Tecsys Inc

TSX:TCS

Earnings Call Transcript 2020-Q1

[Operator]

Good afternoon, everyone. Thank you for standing by. Welcome to the Tecsys First Quarter Fiscal 2020 Results Conference Call. [Operator Instructions] Please note that the complete first quarter report, including MD&A and financial statements, were filed on SEDAR today, September 5, 2019.Some of the statements in this conference call, including the question-and-answer period, may include forward-looking statements that are based on management's beliefs and assumptions. Actual results may differ materially from such statements.I would like to remind everyone that this call is being recorded on Thursday, September 5, 2019, at 5:00 p.m. Eastern time.I would now like to turn the conference over to Mr. Peter Brereton, Chief Executive Officer of Tecsys. Please go ahead, sir.

[Peter Brereton, CEO, President & Director]

Thank you, and good afternoon, everyone. We appreciate you joining us for today's call. Earlier today, we issued our first quarter fiscal 2020 financial results. As already stated, a copy of those results is available on SEDAR and on our website at tecsys.com. Joining me today is Mark Bentler, our Chief Financial Officer, who will walk us through the financials in more detail in a moment. I will start by summarizing the key events of our first fiscal quarter and reviewing our performance. After Mark's comments, I will close with some comments on our outlook followed by a Q&A session.For those new to our story, Tecsys is a global provider of transformative supply chain solutions, which equip growing organizations with industry-leading services and tools to achieve operational greatness. Our products resolve complex challenges for commercial distribution networks for thousands of customers around the world. Tecsys is the world leader -- or the market leader in North America for health system and hospital supply chain solutions. In addition, we provide omnichannel solutions for manufacturing, e-commerce and general distribution operations. In the last year, we announced that Tecsys is transitioning to a SaaS revenue-based business model and away from its traditional perpetual license-based model. The speed of transition is actually faster than we were anticipating, which tells us that our timing was good because our prospects continue to be eager to adopt the new offering. If you are new to our story, then joining us today you've certainly picked an attractive entry point, as I will highlight in a moment. We are pleased with our Q1 2020 results, which we will detail shortly. However, I want to take this time to also highlight the momentum that we are gaining in our transition as well. Subsequent to quarter end, we signed 2 major deals, including another hospital network, or an IDN as we call them, and a significant new customer SaaS contract in complex distribution. Today, I will spend some extra time discussing the details and changes in our business that are driving our transition because we think it's essential that everyone on the call today have a clear understanding of what we are creating here.Our first fiscal quarter results combined with the more recent major signings reflect a broader general strengthening of our business over the past several quarters. Higher-margin professional services revenue grew strongly, and our SaaS momentum also continued. Our cloud, maintenance and subscription revenues grew 40% year-over-year. While SaaS bookings were down on a sequential basis in the quarter, this is not surprising because seasonally our first fiscal quarter is traditionally the weakest for bookings. We think it is important for you to understand that as our recurring revenue streams grow as a percentage of total revenue, seasonal variances in bookings will diminish in importance to our measured performance and long-term success.Although we are making progress and we are gaining momentum, it's not without some short-term negative financial impact. License revenue, which used to be recognized -- or I should say, which used to be immediately recognizable on order signing, is being replaced with subscription revenue that is recognized over an extended period of time. The crossover happens around month 40. In other words, after 40 months, the total revenue from the subscription begins to exceed the revenue that would have come from software license and maintenance fees. This delay in revenue is being somewhat obscured by the recent acceleration in overall bookings and new accounts as evidenced by our last fiscal year, where organic bookings grew by 23%, leading to a sustained surge in professional services revenue. The long-term build of our revenue streams should result in a more predictable outlook for investors with elevated long-term margins.Finally, I want to mention our transition -- our progress on acquisition integration. In Q1 2020, we restructured the OrderDynamics business to align our overall delivery businesses and to capture G&A and marketing synergies. We also added resources in sales. We believe this business continues to be on track to profitability, and we're pleased to report a new customer added in Q1 as well as the successful go-live of a very large global customer. PCSYS continues to perform as expected, adding positively to operating results. Mark will now provide some details on our financials for the quarter.

