Tecsys Inc

TSX:TCS

Earnings Call Transcript 2020-Q3

[Operator]

Good afternoon, everyone. Thank you for standing by. Welcome to the Tecsys Third Quarter Fiscal Year End 2020 Results Conference Call. At this time, all participants are in listen only mode. Following the presentation, we will conduct a question and answer session. [Operator Instructions] Please note that the complete third quarter report, including MD&A and financial statements, were filed on SEDAR this morning, February 27, 2020. 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 Friday, February 28, 2020 at 8:30 a.m. Eastern Time.I would now like to turn the conference over to Mr. Peter Brereton, Chief Executive Officer of Tecsys. Please go ahead, sir.

[Peter Brereton, CEO, President & Director]

Thank you and Good morning everyone. We appreciate you joining us for today's call. Yesterday, we issued our third quarter fiscal 2020 financial results and as already stated, a copy of those results is available on SEDAR and on our website at tecsys.com.Joining me today is Mark Bentler, our Chief Financial Officer, who will walk us through the financials in more detail in a moment. I will start by summarizing the key events of our third fiscal quarter and reviewing our performance. After Mark's comments, I will close with some comments on our outlook followed by a Q&A session.For those new to our story, Tecsys is a global provider of transformative supply chain solutions that equip growing organizations with industry-leading services and tools to achieve operational greatness. Our products resolve complex challenges for commercial distribution networks for thousands of customers around the world.Tecsys is the market leader in North America for health system and hospital supply chain solutions. In addition, we provide omnichannel solutions for manufacturing, ecommerce, and general distribution organizations. First, at a high level, what are we doing? Well, we are actively transforming Tecsys into a global SaaS software company. Our acquisitions successfully integrating and we are winning in Europe, in North America, and across all of our verticals.Remarkably, many of the supply chain problems to be solved are the same whether we are talking to retailers in Australia, consumer goods companies in Paris, or distributors or hospital networks in the U.S. They all need to know where their stuff is in real-time and need to be able to respond to demand in real-time, using an agile platform that is light on the user load but flexible, scalable, and manages the supply chain from end-to-end.Thankfully, we have solutions to these challenges. I'm happy to report that the speed of transition to SaaS licensing continues to accelerate during the third quarter of fiscal 2020. In fact, we experienced for the first time significant customer expansion and migration from perpetual licenses to SaaS during this quarter in both healthcare and complex distribution verticals.These 2 large migrations, particularly as the result of expansion across additional facilities resulted in SaaS fees that are on average a multiple of 4x the value of the underlying maintenance before the migration. We believe there is opportunity to continue to migrate existing customers over time, with key drivers being upgrade timing, security, and expansion. Contracted bookings growth is also accelerating. Overall contract bookings increased by 75% to CAD 29.9 million in Q3 of 2020, up from CAD 17.1 million recorded in the same quarter over the previous year. Organic bookings increased by 51%, while bookings from the recent acquisitions represented 24% of the growth. SaaS bookings in the quarter increased by almost 300% to CAD 2 million, up from CAD 0.5 million booked in Q3 of fiscal 2019.On a license equivalency basis, SaaS bookings represented 72% of total software bookings in Q3 and we expect this percentage to increase over time. These results reflect continued broad general strengthening of our business over the past several quarters. Professional services, cloud maintenance, and subscription revenues combined grew 33% year-over-year in Q3 of fiscal '20.The significant acceleration of contracted bookings in each of our high margin segments bodes for future financial results.With that, I'd like to hand the call over to Mark to provide more detail on our financials for the quarter.

[Mark J. Bentler, CFO & Secretary]

