Tecsys Inc

TSX:TCS

Earnings Call Transcript 2022-Q1

[Operator]

Good afternoon, everyone. Welcome to Tecsys' First Quarter Fiscal 2022 Results Conference Call.Please note that the complete first quarter report, including MD&A and financial statements were filed on SEDAR earlier today. All dollar amounts are expressed in Canadian currency and are prepared in accordance with International Financial Reporting Standards. 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 9, 2021, at 1:00 p.m. Eastern Time. I would now like to turn the conference over to Mr. Peter Brereton, Chief Executive Officer at Tecsys. Please go ahead, sir.

[Peter Brereton, CEO, President & Director]

Thank you, and good afternoon, everyone. Joining me today is Mark Bentler, our Chief Financial Officer. We appreciate you joining us for today's call. Our company began fiscal year 2022 with continued strong accelerated growth on the heels of an incredibly unique year for all of us. With that said, I would like to take a moment to thank some of the greatest health systems in North America for choosing Tecsys to help them meet the unique challenges that the pandemic brought about. Our unique end-to-end value proposition in health care has provided both commercial opportunities and the strengthened confidence in our capacity to define health care supply chain best practices, especially in some emerging pockets of that industry like pharmacy and health care 3PLs.I'm happy to say with the signing of 2 additional IDNs this quarter and 1 new additional IDN in August, this brings us to over 30 new and existing health care accounts that have made significant investments through the pandemic and further solidifies our leadership position as the preferred choice for end-to-end health care supply chains. We are honored to play a role in enabling them to provide excellent patient care.Getting back to the business at hand. I'd like to begin by summarizing key themes of the first quarter of fiscal 2022 and the results of operations. Mark will then walk us through the financial results in more detail. And finally, I'll comment on our outlook, followed by a Q&A session. There are 2 key indicators I would like to highlight, which despite currency headwinds, are continuing to contribute to our track record of solid accelerated growth. Revenue, well I'll touch on growth in quality and our pipeline.So first, this is our 10th straight quarter of record revenue. As we continue to emphasize SaaS revenue continues to scale up relatively quickly due to our ongoing strategic shift to SaaS in all our markets. As we continue to mature this SaaS revenue model, we will increasingly create greater revenue visibility and improve the long-term quality of our revenue. This leads to my second point, our pipeline. As we report results in the second year of the pandemic, while our revenue performance continues to move in a positive direction. This only tells part of the story. As such, I'd like to comment on the growing importance of supply chains as a strategic lever within organizations and how this is being reflected in our pipeline. The supply chains everywhere are in flux due to the pandemic and also strained due to general e-fulfillment trends and shifting trade agreements. Everywhere we look in all sectors, companies are attempting to bolster technology to become more nimble in the face of new uncertainties.Tecsys solutions are increasingly recognized for creating supply chain flexibility. As a result, we are seeing momentum in our pipeline in all lines of business, both new and current customers. Some global customers who signal facility are now expanding the local jurisdictions. Others who may have started with a few modules are now expanding their Tecsys footprint to better equip their supply chains. This past year has been a year of smaller projects. With the massive distraction of the pandemic, we have seen customers tackling highest priority projects only. This has often had the effect of limiting the scope of a project or affecting the timing. This seems to be ending now as we are entering the new -- this is reflected in our very active pipeline and winning sales team. We now seem to be only held back by legal and procurement processes.July and August were very good, and the fall looks exciting. Our momentum is strong and while continuing to invest in the expansion of our own services organizations, we are also investing in the expansion of our partner ecosystem. This is beginning to truly help us to respond to increased demand. The global opportunity in front of us is massive, and we plan to exploit it. Mark will now provide further details on our financials for the quarter.

[Mark J. Bentler, CFO & Secretary]

