Tecsys Inc

TSX:TCS

Earnings Call Transcript 2023-Q2

[Operator]

Good morning, everyone. Welcome to Tecsys Second Quarter Fiscal 2023 Results Conference Call. Please note that the complete second quarter report, including MD&A and financial statements were filed on SEDAR after market closed yesterday.

All dollar amounts are expressed in Canadian currency and are prepared in accordance with International Financial Reporting Standards. Some of the statements in the 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, December 1, 2022, at 8:30 a.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, executive]

Thank you. Good morning, everyone. Joining me today is Mark Bentler, our Chief Financial Officer. We appreciate you joining us for today's call. Our company began fiscal 2023 with a strong growth, underscored by solid SaaS bookings and that momentum continues into Q2.

Bookings included base accounts as well as new accounts in the U.S., Canada and Australia. Our SaaS offering is proving to be a system of choice for organizations grappling with outdated technology and supply chain complexity. Since our last results call, we announced implementations at the distributor AMG Medical and the University of Miami Health System, each of which appointed Tecsys software as the digital enabler of their supply chain strategy.

With nearly 20 projects of renewals landing in the quarter, we are seeing traction for the Tecsys value proposition across all industries in which we do business within a market that is highly engaged. As much as I'd like to say that the pandemic is behind this, the effects of it are not, labor and supply issues continue to affect many companies.

That said, our ability to get in there and install a system that puts them on a path for success is what we do really well. And this gives us confidence that the momentum we are seeing will only continue to gain speed.

Now before turning to the second quarter results, I wanted to take a moment to speak about a transition that is underway in our HR leadership. Patricia Barry, who has led our HR team for more than 20 years, will be retiring over the next few months and she has much to be proud. She's been a key part of our success. And we'd like to express our appreciation and wish her all the best.

I'd also like to welcome Nancy Cloutier to the position of Chief Human Resources Officer. I've spoken before about the important role our talented people play in the development and delivery of our software. Nancy brings her HR experience from much larger organizations to us and is now leading the effort to prepare our HR team and the company as a whole for the growth ahead. As our team expands and our business continues to grow, we are excited to have Nancy on board.

Getting back to Q2 results, I'd like to take a moment to summarize the key events of the second quarter of fiscal '23 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 a couple of key indicators I'd like to highlight, which are contributing to our continued track record of stable growth as a SaaS organization. First, our revenue model continues to move in a positive direction. Our SaaS revenue model provides greater revenue visibility and makes it easier for new and existing companies to buy our software solutions.

Notwithstanding our total record revenue, up 11% in the quarter compared to the same period last year, the real headline is that our SaaS revenue is up 34% year-over-year, which results in the achievement of an important milestone in this quarter. And the SaaS revenue now represents over half, 52% to be specific of total recurring revenue. That means that in the last 4 years, we have built a SaaS business that is driving more recurring revenue than our legacy on-prem business built to over the previous 35 years. We are extremely proud of this achievement.

Second, our SaaS ARR bookings are up 30% in the first half of this fiscal year compared to the same period last year. Bookings included base account expansions as well as new SaaS accounts. As mentioned in Q2, we added 2 new major health care IDNs in the U.S. as well as new complex distribution and converging commerce accounts outside of the U.S.

These bookings also reflect continued partner involvement in our pipeline and in our closing activity. It is extremely difficult to manage today's supply chain complexity within a properly integrated digital supply chain platform. We're finding that the companies try to patch together an agile supply chain by adding on to old style monolithic systems. At some point, they conclude that the core software they're using was never designed what they now -- to do what they now needed to do.

Tecsys is proven to be among the best cloud-based solutions available in the markets we serve. And we have the people, the products and the plan to provide what the market demands.

Mark will now provide further details on our second quarter and first half financial results.

[Mark Bentler, executive]

Thank you, Peter. Starting with our second quarter. We're pleased with the strong performance in our quarter ended October 31, 2022. Total revenue was $38.1 million. That's 11% higher than $34.3 million reported for the same period last year. Total revenue, excluding hardware, increased 9% compared to the same period last year or 6% on a constant currency basis.

As many of you know, a significant portion of our revenue, about 70% this quarter is denominated in U.S. dollars. As a result, movements in currency exchange rates have an impact on our reported revenue and growth. We continue to experience strong and steady revenue streams underpinned by a 34% increase in SaaS revenue, up from $6.6 million in Q2 2022 to $8.8 million in Q2 of this year.

On a constant currency basis, SaaS revenue was up 30% compared to the same quarter last year. SaaS remaining performance obligation, also known as RPO or SaaS backlog was $109.5 million at the end of Q2 fiscal 2023. That's up 51% from $72.7 million at the same time last year. On a constant currency basis, that growth was 43%.

Maintenance and support revenue for the 3 months ended October 31, 2022, was $8.1 million, down 1% compared to the same quarter last year or down 3% on a constant currency basis. The general decline in the quarter compared to the same period last year is consistent with our shift to SaaS. We expect as current customers migrate to our SaaS offering, maintenance and support revenue will continue to decline over time.

Professional services revenue for the second quarter was $13.5 million. That was up 4% from $13.1 million reported for the same quarter last year, but flat on a constant currency basis. As we've noted in the last few quarters, we're starting to see the impact that our transition to SaaS will ultimately have on our professional services revenue line. That is we're seeing a continued reduction in custom development work as customers opt for a more out-of-the-box approach to platform implementations.