Thanks, Peter. Total revenue in the third fiscal quarter of '20 was $26.8 million, up 43% compared to $18.8 million reported for Q3 of fiscal 2019. Of this, OrderDynamics and PCSYS contributed approximately $5.1 million of combined revenue with organic growth of $2.9 million or 17% from Q3 2019. Recurring cloud maintenance and subscription revenue grew by 31% year-over-year to $10.6 million for Q2 of fiscal 2020. Annual recurring revenue, also referred to as ARR, at January 31, 2020 is CAD 42.5 million, up 30% compared to CAD 32.7 million in the previous year quarter and up CAD 2 million or 5% sequentially from $40.5 million in the quarter ended October 31, 2019.Professional services revenue was up 35% to CAD 9.9 million in comparison to CAD 7.3 million recorded during Q3 of fiscal 2019. Organic professional services revenue growth was 19% in this period while acquired revenue added 16% for the quarter.We see strong continued demand for services with professional services bookings up CAD 12.9 million in the quarter compared to CAD 10.7 million for the third quarter of 2019, which is a 21% increase. Sequentially, compared to Q2 2020, professional services bookings increased by 34%. We expect to show continued healthy professional services revenue in the coming quarters.Proprietary products revenue was up CAD 1.5 million, flat compared to the same quarter last year. Total gross profit increased to CAD 12.8 million, up 36% or CAD 3.4 million from CAD 9.4 million recorded in Q3 of 2019. This was driven by a higher services margin of CAD 2.9 million. Gross margin was 48% compared to 50% in the prior year period. The decline in gross margin is primarily the result of a higher mix of lower margin hardware revenue from the PCSYS acquisition.Operating expenses increased to CAD 11.4 million, higher by CAD 0.3 million or 3% compared to CAD 11.1 million reported in Q3 of fiscal 2019. The acquisition of PCSYS contributed CAD 0.9 million of the increase, which was then partially offset by lower operating expenses in the rest of the business.These lower costs in the current quarter were driven primarily by prior year nonrecurring rebranding costs as well as prior year acquisition costs. We believe that operating expenses will increase slightly in the coming quarters as we continue to invest in research and development as well as sales and marketing, to take advantage of what we believe to be significant market growth opportunities. Adjusted EBITDA was CAD 2.6 million in Q3 2020 compared to an adjusted EBITDA loss of CAD 0.1 million in Q3 of 2019 and adjusted EBITDA of CAD 3.7 million in Q2 of 2020. The sequential decline in adjusted EBITDA from Q2 to Q3 was the direct result of a particularly robust contribution from PCSYS in Q2, higher operating expenses impacted by our decision to invest and build for the future, and a slight sequential decrease in license revenue Profit from operations was CAD 1.4 million compared to a loss from operations of CAD 1.7 million in Q3 of fiscal 2019 and a profit of CAD 2.2 million reported in Q2 of fiscal 2020.Net profit in Q3 fiscal 2020 was CAD 0.8 million or CAD 0.06 per share compared to a loss of CAD 1.4 million or CAD 0.11 per share for the same period in fiscal 2019. Total backlog at the end of Q3 fiscal '20 was CAD 98.2 million, up 13% sequentially from CAD 87 million at the end of Q2 fiscal '20. This includes annual recurring revenue of CAD 42.5 million and professional services backlog of CAD 24.2 million. I will now make a few comments on the 9-month period ending January 31, 2020. For the first 9 months of fiscal '20, total revenue was $77.1 million, a 45% increase from CAD 53.3 million in the same period last year. With that result, trailing 12-month revenue at January 31, 2020 has exceeded CAD 100 million for the first time in the company's history. Year to date, for the first 3 quarters of fiscal '20, recurring revenue grew by 39% to CAD 30.4 million from CAD 21.9 million in the same period last year. For the first 3 quarters of fiscal year '20, SaaS bookings increased almost 8x to CAD 4.7 million from CAD 0.6 million in the same period last year. Over the same 9-month period of fiscal year '20, adjusted EBITDA grew by 298% to CAD 8.3 million compared to CAD 2.1 million in the prior year to date period. For the first 3 quarters of fiscal '20, contract bookings totaled CAD 71.8 million, a 63% increase over the same period last year, where bookings totaled CAD 44 million. Finally, we ended Q3 fiscal 2020 with a strong balance sheet position with cash and cash equivalents of CAD 11.9 million, a slight decline of CAD 0.2 million sequentially compared to the end of Q2 2020, and debt of CAD 11.1 million.And with that, I will now hand the call back to Peter.

