Tecsys Inc

TSX:TCS

Earnings Call Transcript 2021-Q3

[Operator]

Good morning, everyone. Thank you for standing by, and welcome to Tecsys' Third Quarter Fiscal 2021 Results Conference Call.Please note the complete third quarter report, including MD&A and financial statements, were filed on SEDAR after markets closed yesterday. All dollar amounts are expressed in Canadian currency and prepared in accordance with International Financial Reporting Standards.Some of the statements in this conference call, including the question-and-answer period, may include forward-looking statements that are based on management's beliefs and assumptions. Actual results may differ materially from such statements. I would like to remind everyone that this call is being recorded on Thursday, February 25, 2021, at 8:30 a.m. Eastern Time. I would now like to turn the conference over to Peter Brereton, Chief Executive Officer at Tecsys. Please go ahead, sir.

[Peter Brereton, CEO, President & Director]

Thank you, and good morning, everyone. Joining me today is Mark Bentler, our Chief Financial Officer. We appreciate you joining us for today's call, and we hope that everyone on this call, along with their families, is safe and stay safe. We remain optimistic at what appears to be a light at the end of the tunnel with COVID and the accompanying vaccines.As you know, Tecsys is a leading global provider of supply chain solutions that equip the borderless enterprise for growth. I am pleased to report that after the market closed yesterday, we reported our eighth consecutive quarter of record revenue, which includes 89% growth in SaaS revenue over the same quarter last year. The pandemic continues to highlight the need for a level of agility not seen previously with our diverse customers. Retailers are responding daily to the changing requests of their customers, and in many cases, we are the backbone to the way they respond.Then as leaders in the health care supply chain space, we understand the unique needs our customers are faced with, not only within the 4 walls of the hospital, but the expediency with which supplies need to arrive. We have been working feverishly to heavily invest in the internal expertise needed to meet these demands through a 19% growth in head count. We feel strongly this investment will support the long-term revenue growth in the business as well as allow for unparalleled customer success. We experienced several notable events during the quarter. We added 6 new accounts to the Tecsys base, 3 of which were major accounts that initially will start small, but we expect continued growth to come.With respect to our health care segment, we are pleased that we were able to sign 2 additional new IDN contracts for our SaaS platform. In complex distribution, we signed what we believe will become an important contract with a U.S. state for the use of our WMS platform. The agreement extends to all departments and state agencies who may have a need for supply chain management software solutions. Although we have not yet booked SaaS amounts under the contract, we expect orders starting in Q4. In addition, we will be partnering with a major systems integrator on this project.We continue to experience enhanced partner activity in this quarter. We signed 2 new deals in the complex distribution segment that came through partners. Indeed partners have influenced 21% of our current pipeline of opportunities, an increase again from last quarter and up from essentially 0 just a few short years ago. We believe this bodes well for the future. We are committed to our partner channel and anticipate that our relationships will continue to successfully scale. If our pipeline trends continue, we expect an increasing amount of revenue will be partner influenced in the future.We also added a major French retailer to our WMS7 SaaS cloud platform to help fulfill e-commerce business from their U.K. fulfillment center. WMS7 is the WMS that we acquired as part of our acquisition in Denmark. It installs rapidly and is well suited to web shop fulfillment. This represents the first sale of that product outside of Denmark, and we expect that there will be more. In general, the momentum in demand for Tecsys solutions across verticals continues to accelerate. We are invested in our people, our partner ecosystem and the development and execution of solutions helping our customers succeed.Mark will now provide further details on our financials for the year and the quarter.

[Mark J. Bentler, CFO & Secretary]