We're also continuing to experience the increased collaboration of our partner ecosystem and helping to implement our systems. We expect that over time, these factors will continue to moderate our professional services revenue growth in the future.

License revenue for the quarter was $1.1 million compared to $1.0 million in the same period in fiscal 2022. As we've stated before, with most of our software bookings now SaaS, we expect license revenue to decline in general over time.

Hardware revenue in Q2 of fiscal 2023 was $6.6 million. That was up 22% from $5.4 million in the same period last year and an increase of $2.8 million sequentially compared to $3.8 million in Q1. By way of reminder, we sell primarily third-party hardware to our customers for warehouse operations and in-hospital point of use, storage and tracking. This part of our business tends to be lumpy and revenue recognition here is tied to delivery timing. That said, like last quarter, our hardware backlog remains strong, driven primarily by hospital network point-of-use orders.

Turning now to bookings. The SaaS bookings are reported on an annual recurring revenue basis and can be somewhat lumpy due to the timing of quarterly deal closings. SaaS bookings were down 31% in the quarter to $2.8 million compared to $4.0 million in Q2 of last year.

I'd point out that it's helpful to look at a longer term period to get a real understanding of what's happening with momentum on SaaS bookings. We've been seeing some sustained momentum with SaaS bookings up 30% year-to-date compared to the first half of last fiscal year and up 40% in the last 12 months through Q2 fiscal '23 compared to the prior 12-month period.

Professional services bookings were $15.0 million in the quarter, down 16% compared to $17.9 million in the same quarter last year, but up 55% sequentially compared to Q1. This highlights the lumpiness and impact of timing on reported quarterly bookings. A reminder, that we do see our transition to SaaS and strengthening partner ecosystem tempering professional services growth in the long term. That said, professional services backlog remained solid at $31.9 million at October 31, 2022.

For the second quarter, total gross profit was $16.7 million. That was up 7% compared to $15.5 million in Q2 of last year. That was led by higher gross profit contribution from SaaS, maintenance and support as well as license and hardware.

As a percentage of revenue growth -- as a percentage of revenue, gross margin was 44% compared to 45% in the same period last year. Combined SaaS, maintenance, support and professional services gross profit margin for the 3 months ended October 31, 2022, was 46% compared to 49% in the same period in fiscal 2022, but flat sequentially compared to Q1 fiscal '23.

We generally expect services margins to flatten out in the coming quarters of fiscal 2023. And we expect to see services margin improvement into fiscal 2024 and beyond. We believe this will result as the business continues to scale and as we focus development and operational energy on optimizing platform efficiency. We see this as a multiyear journey with incremental benefits building over time.

Switching now to our expenses for the quarter. Operating expenses increased to $15.6 million, that was higher by $1.7 million or 13% compared to $13.9 million in Q2 fiscal 2022. Operating expenses are up compared to the same quarter last year, primarily because of higher research and development costs as well as higher sales and marketing costs. Compared to Q1, research and development costs were up 3% on a sequential basis. We expect research and development costs to be relatively flat sequentially in Q3 compared to Q2.

Sales and marketing costs were up sequentially in Q2 on higher marketing program spend, seasonal sales and marketing events and travel. We expect an increase in sales and marketing costs sequentially in Q3 that will be slightly more modest than the increase we saw in Q2.

Net profit for the quarter was $715,000 or $0.05 per -- earnings per fully diluted share compared to $708,000 or $0.05 per share for the same period in fiscal '22. Net profit in the current period benefited from a lower effective tax rate.

Adjusted EBITDA was $2.8 million in Q2 fiscal '23 compared to $3.2 million in Q2 of last year. Net profit and adjusted EBITDA were both positively impacted by favorable foreign exchange of approximately $0.8 million compared to the same period last year.

Turning now just briefly to our results for the first half of fiscal '23. Total revenue was $72.3 million. That was up 7% compared to $67.5 million in the first half of last fiscal year and that's up 5% on a constant currency basis.

SaaS revenue for the first half was $16.8 million. That was up 37% from $12.2 million in the same period last year and up 34% on a constant currency basis. Our SaaS bookings were up 30%, as I previously mentioned, to $6.7 million compared to $5.1 million in the first half of last year.

Our net profit for the first half was $755,000 compared to $952,000 in the same period last year. Foreign exchange movements had a positive impact of approximately $1 million on profit and adjusted EBITDA compared to the same period last year.

Adjusted EBITDA was $4.3 million in the first half of fiscal '23 compared to $5.7 million last year. We ended fiscal '23 with a strong balance sheet position. On October 31, 2022, we had cash and cash equivalents and short-term investments of $41.8 million. That was down $1.5 million compared to $43.2 million at the end of fiscal '22, but up sequentially from $37.5 million at the end of Q1.

Finally, we had debt of $7.8 million at quarter end compared to $8.4 million at the end of fiscal '22.

I'll now turn the call back to Peter to provide some outlook comments.

[Peter Brereton, executive]

Thanks, Mark. Tecsys stable performance continued through the second quarter of fiscal 2023 with a strong balance sheet and a robust backlog and strong sales pipeline. We are seeing widespread buyer intent across target markets, solid opportunity cycles and a highly capable sales team with the tools and talent they need to capitalize on a market ready to invest in new technology.

Our increasing market share in health care, supported by an increasingly robust partner network and growing acceptance of the clinically integrated supply chain and consolidated service center model, together with our expanded health care sector offering gives us confidence that the health care sector will continue to serve as an important revenue stream for us.