[Mark J. Bentler, CFO & Secretary]

Thanks, Peter. Total revenue in the first fiscal quarter of 2020 was $24.3 million, up 49% compared to Q1 of fiscal 2019. Organic revenue growth was 15%. Q1 fiscal 2020 organic revenue benefited $0.5 million or about 3% from the stronger U.S. dollar in comparison to the same period last year. Professional services revenue was up 61% to $9.7 million. Organic professional services revenue growth was 41%, representing an increase of $2.5 million compared to the same quarter last year. While most of this increase was due to backlog conversion, we see strong continuing demand for services with professional services bookings of $7.4 million during the quarter compared to $5.8 million in the same quarter last year. We expect to show healthy professional service revenues in the coming quarters.Our cloud, maintenance and subscription revenue increased 40% year-over-year to $9.8 million with 9% growth coming from our organic business and the remainder coming from the OrderDynamics and PCSYS acquisitions. Proprietary products revenue decreased 67% to $0.4 million compared to Q1 2019, primarily due to a decrease in proprietary software license revenue influenced by our shift to SaaS licensing.During Q1 2020, SaaS subscription bookings were $0.4 million compared to 0 in Q1 of last year. Perpetual license bookings declined to $0.4 million from $1 million for the same period last year. Total gross profit increased to $11.5 million, up 52% from $7.6 million in Q1 of 2019 driven by higher service margin of $4.3 million and partially offset by lower product margins of $0.4 million.Gross margin was 48% compared to 47% in the prior year, with significant expansion in services gross margin offset by lower product margin due to the lower mix of license revenue.As previously indicated, lower license revenue driven by the overall shift to SaaS, will have a negative short-term effect on our margins, and we saw this in Q1 2020. Operating expenses increased to $11 million, higher by $3.3 million or 44% compared to $7.7 million in Q1 of fiscal 2019. $2.7 million of this increase was attributed directly to operating expenses from OrderDynamics and PCSYS, including acquisition integration costs of $0.4 million.Peter previously mentioned on the restructuring activities in the OrderDynamics business. These integration costs were the direct result of those one-time restructuring activities. Adjusted EBITDA was $2 million or about 8.2% in Q1 2020 compared to $0.5 million or 3.3% of revenue in Q1 of 2019. Growth in higher-margin professional services and cloud revenues drove the increase. Adjusted EBITDA benefited by about $0.3 million, resulting from our implementation of IFRS 16 where certain lease costs are now accounted for as depreciation and interest expense, and therefore, not included in EBITDA.Profit from operations was $0.5 million compared to a loss of $0.1 million in Q1 of fiscal 2019 and a loss of $0.8 million in Q4 of fiscal 2019. This improvement in profitability was driven primarily by higher professional services and cloud, maintenance and subscription contribution as previously indicated. Loss was $0.3 million or $0.02 per share in Q1 2020 compared to a profit of $13,000 or 0 per share for the same period in fiscal 2019. Total backlog at July 31, 2019, was $76.4 million, up from $47.8 million at July 31, 2018, with $14.1 million or 29% representing growth in organic backlog. Q1 of fiscal 2020 annual recurring revenue was $38.3 million compared to $26.8 million in Q1 of 2019. This increase reflects the company's ongoing focus and transition to a SaaS business model, which should create incremental shareholder value.Total contract value bookings increased 32% from $10.6 million in Q1 of 2019 to $14.0 million in Q1 of 2020. During Q1 of 2020, the company signed 8 new accounts with a total contract value of $3.4 million compared to 3 new accounts with a total contract value of $1.9 million in Q1 of 2019.Finally, we ended Q1 fiscal 2020 with a strong balance sheet position with cash and cash equivalents of $13.3 million, a slight decline of $1.6 million from April 30 of 2019. And with that, I will now hand the call back to Peter.