Thanks, Peter. We're pleased that our results for the third quarter continued our growth trend. Recall that our fiscal 2021 third quarter ended on January 31, 2021. I'll now review the quarter and then the year-to-date performance in more detail. First, focusing on Q3, total revenue was a record $31.9 million, 19% higher than $26.8 million reported for Q3 2020, and 4% higher sequentially, over $30.7 million reported in Q2 of 2021. This year-on-year growth was driven primarily by cloud, maintenance and subscription revenue as well as professional services revenue. Cloud maintenance and subscription revenue increased by 26% year-over-year to $13.4 million in Q3 2021, up from $10.6 million in Q3 of 2020. As Peter mentioned in his opening remarks, the increase was primarily driven by an 89% increase in SaaS revenue to $4.7 million, up from $2.5 million reported in Q3 of 2020. Sequentially, SaaS revenue declined by $0.4 million from Q2 fiscal 2021. As discussed last quarter on this call, this was due to a customer cancellation, which had the effect of pulling anticipated future revenue into our second fiscal quarter.Professional service revenue increased by 24% in the quarter to $12.3 million compared to $9.9 million in Q3 of last year. Proprietary products revenue amounted to $1.3 million in the third quarter of fiscal '21, down 12% or $0.2 million compared to the same period last year. This resulted from an expected decline in perpetual license revenue as we're now focused on SaaS. Third-party products revenue increased to $4.9 million, $0.5 million or 12% higher in comparison to $4.4 million for the same period last year. SaaS subscription bookings, which we measure on an ARR basis and a recurring revenue basis, were $1.0 million, which is a 49% decrease from $2.0 million reported in Q3 of last year.Professional services bookings were down 19% to $10.5 million in the third quarter of fiscal '21 compared to $12.9 million in the same period last year. This decrease was a result of timing of deal closings. We have historically seen some lumpiness in quarterly deal closings, and we expect this to continue. In particular, the second wave of COVID-19 delayed some deals into our fourth quarter, resulting in a significant new business pipeline for the last quarter of our fiscal year. Perpetual license bookings in the third quarter of fiscal '21 were $1.2 million compared to $1.5 million in the third quarter of last year.Annual recurring revenue, or ARR, as of January 31, 2021, was up 20% to $50.8 million compared to $42.5 million on the same date in 2020. Sequentially, ARR was down $0.1 million from Q3 2020 due primarily to currency fluctuations. A significant portion of ARR is denominated in currencies other than Canadian dollars. As a result, movements in exchange rates will have an impact on ARR. During the third quarter of fiscal 2021, exchange movements, and in particular, the weakened U.S. dollar, had a $1.3 million negative impact on ARR. Of course, for us, SaaS is a key driver for ARR growth. And as we have indicated over last quarters, we've begun to focus on what we call contracted SaaS backlog as a key performance indicator. Recall that contracted SaaS backlog represents revenue that we expect to recognize in the future related to firm SaaS performance obligations that are unsatisfied or partially satisfied at the reporting date. This is also sometimes referred to as remaining performance obligation or RPO. As of January 31, 2021, our contracted SaaS backlog was $57.6 million, and that's up 11% from $52.0 million at April 30, 2020. Contracted SaaS backlog was down $2.6 million sequentially compared to October 31, 2020. Contributing to the sequential decrease was a negative foreign exchange impact of approximately $1.8 million in the third quarter of fiscal 2021.Moving to professional services. At January 31, 2021, our professional services backlog stood at $37.8 million, down $0.9 million sequentially from October 31, 2020, and up from $35.0 million at April 30, 2020. We believe this backlog will support continued strength in professional services revenue in the coming quarters. Gross margin was 48% in the third quarter, stable compared to 48% in the prior year quarter. Total gross profit increased to $15.4 million, up 20% or $2.6 million from $12.8 million in Q3 of 2020, due in large part to higher services margin of $2.9 million.Operating expenses increased to $12.8 million, higher by $1.3 million or 12% compared to $11.4 million in the same period last year. While we continue to invest for growth, we also continue to see lower travel costs, and this is favorably impacting operating expenses. Profit from operations in Q3 2021 was $2.6 million, an increase of $1.2 million or 89% compared to $1.4 million in Q3 of 2020. Net income was $1.8 million or $0.12 per fully diluted share in Q3 2021, and that compares to profit of $0.8 million or $0.06 per share for the same period in fiscal 2020. Adjusted EBITDA was $4.0 million in Q3 of 2021. That's up 50% compared to $2.6 million reported in Q3 of last year. We ended the quarter with continued balance sheet strength and liquidity. Cash flow from operations for the first 9 months of fiscal '21 was $11.0 million compared to $3.9 million for the same period last year. And this is owing to a combination of increased profitability and more current receivables. At January 31, 2021, we had cash, cash equivalents and short-term investments of $39.6 million compared to $37.5 million at year-end and up significantly from $30.5 million at October 31, 2020. We had debt of $9.9 million at January 31, 2021 compared to $10.8 million at the year-end. Turning to results for the 9 months of our fiscal year. Revenue was $90.7 million, up 18% or $13.6 million from $77.1 million reported in the previous fiscal 9 months. Cloud maintenance and subscription revenue increased 28% to $39.0 million in the first 9 months of fiscal 2021, up from $30.4 million in the prior year. The increase was primarily driven by SaaS revenue, which increased by 116% to $13.7 million. That's up from $6.3 million in the first 9 months of last year.Professional services revenue was also up 18% to $35.3 million in the first 9 months compared to $29.8 million in the prior year period. SaaS subscription bookings increased 29% to $6.1 million in the first 9 months of fiscal '21. That compares to $4.7 million in the same period last year. Professional services bookings were up 20% to $36.1 million in the first 9 months compared to $30 million in the same period last year. Net profit for the first 9 months of fiscal '21 was up 162% to $5.2 million, and that represents $0.35 per fully diluted share compared to a profit of $2.0 million or $0.15 per fully diluted share for the same period of fiscal '20. Adjusted EBITDA for the first 9 months of fiscal '21 was $12.3 million, up 48% compared to $8.3 million reported for the same period in fiscal 2020. Finally, on February 24, 2021, we declared a quarterly dividend of $0.065 per share payable on April 8, 2021, to shareholders of record at the close of business on March 18, 2021.I will now turn the call back over to Peter.