Thanks, Peter. We're pleased with our strong performance quarter ended July 31, 2021. Before I get started with a review of results in the quarter, I wanted to point out that, as you may have noted, we've changed the way we present our breakdown of revenue on the face of the income statement. We're now showing SaaS revenue separately from other recurring revenue, namely maintenance and support. We're also presenting license revenue as a separate line, including proprietary and third-party licenses in that revenue line. We're presenting hardware also on a separate line, and this is -- this line, likewise, includes both proprietary and third-party hardware.Finally, we've combined reimbursable expense revenue with our professional services revenue line. We made these changes in order to highlight the areas of the business that are driving our performance and that we believe will drive our future growth. We believe this presentation will create greater clarity and underlying trends in our business. And we've also streamlined our management discussion and analysis of financial condition and results of operations by, among other things, adding comparative tables, which we believe makes the discussion clearer as well as easier to read. With that, I'll move on to the first quarter results in more detail.Total revenue was a record $33.2 million, 18% higher than $21.8 million reported for Q1 2021. And as Peter mentioned, our 10th straight quarter of record revenue. As many of you know, a significant portion of our revenue, about 65% to 70% is denominated in U.S. dollars. As a result, movement in currency exchange rate has an impact on our reported revenue and growth. During Q1 fiscal 2022, currency exchange movements had a negative impact on our reported revenue as the value of the U.S. dollar was weaker compared to the same quarter last year.In fact, on a constant currency basis, using Q1 fiscal '22 exchange rates, our first quarter revenue grew by about 25% compared to the same quarter last year. This unfavorable currency movement impacted all revenue lines in the quarter in a pretty material way. We continue to experience strong and diverse revenue streams underpinned by a 47% increase in SaaS revenue, up from $3.8 million in Q1 '21 to $5.7 million in Q1 2022. On a constant currency, SaaS revenue was up about 57%. Maintenance and support revenue for the 3 months ended July 31, 2021, was $8.3 million, down $0.1 million compared to the same quarter last year. This decrease was a result of the negative impact of currency movements. In fact, on a constant currency basis, maintenance and support revenue actually increased by about 5% compared to Q1 last year.Our annual recurring revenue at July 31, 2021, was $53.7 million. That's up 9% from $49.3 million at July 31, 2020. On a constant currency basis, that increase was about 15%. Professional services revenue for the first quarter was up 17% from $11.2 million reported for the same quarter last year, driven primarily by backlog deployment. Again, currency movements created a headwind on revenue growth here, which would have been 25% on a constant currency basis. License revenue was $0.4 million, down $0.4 million compared to the same period in fiscal 2021. While this number will continue to be lumpy from quarter-to-quarter, we expect the general trend of declining license revenue to continue over time, and this is in line with our shift to SaaS.Hardware revenue in Q1 fiscal '22 was $5.8 million, an increase of $1.9 million compared to the same period last year, and this was driven by solid backlog heading into the quarter. SaaS bookings are reported on an annual recurring revenue basis, and those bookings decreased by 54% to $1.1 million in Q1 of 2022 compared to Q1 2021, which was at about $2.4 million. SaaS bookings were highlighted by 2 new hospital networks as well as some solid base business uptake in complex distribution. After quarter end, as Peter mentioned, in the month of August, we signed yet another new IDN network.Professional services bookings were robust at $14.5 million, comparing favorably to what was a solid $14.1 million in the same quarter of last year. License bookings were $0.3 million in the quarter compared to $0.5 million in the same quarter last year. SaaS remaining performance -- SaaS remaining performance obligation, also known as RPO or SaaS backlog, was $65.0 million at the end of Q1 fiscal 2022. That was up 14% from $57.0 million at the same time last year. On a constant currency basis, that growth was 21%. During the quarter, however, SaaS RPO decreased by about 1%, and this was primarily a function of Q1 bookings. Professional services backlog at the end of Q1 fiscal '22 was $35.1 million. That was down about 8% compared to $38.1 million at the same time last year, but up about 4% sequentially from April 30, 2021.For the first quarter, total gross profit increased to $14.4 million, that's up 7% from $13.5 million in Q1 of last year. As a percentage of revenue, gross margin declined 43% compared to 48% in the same quarter last year. This decline was a result of unfavorable exchange movements, investments to support key growth initiatives and change in revenue mix.Switching now to our expenses for the first quarter. Operating expenses increased to $13.3 million, higher by $1.8 million or 16% compared to $11.5 million in Q1 of fiscal '21. Operating expenses increased as we expanded investment in sales and marketing as well as in research and development. Net profit for the quarter was $0.2 million or $0.02 per basic and fully diluted share compared to $1.2 million in Q1 last year, which was $0.09 per basic share and $0.08 per fully diluted share. Adjusted EBITDA was $2.5 million in Q1 of '22 compared to $3.5 million in Q1 of '21. The decrease in profit and adjusted EBITDA compared to the first quarter last year was primarily due to the unfavorable foreign exchange impact, which negatively impacted the number by $1.4 million from quarter compared to the prior year.We ended first quarter with a strong balance sheet position. At July 31, 2021, we had cash and cash equivalents and short-term investments of $39.5 million. That compares to $45.9 million at year-end, and we had debt of $9.3 million compared to $9.6 million at year-end. Cash used in operations was $5 million in Q1, and this included the impact of seasonal year-end bonus payouts as well as growth in accounts receivable. DSOs or days sales outstanding in accounts receivable remained solid at 54 compared to 47 at year-end and compared to 60 at the same time last year.I will now turn the call back over to Peter to provide some outlook comments.