[Peter Brereton, CEO, President & Director]

Thanks, Mark. In our last quarterly call, we mentioned that we were looking forward to delivering growth for our primary business sectors with a particular focus on the health care segment. Concerns over the uncertainty around U.S. health care legislation seems to have abated, and the trend toward cost savings and efficiencies continues to preoccupy U.S. hospital executives. We are pleased to be able to report such growth and reiterate that we see this trend continuing. As such, we believe our value proposition continues to strengthen. I think it bears repeating that once again Gartner released its 10th Annual Healthcare Supply Chain Top 25 ranking in the Best of the Best Masters Category, recognizing supply chains that have been consistent leaders over the past decade. And I'm pleased to report that the top 3 health care supply chains again were Tecsys customers. I want to close out with our outlook for the remainder of fiscal 2020. First, we will maintain a laser focus on developing and growing our SaaS revenue model and annual recurring revenue generation. As of today, we will be providing you with appropriate metrics to gauge our progress as we move through the fiscal year and beyond. Secondly, we will continue to expand our partner ecosystem. This is key for us, and we now have partners working with us in both North America and Europe. We'll keep you posted. Thirdly, we'll continue to expand our omnichannel business platform. We continue to see exciting opportunities in the convergence of retail and distribution supply chains. Remember, change is what drives our business, and this is a monumental change that continues to turn the traditional supply chain on its head.Finally, we have a strong focus on improving our margins. This will take some time as we undergo the transition to SaaS, but we are pleased to see the speed with which the transition is happening, and look forward to having this transition behind us. We believe that a growing SaaS business in 2 exciting markets will provide great value for shareholders.With that, we will open the call up for questions. And back to you, operator.

[Operator]

[Operator Instructions] And our first question comes from the line of Amr Ezzat with Echelon Partners.

[Amr Ezzat, Analyst]

Guys, on OrderDynamics and PCSYS, it seems like they contributed $5.6 million in sales this quarter and that compares to $4.9 million last quarter, which looks like pretty impressive sequential headline growth. So just wondering if you guys can take us through the dynamics there.

[Mark J. Bentler, CFO & Secretary]

Yes. I think the thing that just to be aware of there is that PCSYS does have -- has hardware sales, and those tend to be -- those can be a little bit lumpy. That's going to be driving part of that change. OrderDynamics is growing on a recurring revenue basis sequentially, certainly. Professional services revenue was also pretty robust in the PCSYS business. But I think a lot of the dynamic of that quarter-on-quarter, the dramatic increase in that quarter-on-quarter top line is PCSYS hardware.

[Amr Ezzat, Analyst]

Okay. Great. Well, I guess more broadly speaking, like when you guys made these acquisitions, OrderDynamics was expected to grow 30%. And I think PCSYS was sort of flattish with the hardware ebbs and flows. You're now like 6 and 10 months into these acquisitions. Just wondering how your views evolved, if they've evolved at all, on the growth potential for both of them.

[Peter Brereton, CEO, President & Director]

No, I would say not. Our -- there's always -- these businesses are always a little bit lumpy. But if we look at -- if I start with PCSYS, I mean, PCSYS continues to actually outperform our targets for them. They are doing more revenue and somewhat more profitability than we anticipated. They signed a number of new accounts in the last quarter. Their business of supplying 3PLs in the Scandinavian region is doing very well. And through their partnership with those 3PLs, those 3PLs are winning a lot of new clients. So that is doing -- I would say it's performing somewhat above expectations, but not enough to sort of change our overall outlook there. In terms of OD, OD has -- is just a lumpier business. They sign fairly large contracts relative to the size of that business. And we definitely sort of probably prior -- just prior to and just post the acquisition, they definitely hit a dry spot. Not typically a surprise. I mean the executive team had really been busy selling the business rather than selling the software for a few months. And I think that factored into than what was in the pipeline and so on. So they definitely hit a dry spell for a bit. But we've seen that pick right back up again with signing of a nice new contract in Q1 and a lot of great stuff in the pipeline for Q2. So we don't -- I would say at this point, we don't see any change to that original outlook. And from a probability standpoint, we'd said that we thought OD would go from losing money when we acquired them to sort of be breakeven within -- on a quarter-by-quarter basis, breakeven within about 18 months. And at this point, we are right on track with that.