[Peter Brereton, CEO, President & Director]

Thanks, Mark. After 8 consecutive record quarters, our pipeline suggests to us that demand remains elevated into the foreseeable future. The pipeline has continued to grow in the quarter. It is important to note that not only have we witnessed the growth through our pipeline, the weight within that pipeline has also shifted to much greater new business. At the end of Q3, approximately 70% of the pipeline is new business compared to 30% base. While new customer acquisitions have clearly been delayed due to the second wave of COVID, we are also seeing an influx of new opportunities at the top of the funnel. The combination is leaving us with a significantly larger new business pipeline. In summary, I want to remind analysts and investors about our 3 key operational themes for the remainder of fiscal 2021. First, the 89% growth in SaaS revenue validates our continuing focus on developing and growing our SaaS revenue model, which is helping to scale annual recurring revenue streams rapidly. Secondly, we continue to expand our partnership ecosystem, which is key for us to scale rapidly into the post-COVID market opportunities. We have partners working effectively with us in both North America and Europe. We will continue to invest, so that we can enable them more quickly and efficiently. From accelerated training programs to improved onboarding tools, we are determined to make our SI partners very successful. We also continue to expand and refine our omnichannel business platforms to service evolving needs in the health care supply chain, converging distribution and retail market segments.In closing, we are pleased to welcome Martin Schryburt to lead the R&D organization. He joins us from a multinational telecommunications, information technology and consumer electronics organization where he led an international distributor team of over 500 engineers, delivering on product architecture development and support. He has a keen understanding of the critical nature of innovation we play as we continue to grow.With that, we will open the call up for questions. Thank you.

[Operator]

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

[Amr Ezzat, Analyst]

Congrats on a solid quarter. My first question is on the bookings side, specifically on the SaaS ARR bookings. I know quarter-to-quarter, it could be pretty rock and roll. And Mark, you mentioned that part of that is timing of contract signings. I thought I'd ask because it's the lowest we've seen in the past few quarters. Can you maybe give us a sense of size of the opportunities you're sort of working on relative to the last few quarters? Is it sort of similar size or larger, smaller? Any color there?

[Peter Brereton, CEO, President & Director]

Sure. I mean, I'd sort of give you sort of 3 bits of, I guess, insight on that situation. One is that in terms of what happened in Q3, there was really 2 factors. One was definitely COVID. There was probably somewhere between 45 and 60 days in that quarter, whereas the second wave was sort of rolling through and reaching its peak in different areas. New accounts were just not focused on getting contracts signed. I mean they were focused on what was going on in their own areas. In some cases, their own families, et cetera, especially in the health care market. A lot of the hospitals swamped again with cases. So there was definitely a significant temporary distraction.The second factor was almost just a fluke. Like we did sign 6 new accounts in the quarter, which is actually the highest it's been for quite a while. I mean 6 new accounts for us in a quarter is quite significant, including 2 new hospital networks. But the 3 largest accounts that we signed in the quarter, all decided to start with what were effectively pilots, sort of, really small initial order just to get started, get things rolling and planning to scale up over time. So it's a combination of sort of the COVID wave and then the fact that really the 3 largest accounts in the quarter, all of whom are very large organizations, decided to start with that approach was -- impacted the quarter.That said, as we look at Q4, I don't want to give you precise numbers, but I can tell you that the pipeline for ARR in Q4 is significantly higher than we have ever seen it. And those deals are already coming in. I mean if I look at it, I mean, in the first 3 weeks of Q4, we were more than halfway through what we did in all of Q3. So it's -- I mean it's ramping back up. It's happening. And I mean as the COVID -- second COVID wave subsides, everyone's sort of finding their pens again and the deal they're flowing in.

[Amr Ezzat, Analyst]

Great. That's pretty helpful. I'm just reassuring, I guess. Okay. So on the macro level, we've touched over the course of the last year on how COVID sort of increased the adoption rate of SCM software, all over the health care space, which obviously was very beneficial to you guys. Now I'm just wondering if you guys can give us a bit of an update on how the vaccine rollout# and the issues we are seeing across different geographies is impacting your industry? And then maybe you could touch on whether you are involved in that rollout one way or another?