[Peter Brereton, CEO, President & Director]

Thanks, Mark. The positive growth trends set in fiscal '21 are continuing into fiscal '22, not only are we reporting record financial performance, but it's encouraging to note the strength of our current pipeline and the overall strength of the business. As an indicator of future performance, we can look to our fiscal 2022 pipeline of business. We entered the fiscal year with a strong pipeline, and the pipeline remains strong over the generally quiet summer months.We are seeing solid opportunity cycles and great activity across all segments, both among current customers and new prospects. We plan to exploit market opportunities by accelerating investments in channel and direct sales development and marketing programs to boost our ability to gain more market share rapidly. In the coming year, we'll continue to intensify channel relationships. We will also continue to invest in research and development to ensure we continue to have world-class products catering to the needs of our customers and prospects.We are committed to continuing to make investments in these critical areas to maintain our momentum, which may impact near-term profit margins. We believe that slightly lower profit margins in the short-term will be more than offset by gains in market share and revenue in the medium and long term. After a terrific fiscal '21 for Tecsys, we are pleased that this first fiscal quarter of '22 continues that trend. We believe that the outlook for the remainder of fiscal '22 appears solid. While we can't predict what additional curves COVID may throw at us, Tecsys has never been in a stronger financial position to weather future sudden market volatility, if it were to occur.In summary, I want to remind analysts and investors about our 3 key operational themes for the remainder of fiscal '22, which has not changed from our previous analyst call as we entered the fiscal year. First, we'll continue to maintain a laser focus on developing and growing our SaaS revenue model. We will likewise continue to optimize our internal processes and resources to complement this shift to SaaS in order to maintain high levels of customer satisfaction. Secondly, we will continue to expand our partnership ecosystem. This is key for us to scale rapidly into the market opportunities that I mentioned earlier. We now have partners working effectively with us in both North America and Europe. We will continue to invest, so we can enable them more quickly from accelerated training programs to improve onboarding tools, we are determined to make our SI partners very successful.Thirdly, we plan on investing in all our sales channels to exploit the momentum and opportunities coming at us. We also continue to expand and refine our omnichannel business platforms to service evolving needs in our health care supply chain, converging distribution and retail market segments. These efforts will help us to not only minimize customer churn, which is already very low, but will also help us to expand revenue from current clients as we saw upon this quarter. Remember, change is what drives our business. And the COVID-19 pandemic has accelerated the monumental change that was already underway and continues to turn traditional supply chain on its head.With that, we will open the call up for questions. Thank you.

[Operator]

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

[Amr Ezzat, Analyst]

Peter, Mark, good afternoon and congrats on another record quarter. My first question is on the bookings side. It's been trending down for a couple of quarters. You spoke to timing. And you also mentioned that July and August have been very strong. I'm wondering what is driving that strength. Is it all driven just by that one IDN you spoke to? Then if I'm looking beyond July and August, how is the pipeline looking relative to the last few quarters?

[Peter Brereton, CEO, President & Director]

Yes. I mean, we felt like Q4, as you remember, was quite strong, although not as strong as the prior Q4. The prior Q4 was in many ways a pre-pandemic Q4. I mean, the business closed in Q4 of '20 was all projects that were set in motion and paper ready to sign before the pandemic broke out. So that was kind of a pre-pandemic quarter. We then sort of dropped into lower bookings over the next couple of quarters, and then it began coming back in Q3 -- sorry, Q4 -- or Q3 and Q4, I guess.Q1 was actually a very busy sales quarter. But I think I even mentioned it on our Q4 year-end call. What I was noticed about ended up happening, and that is that we're finding now there's many projects ready to kick off. The pipeline is very active. The sales team is very busy, but there's backlogs in all of the procurement and legal departments. So we're just finding it's taking longer to get the deals across the finish line. A lot of our customers have had everything from M&A to new buildings, new -- other new capital projects and so on, all held up by the pandemic, and now they're trying to get them all moving. And we end up sort of in the lineup to get through legal and procurement.So we're looking at this overall year and saying, we're seeing sort of lots of signs of great activity. The Q1 was actually getting busier and busier each month during the quarter from a sales standpoint. And then Q2 is now off to a pretty strong start. But we are continuing to see some lag there. So there's definitely like a -- there's a bit of a long term. We can see it in our pipeline. We can see the stuff sort of ready to sign, getting close to sign, but hung out there right at the end of the pipeline. It's breaking. But it's definitely shifting business out probably, I don't know, a typical deal, sort of 30 to 60 days kind of thing. So we are seeing that impact. And we saw hit us in Q1.