[Amr Ezzat, Analyst]

Well, maybe on OrderDynamics, I'm not sure if you guys mentioned it for this quarter. But what are the operating losses? I'm not sure if you guys are disclosing it.

[Mark J. Bentler, CFO & Secretary]

Yes. I mean we had contribution to adjusted EBITDA from that business, which was negative by about $600,000 in the quarter. And that's down sequentially from Q4 by about $250,000. And that's the sort of the trajectory that we expect to continue. Remember, we did the restructuring in Q1, and that -- the benefit of that restructuring you will start to see in -- more fully in Q2.

[Amr Ezzat, Analyst]

Okay. Then Peter, one of the goals you just mentioned at the end of your prepared comments was to expand your omnichannel platform. What do you understand by that? Are we talking like organically or are there areas that you want to add to in terms of like M&A?

[Peter Brereton, CEO, President & Director]

Really, just in terms of growing that market space for us is what I was referring to. So we have added 2 new salespeople, one on the West Coast and one on the Atlanta region to specifically pursue omnichannel business. They both come with a great background in that space. And they are building out pipelines there as we speak. We are investing in the platform by continuing to invest in R&D. And we are working to bring our solution -- our existing solutions from the organic side and the omnichannel platform together so that we have more of a complete end-to-end platform. So it's really just a question of taking these assets we've now purchased, bringing them into our existing network and adding sales and marketing to drive them. And we think that there's a very sizable market there.

[Amr Ezzat, Analyst]

Then, maybe just one last one. The $400,000 in severance related to the acquisitions, when did that sort of taper off? Or is it that just like that quarter?

[Peter Brereton, CEO, President & Director]

That -- I mean, there may still be some minor sort of follow-on restructuring expenses if we end up -- there's always some tax planning or legal costs as you figure out how to merge entities from a legal structure and so on. So there could be some small additional costs. But our expectation is that the -- in terms of the lion's share, that was it. We had several senior executives left that sort of as we merged these businesses in weren't needed anymore. So they moved on. We've merged the marketing in under our main marketing team. The website and all the digital marketing has all been merged in. So there's a number of costs that just became redundant. So that all hit in the first quarter. So we do not -- I mean, we're done. At this point, it's the rest of it. There are some additional savings that will kick in just because, for instance in August, we moved the OrderDynamics people into our main Markham office because the lease for OrderDynamics was ending. So we just let it end and merged the people into our Markham office. So there's some additional savings that will come, but that doesn't require a restructuring charge. So that's just a drop in the expense line.

[Operator]

Our next question comes from the line of Gavin Fairweather with Cormark.

[Gavin Fairweather, Analyst of Institutional Equity Research]

Just wanted to start on the professional services line. Maybe you could just give me some color about your utilization in terms of your team there because I was surprised by the margin on services in the quarter. So I wasn't sure if it was more of the utilization of your services team or more just the shift in mix towards SaaS.

[Peter Brereton, CEO, President & Director]

No, that was -- a good question. I mean the utilization was very, very high, I mean, especially for a summer quarter. I mean we're -- If you look at what happened last year, I mean, Q1 of last year was unfortunately a pretty relaxing quarter for our services team. By Q2, it was picking up speed a little. Q3 was solid. Q4 was strong, and Q1 was phenomenal, I mean, as we came into this year. And I think what it is, is you -- as I mentioned in my prepared remarks, bookings last year on the organic side were up 23%. And that just created a massive backlog as we got towards the later part of the year. I mean we literally ended the year with a larger overall backlog than we'd had revenue for the year, which is a bit of a trick of the math partly based on the acquisitions and the timing of the acquisitions and so on. But it still speaks to the overall very large size of the backlog. So services in their first quarter, I would say it was pretty well maxed out, especially considering that it was a heavy vacation period, right, a lot of people away on vacation in July and so on. And yet in spite of that, those are the numbers that you saw there.