[Peter Brereton, CEO, President & Director]

Thanks, Mark. I'm happy to report that we are performing extremely well across all business units, while the acquisitions are contributing well after completion of their integration. Our transition to a SaaS-based recurring revenue model is accelerating and we believe that the transition is beginning to show up in the operating leverage that is evident in our earnings cycles.As a sign of our sales traction, the company signed 8 new accounts and migrated 2 current customers to expanded SaaS licenses. 2 of the new accounts were hospital networks and one of those was in close collaboration with our partner, Workday. In case you missed it up above, we're very pleased that our total contracted bookings increased by 75% this quarter compared to last year and that this migration of existing customers to our SaaS platform delivered 4 times the original maintenance. Those are good numbers.One of the agreements signed during the quarter was a great example of what can happen in the healthcare space. This organization's first time with us to implement warehousing about 6 or 7 years ago. They expanded their relationship with us by adding OR and Cath labs for one hospital a couple of years ago and they've now signed with us to roll out our platform throughout the network. Every hospital, cath lab, and OR will be on our platform along with warehousing and transportation. We are quite excited to see this kind of uptake going on in our market. I want to close out with our outlook for the remainder of fiscal 2020. First, we'll continue to maintain a laser focus on developing and growing our SaaS revenue model and annual recurring revenue generation. The positive financial impact of this is clear in these results we're discussing today. Secondly, we will continue to expand our partner ecosystem. This is key for us, and we now have partners working with us in both North America and Europe and our partnership with Workday is really beginning to deliver. We'll keep you posted.Thirdly, we'll continue to expand our omnichannel business platform. We continue to see exciting opportunities in the convergence of retail and distribution supply chains. Remember, change is what drives our business and this is a monumental change that continues to turn the traditional supply chain on its head. Finally, we have a strong focus on improving our margins. This will take some time as we undergo the transition to SaaS but we're pleased to see the speed with which the transition is happening and look forward to having this transition behind us. We believe that a growing SaaS business in 2 exciting markets will provide great value for shareholders. In closing, I want to thank the tireless dedication of our entire team and ongoing loyalty of our customers that makes these strong results possible. With that, we'll open the call up for questions. Operator, back to you. Thanks.

[Operator]

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

[Amr Ezzat, Analyst]

I'd like to start with getting your thoughts on the potential if any short and long-term impacts of the coronavirus on the industry and your business specifically. In terms of one, are you guys seeing any potential short-term disruptions as all hands might be on deck managing the crisis for your clients? And 2, I guess the potential of the virus for further exposing some of the inefficiencies in the supply chain of the healthcare industry. Are you guys seeing any of that at all?

[Peter Brereton, CEO, President & Director]

We're not yet and I think in a sense, probably we have 2 points of reference for this in a sense. When the SARS crisis hit a few years back, we did see a slowdown on the professional services side for a few months, mainly because of the fact that customers did not want traveling consultants coming to their premises very often. They were just nervous about sort of consultants that were traveling through airports and so on, and then coming and working with their staff.So we did see a hit during SARS that lasted probably 90 days and particularly, I think because we are a Canadian company primarily, and Toronto was sort of a SARS hotspot. So it made a lot of our U.S. clients a bit nervous.The other reference I would go back to is the H1N1 situation. The H1N1 situation actually hit during a slower period for our business. The whole sort of tech industry was in a slower time. But in that particular case that generated quite a bit of business for us as we ended up being the selected platform recommended by the CDC for rolling out the H1N1 vaccine.So we did a contract -- a natural contract for the U.S. government and we also did a local contracted city in New York. And those turned out to be excellent contracts for us. So we've been sort of both effects in a way. I would say it's early to tell at this point how it will affect us but I'm sure one way or another, it will affect us a bit if it continues to spread.

[Amr Ezzat, Analyst]

Then I'd like to go back to what you were saying in your prepared remarks, Peter, with regard to the migrations from on-prem to SaaS for existing clients. I guess can you see any value propositions for an existing client to migrate to SaaS given the higher costs versus the maintenance fees. I think you said it's 4x. Are you guys adding any modules or intensives to have clients switch?

[Peter Brereton, CEO, President & Director]

First of all, the 4x is a compound number, right, because we're -- I mean that included a client that, for instance, added a lot of users as well as migrating and another client who pretty much simply migrated without adding users. So some of that is expansion. Some of that is migration. If you look at direct migration, it tends to run for 2x.But the value prop for the customer is really, I mean, there's multiple areas of value proposition. It's increasingly difficult for end user clients to keep really good quality IT people on their staff. And if you're going to run your own servers and manage your own environments, you now need database people, security people, and security people are in quite short supply. So there's a number of things you need in addition to, of course, just the cost of running servers, and backups, and maintaining hot failover and disaster recovery capabilities and so on, all of which we can offer in our SaaS offerings.So for most of them, it's a pretty simple sort of equation of looking at the cost of running it in-house and the security risks of trying to manage their own security environment, which is just increasingly difficult. Whereas if you look at the way we deploy in the cloud, we're predominantly on AWS. We use Microsoft Azure for some of our deployments. But you've got a combination of our own certification for our application that runs through SOC 2 and so on, regular compliance testing, and penetration testing, and so on. And then that's layered onto AWS or Microsoft public cloud, which has an enormous amount of protection built into it. So the combination is just a level of security that it's virtually impossible for clients to maintain on their own.