[Amr Ezzat, Analyst]

It's not a bad problem to have. So if I'm thinking about your OpEx, it's sort of flat actually relative to last quarter. And I would have expected a higher number with your headcount increase. We spoke to that in the last conference call. Just wondering where the disconnect is here. Then if you could maybe give us a sense of what a run rate OpEx number would look like in light of the increased investments?

[Mark J. Bentler, CFO & Secretary]

Yes, I'll take that one. Yes, the -- there were a couple -- I think a couple of dynamics I would mention and that were called out in the MD&A as well. And in particular one, which is the -- in research and development, we did capitalize some development costs to a greater extent than we had in the prior quarter and in the prior year quarter as well. So that created a little bit of in-quarter tailwind on those costs. I think that was about a $400,000 impact. We expect that, that will flatten out and normalize in the quarters ahead, but you would have seen that come through as some sequential -- as a factor decreasing sequential costs in OpEx.In terms of where we're going from here, I mean, I think we have -- we still have some hiring to do in sales and marketing. I think a lot of that hiring is -- that we've done recently is you're starting to see that hit the P&L in Q1, but there's a little bit more in the plans to come for sure. I think on the R&D side, I expect not only that rightsizing of capitalized amount, but also a general increase in development spend as new hires continue to come online and projects continue to roll out.

[Amr Ezzat, Analyst]

Great. So if I'm thinking about a run rate number for the next couple of quarters for OpEx, how do I sort of think about that? Then in terms of the capitalized R&D, is that what you guys have had in your fiscal Q1? Do we expect that to continue like throughout the year?

[Mark J. Bentler, CFO & Secretary]

No. I think you should see that sort of come down. You should see that come down probably by $200,000-ish in the next quarter and sort of maintain at that level.

[Amr Ezzat, Analyst]

Then on the gross OpEx number?

[Mark J. Bentler, CFO & Secretary]

Yes. I mean I think the general trend there will be increasing. I think the increases will be fairly slight, Amr.

[Amr Ezzat, Analyst]

Okay. Maybe one last one for me. In your AGM, you spoke to reaching 100 IDNs within the next 4 years from your current 50-ish. Conceptual question, I guess. Can you maybe give us a sense of how the next 50 looks like compared to the 50 you currently have? Should we sort of expect the next 50 would double your health care revenues? Is that a fair statement? Then to reach that goal, how much human capital or other resources would you need?

[Peter Brereton, CEO, President & Director]

Yes. I mean, in terms of the overall makeup of the next 50, we would expect it to be similar to the first 50. I mean the first 50 includes a combination of very large networks as well as sort of medium-sized networks. So we certainly expect that kind of makeup to continue. It's still that top 300 that we're targeting. So we don't see a change there. We do expect over the coming 4 years to deepen our penetration of existing accounts. So we're actually looking for growth, both, of course, on the new account side and existing accounts, what would it do to our hospital revenues, we would certainly expect it to more than double our existing hospital revenues because of the fact that we would be not only adding new accounts, but also growing the base account.So and we think the activity is there to do it. I mean, it's not linear. Our expectation is that we would add sort of more accounts each year to the point where by the last year, we'll be sort of adding 15 to 20 a year kind of thing. But we're seeing a nice -- it certainly looks very doable. We have very targeted plans. We have the account names mapped out sort of we know our approach, and we see what's happening in the pipeline. The -- from a human capital standpoint, we do need to continue to grow that. So as an organization, we had been targeting getting to 30 health care reps within 3 years. We're a little bit behind on that ramp now. We're watching the productivity as we go. The productivity, I would say so far, and it's hard in a pandemic year to judge it. But based on the data we're seeing, it looks like the productivity per rep may be a little bit higher than we anticipated in our model that called for 30 reps in health care.So it may turn out to be that we don't need quite that many, but we're still working that through now. But certainly, over the next 4 years, we would expect to still approximately double the size of our existing health care sales organization.