[Gavin Fairweather, Analyst of Institutional Equity Research]

Okay. And then when we think about your Q2, obviously, August is a sleepy summer month, too. But I'd imagine you're kind of planning a busy September, October as well?

[Peter Brereton, CEO, President & Director]

Yes. I mean at this point, the services team remains fully booked. So you always get some variation just because around go-lives and so on, you end up with a lot of overtime and so on. But certainly, at this point, we see Q2 is also looking pretty strong.

[Gavin Fairweather, Analyst of Institutional Equity Research]

Okay. Great. Just secondly, for me. I'm trying to remember when you launched the pharmacy product within the health care vertical, I think it was kind of slow. Are there any metrics you can share in terms of KPIs on weights or anything like that coming out of that product now that it's being live with your early customers for the better part of the year?

[Peter Brereton, CEO, President & Director]

No, and you know, we're actually working on developing those with the University of Washington, but we are not yet ready to release those. I can tell you that the numbers must be fairly good just because so far, the customers that have traveled out to visit University of Washington and have discussed what they're doing with the platform have ended up either buying the product or indicating that they would like to buy the product. So I think that's a pretty good sign. But we're not yet finished that study.

[Gavin Fairweather, Analyst of Institutional Equity Research]

Okay. Great. I will stay tuned. And then just lastly for me before I pass the line. We've been talking for a few quarters about this shift towards SaaS, but the license sales in the quarter did pop down a little bit more than I thought. So is this kind of a newer normal that we should think about for the proprietary product? Or was it kind of a slower quarter on that front in addition to the shift to SaaS?

[Peter Brereton, CEO, President & Director]

It was a slower quarter in addition to the shift to SaaS, I think. I mean the summer quarter is always a killer for those perpetual license deals. In fact, I almost always dread it when we have a strong Q1 in perpetual licenses because I know a year later I'm going to be having to explain why we're down because it -- the month you're trying to get the deals closed usually is July. You push for year-end in April, things start warming up again in May, you start trying to close deals in June and July. And in July, inevitably, there's somebody who owns a very important pen who decides to go fishing in the last week of July. So it's always just a tough quarter. And it's partly why I mentioned the bookings in August already showing very strong. But -- so I guess, the short answer is yes, it's part of the trend to SaaS, but I think it's also just a bit of a lumpy dip.

[Operator]

Our next question comes from the line of Nick Agostino with Laurentian Bank.

[Nick Agostino]

I guess, Mark, question for you, and I apologize if I missed this in the remarks given earlier. But I think last quarter, you gave an indication as to what the impact was on the business on sales and EBITDA as a result of the shift to SaaS, in other words, what sales could have looked like or what EBITDA could have looked like had you maintained the perpetual license model. Can you provide those numbers for this quarter?

[Mark J. Bentler, CFO & Secretary]

Yes. I mean the rule of thumb we were using there, Nick, was sort of a 2x on the SaaS booking number, right? And we booked -- because normally when you sell SaaS, the amount of license you would've sold, had you sold perpetual, it turns out to be about a 2x number of the ARR on SaaS. And so, if -- using that logic, we did book about $400,000 of SaaS business in the quarter. So you could say that the impact on EBITDA was pretty close to double that number -- or double that number less a little bit of additional selling costs that would have hit the P&L on commission, so sort of in that order of magnitude.

[Nick Agostino]

Okay. Great. And then the other question, you mentioned -- Peter, you mentioned, obviously seeking expanded partner ecosystem. In the quarter, you announced 1 IDN, and then I think post-quarter, another IDN. Last quarter, you highlighted Workday as being a partner that's been helping you guys on the health care side. Can you maybe just give us some color as to where Workday sits and whether they were involved in either one of those 2 IDN wins?

[Peter Brereton, CEO, President & Director]

The first one, the one that we signed in Q1 was definitely a joint win with Workday. And the one that we signed in the start of this quarter was, if I remember correctly -- I mean, that's one we've -- it's certainly one we've been talking to you for a couple of years and that finally closed in August. Workday might be in that account as well. I'm not sure. But it wasn't quite the same sort of tightly partnered approach that was in the Q1 deal.