[Amr Ezzat, Analyst]

On the performance of OrderDynamics and PCSYS, again, an impressive quarter but it's sequentially down by my math from CAD 6.9 million last quarter to CAD 6.4 million this quarter. Is that just the holiday seasonality or is there anything to read into that?

[Peter Brereton, CEO, President & Director]

Well, PCSYS last quarter had an absolutely blowout quarter. I mean like way, way above our expectation when we acquired them way above the normal performance. It was a combination of sort of the way some deals came together and with pulled license into the quarter and then they had a number of -- their professional services staff was working insane hours during that quarter and so on.So it was definitely an anomaly and they are back this quarter. They are back to just good solid performance that we're very happy with. But that was definitely an upward blip last quarter in PCSYS.

[Amr Ezzat, Analyst]

One more and I'll pass the line. If I think back I guess about complex distribution and the healthcare segmentation, can you guys give us what it was for the quarter, what's contributing to the 17% organic growth?

[Peter Brereton, CEO, President & Director]

Last I looked at that, we don't have that number right in front of us, Amr. Sorry, we probably should but that -- the last I looked, healthcare right now is back down to running about 35% of total revenue and that's really because of course with the acquisition of, like, it's growing at a great clip. But with the acquisitions of PCSYS and OrderDynamics, that has sort of pushed it back down as a percentage of the whole.

[Operator]

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

[Nick Agostino]

Peter, you mentioned that I guess one of the new customer wins was through Workday. Can you just confirm that that was a healthcare based win? And if so, maybe where is Workday with regards to bringing some complex distribution customers? I know in the past you said they were getting any traction. Just wondering where they stand there.

[Peter Brereton, CEO, President & Director]

Yes, it was. It was a hospital network that signed with Workday and with us. And so we'll both be sort of working side by side there to implement that. We both, as I think you know, we both contract directly with the clients. There's no sort of business transaction happening between us and Workday.But that was -- it was probably a moderately sized hospital network. Some of the early ones we signed with Workday were smaller networks. This was more of a medium-sized network. So we're pleased with that.And on the complex distribution side, we do not yet have any inked deals but we do still have several in the pipeline. So we're looking forward to getting something in complex distributions soon, but it's not done yet.

[Nick Agostino]

And then you also mentioned you're gaining some traction in Europe. Can you just maybe talk a little bit about cross-selling opportunities you're seeing in that specific market? Obviously, PCSYS gives you a great footprint there. What kind of traction are you getting as far as selling healthcare into that market?

[Peter Brereton, CEO, President & Director]

Healthcare is still very slow. We continue to see some level of interest in the Scandinavian region but moving quite slowly. There's no question there is a little bit, I mean, probably similar to the way we've seen Canada versus the U.S. On the Canadian side, the adoption of new supply chain technology is extremely slow because it's all socialized medicine and the decisions all end up needing to roll up to sort of provincial cabinet and so on, which is then stuck in election cycles and et cetera, et cetera.Europe is not that different than Canada. So it is moving more slowly but it is still moving along. In terms of Europe in general though, by far and away, our biggest successes are coming through the DOM platform that we acquired with OrderDynamics.So we're expanding there. We're continuing to see expansions with some of the existing brands and as well as win new brands. So that's the -- and it's a combination of being able to -- if you take the DOM platform, for instance, we acquired with OrderDynamics. The fact that we can now offer 24-7 support on that platform with actual sort of support people in seats, 7 by 24, to manage that support, is also proven to be a confidence booster in that market. So I think just our scale is adding to some of the volume and win rate on that platform.