[Peter Brereton, CEO, President & Director]

Yes. I mean, first of all, no, we are not involved in the rollout. I mean, there's been -- we have been involved in quite a number now of projects that involve support for rollout of PPE, emergency supplies and so on. But it turns out for us, that's really where the business has been coming from. By and large, the governments are all falling back on existing systems, largely deciding to rely on sort of systems they've used for years for flu vaccines and others and just sort of ramping the additional volume through those systems. So we're not seeing that. The one opportunity in Canada, which was the federal agreement, was won by Deloitte. We were teamed up with Accenture for that one. So we did not win that contract. Deloitte won that contract with a decision to implement a combination of a U.S.-based system and a German-based system. So we are seeing lots of additional opportunity in health care as people come to grip with how critical the supply chain is to their businesses and to proper patient care. But by and large, the governments have decided to fall back on flu vaccine systems to manage the rollout of COVID.

[Amr Ezzat, Analyst]

Great. Then you guys spoke to your channel partners, I guess, being more involved. But can you give us a sense of utilization levels on the professional services side? And maybe an update on the head count. We continue to go from record to records at least on the revenue side on professional services.

[Peter Brereton, CEO, President & Director]

Mark, do you want to take that one?

[Mark J. Bentler, CFO & Secretary]

Yes, sure. So I mean, on the head count level, we've been growing that team pretty dramatically. Peter mentioned the overall head count's up about 19%. The PS head count is up slightly higher than that since the beginning of the year. So we're definitely hiring into demand, and we're hiring into that kind of mini backlog that we have there. Utilization rates are running what we think to be pretty solid and sustainable. They're -- for us, they're running right around -- I mean, when you talk about numbers, you have to be kind of careful what you're talking about and how you measure them. But for us, we're essentially in line with our budget expectations on utilization. That said, we have quite a number of people that we've onboarded and continue to onboard that are underutilized as we bring them up the trading -- the training learning curve and get them ready to sort of hit the field as it were to do implementation. So there is some latent delivery capacity that's just building naturally as we add on this additional head count.

[Amr Ezzat, Analyst]

Okay. Then maybe one last one. Can you give us the split between your health care business and the other segments, 3PL, distribution, retail? Like how large is health care now relative to the overall business?

[Mark J. Bentler, CFO & Secretary]

Yes. We look at that -- we like to look at that and scale that in terms of recurring revenue. And right now, health care is 31% of our business with complex distribution making up 69%.

[Operator]

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

[Nick Agostino]

Also, congrats on a good quarter. And if I could start back on the booking question. I think I heard you guys say you have some sizable -- sorry, small wins with sizable accounts. And I guess my question is being, in the past, you were talking about how new customers are taking a -- larger deals and maybe taking more upfront than historically speaking. Could you just maybe speak to why these customers are coming in on the small side with the opportunity to grow? Are they just being cautious because of some macro environment concerns? Or does it relate to -- they just have had enough opportunity to do the homework given everything else that's going on, but they'd rather pilot and then go from there? So just any color would be great.

[Peter Brereton, CEO, President & Director]

Sure. The IDNs, like the hospital networks we signed in the quarter, actually signed for fairly chunky upfront business. So it was the general distribution accounts that came in during the quarter that fall into that category of being sort of large organizations but that started quite small. And it's really just a speed of adoption thing for them. I mean they looked at it and said, hey, you know what, it's -- we're going to be a learning curve. It's going to take us a while to get the first site implemented. Let's just start with 1 site. Let's get it deployed, and then we'll come back and add more as we go, so that they don't have ongoing SaaS fees for a bunch of sites they haven't deployed yet. So that's why we expect it to ramp up fairly quickly from here as they get that first site even partially implemented. They'll already be starting on the second site and so on.One of them in particular signed a master agreement that is designed to cover sort of a bunch of orders. But in -- they literally just ran out of time to get the software order done for their own budget reasons. They actually sent us a small hardware during the quarter. But the software orders are only going to commence in Q4. So it was a combination of factors. But on the health care side, on the hospital network side, they actually did start with significant -- reasonably significant orders.

[Nick Agostino]

Okay. Great. And then I think you called out earlier that you had a -- you signed a government contract in the U.S. that services the state, if I heard it correctly, starting fiscal Q4. And that you were going to be increasing your partners, I guess, for the rollout. And that was a complex distribution win. If I heard that correctly, I guess, my question is speaking on the partner influence side and the fact that you highlighted partners had a role on the heath care side. Specifically, how was Workday -- and I've mentioned that specifically because I think up until now, they've already delivered health contracts. Has Workday been successful in crossing over to deliver complex distribution contracts? Or were there other partners that help deliver that? And I'll point to KPMG in that.

[Peter Brereton, CEO, President & Director]

No. It was other partners. So yes, we've partnered in the systems integrator space, KPMG-type accounts. We've been working with KPMG. We've been working with Deloitte as well as West Monroe and other more sort of mid-market partners. But with Workday to date, all contracts signed that have been signed in cooperation with Workday have still been in health care at this point.