Turning to converging distribution. We continue to hold our sweet spot there and carve out our share of a massive market opportunity, driven by fundamental changes to the supply chain industry. Changes spurred by aging existing systems, digital adoption and a realization that heightened consumer expectations are here to stay.

We are pleased that this first half of fiscal 2023 continued recent trends. It isn't hard to see that accelerated changes on the horizon when it comes to supply chain management and companies are starting to invest in that change. We believe that the remainder of fiscal '23 is tracking well against our internal KPIs. And we are well-positioned to expand our footprint in this growing market.

In summary, I'd like to remind analysts and our investors of our key themes for fiscal '23. First, we'll continue to maintain a laser focus on expanding our SaaS revenue model. Second, we will continue to deepen and strengthen our partnership ecosystem. This is key for us to scale rapidly into North American and international markets. Third, we will continue to expand and refine our distribution and omnichannel business platforms to service evolving needs in both of our health care supply chain and converging distribution market segments.

Across all markets, we will place emphasis on customer success. We have long stood by the philosophy of customers for life and a big part of that formula is to deliver value fast, stay connected and expand on the value delivered.

With that, we will open the call back up for questions. Thank you.

[Operator]

[Operator Instructions] And our first question is from Amr Ezzat with Echelon Partners.

[Amr Ezzat, analyst]

My first one is on the economic environments, like, it's ever weaker. And I'm just wondering how conversations with clients are evolving. It seems like your product is still getting good traction, but wonder like if you're seeing some reluctance from net new accounts to engage in conversations at all or...

[Peter Brereton, executive]

Amr, overall, it seems to be a multi -- sort of a multi-speed situation. I mean, we're in a lot of different markets. And the health care market, for instance, the hospital market is completely unaffected. I mean, that market right now is just go, go, go. It's -- frankly, it is hotter than we have ever seen it.

The retail side, I would say is actually doing surprisingly well. There's a lot of talk of recession and our consumer spending habits changing and all that kind of thing. We're not seeing that in the retail markets we serve. We just came through Black Friday, Cyber Monday. We saw it through our Imagine Solution platform. We saw some pretty good order flows running through that platform.

And certainly, we're seeing continued investment from that market. So that -- I mean, we're keeping an eye on that. That could yet slow down. But certainly, at this point, the actual transaction flows and interest and we added a couple of more accounts in the quarter in that market. It seems to be clicking along quite well.

The general distribution, I would say is the one that is more hit and miss. There are accounts -- I mean there are sub-segments in general distribution that are clearly slowing down a little bit and we'd be more cautious. There's other segments that are not. So that's where when we look at our overall across the board, we look at the mix of health care and general distribution and retail, we're seeing overall total pipeline is very strong. No question that health care is the strongest. I would say retail is probably next. Complex distribution is probably last. And yet even there right blood still reasonable. So -- but we continue to sort of watch what's going on in there, but so far not seeing any impact on slowing down the pipeline.

[Amr Ezzat, analyst]

Great. Mark, appreciate all the color on costs and margins in your prepared remarks. So if I were to sort of sum up for margins in and around the same levels in fiscal '23 with an improvement in fiscal '24, so I wonder whether fiscal '24 is a year that looks like fiscal '21, where you guys were double-digit EBITDA margins? Is that fair? Or is that like too aggressive?

[Mark Bentler, executive]

So I think that's -- I mean that's a sort of a different question. When I was talking about margins, I was really talking about services gross margins I'm thinking about combined. Yes, and that's -- in that we have to be a little bit careful about that extrapolation because our stated intent and our philosophy has always been that if we see real market opportunity for growth and taking market share, we're going to invest into that.

So we'll continue to monitor that. But at least if we see markets and potential and pipelines like they look right now, I think our propensity in the intermediate term will be to invest into that in sales and marketing, in R&D and let the EBITDA margin expansion happen a little bit later as long as there's real opportunities to invest in growth.

[Amr Ezzat, analyst]

Fantastic. So it's too early to call a proper inflection point on EBITDA margins and it will...

[Mark Bentler, executive]

Yes. I would say keep an eye on -- keep an eye on gross margins.

[Amr Ezzat, analyst]

Fantastic. Fantastic. Then maybe one last one for me. Can you update us on the capital allocation strategy and M&A in light of your strong balance.

[Peter Brereton, executive]

I mean, we continue to look at there, but nothing really has changed. I mean we're clearly pretty conservative buyers. The opportunities we've looked at still have ended up sort of priced above a level that we think is reasonable to go in and spend investors' money on.

And so we continue to look. We're looking in Western Europe. We're looking in the U.S. market. We're looking for the right fit and good opportunity. But so far, we're not -- we're still seeing pricing pretty high. We're still seeing private equity companies with a lot of dry powder willing to pay more than we're willing to pay.

And so our -- at the same time, the organic growth we have in front of us, we think is tremendous. And so feel we don't want to -- unless we find the really right fit, we'll stay focused on organic growth.

[Operator]

Our next question comes from Andy Nguyen with Raymond James.

[Andy Nguyen, analyst]

Peter and Mark, this is Andy on for Steven Li. When you mentioned the deal pipeline in the complex distributions vertical, it's kind of reasonable. Can you give us some more color on your outlook in that specific segment? Should we expect any changes for the rest of the year or next fiscal year in that sense?

[Peter Brereton, executive]

No, no real changes. I mean, we have always continued to run well, not always, but I guess for probably 15 years now we've run with sort of 2 primary verticals, the general distribution vertical and the Hudson vertical and they have taken turns to some extent being hot.