[Nick Agostino]

I appreciate that color. I guess I was really looking for what was driving the European penetration. That was the answer I was looking for. So I appreciate that. Last question. On the last call, you talked about the healthcare win rate if I recall is somewhere around 40%. And in the case of complex distribution, I believe you had said it doubled up to that 40% rate. Don't quote me on numbers exactly but the question begin have you seen the win rates change this quarter in either area, accelerating, just given the strong announcements you've made in this particular quarter. And I'll leave it there.

[Peter Brereton, CEO, President & Director]

I think the win rates have stayed about the same. We actually saw, I think it was November we saw our metric, it might have been December, we saw our metric on complex distribution looked like it dropped a little bit, but then it bounced right back up again in January. So we think complex distribution is holding around 40%. You're right. It did double from the lower, well, almost doubled from sort of the low 20s to around 40% over the last year or so. On healthcare, actually, I don't where the 40% would have come from because our win rate in healthcare for the last 2 years has been extremely high, closer to the 80% market. Typically, when we don't win in the healthcare space, it's because the projects got postponed. They decided to build another hospital, et cetera. It's sort of you lost to other capital projects more than you lost to other competitors. There was one competitor that sort of seemed to be taking a bit of a run at us out of Europe in the space, just going after -- specifically after sort of simple nursing supplies. And we understand that a few months ago, they sort of packed up and went back home. So it seems like our position in that market continues to strengthen.There's also one other player that has been in the nursing supplies market for a long time that has decided to completely exit the market. They've announced they're pulling out and they're focusing on pharmacy automation. So that has just further consolidated our position in that market.

[Nick Agostino]

My apologies. I did understate your healthcare win rate. You're right, it was 80%.

[Operator]

Our next question comes from the line of Deepak Kaushal with Stifel GMP. Please proceed.

[Deepak Kaushal, Director and Technology & Communications Analyst]

First on the SaaS migration, did I hear right? So you had your first 2 existing customer migrations to SaaS? Is that correct?

[Peter Brereton, CEO, President & Director]

Right, yes.

[Deepak Kaushal, Director and Technology & Communications Analyst]

I just wonder if you could talk a little bit more about that because you mentioned some of the roadblocks, like timing, security, expansion. How is the sales cycle for those migrations of existing customers and how do you expect the numbers to kind of pace on a quarterly basis in terms of how many you can achieve?

[Peter Brereton, CEO, President & Director]

Pacing on a quarterly basis at this point is still very, very hard to peg just because it's early in that cycle and we're still sort of learning the ropes on that. In these cases, these were -- one of them was an account, the one that I sort of described in the call script, that was probably increasing our footprint within their business by sort of fivefold kind of thing, 4-or-fivefold. So they were adding a lot more hospitals, a lot more ORs, and cath labs, and so on. So it was a significant expansion.And they just looked at sort of how they were set up and what would work best for them, and so on, and decided that the approach of going SaaS and letting us manage security, and the different approach to upgrades that's taking on the SaaS front and so on, was just a better solution for them. In the other case, it was a company that has always in a sense preferred to outsource as much as they can. And as soon as they felt like our SaaS platform was mature enough to move onto, they just signed up the upgrade onto it to completely get out of sort of doing on-prem anything. So they just wanted to sort of simplify their business model as much as possible.So different reasons, but in both cases, convenience, security, reliability, disaster recovery, et cetera, were all sort of factors that are driving it. I mean there's no question at this point. For most clients, SaaS is the better business proposition. So it's just a question of when is the right time for them to make that move. So we expect, as we look out over the next couple of years, we expect to see sort of a fairly steady trickle probably for the next year or so and then an acceleration sometime after that, probably in the second or third year.

[Deepak Kaushal, Director and Technology & Communications Analyst]

And do you have a sense of in year 1, year 2, year 3 what kind of penetration of your existing customer base you can get on that migration? Can you 10% year 1 and then accelerate to 30% in year 2?

[Peter Brereton, CEO, President & Director]

Honestly, we think it will be slower than that. Remember, we have hundreds of customers. So if we built up this customer base, like, we have customers running our -- pretty much running our entire platform that have been on -- that have just journeyed with us from literally the early '90s. So you're talking customers who have been on this platform, like, we've been building up this customer base for close to 30 years.So if we were to migrate 10 customers in the next year, I would consider that a great success. And yet, out of the hundreds of accounts we have, that would be, what, 1% or 2% of our customer base kind of thing. So this is going to be a fairly long journey and that's why I say, you know, I would expect a fairly steady trickle this year. A couple of percentage points maximum this year. By next year, I could see it moving up to maybe 5% kind of thing. But I think you're looking at sort of year 3, 4, 5 by the time you're into a major migration. I mean it's a huge opportunity but it is a very large install base to migrate.