[Nick Agostino]

Okay. And then lastly, last quarter, you'd indicated more spending on sales and marketing as well as R&D. And when I look at the results for this particular quarter and I just compare them to Q4, it looks like spending on that side actually came down. And that's also true if I look at fiscal Q3 of last year. Should we anticipate that -- I'm going to assume that the run rate that we saw in Q1 is not going to be the run rate. Should we anticipate some spending in fiscal Q2? And if so, how much do you anticipate?

[Mark J. Bentler, CFO & Secretary]

Yes. I think on the sales and marketing side, Nick, I think one of the things -- Q1 -- from the sequential standpoint, Q1 this year would not have been a very big marketing spend quarter. So I think there's that. We have our user conference next quarter, which is an important marketing event for us. So I think those -- that sort of a dynamic would have a tendency to increase sales and marketing costs a little bit quarter-on-quarter prospectively. On the development side, we do have a plan to continue some light hiring in that line as we continue to invest in development, but not a dramatic change there.

[Peter Brereton, CEO, President & Director]

On the sales part, Nick, we have continued that rep. So we're -- we are -- and I think that's what's sort of messing with the numbers, as Mark said, is the lumpiness of marketing spend. I mean some of the marketing spend and something tied to trade show events and other kind -- other type of projects that are -- can be significant in a quarter. But if you actually look at the sales team, we have just continued to add heads.

[Operator]

Our next question comes from the line of Daniel Rosenberg with Haywood Securities.

[Daniel Rosenberg, Analyst of Technology]

I was wondering, in terms of direct sales versus partners, have you seen any acceleration through your partnership channels and maybe the mix of sales in this quarter compared to what is showing up in your backlog? Could you provide some color on that front?

[Peter Brereton, CEO, President & Director]

Do you mean in terms of sales directly brought in by partners versus business we've sold direct?

[Daniel Rosenberg, Analyst of Technology]

Yes. I mean sales sourced directly versus your partner ecosystem?

[Peter Brereton, CEO, President & Director]

Yes. I mean the challenge there is that even the deals that we would associate as being partner deals, we've still sold them directly on our paper. We've just sort of worked in concert with those partners in the field. But I would say overall, at this point, if I look at our last few quarters, I was just looking at this last week, we're up to a point where somewhere around 30% of our new accounts that have been coming in have been, in effect, touched or influenced or directly driven by one of our partners. So I mean, it's starting to become a significant factor. It's hard to look at it in isolation. Some of them, could we have won them anyway without the partner? Perhaps. Others, definitely, we would've won them. But the partner accelerated the process. But the number in terms of the percentage that's been touched are somewhere around 30% of them.

[Daniel Rosenberg, Analyst of Technology]

Okay. And in terms of geographies, there's also strength in Canada. I was wondering was there anything specific driving that in this quarter? Or is there a trend going on? Because in your remarks, I mean, the past few quarters, you spoke about the U.S. and regulation being relatively friendly for business on the health care side, but I was wondering the dynamics going on geographically.

[Peter Brereton, CEO, President & Director]

We had a couple of large projects on the Canadian side that drove up the professional services business over the last few quarters. So we've been seeing that trend a little bit lately. I think it's a relatively short-term trend because if you look at our overall bookings, our overall bookings are still predominantly coming from the U.S. market. But we did have a couple of sizable projects that have temporarily twisted that revenue mix back towards Canada a little bit.

[Daniel Rosenberg, Analyst of Technology]

Okay. And lastly, in terms of the outlook, focus on profitability. I was wondering if you could provide us some guidelines in terms of what that means going into next year. Are you thinking about double-digit EBITDA growth? Or just to get some sense of what that means because we've seen a strong rebound this quarter relative to last quarter, but obviously, there's some volatility as you signed higher-margin contracts.