[Operator]

And our next question comes from the line of John Shao with National Bank.

[Meng Shao, Associate]

Yes. So my first question is I think you already mentioned that Tecsys have added 2 hospital networks during the quarter and one network in August. I'm just curious about your spending trajectory and how we should see their spending scale over time because I'm just trying to get a sense of the size of the customer wallet share.

[Peter Brereton, CEO, President & Director]

Yes. I mean, we estimate that, as I mentioned earlier, I think on the -- I guess it was maybe in the AGM, but we typically see that a fully implemented average sized network should be spending about $2 million a year of annual recurring revenue in addition to whatever consulting revenue and other revenues they may give us, but the focus there on the recurring piece. So these accounts that are signing are pretty typical in that they're starting in, let's say, the 20 to 25 kind of percent that size because they started in one area or they start with only a couple of hospitals into their network, and then they expand it over time.So we typically see -- we've seen this in the past, even in the old perpetual days. We saw that our upfront deal size ended up being sort of 10% to 15% of the total revenue we would actually include over the next sort of 7 years kind of thing. So we see sort of long tail on these kinds of deals with lots of upside. And the secret, of course, is to make sure that the first project is a big success, provides a great payback for the hospital network and puts them in a good position to decide to go ahead to the next phase.

[Meng Shao, Associate]

Great. So my other question is I think that there is a current macro backdrop that there's a shortage talent and wage inflation. So did any of these factors actually impact the hiring process in the past few months and now passing on?

[Peter Brereton, CEO, President & Director]

You want to take that one, Mark?

[Mark J. Bentler, CFO & Secretary]

Yes. I mean, I think we -- we continue to recruit pretty aggressively. And I think there are definitely challenges in terms of bringing on new resources at speed. And we do see competitive pressures on pricing in the market. So I mean, I think that's something that is right now is just -- is the reality. And we expect that to continue. It's definitely a competitive hiring marketplace right now.

[Operator]

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

[Gavin Fairweather, Analyst of Institutional Equity Research]

I just want to start on the health care side. It sounds like some of the deployments that you've been seeing have been a bit more targeted and really looking at the highest priority kind of items. I guess I'm curious, what your sales team is hearing from clients. Do you expect that to remain kind of status quo going forward? Or are you hearing any signs and maybe certain clients are looking to get more ambitious with the rollouts?

[Peter Brereton, CEO, President & Director]

Yes. I mean, there's an interesting mix in the pipeline right now. If we look at the pipeline, I would say there is a -- if I would hazard a guess, I'd say 30% of the new accounts in the pipeline right now are looking to be sort of more ambitious and bite off sort of a much broader piece of the platform right upfront. But there's still probably the majority at this point that are being quite selective and very sort of targeted in their approach to which part of their supply chain, they're going to address upfront.I mean, as you know, the Delta wave is pretty seriously impacting a number of these areas. And you kind of see that in the -- in what's happening in these deals. The deals from further south, where they're in areas where that are being still quite hard hit by Delta, we're tending to see only very targeted type deals in other areas that are much more quiet. They tend to be opening up to addressing biting off a much larger piece upfront.

[Gavin Fairweather, Analyst of Institutional Equity Research]

That's helpful. And then good to see the, I guess, broad commercial release of your pharmacy module. Can you speak to some of the KPIs that you've pulled out at some of your earlier clients? And then maybe just you could remind us, of the $2 million kind of fully baked spend with the large IDN, what proportion of that would be tied to pharmacy?

[Peter Brereton, CEO, President & Director]