There's -- you may remember a few years ago, we had talked of tearing up the Affordable Care Act in the U.S. And suddenly, the U.S. hospital market went quite flat for a couple of years. Meanwhile, the general distribution side was actually quite robust.

Right now it's clearly the hospital side. I mean as they went through the pandemic and came out the other side and sort of many of them realized how weak their supply chain solutions were that they were existing with. And so it's become an even harder market than it was before.

So that's clearly where a lot of the excitement is right now. But at the same time, the general distribution market still represents 55% of our revenue. It's an enormous market. There's 12,000 companies in that market.

I think it was Gartner Group that just came out with a statement that said they believe close to 50% of the companies in that space will be shopping for new solutions within the next few years. These are systems that all went in, in time of Y2K. And they're getting pretty old. So that market continues to be quite interesting. So we will prioritize investments in health care right now because that's the hottest market for sure. At the same time, we will continue to do a great job of serving the other market as they come through this -- the current distractions they're in.

I mean, it's largely still distractions around labor availability and transportation availability as well as, of course, the shutdowns in China impact that market a fair bit. So we've got to get through those. That's probably going to take another couple of quarters before that market really completely warms back up again. But even so it's still good enough, frankly. It's still a pretty decent market, so no real changes on our side. We'll continue to pursue them both and fully expect that market to come back up to a more normal operating temperature within a couple of quarters.

[Andy Nguyen, analyst]

And maybe just a question for Mark. You had a really decent quarter in terms of cash flow from operation generation. Should we expect a similar level for the remainder of the year comparing to like fiscal 2022?

[Mark Bentler, executive]

Yes. I mean I think we had a good -- I mean we had a kind of a light Q1 on cash flow, which is kind of a little -- it's a bit seasonal for us. It kind of is our historical trend. That's kind of low point. Tends to come back a little bit in Q2. Our bigger cash generating quarter tends to be in our Q4. So I think -- I expect the back half of the year to be generating more cash flow than the first half of the year.

[Operator]

Our next question comes from Gavin Fairweather with Cormark.

[Gavin Fairweather, analyst]

I wanted to talk about health care. Obviously, your comments were quite bullish on what's going on in the pipeline. Obviously, you added 2 new networks this quarter. By my count, you should be maybe a tick over 60.

Obviously, to hit to 100 target, we will need to see an acceleration in the number of kind of quarterly additions to hit that. So maybe just discuss kind of how many logos in the pipe, how the sales cycles are going and any other KPIs and color there, which are kind of backing up your bullish comments.

[Peter Brereton, executive]

Yes. I mean -- I mean, we're currently -- if you look at total in the pipeline, we've got -- it was actually a couple of weeks ago, I looked at that. But I think we've got in the low 20, 23, 24 accounts in the pipeline right now.

But one of the changes is just the velocity in the pipeline. I mean, they're moving through quickly. If you talk to our sales teams, they're -- right now their main complaint is the speed of the legal process by the time the contracts have to go through a legal review it, on the one side, on the client side or on our side, it takes some time. And so it's pretty strong. I mean if we look at our total pipeline, it's more than 2/3 of our pipeline right now is actually a new account health care opportunity.

So it's very, very strong. In terms of reaching 100, we're quite confident we're going to hit it. I mean, we've come through a couple of really weird years that we're sort of pretty up and wait and sort of lots of pipeline, but too distracted to do anything.

And so that seems prevented. I mean, at this point, it really is rolling. So we sort of look at it and say, yes, we've signed 5 in the first half. Can we -- by next year, could we be at a run rate of sort of 12 to 15 in the year? Yes, we think so. So we're looking at it over the next couple of years and feeling like we're pretty well right on track to hit that 100 mark on schedule. So we're feeling good about that.

I mean I think the question we're starting to think about is sort of okay, what comes after that 100? There's obviously 300 in total. How many in total can we get, can we end up with 150? I sort of said 150 is the minimum long-term goal. But at the same time, the market acceptance is growing so rapidly. It's quite possible we can push that to more like 200. There's also the -- in effect, almost the verticals within the hospital space. We're still just in the early stages of growing the pharmacy piece.

This last quarter, we had a pharmacist, a U.S.-based pharmacist join our sales team. So she's now an active part of our sales team helping to sort of explain our solution to the market and so on. And that -- we think that's going to have a very positive impact. So there's just lots of growth within the accounts we already have, plus we still see a pretty good runway for new accounts.

[Gavin Fairweather, analyst]

Awesome. That's great color. And maybe for Mark, your comments on services gross margins were interesting. They've been trending in kind of the mid-40%s. It sounds like they're going to stay there in the back half. But curious maybe for a longer term target on that front. I mean, the SaaS revenue is scaling and you're doing some work to kind of optimize the platform on the backend and you're pushing more services work out to partners. So how do you think about kind of the longer-term potential for that gross margin line on services?

[Mark Bentler, executive]

Well, I mean, I think it's -- I think when we look at the cloud componentry in there, where we're sort of in the sort of high 50s right now, it's sub-optimized. And if we look down the road and sort of see a dot on the wall and aim for it, it's 10% plus expansion on that line.

The question for us is how quickly can we move the needle there? And how much scale does the business need to have in order to get there? There's -- we're doing quite a bit of work on figuring out and running initiatives that are currently underway that we expect will have a positive impact on margins over time.