[Peter Brereton, CEO, President & Director]

I mean we continue to push that up. I mean we've set ourselves a longer-term goal of being sort of at least getting to be, they call it a rule of 30 company, which is to say that the growth in our annual recurring revenue plus our EBITDA percentage should be equal to at least 30. I mean if you look at this quarter, you could argue that we're already above that, but as you say, that's -- there is a certain amount of lumpiness to it. But certainly, our objective is to run an adjusted EBITDA that is above 10% for the foreseeable future. Longer term, we would expect to see that climb up into the sort of mid- to upper teens. But we think that's going to take at least another couple of years. But what makes it hard to call is the -- frankly, over the last few quarters, a real surge in bookings. I mean we are signing new accounts, sizable new accounts, growing the backlog and exceeding our own targets to do so. Just because of economy of scale and so on, that starts to tip all those numbers a little faster than we had anticipated. So on the one hand, I'm giving you what our general calibration has been. On the other hand, I'm saying I recognize the sort of recent results in terms of bookings could indicate a faster move in that direction. If that didn't sound vague enough, I can try again.

[Operator]

Our next question comes from the line of Andrew McGee with National Bank.

[Andrew Brice McGee, Associate]

I just wanted to follow up on the opening commentary regarding the strength that you're seeing in your pipeline. And I'm wondering if you could update us on how much Workday represents as a percentage of that pipeline and how much of your enthusiasm is tied to some of the building that you have done in your direct sales force.

[Peter Brereton, CEO, President & Director]

Yes. If you look at -- I mean, obviously, Workday is largely -- not solely, but largely linked to our health care pipeline. And if you look at active accounts in our health care pipeline, on the new account front, they're involved with about half of them. But in essence, that ends up meaning less than half just because there's a substantial portion of our health care pipeline that's coming from base accounts that have already been our accounts for anywhere from sort of 1 to 10 years and continue to come back and make significant additional investments in their supply chain. So I would say the Workday-related pipeline is still probably in sort of 30% range there. We are seeing connections over into the complex distribution side as well, but those -- we have not seen any of that business actually materialize yet. So we'll have to see how that goes. In terms of the growth of the sales team, I think it's more sort of the inverse of that from the standpoint that we did this re-branding last year. And we worked with a company out of St. Louis to completely redo our -- sort of our whole -- sort of update our whole story, simplify the messaging, clarify the look of the brand and its image in the marketplace and so on, and then from it launch a whole new sort of digital marketing campaign to update who we are to the market kind of thing. That has resulted in -- like effectively, it's worked. So we're now seeing larger, more frequent opportunities coming in inbound. And so the growth of the sales team is actually a reaction to what we're seeing coming in. So we're -- I mean, I think, partly what makes the growth of the sales team so exciting is we're finding we can bring in an experienced rep with a good background, good understanding of the marketplace, and within 60 to 90 days, the rep has a very solid pipeline. And it's because of that inbound activity that's coming out of the -- what I would certainly perceive to be coming out of a successful re-branding and digital marketing effort.

[Andrew Brice McGee, Associate]

Okay, that's helpful. And then, just on the OrderDynamics piece, I know that you have been working to kind of integrate that into your platform, and I'm sure you're retraining some of the sales team in terms of selling that. I'm just wondering how much time have you actually spent cross-selling that to your existing base, and whether or not some of the wins that you've been seeing are, call it, net new wins or whether or not they've been from a customer that you already have.

[Peter Brereton, CEO, President & Director]

So far, they are all net new. We are -- our user conference that's coming up in a few weeks, I think, is going to be key to really sort of conveying across to our existing client base what are the capabilities of that platform. We do have a few sort of active engagements underway that we believe are going to turn into contracts. We'll have to see how that goes. But at this point in time, the new contracts from -- on the OD side have all been new accounts.

[Andrew Brice McGee, Associate]

Okay. Great. And then just my last question here. On the deferred revenue line, we saw a bit of a sequential decline. Mark, is that largely all related to the professional services side of the business? And secondly, I'm wondering if you could just kind of give us any color in terms of how the deferred revenue line would have been building just on kind of a cloud subscription basis.