Sure. I mean we're still pulling out KPIs. I mean we've certainly -- that rollout is still early. We've got it out in a couple of accounts now that we decided it was time to go commercial. We had enough proven success with it, and we felt like the product was quite stable for that market. So it was time to go commercial. That's why we announced that at the ARM trade show. But if you look at the benefits, I mean, the predominant hard benefits come down to reduction in expired drugs on the shelf. It's not uncommon for a hospital to run with sort of 5% to 7% of drugs expiring on the shelf. And that is a -- that ends up being a very, very large number.There's also drugs that get lost or stolen or misplaced or whatever, but the bulk of the cost seems to be related to overbuying or buying in too large units to measure, buying a 500 milliliter bottle of a liquid drug that you have to throw out 30 days after you open the bottle. If you are only using 100 mills a month that means you are throwing out 400 mills every month. So a lot of it is just this expiration of very expensive drug sitting on the shelf. That runs into the millions. So the payback on that is very substantial. Now there's other benefits, the ability to better manage an emergency recall. The news comes out, certainly a lot number needs to be recalled. With our platform, they're going to know exactly where in the hospital those likes are for that drug to be able to execute that recall very quickly.We've got built in management of the specialized pricing for First Nations. That's all managed within the system. So there's a number of benefits that sort of streamline and automate the whole decision-making in pharmacy management process. But the hard dollar paid back tends to come in reduction of expired goods. The -- and Gavin I have to admit, I forgot the second part of your question. What was the second part of your question?

[Gavin Fairweather, Analyst of Institutional Equity Research]

That was helpful. Yes. It was just around how much pharmacy you could account for in like the $2 million of fully baked AR from a typical IDN?

[Peter Brereton, CEO, President & Director]

Yes. I mean, we think it's about $0.5 million, into the $2 million. It -- a lot depends on the network. There are networks where it could be as much as $800,000 out of the $2 million, but we think more in a typical situation is sort of, call it, $400,000 to $600,000 into the $2 million.

[Gavin Fairweather, Analyst of Institutional Equity Research]

That's super helpful. Maybe just if we could switch gears and chat about distribution. I think you talked about growing pipelines kind of across the business. Would there be any distinction between kind of the logistics side of distribution and the retail, which I think is still facing some challenges? And maybe you can update us on kind of win rates that you're seeing in the market there?

[Peter Brereton, CEO, President & Director]

Sure. I mean, retail is pretty interesting. I mean, we're seeing -- we continue to see a lot of opportunity in brands going direct to consumers. So not really retailers, but people that are becoming online or organizations that are becoming online retailers by taking brands that have been in the market for years and now setting up direct-to-consumer websites and marketing direct-to-consumer and building that direct relationship with the consumer. So that marketplace is actually fairly active right now. The true retailers, I would say, are just starting to come back. And we've got a number of good opportunities in the pipeline right now, but those guys got hammered, of course, during the pandemic.Even some in the areas where you wouldn't think they would get hit that hard by the pandemic. But -- I mean, people spent less on fashion, they spent less on cosmetics, they spent less on lots of things during the pandemic. And it almost seems like everything except home renovations and appliances sort of went down. So those guys felt it pretty hard. I say that -- if I -- judging everything by pipeline can be risky. But sort of looking at the key leads there, it certainly looks like that market space is coming back. There's more confidence. They're seeing more reliability and predictability in their numbers. And we certainly think we're ready to see some pickup in that space. The rest of sort of general distribution, I mean, it's coming along. I mean it's -- by and large, it has not been that affected by the pandemic.I mean the projects have been -- again, they've been smaller and more targeted projects, but that's just because of distraction. The actual revenue and earnings in the rest of the segments has been quite solid. So we're not really seeing any major sort of swing there.

[Gavin Fairweather, Analyst of Institutional Equity Research]

That's great. And then maybe for Mark, can you remind us on the mechanics of the FX impact on your ARRs? Do you mark-to-market it kind of each quarter at the closing rate or are you marking it at the time of renewal of your customers?

[Mark J. Bentler, CFO & Secretary]

Yes. We do use the period end rate as the mark there.

[Operator]

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

[Nick Agostino]

Yes. My first question on back on the office side. Peter, I recall at one of your conferences last couple of years, we actually meet in person, of course. There was discussions around the regulatory environment. And I believe it was 2018, there was a regulatory mandate that came to the tracking of drugs within the hospital environment. And if I recall correctly, that may have been pushed out to 2021. Can you just remind us where things sit from a regulatory perspective when it comes to drug tracking?