[Nick Agostino]

Okay. And then just on the e-commerce side of the business. I believe you guys said you had a good -- in a prior press release, you had a good Black Friday into Cyber Monday period. Just any color on how the business momentum you're seeing on that side going into the holiday season specifically and through January and even up until February? Any momentum on e-commerce in general would be helpful.

[Peter Brereton, CEO, President & Director]

Well, yes, the volume flow through that platform has been up very substantially. I mean, again, virtually doubled this year compared to prior year and so on. But the whole retail space, I mean, is rocky right now, right? So as we look across our business, I mean, health care is absolutely flying. General distribution is absolutely flying. The retail piece is rockier. And part of it is there's 2 markets we really go after with that product line. One is sort of the brand owners and manufacturers that are bypassing retailers and going direct-to-consumer. They're, by and large, doing okay. We had a few weeks ago, we had a shoe manufacturer -- a very major shoe brand that just went live on the platform, for instance. And that whole project has gone very well. We've got a sportswear company that is absolutely flying, bringing on new volumes all the time. But when you actually get to the true retailers that are -- we tend to target with that retail chains that have sort of at least 100 stores and can do a lot of fulfillment from store, buy online, pick up in store and so on. They've all been so rocked by the pandemic that we're actually in discussions with quite a few of them, but they're all sort of hesitant to pull the trigger on new investments right now. So that segment of the business, I would say, is -- I mean it's local along, but it's not on fire like the other 2.

[Operator]

[Operator Instructions] Our next question is from the line of Bill Zhang with Raymond James.

[Bill Zhang, Analyst]

I just wanted to start off with the customer cancellation here. Can you remind us what the context is there? And do you anticipate any additional trend?

[Peter Brereton, CEO, President & Director]

No, that was a cancellation that we -- happened back in Q2. And we actually -- we ended up discussing it at some length in that quarter. But of course, that's already 3 months ago. So it's pretty easy to forget what all went on there. So it was a situation where they had -- it was in complex distribution. They had signed to implement the WMS platform. It got partway into the implementation. They ended up with a change in the management team. The management team -- the new management team decided that it was just too much effort on their part to implement it. And they decided to cancel the project. That triggers -- because they were on the hook for 5 years of SaaS fees, that triggered them, in effect, paying out the balance of the SaaS contract. So suddenly, revenue that would have come in ratably over 5 years came in, in one big lump in Q2. And -- which is, first of all, jacked up the SaaS revenues in Q2. And secondly, it then causes a quarter-on-quarter decline in Q3 with, not only the lump gone, but the future ongoing revenue gone.So -- but those are -- we've had those, like -- I guess the answer is there are always some cancellations, but our renewal rate continues to be very high. I mean, we typically run with an annual renewal rate of 95%, 96%, implying an average customer life of 20 to 25 years. And we don't see that changing. But every year or so, we get one of these that sort of whatever, just due to a change in the tea leaves, the situation changes, and they decide to back away from a project. So it's not that unusual, but it's certainly not common.

[Bill Zhang, Analyst]

Okay. Great. And your adjusted EBITDA. So I know the margin -- it's down a little bit sequentially. Obviously, you're still investing in sales and marketing. What would be a good run rate on those investments.

[Peter Brereton, CEO, President & Director]

Mark, do you want to take that one?

[Mark J. Bentler, CFO & Secretary]

Yes. I mean I think we continue to hire, and the growth in head count that we've had even in Q3 -- and we'll continue to hire in Q4. The growth in head count in Q3 is not fully baked into Q3, right, because that head count -- those head count adds would have happened during the quarter and partially impacted the quarter from a cost standpoint. So we sort of see the general trend on our OpEx as increasing. We've talked about sales and marketing historically and sort of pointed at investment in that area, in particular where we picked that up quite -- I would say, quite significantly in the last quarter. We've got several new people that have started recently or will be starting in -- that started in Q3 or will be starting in Q4. So we continue to focus there, and that's to cover the opportunity. A lot of those head count increases are account executives. They're quota-carrying people that are out on the street working bookings and getting deals. So I think we do continue to invest in R&D as well. So I think the sort of OpEx levels that you're seeing now will continue to, in general, tip up in the quarters ahead.