[Deepak Kaushal, Director and Technology & Communications Analyst]

And it's paced by their readiness to migrate or paced by your capabilities to serve? And that kind of leads into my second question around the hiring plans. Are you guys still looking to hire 25%? Because margins are still up at 10% and we're expecting some kind of investment to support more staffing.

[Peter Brereton, CEO, President & Director]

So first of all, that rate of transition is -- I would say it's driven by both. But certainly, let's put it this way. If half of our customer base decided to migrate to SaaS next year, we'd be in trouble. There's no way we could manage all that but I don't think they will. I think some of them, for instance, may have only bought brand new servers last year or something like that and they're going to want to run those out 2, 3 years, 4 years, whatever, before they're ready to sort of say, okay, those are fully amortized, time to move on.So it's going to happen over a period of time and I think we'll be able to handle it as they go. On the hiring front, yes, we are still doing a lot of recruiting. I think during the last quarter, we were up, what, 26 heads by the end of the quarter compared to the start of the quarter. We have just brought on 2 full-time recruiters that have joined the HR team to work full-time in the recruiting. I think they're starting next week.So the effort continues to be on to ramp that up. I apologize for the fact that the EBITDA seems to be holding up anyway.

[Deepak Kaushal, Director and Technology & Communications Analyst]

Thanks for making my Friday on 2 counts. So 26 heads, that's quite a bit, and you're maintaining 10% EBITDA margins. So I expect you're signaling then you can kind of sustain that?

[Peter Brereton, CEO, President & Director]

We still expect that it will grow in a little bit as we go through this. But there's no question, when you're -- I mean that growth in -- that sequential growth in recurring, up 5% just from last quarter. As that kind of thing continues and we continue to see this level of booking, we continue to see decent growth in that recurring number.That certainly sort of continues to sort of create enough of a cushion that you can hire at a pretty good clip and without EBITDA suffering too much.

[Mark J. Bentler, CFO & Secretary]

Deepak, we still also have the dynamic of license that is still present that's going to create some lumpiness as you think through where are margins going to be and where are margins going to go. This quarter was a pretty -- had a pretty meaty amount of license bookings, about a CAD 1.5 million in license bookings in it. So we expect that number to sort of tail off over time.

[Operator]

[Operator Instructions] Our next question comes from the line of Daniel Rosenberg with Haywood Securities.

[Daniel Rosenberg, Analyst of Technology]

I just had a follow-up to that Mark, you mentioned the license revenue just now expecting to tail off. So I was wondering what visibility you have because it's hard to obviously predict the lumpiness part of your revenue mix. But in terms of hardware or perpetual licenses that you see coming or how is visibility?

[Mark J. Bentler, CFO & Secretary]

Daniel, it's a really hard one to call. I mean if we look at our pipeline and we still do have a good handful of intermediate size license deals in there. It's becoming a smaller and smaller part of the picture and frankly, it's just hard to call.If we hit 3 nice sized ones, we're going to have a meaty license quarter. If we only hit one, we're not. So it's hard to call and it's hard for us to call that.

[Daniel Rosenberg, Analyst of Technology]

And then I guess over time, this stuff moderates. In terms of the mix of backlog, this quarter you got gross margins south of 50% but in terms of that mix of revenue you see coming forth, do you view it as high value revenue?

[Mark J. Bentler, CFO & Secretary]

I think if you look at the year to date -- our year to date numbers here and the mix of those different revenue components over the year to date period, it's probably a pretty reasonable mix.Of course, what's going to happen over time is that high value recurring revenue business is going to continue to grow. We've seen it grow sort of 5% sequentially from quarter-to-quarter over the last several quarters at these booking levels. So I think that's what we're going to eventually start to get some traction on gross margin.But then playing the other angle is where we're at on a year to date basis from licensing perspective. That number is going to tail off. If we have a crystal ball and look ahead, next year's first 9 months is expected to have lesser license in the mix.