[Peter Brereton, CEO, President & Director]

Sure. The -- and I think the final -- I mean, they rolled that out in stages. So the manufacturing, that's what you're referring to is the Drug Supply Chain Security Act. And the -- which requires in effect, traceable registered transfer of drugs every time it moves from one legal entity to another. So it doesn't require the tracing of drugs, for instance, within a balance sheet in effect. But if it's going to move from one legal entity to another, then it must be registered and traceable and so on.And the manufacturers had to be compliant. I think it was in 2017, the distributors by 2019 or 2020. And -- but the actual endpoint of distribution keeps moving out a little bit. So I think the latest deadline on that is '22. And even then it's only covering right now fairly high-class drugs sort of drugs that have a high street value and that kind of thing. Over time, the expectation is that it's going to move down, what the legislation calls for is that it will move down through the various classes until it is much more comprehensive. So we're still seeing in the hospital space. We're seeing some hospitals that are deploying specifically to be ready to be fully compliant and in effect, remove the overhaul.So you've already got a good platform in place. You can just manage it that way. Others are sort of saying, well, we don't think we're actually going to do many sales to third-party legal entities. We're only going to sell to our end-user patients, which doesn't require trace. Therefore, we're going to just sort of track manually on a spreadsheet or whatever, the occasional third-party legal entity sale. We'll see how that pans out. We think as we get more success and reputation in the pharmacy space, we'll see more uptake driven by that. The same thing, by the way, from a regulatory compliance standpoint applies to what's called the UDI requirements, which is a unique device identifier legislation, and that calls for full track and trace on implants, anything from knee joints and hip joints to even -- eventually it's going to touch rate down on stainless steel screws and that kind of thing. So that is also driving some of the activity we're seeing right now in, for instance, sales of the operating module because that's an absolute pain to manage with a good supply chain platform.

[Nick Agostino]

Okay. Appreciate. I guess my next question, you talked about channel partners and the contribution. I know you've talked about this in parts. Can you maybe just give us an update to your channel partner contributions this quarter? And specifically, Workday and KPMG [Technical Difficulty]

[Peter Brereton, CEO, President & Director]

I mean, at least on my end, you were breaking up there a little bit. So I don't know if that's me or you, but I mean, in terms of partners, we are seeing a lot of action with partners in the health care space. The -- if I remember correctly, and I don't have that data right in front of me. I remember correctly, one of the deals that closed in Q1 was directly partner related. One of them was not. The Workday situation, we're still in the same position we're in that we've signed, I think it's 4 deals in total with Workday. They are now live. We're undergoing a validation process there to make sure they're sort of fully satisfied with the cloud service that backs that up and how the data moves back and forth between the 2 cloud components.Once we complete that verification, we then move from sort of trial -- the trial period on that partnership into the more full-blown phase. So we're still in that verification phase on that one right now. We expect that to finish in the not-too-distant future, but we've never gone through it with Workday before, so we don't really know for sure how long that will take. The -- if I look at the pipeline going forward, certainly, and we're actually just commenting on in our Board meeting earlier this morning, it's interesting. The partner activity in the ecosystem is very much tied to health care at this point.If you look at most of the health care deals in the pipeline, there is a partner involved in a very high percentage of them. If you look at the complex distribution of retail accounts, there's not that many partners involved there, much lower percentage. So we've got -- our partner team is working very hard to try to open up the distribution and retail side to partners, get more partners involved because we think it's also going to be key to that rollout. And I think, yes, that's all I would have to say that. I know one of the deals we just signed a deal a couple of weeks ago in the complex distribution that was -- that had a partner directly involved. But it's -- as I said, it's really the health care space where the bulk of the partner activity is at.

[Mark J. Bentler, CFO & Secretary]

So I would just add that influence in our pipeline. It just -- it continues to grow. We've sort of been disclosing that number quarterly for the last number of quarters, and it's up -- it's just up over 20% now of our pipeline is partner influence, so continues to expand.

[Nick Agostino]

Okay. I appreciate that. And my last question, just going back to the SaaS bookings, and you guys highlighted the legal and procurement backlog to really get these deals finalized. Can you maybe comment on -- from a dollar perspective or just give us some and I know that, I think 2 quarters ago, you recorded $1 million of SaaS bookings. But that quarter aside, it looks like you're doing more in that $2.5 to $3.5 million SaaS bookings per quarter. If the backlog wasn't there -- or sorry, if that bottleneck wasn't there are you -- did you have or do you have enough pipeline deals that could have been signed in the quarter to kind of put you more a run rate?

[Peter Brereton, CEO, President & Director]

Yes. I mean, we don't -- as you know, we don't really give forecast, but your statement is right on. I mean we're looking at a very sizable pipeline. I've never seen the sales team so active through the summer months. We certainly had the possibility. And we came in at 1.1 in the first quarter. We certainly have the possibility to get probably in the range of 3x in the first quarter, if it hadn't been for those bottlenecks in legal and procurement. So -- and when we look at Q2, it's -- I mean, it's just -- the stuff is kind of just snowplowing ahead of us. So that bubble in the pipeline just keeps getting bigger. But it certainly looks as though we're well set up to get -- to be running in the kind of range you're talking about there.

