Pivotree Inc

XTSX:PVT

Earnings Call Transcript 2023-Q2

[Operator]

[Audio Gap]. During the call, we will reference certain non-IFRS financial measures. Although we believe these measures provide useful supplemental information about our financial performance, they're not recognized measures and do not have standardized meanings under IFRS. Please use our MD&A for additional information regarding our non-IFRS financial measures, including for reconciliations to nearest IFRS measures. Now I'd like to turn the call over to Pivotree's CEO, Bill Di Nardo.

[William Di Nardo, executive]

Thank you, Dennis, and good morning, everyone. Thanks for joining us on our second quarter 2023 conference call. With me today, as usual, is Moa Ashoor, our Chief Financial Officer; as we normally do each quarter, we've published a CEO letter in conjunction with our earnings results that's available on our website we filed on SEDAR. We find a lot of my comments today will be reflected in the [indiscernible]. -- also mentioned in the past, the interim quarterly letters are going to be shorter than they have historically and our focus is going to be on a larger analyses. But again, take some insight color in some of these results. So we delivered our third consecutive quarter of positive invested EBITDA in Q2 despite some of the revenue being down from the first quarter. The team was highly focused on driving operating efficiencies in the business, and we took some additional restructuring actions this quarter and by an additional $10 million annual exchange due identical food and took action on in Q2.

This will give us to invest in our product recoil driving the additional operating efficiencies to come in Q3 and Q4. And again, we have stated this since last year that we remain committed to driving a model of sustained profitability as we exited last year and continue into this year. And again, the keyword there was sustained, and we are delivering on that expected. Our focus this year is to continue to adapt to these certain uncertain economic conditions, ensure that we're rightsized to remain on a path to sustain that profitability.

But the other key factor we've articulated since the start of the year is being able to invest in the new products and the recurring revenue streams. Our ARR of $43 million makes up nearly half of our revenue. And because there's some seasonal consumption trends in our ARR, we also look at it on a trailing 4-quarter or 12-month basis. And by that measure, it's the highest it's ever been at $45 million. We continue to work closely with our customers over periods that span years, and we've been transitioning our PS work that we do at the beginning of a relationship into ongoing managed services. And all of our processes and efforts this year, in particular, have shifted increasingly towards recurring and product-based revenue.

But I've been consistent in my communication on the macroeconomic headings that we've seen. And in the second quarter, we saw this particularly impact the time to close new logos. Existing customers continue to form a really strong foundation, but particularly on the professional service side of the business, the new logo closings have continued to be delayed. Now while professional service revenue in the second quarter is down from the record high in Q2 of last year, managed service revenue has grown in each of the last 6 quarters and was up 7% in the second quarter. Now looking at our bookings. The areas that are showing signs of progress, again are in the recurring revenue and the managed service.

Our sales pipeline had the largest increase in MRR and product-based opportunities, and our ARR bookings of $1.9 million is the best quarter since Q4 of 2021. Now this is being driven largely by supply chain managed services and the recent accelerated uptake of our control Tower solution. A number of folks and some of our investors and analysts have been able to participate in our product base, and they can see the progress that's being made on this front, and we're starting to see that show up in the -- both the pipeline and the bookings. What really pleases me is the demonstrated creativity in the go-to-market strategies with our teams.

They are leveraging the existing customer base to introduce these products. And really what for us is an important factor isn't just the revenue, but the insights that come from customer-driven road mapping. And Control Tower is a great example of that. We've had some really quick uptake in our existing customer base. We just landed a brand-new retail logo, a big global brand on managed service and they've been consuming control power and look like they're going to be a major part of road mapping that product with some already really insightful initiatives that are coming with that product.

So Again, you can see the linkages between how we get a customer started with us and our ability to introduce the products and start to scale our products with them. The pipeline of qualified opportunities in this area doubled in data and supply chain between Q1 and Q2. And we expect Q3 and Q4 to continue to progress on AR bookings and product expansion.

Now on the professional services side of the house, we've seen continued impact with deal elongation, lengthier reviews and new logo softness that's impacting the enterprise software and services industry. We've also seen a change in behavior around the procurement process.