Those are focused on reducing public cloud infrastructure costs, making the platform more efficient to operate and support. And the other dynamic in there, of course, is larger average deal sizes here. Typically, we'll tend to support higher margins. The bigger our deals are, the higher the margin, the higher additive margin is and then how that has a positive effect on moving up the averages.

So like I said, we're doing a lot of work in this area. And we think there's a lot of potential and that's kind of the 10 points out there. It's a question of -- for us, it's a question of when and where is the top?

[Gavin Fairweather, analyst]

That's helpful. And then maybe just on professional services. And I know you made some additions to the team there. And it sounds like the load that's being absorbed by your partners continues to increase. How should we be thinking about this revenue line going forward? Are the partners kind of taking on more of their work than perhaps you were thinking? And should we be looking for a pretty modest growth in the services line? Maybe just help us out with some updated thoughts on that.

[Mark Bentler, executive]

Yes, it's interesting. I mean, our -- that line is moving. It's moving pretty -- the growth line there seems to be changing pretty dramatically. Just in terms of the -- we measured the attach rate, so the bookings that are coming in on professional services as deals happen.

So when a new SaaS deal happens, how much services is attached to it. And that evolves over time because those initial implementations, you tend to do a deal. There's some services to do the core implementation and then there's some additive work that comes off. So it's not completely scientific. But we have seen those attach rates sort of declining.

And we pointed a couple of different things for that. One is, as you said, the partner ecosystem development and how the partners are taking some of the surrounding professional services, not necessarily very specific product configuration, core implementation stuff. But some of the surround stuff oftentimes the sort of stuff that we think about as more kind of client-side services that sometimes clients engage us to help them with.

We have partners right now that are doing work in that area. So that's tamping down that attach rate. The other thing is -- and I mentioned it in my remarks, this notion that as we shift more and more to SaaS, just that shift itself, the market is starting to say, hey, wait a second. If we want to really take advantage of SaaS and upgradability in the future, we want to make sure we stay as clean as we can on the stack and really get rid of custom mods and modification work that would otherwise be services revenue for us and stick with the core platform.

And we're kind of encouraging more so now in the SaaS world than previously for our new prospects and customers to stay on that clean path because there is more value in the end for them to be in a clean upgrade path. And that's happening even more dramatically as health care becomes a bigger part of our bookings, which we've seen in the last -- in the last number of quarters. Health care becomes a bigger part of our bookings. And those deals tend to be very sort of modification-light.

We're oftentimes we're going into an opportunity where we're not necessarily replacing a system, we're putting in a system. So oftentimes, the networks are very keen to say, hey, what's the best practice here? Tecsys has this end-to-end solution. We say, well, this is it. Put this in just like this and you'll benefit and here's your ROI and you don't need to do a lot of -- I had this old system that was doing this and I'd like it to go do this, those kinds of conversations aren't happening nearly as much in the health care side. So that's tamping down the amount of services or custom work that happens around implementation. So we think that's probably going to moderate growth on professional services. Frankly, Gavin, I'm not sure where that's going to land. I mean, I think it's -- in my head, it's clearly single-digit growth. Is it mid-singles? I think time will sort of tell.

[Gavin Fairweather, analyst]

Okay. That's helpful. And then just maybe a quick one. I saw in the MD&A or on the SaaS revenue, you said that there is a bit of a drag from cancellations in the quarter. Did you see maybe a little bit of churn in somewhere in the business there?

[Mark Bentler, executive]

I mean we do see some churn. That's a -- that's not a new comment. It's kind of meant to be kind of an all-encompassing, here's the stuff that makes that number move around. And if you're trying to loop the bookings through to the -- to what was reported as last quarter's revenue and plus bookings and what's showing up as revenue this quarter, the dynamics there are attrition and cancellation is one of the dynamics and the other dynamics is timing. Sometimes we sign a deal and it doesn't necessarily start right away. It might start 2 months later or even 3 months later, quite oftentimes, it does start very quickly. But there can be a bit of a time delay there. But we have over the course of time, we've had some cancellations happen.

[Operator]

Our next question comes from Nick Agostino with Laurentian Bank.

[Nick Agostino, analyst]

I guess, Peter and Mark, just trying to understand the hardware revenue. I think it was a record number that you guys printed this quarter. And if I recall correctly, last quarter, you were somewhere around $4 million. And you suggested that maybe you'd be down at that level in the near term or in the short term just because of supply chain constraints.

So just trying to understand how -- like how you are able to source a stronger number? There's anything you guys did differently? And is that something that can carry forward or should we expect maybe a drop back down to that low $4 million?

[Mark Bentler, executive]

Yes, it's a great question, Nick. And that was a big quarter and a little bit, I mean, didn't quite see that much coming. But we did see some -- remember, like these deals can be pretty lumpy. So you can have a $0.5 million shipment come through here or more and it kind of falls into one quarter versus another quarter.

So there is just that delivery timing. And that's why we always mention that in the prepared remarks and the MD&A because it's very real. In terms of what's going on in our book there, we still have very significant backlog. So it does come down to a question of how quickly can we deliver this? We -- expectations around the Prop-Tech side here, where we're still having some -- it seems like it's loosening up now. But we're still kind of burdened a little bit by our own supply chain issues with chips to build out those smart panels.

But we see that kind of loosening up. Whether that's going to impact this year or in the sort of Q1 of next year, that backlog is going to start releasing here eventually. But what does that mean for the next couple of quarters? I don't -- I think we're at a high watermark right here. But I also don't think we'll probably be back down below $4 million in the next couple of quarters it looks like because of the backlog we have and the delivery schedules we have right now, it's going to be somewhere between those numbers.

