniel Rosenberg with Paradigm Capital.

D
Daniel Rosenberg
analyst

I just wanted to continue that line of thought around hiring and investment in sales. So you mentioned the headcount grew over the past year as you made the investments. So can you just speak to your plans on specific hiring in sales? Just any targets around headcount, what you're thinking as you look to the opportunity this year?

W
William Wood
executive

For the most part, we to build out and lend between our direct force, but at a more modest rate than we've added in 2023 versus 2022 was really to make sure that we could perfect our sales motions, our marketing motions and be able to pursue those leads while we were building the partner community and their ability to deliver opportunities to us and go out and win [Technical difficulty] to that end the velocity and the increase that we're seeing in partner-led deals versus Q1 of 2023 to Q4, 8x is indicative of that partner channel starting to be at the front of the pack in terms of leading our ability to drive sales pipeline and conversion of that and then the delivery of the services related to that. So we don't need to grow at the same level that we did in '23 from a sales standpoint as we now are better positioned to empower our partners to do that with us.

D
Daniel Rosenberg
analyst

And then on the partner channel, is there kind of a -- obviously, you need to stand it up. But once it's fully running, when do you think that operating leverage starts to kick in. This is a 2025 event or 2026 event? How long a way do you think you can start to see the kind of hockey stick benefits of that channel?

W
William Wood
executive

We'll start to see that in the very latter part of '24 in a green shoots way more materially and then' 25 more fully. We want to be very careful in not just throwing it over the fence to the partners and ultimately making sure that our commitment to delivering a great implementation experience and training experience is not in any way compromised. So as Sujeet highlighted, our bench will stay the lotus, if you will, to make sure that they are empowering our partners with the same level of understanding of the products and platforms and ultimately, how we go about the implementation. But in '25, we really see that bench supporting a much larger part of the community and more repeatable. As I mentioned in my comments, repeatable and scalable processes, self-serve, self-serve training, self-serve qualification of those partners being in place so that we can get really acceleration from a leverage standpoint as we get into '25 more fulsomely.

D
Daniel Rosenberg
analyst

And then maybe a final question just around capital allocation. So as you start to see the benefits of the investments you've made starting to grow, do you see yourselves reinvesting in organic growth? Or will you kind of let that cash build up and be opportunistic around the M&A pipeline? Just trying to understand if the scalability or the the speed in which you could build out that sales channel can be accelerated with excess capital? Or is it really about turning towards M&A as it comes up?

W
William Wood
executive

For the foreseeable future, Daniel, we see organic growth is still a priority in using capital to continue to fuel that. Our marketing efforts create the activity and the awareness within the markets that we serve, and we'll continue to raise the flag, of the Sylogist flag that is of who we are and what we do. We have to accept the fact that we are new into 2 of these spaces. Gov and Ed particularly, and we need to continue to invest behind that. But as a percentage of overall revenue, we're comfortable of our sales and marketing staying in the range that it is now. But ultimately, that requires capital to continue to drive that organic growth, which we feel is the best value creation lever that we can pull. And to that end, it does not mean that we don't have free cash flows as well as our credit line and so on to be able to pursue M&A over the same term. We see the use of paper as not where we want to be in terms of dilution for our existing shareholders. That would really need to be a unique scenario where that is a possibility. But for the most part, it will continue to be a blend of resources to drive organic growth and then look at M&A from a strategic standpoint.Ă‚

Operator

The next question is from Gavin Fairweather with Cormark Securities.

G
Graham Smith
analyst

This is Graham Smith on for Gavin Fairweather. I just kind of want to go back into the cadence like the services and the gross margins related to those services. So I understand you guys are keeping a larger bench to kind of help train the partner channel. But I think just with this quarter and last quarter sort of being a bit weaker on the services side. I was wondering like if you guys are still expecting an acceleration in services revenue, how much of that like improvement in utilization? Like how much torque can there be on gross margins?

S
Sujeet Kini
executive

I can take that, Bill.

W
William Wood
executive

Go ahead, Sujeet. You can take the headline there.

S
Sujeet Kini
executive

Yes Yes. So Graham... The way we think about PS for 2024, and I'm just sort of recapping the comments I made. One is, as you pointed out, there will be a continuation of holding on to the internal bench. As an offset or as an Ajun comment to that, what I will say as well is as part of continuing to hold on to the internal bench in terms of the additional hiring from a PS perspective for 2024, it's a combination of additions of full-time employees as well as a fairly significant spend from a contractor perspective. And essentially, what this does is it gives us that agility or nimbleness to react to the situation from a partner delivery perspective as well as a direct delivery of project services perspective. So essentially, it allows us that ability to pull back on levers as necessary to create, as you're saying, that torque from a gross margin perspective. Our view is we will continue to monitor this. We will continue to monitor this during 2024. And essentially, the comment really here is project services for 2024 are going to be a combination of direct. We will obviously continue to do direct, but we will also be pivoting to the partner-led delivery model. So essentially, there will be -- there will be movement between these 2 models. But from a cost perspective, we have that ability to adjust our spending to a certain extent to maintain the gross margins that we're talking about. I hope that gives you some color in terms of how we are thinking about this.Ă‚

G
Graham Smith
analyst

And then just next, I was kind of wondering on the partner side. Like is the contribution that you guys are seeing? Is it like sort of more broad based? Are you seeing an increasing amount of lease coming from Microsoft? Maybe any color on that would be helpful.