[Peter Brereton, CEO, President & Director]

And part of that, Bill, is that we're seeing -- I mean, we've made the decision that sort of based on what's happening in the 2 markets, our 2 primary markets, that sort of growth is creating more value for shareholders than pure EBITDA expansion. So we actually sort of keep making a little more money than we actually meant to. The focus has been on the growth side. Where we look at our lifetime value to CAC ratio, it's quite high and indicates that sort of the continued investment in sales and marketing makes a ton of sense based on the growth we're experiencing. And if -- I mean if you look at our year-to-date after 3 quarters, if you add up our -- use that rule of 40 measure, you add up our growth in our EBITDA number, where year-to-date, we're at about 32%. But the focus is continuing to sort of be -- sort of if -- wherever we can, let's drive the growth number and just keep the EBITDA reasonable. And so that's how we continue to make our decisions, especially given that our lifetime value to customer acquisition cost remains so positive.

[Bill Zhang, Analyst]

Okay. Yes. That makes sense. And a couple more for me. So your 2 hospital wins in the quarter. Were any of those related to Workday?

[Peter Brereton, CEO, President & Director]

No. They were not.

[Bill Zhang, Analyst]

Okay. And just a general update on the partnership ecosystem. How do you see that affect professional services going forward?

[Peter Brereton, CEO, President & Director]

We expect to see, over time, the pipeline begin to -- sort of what we see in the pipeline begin to reflect itself in the actual backlog. And I mean that's sort of only starting to happen now. We measure our pipeline more on an ARR basis. And it's on an ARR basis that we say 21% of our pipeline is now partner influenced. Interestingly enough, if you look at the total value of the pipeline, including professional services and sort of other ancillary products, the partner influence component has actually only been 17%. So what it tells you is that on the partner influenced deals, we will drive less professional services because the partners will pick up more of that revenue. So the expectation over time here is that you'll continue to see the ARR number climb faster than you'll see the professional services number climb. And I mean, right now, it's extreme because we're in the -- we're only a couple of years into the shift to SaaS. So we've got ARR growth of 89% and pro services growth of whatever it is, 24% or something. But that -- even as SaaS normalizes in terms of growth rates, we expect the SaaS growth number to outstrip the pro services growth number by a reasonable margin as the partner ecosystem picks up more and more of that work.

[Operator]

Our next question is from the line of Deepak Kaushal from Stifel GMP.

[Deepak Kaushal, Director and Technology & Communications Analyst]

First, a couple of follow-ups, and then I've got a bigger picture question. Peter, there was a couple of questions on Workday. I just wanted to maybe step back. You had some good couple of years of working with Workday before you had some deals closed and then you're implementing your first deals and now they're live. What's kind of the report card and the assessment going forward on that partnership? Are things stalled there? Or do you see continued momentum? Just some high-level thoughts on that.

[Peter Brereton, CEO, President & Director]

We see continued activity with Workday. But the initial focus with Workday was very much on the hospital marketplace. And I don't want to comment too much on sort of their outlook. But I -- it feels as though Workday has sort of managed to pick up the -- a lot of the networks that were willing to change out their ERP. So they tended to win sort of smaller and mid-market networks. The large networks have remained sort of quite entrenched in their existing ERP platforms, either the Oracle PeopleSoft platform or the Infor Lawson platform largely. And there doesn't seem to be a lot of movement among those larger players. So if you look at our wins, typically, what we're finding is it's when we're working for larger networks, we're winning on our own. It's as we get down into the sort of more medium-sized networks, that's where we're seeing the movement with Workday. And I think they've sort of almost completed the first suite through that industry. So it feels like it's slowing down a little bit. We actually still have quite a bit in the pipeline with them. And we have regular pipeline calls with them. And I'm sure we'll see more deals done this year. But it does feel like there's a bit of a breather being taken. And it may even be that with the COVID going through, there's more focus on fewer supply chain issues, where we're seeing a lot of activity and less focus in areas like human capital management and financials.

[Deepak Kaushal, Director and Technology & Communications Analyst]

Okay. Got it. And then just a follow-up on the margins. I know you're investing heavily and you're going after growth, and I take absolutely no issue with that. And the margins have been coming in better than I've expected. And you mentioned better than you expected. What's the kind of level that you want to manage it at over the next 2 years, say, and before you pursue that rule of 40 metric?

[Peter Brereton, CEO, President & Director]

I mean, in an ideal world, if I could -- if we could just sort of spreadsheet it and have life follow the spreadsheet, which, of course, is never the way life works, unfortunately, something like a 12% EBITDA and an 18% growth or even a 20% growth and a 10% EBITDA would be ideal. We continue to feel that our kind of systems that have sort of long implementation cycles and then very, very long life cycles, it's tough to get all the way up to the rule of 40. But at the same time, we can run a very long-term business here with -- at a rule of 30 or a rule of 30 plus. So a 20%, 10% would be a really nice ratio to run out over the long haul. We are, of course, yanked up and down by currency, right? So we are -- Mark, what are we now, roughly 60% U.S. currency, I think?

[Mark J. Bentler, CFO & Secretary]

Yes. That's right.