[Daniel Rosenberg, Analyst of Technology]

In terms of the macro picture, you spoke about impacts of coronavirus or lack thereof at the moment. I was wondering, a lot of other headlines go around the U.S. election. So any feedback from the front lines in terms of healthcare spending and how that might change or what would be a catalyst for change? Or is the federal election or the U.S. election not really a factor in that budgetary process at the front line?

[Peter Brereton, CEO, President & Director]

It's very hard to say. When Trump came to power, he was threatening to tear up the Affordable Care Act. That definitely threw the healthcare market into a bit of a tailspin for really the better part of a year, maybe almost 18 months as sort of no big projects were commenced. A lot of small stuff continued. Our revenue actually held up fine in healthcare but our bookings suffered for a period of time while they were sort of very distracted by what in the world they would do if that happened.That seems to have died. Now we look ahead at this year and who knows. We could literally end up with sort of an election being run between somebody who wants to nationalize healthcare and somebody who may still want to tear up the Affordable Care Act. So we sort of have this thing going on between 2 extremes.There's always a risk for us that distraction will slow us down temporarily. And at the same time, when we back off and look at sort of the macro long-term level view, the U.S. right now is spending 19% of GDP on healthcare. The pressure is only upwards with both a combination of aging population and the increasing number of things medicine can do for people to extend life, fight cancers, all kinds of things.So all of these things add both potential but add cost to the system. And our platform is now proven to reduce cost, improve quality, and improve outcomes. Literally, reduce post-op infection. Reduce cost of performing an operating procedure, reduce cost of supplies, reduce waste, reduce expiration of product, et cetera.So we think sort of long-term, there's very, very little risk. Short-term, yes, it's really hard to call. And distraction is the enemy. If they were in a nationalized healthcare, would they still need to drive costs out, improve quality, and improve outcome? Absolutely. Btu would there be some temporary distraction while they went through that? Quite possibly.So I think the odds of that are very slim because of course, in election year in the U.S., the focus is all on the President but in the meantime, you actually need Congress and Senate to pass those laws and I'm not sure they're about to nationalize healthcare. But those are -- we're keeping an eye on that as we go.As always, it's one of the reasons we continue to think it's a good strategy to be in both healthcare and in complex distribution and the converging supply chains on brand management and retail. Because typically, an election cycle can temporarily interrupt healthcare, whereas the other side of the business is drive off more of economic cycles. So they tend to sort of offset each other and we can, if necessary, just shift resources back and forth between the 2 sides of the business.

[Daniel Rosenberg, Analyst of Technology]

Right, and you're certainly more diversified than you were on the last election at this point. That's it for me. Congrats on a great quarter.

[Mark J. Bentler, CFO & Secretary]

And maybe Daniel, if I could jump in on the back of that, sort of diversification on -- industry diversification question. Amr asked a question earlier about the split and I just looked at the details. And last year, we were slightly tipped towards healthcare in total contract value bookings in the year to date period, sort of 50, 55, 45 time split. And this year, I would say it looks like it's roughly the same. It's about 50/50 in the organic business. So there's a big chunk of diversification that's still alive and present there.

[Operator]

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

[Gabriel Leung, Research Analyst of Technology]

Two things. First, Peter, it's been a while since I asked but can you remind us again, how many hospital networks do you now have under your umbrella?

[Peter Brereton, CEO, President & Director]

I believe at last count, we are at 46.

[Gabriel Leung, Research Analyst of Technology]

46. Perfect. My second question goes back to the growth versus profitability discussion. So it sounds like at this point, the view is that even with your hiring plans, there is a view of still being able to maintain that sort of 10% EBITDA level of profitability, plus or minus depending on how the quarter plays out revenue wise.But I'm curious to hear your thoughts about sacrificing some more margins if you believe that there's a greater opportunity for organic revenue growth. Clearly, bookings have been great. You see a very strong pipeline. So based on all of that, how do you -- what's your view on the growth versus profitability argument and do you subscribe to, for example, the rule of 40 now that you're becoming more and more of a SaaS company.