[Operator]

[Operator Instructions] Our next question comes from the line of Steven Li with Raymond James.

[Steven Li, Director & Equity Research Analyst]

Hey, Peter, Mark. Yes, just a couple of questions. On the IDNS, so the 2 in the quarter and the one in August, any of them, like the Mayo or Trinity Health type size or more next year?

[Peter Brereton, CEO, President & Director]

Yes. No, these were all sort of next year. I mean, good mid-range deals, but not in the size range of like a Mayo or Trinity. I mean there's not that many the size of Mayo and Trinity, of course. The vast majority of the market is sort of those mid-range sort of 10 to 20 hospital networks kind of thing. And these were more typical mid-range type opportunities.

[Steven Li, Director & Equity Research Analyst]

All right. Got it. And then, Peter, on the sales and channel investments, are you doing a similar scope addition in distribution? Any time line in terms of headcount additions there?

[Peter Brereton, CEO, President & Director]

We are growing the sales team in distribution, but our it's funny. Our challenge is and we have to manage the -- we're trying to maintain profit at a reasonable level, right? So we want to focus on growth. We want to create as much top line growth as possible, especially SaaS revenue growth. At the same time, we don't intend to run this thing at a loss. So we're trying to manage that carefully. So if and don't -- if there's a question of sort of reasonable spend limitations, then we -- right now, we always prioritize health care first because we feel like health care is much more time driven.The health care market is now moving. It's moving as a group. And if we don't move quickly and expand the sales organization to take that opportunity, we're going to leave it open for someone else. And right now, we have a massive leadership position in health care. We're way ahead of everyone else, both in terms of the platform that we have as well as the number of accounts that we have. But we want to keep it that way. So we're -- so wherever it's sort of a question of do we spend in health care or do we spend in complex distribution, health care wins that battle. At the same time, we can only grow health care so fast. There's limits to how fast you can grow the team. We need sales people that actually know what they're talking about. We've got to bring them up to speed and so on.So it still leaves lots of room for expansion in complex distribution. But as I say, if it's either/or, then we invest in health care. If we have enough for both, then we're investing in complex distribution as well. The complex distribution market is actually many times larger than the health care market. But as you know, our win rate is lower. I mean, our win rate in health care is -- gets very close to 100%. Our win rate in complex distribution is more sort of in the low to mid-40s. So that's how we balance it. But certainly, if I look 5 years down the line, I would expect both sales teams to be at least double their current size.

[Steven Li, Director & Equity Research Analyst]

That makes sense. And when I look at your PS -- so this quarter, constant currency, PS growth outpaced ARR. Was there some large deal implementations that skewed the growth? Or would you expect PS growth to kind of stay ahead in the near term?

[Mark J. Bentler, CFO & Secretary]

We don't expect PS growth to stay ahead of SaaS growth in the near term. I think we had -- you might recall, we did do quite a bit of hiring and growing that team over the course of last fiscal year. So we entered the year here with a pretty strong bench that had grown quite a bit in recent quarters. And I think what you're seeing in PS revenue, we still have a robust backlog, and you're seeing that bigger team getting more and more efficient, more and more utilized in that quarter. But I think the growth rate of that services, that core services team has slowed down a bit. So I don't expect that PS revenue growth to continue at that same pace.

[Steven Li, Director & Equity Research Analyst]

Great. That's helpful. And then, Mark, I might have missed it, but did you say what the impact was on adjusted EBITDA from FX?

[Mark J. Bentler, CFO & Secretary]

Yes, we did. So the revenue side was about a $2.3 million headwind. On the cost side, it was about a $900,000 tailwind. So on the bottom line at adjusted EBITDA level is about a $1.4 million negative impact in the quarter.

[Steven Li, Director & Equity Research Analyst]

Got it thanks.

[Peter Brereton, CEO, President & Director]

Yes. There's many things we can control, but currency is not one of them.

[Operator]

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

[Peter Brereton, CEO, President & Director]

Great. Well, thank you very much. That concludes the question-and-answer session. And thank you for taking the time to join us today on this call. As always, if you have additional questions, please don't hesitate to give Mark or I a call. And we look forward to talking to you at the end of our second quarter. Thanks, and bye for now.

[Operator]

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