[Mark J. Bentler, CFO & Secretary]

Yes. So it is professional services related and it's also just -- there's some just timing of -- billing timing and some lumpiness in certain quarters where more renewals start that sort of have some impact on that deferred revenue number as well. When we're in a quarter where a more than sort of 25% of our maintenance or SaaS renewals are starting, it has an impact on that deferred revenue number. But it is true that professional services is not an insignificant component in that deferred revenue and had an impact in that quarter.

[Operator]

Our next question comes from the line of Gabriel Leung with Beacon Securities.

[Gabriel Leung, Research Analyst of Technology]

Just got a couple of follow-ups. Peter, just as it relates to some of your newer IDN signings, whether Q1 or Q2 win, I'm just curious whether you're seeing an increase in the initial scope or mandate of the initial deployment, or if it's been similar with the previous wins, going to the department first and then work from there. Just curious to see what the -- what's going on right now.

[Peter Brereton, CEO, President & Director]

Yes. I would say there's no change. What has changed is what did they decide to tackle first. In these cases, they are both sort of more classic sort of self-distribution-type agreements. But these are sort of average-size deals. I mean they're -- they seem to typically start around with a total deal value of anywhere from sort of $1 million to $2 million, kind of. And once we get established and get rolling and we sort of learn to work together with them and so on, then that's when we tend to start to see opportunities for follow-on business and expansion of the business relationship and so on. And if I look at the pipeline right now, I would say our biggest opportunities in the pipeline are all base account deals, where there's already an established trust and credibility and so on, and they're ready to sign for a much larger piece of business.

[Gabriel Leung, Research Analyst of Technology]

Got you. That's helpful. And just moving over to, I guess, the SaaS business for a second. Given that this is going to be a bigger mix of your revenues going forward versus traditional perpetual license, maybe you can set a baseline for us and sort of talk about how should we think about deal size, whether it's an OrderDynamics deal or a traditional tech deal on the SaaS side? What would be considered sort of a minimum, an average or a significant SaaS contract from an ARR basis?

[Mark J. Bentler, CFO & Secretary]

Yes. So I mean, it's a great question. It's a wide variety -- it's kind of a wide-variety number. I mean if I look back at deals that we've signed in the last number of quarters, the ranges are anywhere from $100,000-ish up to several hundred thousand dollars-ish per -- from an ARR basis. That said, we do see stuff building in the pipeline that is bigger and on the higher end of that. So the deals are getting bigger, but that's sort of the range that we're seeing things in right now.

[Gabriel Leung, Research Analyst of Technology]

Got you. And maybe 2 more questions probably both for Mark. But as we look at the perpetual product revenue line, obviously, a part of that will be determined by license revenues. But do you still flow through some of the historical -- I guess some of the disposables from Logi-D within that revenue line or is that -- how should we think about that?

[Mark J. Bentler, CFO & Secretary]

We do. Yes, that proprietary line has both license in it and proprietary hardware technology products.

[Gabriel Leung, Research Analyst of Technology]

Got you. And one last thing. User conference, obviously, this quarter. How should we think about the step-up in sales and marketing costs associated with that event in your P&L?

[Mark J. Bentler, CFO & Secretary]

I think I'm just sort of thinking about the over-under on what happened in Q1, and there's -- the timing of that marketing spend is, it's a little bit -- there's a little bit of art and a little bit of science in it. But I think that event, and in general, I think several hundred thousand dollars of quarter-on-quarter marketing expense would not be out of the line of reasonable in terms of expectation.

[Operator]

And we have no further questions queued up over the phone lines at this time.

[Peter Brereton, CEO, President & Director]

Great. Well, thank you very much, everyone, for joining us. And as always, if you have additional questions, please don't hesitate to reach out to Mark or I, and we look forward to talking to you at the beginning of December. Thanks, and bye for now.

[Operator]

That does conclude the conference call for today. We thank you all for your participation, and ask that you please disconnect your lines.