[Peter Brereton, CEO, President & Director]

And yet, the majority of our costs are Canadian. So as the sort of the Canada-U.S. currency rate fluctuates that -- I mean, that directly post the bottom line up or down. So we do some hedging, but we don't hedge more than a year out. So the -- you can only shelter yourself from changes in currency for so long.

[Deepak Kaushal, Director and Technology & Communications Analyst]

Got it. And so that kind of 20% growth rate and rule of 30 model, and the double time for the business in that model is like 5 years. Is that what your gut is telling you right now? I think you know you had a $200 million target 5 years out or so. What's your intuition saying in terms of time to double for your business or when you might get to that $20 million milestone for revenue?

[Peter Brereton, CEO, President & Director]

Yes. I mean, we're certainly running a little hot on our plan right now in terms of getting to that. But I mean, we've looked at -- I mean, if you compound at 20%, you actually get there about 4 years. And it certainly feels like in the 4- to 5-year time line, we can double the business again. I mean if you look in the past, it's basically taken us 5 years to double the business to where it is today. And it certainly looks like we can do that again.

[Deepak Kaushal, Director and Technology & Communications Analyst]

So just to be clear, doing that, you think you can do that sooner than 5 years, sooner than 4 years, or in 5 years?

[Peter Brereton, CEO, President & Director]

Okay. I mean, as you know, we don't give forecasts. So we're painting in broad brush strokes here. But I'm saying if you can run at a compound 20% growth rate, you get there in about 4 years.

[Deepak Kaushal, Director and Technology & Communications Analyst]

Got it. Got it. Okay. No, I'm one of those guys that see my spreadsheet is potentially the all deal kind of on the spreadsheet. But we appreciate the color, and thanks, again, for shedding light on the reality of certain opportunities. I appreciate it.

[Operator]

Our next question is from Gavin Fairweather with Cormark.

[Gavin Fairweather, Analyst of Institutional Equity Research]

Just on the new logos in the pipe. You talked about how they're now kind of 70% of that pipeline. I guess, how is that weighted at the top of the funnel between kind of health care and distribution? And then just secondly on that. As that funnel, the composition of the biz has shifted, is that driven just by new logo strength? Or is there also just a bit of block or a lull temporarily on the upsell side right now?

[Peter Brereton, CEO, President & Director]

I would say -- and I have to pull out the pipeline detailed grid, which I don't have in front of me right now. But I would say that it is very, very largely on the new account side. I feel like the base side has actually continued to -- they continue to expand, but it's continued to expand at a very -- a reasonably constant rate. So the surge is definitely from the new account side.Some of the changes we've made over the last year to our digital marketing approach and digital marketing campaigns are proving very, very successful in terms of new opportunities entering at the top of the pipe. And if you look at the breakdown between health care and complex, it's reasonably equal at this point. It moves week-by-week and some weeks, complex is a little bit ahead. I think right now, as we speak this week, health care is a little bit ahead. But it's actually remarkably equal. It's probably more equal than it's been in a long time.

[Gavin Fairweather, Analyst of Institutional Equity Research]

Okay. Great. That's very helpful. And then just lastly for me. On this WMS7 product you obviously pieced this with WMS. Can you talk about kind of the niche in the market that, that fills? How it kind of stacks up competitively a bit of a kind of lighter system than maybe your traditional WMS that you're selling in North America? And then maybe just how you're thinking about executing on, taking it out of Denmark and getting some international growth? And that's it for me.

[Peter Brereton, CEO, President & Director]

Sure. Yes. I mean, we're fascinated with this product. I mean, it takes a completely different approach to how it manages a warehouse. Even the -- for instance, the algorithms that it uses to minimize travel time in the warehouse, for instance. I mean, a huge amount of labor productivity is wasted in the warehouse with travel time with people having to walk from section to section and aisle to aisle and so on. So it takes a very intelligent approach to minimizing travel time and so on, and yet, it does it all with very low overhead, very little setup time and configuration time.It's also got great integration team, sort of, some of the simpler types of automation. So the beauty to it is that you can implement it -- like a typical implementation time for that product is 4 to 8 weeks. Most of the implementations go in, in about 5 weeks. So the -- it's a completely different sort of approach to managing a warehouse. And where we find it in the market opportunity looks fascinating is as more and more companies look to support same-day or next-day fulfillment, the idea of having, for instance, in the U.S. just a huge East Coast DC and a huge West Coast DC or maybe 1 huge DC, the larger DC in the center, it just doesn't really work. I mean it means if you want next day, you got to do everything by FedEx or UPS overnight, which is a crazy expensive way to ship everything. And you certainly can't support same day.So more and more companies are looking at sort of a micro-fulfillment strategy where you end up with sort of dozens of small fulfillment centers across the country in sort of one in every major metropolitan area. So that for the 20% of your products that represent 80% of your sales, you can offer same-day delivery on all those products. Well, to do that requires a different paradigm. I mean you're not going to implement a large heavy WMS system that takes months to implement in sort of dozens of micro-fulfillment centers across the country. So that's the market that we're intrigued with in terms of this product line. We think it's a remarkable fit. It almost seems logical that it came from the same country that invented LEGO. And we think we can take it into the broader market space quite successfully. So this one in the U.K. was a nice win. We're looking at further optimization of that product line to run in the Microsoft cloud so that we can take it to market as a pure Microsoft cloud product. The broader marketing of that product line will probably start this coming fall.