[Nick Agostino, analyst]

Okay. Just a follow-up, I recognize the strong demand side that you guys called it out on the hospital side. But did you guys change anything or any change from your suppliers when it comes to the shipments? Were you able to access shipments at a faster rate for...

[Mark Bentler, executive]

Yes, you kind of cut off at the -- you kind of cut off at the end there. But I think you're sort of -- I think you were asking about are there components in there that are -- where there's less constraint in the supply chain than others.

[Nick Agostino, analyst]

Yes.

[Mark Bentler, executive]

And that's certain. Some of the stuff we deliver is where we really have the -- I would say, we really have more of the supply chain constraints around the Prop-Tech stuff. The core storage stuff that we sell into the hospital point of views is there's not -- we're able to get that stuff. And in fact, that's some of the stuff that was driving the [ pop ] there in the Q2.

[Nick Agostino, analyst]

Okay. That's helpful. I guess my other question is and I'm not sure if you discussed in the prepared remarks, but I think you recently announced a new -- I think it was a rapid implementation for the order management system market, I guess, a solution that can be installed faster. It's a little bit of easier to get guys up and running quicker and then hopefully, they do bigger deployments if I understood that press release correctly. And I'm just wondering, have you rolled that out yet, what the timeline is there? And if you have pulled out what's been the market perception?

[Peter Brereton, executive]

Yes. Nick, we have rolled it out. We actually have -- we signed 2 accounts with it in the second quarter. And at this point, both of those accounts that we signed in the second quarter are already live. So it has been successful and is proving itself in the field. So we're pretty happy with that. I mean, that's very much in the sort of the retail market where the implementation seasons in retail tend to be very short. Nobody wants to mess with the system around Black Friday, Cyber Monday or Christmas.

They then got sort of a few months in the spring. A lot of them don't want to do anything close to Valentine's Day or Mother's Day, so they have sort of a couple of openings in there. The summertime is fairly popular and for implementations in early fall. But you've got sort of these big events that are sort of total blackout periods in terms of implementation. So to have something that you can sort of sign a contract and be live back quickly, we think, is pretty important for that market. So we're pretty happy that we were able to sign 2 accounts and bring them live since we rolled that out.

[Nick Agostino, analyst]

Okay. And maybe just as a follow-up. What's the relative, I guess, revenue versus this solution versus if somebody went with a full-on order management system deployment?

[Peter Brereton, executive]

Like the SaaS revenue is the same. It's really just a highly prioritized and pre-templated approach to implement. So that you don't sort of get hung up in trying to do a thousand things all at once, which is often the temptation when you're rolling out a new platform.

Well, we're putting in a new platform, let's add 4 new payment methods and let's add endless aisle in the store and let's -- et cetera. And this sort of focuses the implementation around sort of, no, let's just implement top-notch order orchestration and we'll cycle back for the rest later.

It uses pre-templated interfaces. It uses RESTful APIs. And it uses a sort of a preset workflow that just takes a lot of the guesswork in process development and white-boarding and constructer pilots and so on, so it takes that all down to a minimum or right out of the process entirely and just brings you live. So you're immediately getting value. Your consumer experience is already elevated and then you can cycle back to address, but it doesn't change the SaaS footprint at all.

[Nick Agostino, analyst]

Okay. That's very helpful. And my last question for top line. Just wondering, are you seeing increases contracts renewed? Are you guys pushing through any pricing increases? And if so what percentage of your contracts have you done that with and what's been the market reaction to that?

[Peter Brereton, executive]

I mean we're doing regular price increases with our old on-prem maintenance revenue stream. But the SaaS side, we're just coming up to start seeing renewals, right? I mean most of these contracts signed on a 5-year contract basis.

We really only entered the SaaS market 4 years ago. So we're just now starting to see sort of coming up on the horizon like as we get into fiscal '24, you'll start seeing some renewals, which will, of course, start to impact RPO and so on because you'll have not only new accounts coming into that, but also renewals pushing out.

But we're just looking right now on what kind of price increases will be right for the market over the next year or so. We do, of course, continue to roll out additional modules as well. So I mean some of the increases come not -- they're just direct like-for-like price increases, but through added value you can provide.

[Operator]

Our next question comes from Rini Sharma with BMO Capital Markets.

[Rini Sharma, analyst]

So I guess specific to the SaaS revenue, I'm wondering how much of the growth was being driven by new customer wins versus expansion with existing customers? And then if you could also talk about maybe like the different strategies that you're using to drive growth amongst new and existing customers?

[Mark Bentler, executive]

Yes. So the spread between new and existing in the quarter was -- it was pretty close to 50 -- it was pretty close to 50-50. And the other part of your question, I think, was -- can you repeat the other part of your question?

[Rini Sharma, analyst]

Yes. We're just wondering what are the difference -- like what are the differences in terms of the strategy that you're using to kind of drive greater penetration amongst existing customers versus getting new accounts?

[Mark Bentler, executive]

Yes. I mean I think -- I mean I'll take that, Peter. It's kind of more -- for us, it's kind of more of that approach is more of a story of which market in a way. If you look at health care, where it's a very defined space, our go-to-market strategy there is we've got these 300 identified hospital networks. And we're very proactive about spreading our sales force out with -- in territories and going after named accounts or going after expansions in existing accounts.