W
William Wood
executive

Yes, Graham, we're seeing both. We're seeing Microsoft walking us into deals and their relationships within the communities that we are now targeting on Ed, Gov and the nonprofit NGO -- and then our partners, independent entities that are -- either have a North American footprint or a regional footprint that are now aware and excited about a particular platform, potentially more than one platform and their practice in a particular genre, becoming an accredited partner bringing deal activity to us and ultimately, then partnering with us with the delivery of services. So it's a very exciting time for us as we leaned in on the partner channel. It's not an easy thing to do to ultimately have in-house to external collaboration, if you will. I will say we're navigating as best as any that I have been able to finance and that really is a credit of a leadership team. Grant McLarnon, who came in as our CRO has deep experience in the partner channel and growing that both within Microsoft and externally as well as our overall team members that are executing and empowering our partners. It's just indeed to talk about it versus the fact of doing it and putting the mechanics in place to make sure that it's not compromised and that scale is achieved and repeatability is achieved in a way that it is seamless for our customers, and they're actually enthusiastic about that partnership that we have with our partners, if you will. So I feel very good about our velocity and the traction that we're getting. And I see that being really a differentiator for us going forward.

Operator

The next question is from Suthan Sukumar from Stifel.Ă‚

S
Suthan Sukumar
analyst

Firstly, I wanted to talk a little bit about the ramp-up in Education and Gov. Could you help us understand a little bit what could be different about this product cycle versus what we saw with Mission. Curious if there's different pricing dynamics or migration activity or even the upsell opportunity? Just just wondering if there's some different considerations to expect.

W
William Wood
executive

For the most part, again, we are platform, not products. So we are in the Gov and Ed environment. They are bringing in the platform and then lighting up those assets. But the platform is there from the get-go. And for the most part, they are gobbling up the entire platform from the get-go because they were existing -- they're replacing existing functionality that we kind of targeted to make sure the platform embraces. The dynamics are -- are tiered a little differently than the not-for-profit space, school districts as well as municipalities. We have to have a tiering and ultimately tie to the idea of citizen footprint as well as student footprint within those. But we've really taken time to research the market, make sure that we are at and opt to we feel we're offering a superior product in a way to be able to drive value but not price ourselves out of that mid to -- that mid-market, if you will, and ultimately make sure that we're not leaving dollars on the table in terms of our SaaS revenue because of the strength of our product and innovation and intuitive that it offers.

S
Suthan Sukumar
analyst

Secondly, it's good to hear sort of positive, but guarded commentary on the displacement success. Curious, what's your -- what's driving the win rates there with respect to that opportunity? Is there some something specific you can point to? Wondering if it's just product is how much is pricing a factor? Just wondering what -- if you could share more color on sort of what's driving your success there?

W
William Wood
executive

Generally, it's 3 factors. The price point of where some of our competitors are assuming their customers are willing or able or desire to renew. Second would be the product where it is vis-a-vis its fast posture or not. And there -- the customer expectation, as we said, coming out of COVID and all of the headlines out there about data security and ransomware and so on. It's just not something that customers are willing to look off anymore. And they're willing to go through the discomfort of change and to get to a new platform to gain additional functionality, a full SaaS posture and innovation. And I think the customer satisfaction, I think, is the other [Technical difficulty] that advocate that we've been looking to earn those our advocates on our behalf. And that's bleeding into other competitors' sandboxes, if you will, relative to both awareness of Sylogist, but also being able to articulate why the product and the experience with us is different than maybe their existing competitor. And we can say that in our marketing and at our outreach. But when peers are saying that's one another, that makes a big difference. And so we're -- that fire is growing as people become more aware of Sylogist and how our customers are succeeding with our platforms.

S
Suthan Sukumar
analyst

And I guess the last question for me is on M&A. Now we continue to see consolidation activity in the space. I'm curious, how have you seen competitive intensity change industry-wide with respect to the targets you have in view? And how should we think about the pace of acquisitions over 2024?

W
William Wood
executive

We don't have a particular pace in mind, Suthan, and I know that you're well aware of that. But we stay alert and our -- the number of lines we have behind the boat have never been greater, the discussions that we have ongoing and our ability to look at deals that are either brokered devels or direct relationships that we've been building since I joined and actually continue to further in one way or another. I would say the landscape remains competitive in terms of M&A activity on broker deals. But ultimately, where we have demonstrated our ability to directly connect with the target, be it for customer density, IP or ultimately the idea of what it would mean for us in terms of extending our team is the key to our success so far. So I don't -- I feel M&A will continue to be a key lever for us as we go forward. And I don't want to say increasing or decreasing because it's from a strategic line. It isn't a must-have. We don't need anything in our IP stack to allow to be competitive. We ultimately feel that our density of customers is such that we can stand on the shoulders of them. We don't need to go out and buy customers to gain credibility. And so to that end, M&A will remain strategic and we have global board support to be able to exercise that through a tight lens, but an aggressive lens to make sure that we can gain scale should those opportunities present themselves.

Operator

This concludes the question-and-answer session. I'd like to turn the conference back over to Bill Wood for any closing remarks.

W
William Wood
executive

I want to close by thanking our customers and investor community for your confidence in us as well as every team member at Sylogist for their incredible energy contributions and determination. Again, I'm very confident that the building blocks for continued success are in place and future value creation for our shareholders looks very bright. Thank you all for your time. Bye for now.

All Transcripts

Back to Top