[Operator]

Our next question is from the line of Richard Tse with National Bank Financial.

[Richard Tse, MD & Technology Analyst]

Yes. From a capital allocation standpoint, can you maybe share with us how you rank your initiatives, whether it be R&D, acquisitions, building your channel partners? Just trying to get a sense of the priorities here.

[Peter Brereton, CEO, President & Director]

Yes. I mean, I would say our priority 1 right now is continuing to build out sales and marketing. I mean that's what we are -- and it's the sense that our win rate in health care is already extremely high. Almost can't go any higher. And our win rate in general distribution and converging distribution is still running in the low 40s, which is still a very healthy win rate. So we are -- our focus is sort of execute, execute, execute. And that's all about building out the sales and marketing organization and then making sure that the consulting and cloud services organization sort of keeps pace with that. So that is priority #1.This -- beyond that, I'm not sure I would put one in front of the other, but we are continuing to invest heavily in R&D. We are -- there's 2 sort of primary segments within R&D we're investing in. One is just the ongoing feature race, which is unending in the various markets that we serve. But the other is back-end work on the platform to drive additional efficiencies in the public clouds. If you look at our current SaaS margins, we think we can pick up another 8 or 10 points of gross margin in our cloud business by optimizing the back ends of the software to take much more efficient -- make much more efficient utilization of, for instance, AWS or Microsoft.The partner side, we do continue to invest in. It doesn't take that much capital. I mean, we've added more people to the actual partner organization, but that's only a couple of people. I think we have 3 people in there in total. And if you look at what we're providing for the partners, a lot of it is the same stuff that we're having to build for our own rapidly growing services organization. At the speed with which we're growing our services organization, you can't just rely on like Moses to spread the tribal knowledge. You have to sort of package it and make it so that it can be sort of disseminated very quickly to new people coming on board, which is exactly the type of thing our partners need as well. So that's another area.But from an acquisition standpoint, I should just add that -- I mean we do continue to look for acquisitions. We've got -- Berty is trying to build out this pipeline for acquisitions. Acquisitions right now -- the pricing tends to be very, very high on any companies that are healthy and growing. But still, we continue to look for opportunities largely to expand our footprint in Europe. And we know that within the next couple of years, we need something in Asia Pac. So we're looking there as well. But there is a -- there seems to be so much value creation going on, driven by the organic growth of our primary business, that even as we look for acquisitions, we want to make sure that they need to fit. They need to fit in well. They need to fit into the strategic direction of the company because we don't want to break the -- or even distract from the value creation going on in the main part of the business.

[Richard Tse, MD & Technology Analyst]

That's helpful. Just on the acquisitions. You made a few acquisitions in recent years. And I guess it's probably a combination of expanding channel and reach and then some technology. So based on your comments right now, should I read that to be that you're looking at opportunities more so to kind of expand your reach rather than adding technology here?

[Peter Brereton, CEO, President & Director]

Yes. I would say that's fair. I mean, even the acquisition we made in Denmark was largely about expanding our reach. It turned out there was a few bonuses in there that may prove to be quite significant. But the intent was to have an experienced supply chain organization that would expand our reach.

[Richard Tse, MD & Technology Analyst]

Okay. And sorry, just a quick one. So if you sort of look at those recent past acquisitions, I'm assuming they're sort of fully integrated into your organization today. Is that sort of fair to say?

[Peter Brereton, CEO, President & Director]

Yes. It's fair to say. I mean certainly, OrderDynamics, we acquired in Toronto, is fully integrated at this point in sales, marketing and right across the board. The Tecsys Denmark, just by virtue of its location and time zone differences and so on, the local management manages a lot more of that on an integrated basis. So we've got some dotted lines happening back to North American management, but it is definitely still more -- somewhat more independent.

[Operator]

And Mr. Brereton, there are no further questions at this time. You may continue with your presentation or closing remarks.

[Peter Brereton, CEO, President & Director]

Great. Thank you, everyone. Thank you for joining us today. And as always, if you have additional questions, please don't hesitate to give me or Mark a call. And we will look forward to talking to you at the end of Q4. Thanks, and bye for now.

[Operator]

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