So it's kind of a finite -- it's more finite in terms of number of hospital networks. It's a more finite population. So we approach it very directly. In terms of the complex distribution market, our go-to-market strategy is much, much broader. So we're doing a lot more sort of typical digital marketing, lead generation to drive new opportunities.

And the base opportunities we have people that are -- we have as part of the sales team that's focused on staying in contact with existing customers, keeping up-to-date with them on when are they planning to upgrade, what's an upgrade look like, having those discussions about SaaS and when it's time to upgrade why SaaS is the right answer.

We've mentioned before that those conversions to SaaS, we're kind of at the frontend of that in our history right now. We've had some customers that have migrated from on-prem to SaaS, but it's fairly limited. There's about a dozen so far that have done that. But as we look in the pipeline, we see building interest from the existing customer base on converting to SaaS. So we've kind of got those identified customer by customer. There are 2 different approaches. The sort of the migration discussion is a different discussion than new opportunities. And like I said, our go-to-market strategy is slightly different between the complex distribution market and the health care market.

[Rini Sharma, analyst]

Okay. That's very helpful. And I guess my second question is just about the environment over here, so outside of U.S. and Canada. What are you seeing there in terms of growth? And are there any specific investments you're making to drive international expansion?

[Peter Brereton, executive]

I mean, nothing new or specific at this point in time. I mean we are continuing to see actually pretty decent activity in the Scandinavian region, where we have a presence there in Denmark. I keep waiting to see if that market is going to slow down, given that there's a lot of sort of energy cost concerns and so on in Europe.

But so far, that market is doing very well. The third-party logistics market, for instance, is booming over there. And a lot of the consumer goods companies are doing really well. So we continue to see good business there. The other place we do a fair bit of business outside of Canada and the U.S. is, other than Western Europe, is Australia. And it's been interesting to see that market continuing to do quite well.

As I mentioned, we had a couple of order management solution clients there in the quarter. We saw expansions with another account over there in the quarter. So that market continues to do well.

We have looked for a long time to find the right acquisition in Western Europe to speed up our penetration of the main part of Western Europe, sort of France, Germany, et cetera. We haven't found one. We'll need to decide at some point if we just begin to sort of begin to build something directly ourselves rather than continuing to wait for the right acquisition, but we haven't made any decisions on that yet.

[Operator]

Our next question comes from Suthan Sukumar with Stifel.

[Suthan Sukumar, analyst]

First question, I just wanted to touch on sales cycles. Can you guys provide a little more color on what you're seeing in sales cycles across both health care and retail? Are you guys still seeing an elongation or is the urgency starting to see deals get done faster?

[Peter Brereton, executive]

I mean, overall, the sales cycles are -- and actually especially in health care, they feel quite compressed at this point. I mentioned earlier on the call, where legal, for instance, is continuing a bit of a bottleneck there as you're -- we're seeing sort of the financial side of health care networks ready to go ahead, the operations side ready to go ahead.

The chief rating officer, chief medical officer, everybody is onboard. But it just takes time to get through procurement and legal. And the fact that, that is a bit of a bottleneck just highlights the fact that sales cycles right now are actually somewhat compressed. You also have the partner effect in that in many cases, by the time we're getting involved in some of these opportunities, our partner may have already been in their working for months and has already helped them go through the cost justification and sort of written up the analysis to prove that this is worth doing and so on. So by the time we jump in, in a sense we're halfway through the sales cycle. So that makes the sales cycle feel a lot shorter as well.

[Suthan Sukumar, analyst]

Got you. And on implementation time line, I think in prior quarters, you kind of talked a little bit about some of the challenges with the project delivery, particularly in the health care space. Is there any -- are there any changes you're seeing from that perspective?

[Peter Brereton, executive]

Sorry, on my end, it broke up a little bit. Can you just repeat that?

[Suthan Sukumar, analyst]

Yes. The question was around implementation time lines. I think in prior quarters, you've kind of touched on some of the challenges you've seen with kind of project delivery in the health care segment. Just curious what you're seeing now?

[Peter Brereton, executive]

Yes. I would say no real change there. I mean the market -- I mean this is -- and this is more of an across-the-board comment, right? Like the market continues to be somewhat starved for good technical people, good implementation people, good project managers and our customers experience that.

I mean they need some of that talent on their side for these projects. We obviously need that sell on our side, our partners need that sell. And there is still a labor shortage in the market across all of those sort of implementation professionals. And we don't see that. I mean, it's not as crazy as it was last year, but it does continue to be a challenge. I mean every time a large tech company does a layoff, it becomes a news item. But I think those people are getting sort of hired back into the market very, very rapidly.

So there's not -- so there's still a talent shortage. You also still have this challenge in health care that most of them have never really run their own supply chains before. So we end up taking time to build up the -- in effect, the volume chart to have the right people in there to actually run the supply chain. So those challenges all continue. At the same time, there are far more experienced chief supply chain officers in health care than there were a couple of years ago.

As the markets become more aware of the need and we continue to penetrate the market, we've seen chief supply chain officers moving from one hospital network to the next and bringing their expertise with them. So we see sort of glimmers of light there that we think are going to further accelerate the space, but there is definitely still an overall talent shortage. So implementation time lines, I would say, are not really changing at this point.

[Suthan Sukumar, analyst]

That's helpful. Mark, maybe a question for you here. Just on bookings this quarter, how much of that was expansions and migrations versus net new business? And how does that compare to prior periods? And how do you think this trend going forward?