[Peter Brereton, CEO, President & Director]

Interesting question. As you can imagine, a very similar question was pondered at our Board meeting yesterday. You look at this. Our view at this point is that the constraint to growth in this business is -- the Governor if you will is the implementation capabilities. So we are very focused on growing the services side of the business, the implementation capabilities. We are focused on growing sort of smarter learning and smarter deployment methodologies to drive some of the labor out of deployment. And we are very focused on building out our systems integrator and ecosystem to get other players in the market to be able to pick up some of the load during implementation.And that's really sort of the focus. I think as we make headway on that, then it will make sense to turn the sales and marketing side of the house up higher. I mean we continue to grow sales and marketing. We're looking to add more sales staff. We're adding in Europe. We're adding in North America, both in healthcare and complex distribution. Bill King that joined us about a year ago now is already working on his plans, we get close to the new fiscal year to sort of build out that team further.So that's all continuing but the governor on growth is definitely the deployment side. When you look at the backlog, it's getting close to CAD 100 million. If you look at the business model and say, sort of okay, sort of ignore GAAP accounting for a minute and say, okay, what's really happening here. We are -- in a typical quarter like the one that just ended, we funded, from a sales and marketing standpoint, the landing of almost $30 million of new business. You figure an average margin in there of roughly 50% combination of services and -- professional services, and SaaS, and so on.And all the expenses pretty much land in the quarter and yet, all that revenue is sort of sold future market. So there's clearly a chunk of value that's getting created here quarter by quarter and the faster we can get to it, the better. But the constraining resource is definitely the implementation side. So we're focused on that. In terms of do we believe in the rule of 40. I've been saying for a while that I certainly believe, and I know it's not as popular, but I certainly believe that this company can pretty quickly become a rule of 30 company. The companies that are sort of rule of 40 tend to be companies that have quicker deploy. They can sell fast, install fast, and the downside to that is they can also be deinstalled fast. And so they tend to be companies that can sort of go in quickly but they also often have a higher churn rate and so on. Our churn rate is very low. If you look at our -- the actual churn rate, ignoring price increases and additions, our average client is with us somewhere around 19 years. So in other words, around the 95% renewal mark. If you include additions, and price increases, and so on, our net churn runs about 105% to 107%. But it's because people tend to deploy us slowly, and carefully, and for the long haul. So it's harder in a sense to get to that rule of 40 number. Not impossible but it's harder to get there.On the other hand, the downside risk is much, much lower because people have put us in just pretty much stay with us forever. So we're looking at this and saying, even if you look at this quarter's numbers, I mean the organic growth number added to the EBITDA, it's a pretty compelling combination already.

[Gabriel Leung, Research Analyst of Technology]

And maybe as a follow-up, as more of your implementations become more SaaS-based, is there still the same level of professional services requirements to get these guys up and running? Or does it really depend on what they're installing? Maybe there's a lower PS requirement on OrderDynamics versus healthcare and traditional complex business on SaaS.

[Peter Brereton, CEO, President & Director]

There certainly is lower professional services required, for instance, on OrderDynamics. Part of it is, with OrderDynamics, the whole nature of that platform means that there's virtually no users, if you will. It's sort of an invisible platform that sits behind the scenes kind of and orchestrates what's happening without a lot of users. In some cases, where they're deployed in retail storage, they've got retail store users.So certainly, they're lower on pro services but the shift to SaaS is not changing that number enormously. If you look at a typical implementation where they might spend let's say $1 million on professional services, well, probably $20,000 or $30,000 out of the $1 million was helping them actually install on-prem, and configure on-prem, and all that kind of stuff. The other $970,000 was training users, reviewing business processes, helping develop new standard operating procedures for how they're going to deploy, testing the idea, all that kind of stuff.So no real change there. What we are seeing is that when you deploy on SaaS, we can do a much better job centrally monitoring how the project is going because we have tools that can show us how thorough has the testing been, how complete has the data, how clean is the data, all those kinds of things. And we're continuing to work on improving those monitoring tools so that sort of the customer and us can have a clear report card on their progress towards go live readiness.So because of that, we feel in some ways it's safer as you start involving more SIs, and more people, sort of helping implement the software for you. So you can maintain a level of quality and consistency that would be very difficult to maintain in an on-prem world.

[Gabriel Leung, Research Analyst of Technology]

One last point of clarification. Did you say that you had signed 2 new hospital networks in the quarter?

[Peter Brereton, CEO, President & Director]

Yes.

[Operator]

I am showing no further questions at this time.

[Peter Brereton, CEO, President & Director]

Thank you everyone and as always, if you have any additional questions, please don't hesitate to give Mark or I a call and we will look forward to talking to you next quarter. In fact, I think it will be early July. So we'll talk to you then. Thanks. Bye for now.

[Operator]

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