[Mark Bentler, executive]

Yes, it was pretty close to half and half. I mean, I think what we've seen more recently and if you take it bigger than a quarter and look at what's going on there and look at what's in the pipeline, I think we see -- we definitely see a skew towards new business here.

I mean, I think the pipeline is something like 70% new business in health care. So that's kind of the sort of the broader trend and kind of the forward outlook trend.

[Suthan Sukumar, analyst]

And what are you guys seeing with respect to churn and expansion renewals activity within your base? Any trends to kind of call out between health care and retail?

[Mark Bentler, executive]

Not really, I would say. I mean, Peter mentioned before, like we have the cycle. A lot of our -- we haven't had a lot of contracts coming to term. Those are 3- to 5-year deals. They tend to be more on the 5-year duration than the 3-year duration.

So we haven't had a lot of -- we've only been really kind of been doing this SaaS thing for 4 years, 3 to 4 years. So a lot of the contracts haven't come to renewal yet. So if we look at fiscal '24, that's where we're going to start seeing some activity happening there on renewals.

[Suthan Sukumar, analyst]

Okay. Okay. Great. And just quickly on your outlook for investments. It sounds like you guys are still looking to invest given the expanding market opportunity ahead. We saw some modest growth in OpEx sequentially. How should we think about the pace of investments ahead?

And from a margin perspective, should we be looking at margins being range-bound? Or is there still some modest expansion expected?

[Mark Bentler, executive]

Yes. I mean I think in the very near term, I would think, pretty range-bound. And that's really because when we talk about adjusted EBITDA margin, it's because our plan is to -- as long as we see market opportunity, and we do right now, our plan is to invest into it.

So I provided a little bit of guidance on my prepared remarks on where we see sales and marketing and R&D costs going in Q3 versus Q2. And that was we expect the sales and marketing costs to increase slightly more modestly than what we saw in last quarter sequentially. And then on R&D, we actually expect it to be pretty flat quarter-on-quarter.

[Operator]

Our next question comes from John Shao with National Bank of Canada.

[Meng Shao, analyst]

I just wanted to ask about your outlook for Q3. I remember last year, the January quarter was a relatively slow one given the holiday season. So do you still expect a similar pattern? Or is it going to be more organized this year?

[Mark Bentler, executive]

That's a good question, John. Thanks for the question. We do -- sort of that question comes into the whole discussion around moderating professional services revenue and what's happening there over time. So as we kind of read the tea leaves for -- on this one for next quarter, we do think that does tend to be a quarter where both on our side and on the customer side, across the holidays, you tend to -- you do tend to see implementation activity slowing down a little bit.

I don't think that's going to have a material kind of negative impact quarter-on-quarter for us. At least that's kind of what we're seeing right now. We're seeing something that's probably a little more flat versus down. And that's just because we've got pretty robust backlog here.

[Meng Shao, analyst]

Okay. And my other question is I just wanted to ask about the rapid implementation as well as the new API stock purpose. So do you think that those newly created APIs, along with this new implementation practice is going to help you grow the partnership channel, given these more easier to roll out and more automation?

[Peter Brereton, executive]

Yes, we think it will over time. I mean that rapid implementation was specifically aimed at the retail space, right? So that's the retail or a management solution that fits underneath a e-commerce platform.

It can fit underneath for instance, the Salesforce power cloud platform or can fit underneath the Adobe e-commerce platform and others. So it fits under there. So in fact, someone goes to a website, places an order and the order in fact drops down through the website and lands in our order management solution and our OMS then figures out where to source the inventory and processes the invoice and there's loyalty points and manages returns.

And if it's a buyer line pick up in store, then it handles the pick up in store. And so it does all the logistics after you click the place order button on the website, right? So it's that space that doing that rapid implementation at. That said, the newer approach to interfaces, which are these restful APIs which are sort of spreading through the industry at this point, we are beginning to move those across all of our product lines.

And there's no question that those are more partner-friendly. So we may end up seeing more of that kind of work continue to move out to partners over time.

[Operator]

Our final question comes from Steven Li with Raymond James.

[Steven Li, analyst]

The 50-50 split and new migration, can I apply that to the dollar growth? So you grew SaaS revenues $6.6 million to $8.8 million. So that $2.2 million growth in SaaS revenues, can I apply that 50-50?

[Mark Bentler, executive]

That was -- I was -- when I was talking about 50-50, I was talking about the bookings. So I'm not sure that I have that number for that revenue growth with -- in that quarter, what that split was between the 2. I suspect that it's more tilted towards new business.

[Steven Li, analyst]

And maybe, Mark, so I know that 50-50 was for the quarter. If I take a long view like LTM, I mean, what would that split be for bookings?

[Mark Bentler, executive]

Yes. I mean I think it's -- I think I talked about the pipeline there and in general, kind of looking at what we have in the pipeline and from a perspective standpoint, we're seeing definitely more weighted to new business. There's definitely growth in the pipeline too that's coming from migration opportunities that's going to drive that kind of expansion number, that base number a little bit.

But like we're seeing like 70% of the health care pipeline is new business, for example. And that's looking like in the intermediate term that health care chunk is going to be more than 3/4 of our bookings. So that's going to tip things towards new business.

[Operator]

And there are no other questions on the phone lines. I'll turn the call back to you for closing remarks.

[Peter Brereton, executive]

Great. Well, thank you for joining us today and for sitting through all this detail. 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 end of Q3. Thanks again.

[Operator]

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