Again, we've been talking about these delays, but one of the things we've really seen again is this taking longer to sign contracts. They stay in or turn into an extended procurement decision. But also because we are trying to introduce product and recurring revenue to the mix, it's taking a little bit longer in the explanation and the contracting around those.

Now the other observation we had highlighted, I think, in our record booking last year, a very large client that gave us 4 or 5 quarters of visibility on PS. At that time, we thought this might become a new trend we're seeing in this environment, it's actually mostly the opposite. We're seeing our clients are breaking the projects up into smaller measurable projects, essentially following more of an agile development principle with a shorter time to benefit.

So that Q4 very large PS bookings seem to be more of an anomaly than a trend. And the trend we're seeing now is more discovery phases, more proof of concepts, smaller chunks. And as a result, it's taking a little longer to get to the larger contracts.

What I will tell you, though, is we did finally start to see some of the things this past quarter, that had been in those discovery phases, start to sign their larger contracts. So again, the trend we're seeing is 7-figure contracts are being preceded by 6-figure discovery phases. Those are profitable phases. It's not that they're money losing, but they are smaller contracts initially and successful completion leads to the bigger contracts.

We actually probably have our highest number of discovery phases and proof of concept phases going on right now than we've seen in our history.

Again, I said this earlier, we're seeing our existing clients continue to do work with us, and this will set the stage and the foundation for a return to growth. Again, we like some of the new logo delays to against some of the market uncertainty and as the market continues to regain confidence and budgets open up, we expect to see the new logo wins. It's not that there are no new logo wins. In fact, we had a terrific new logo in Q1, it's the quantum of new logos that has been down versus previous quarters.

Again, I mentioned previously, the number of proof of concept and discovery phases. We actually are embracing this process because we believe that it is the pattern of behavior that we will see as we make the shift towards product. There is very much a show-me mentality when it comes to buying software these days. And again, I think that show me mentality is also starting to happen in some of the PS work that we're doing.

So again, this is not a bad thing for us. It's a bit of a transformation. It changes the way we manage our sales process and the way we demonstrate value faster. I think these are all good things for long-term help with both our business and our clients, but we are working with the right clients and getting the right initiatives, and we've seen this process play out over the last couple of quarters with some great extensions. A good example of that is our cycle bonding last year. They started with a small project and since become one of our larger customers and are working with all 3 of our business units and leveraging a lot of the products that we've been talking about. This is a really good example of building deep relationships and intimacy on professional services and being able to use that to develop product road maps on how to best serve our customers beyond just the professional services.

We saw this group of concept, particularly in commerce. And we've highlighted that's one area that's been slow to recover for us. But that dynamic of POCs, we may probably have the greatest number of discovery phases and POCs going on right now in the business. And a lot of their contracts really are these 6-figure discovery, make sure the requirements are right phase, but they are linked to quite a large number of 7-figure contracts to take these projects through completion. So there's a little bit of a picking up python for our commerce team, and it's been a number of these projects that have been sitting on the 5-yard line as we call that -- as we start to see that open up, I think we're going to see the turnaround that we've been expecting in commerce.

A number of these actually are also recurring revenue and next-generation managed services. And again, I think you'll start to see, over time, some of the products that we've been building like Control Tower are finding their way into our broader managed services portfolio.

In data management, we had 4 cross-sell wins in the quarter where we sold managed services to professional service customers. We also had sequential growth in data bookings, and it continues to be an area of relative strength for us. So again, data is continued to be a strong category for us. It's also the biggest category for using our enabling technologies. We've talked for some time about the importance of enabling tech, whether that's cloud which has been on a rapid growth trajectory for many years, something we use extensively with our clients, machine learning and AI. Our data management team is probably the most advanced of the group using machine learning and generative AI and solving customer problems.

So again, good progress, lots of promise in that category. Where we've seen the most -- the recent momentum around product is really in supply chain. As I mentioned earlier, we had several ARR wins for our new Control Tower solution, and it was connected to a number of managed service wins. So Again, there's real progress with supply chain on product, folks who have been to our product A. You can see these are the traditional products you can touch feel. They look like enterprise software, they're not hard to communicate what it is that they do. And as a result, this team is having some great success.

We're getting more add backs and more opportunities to, again, involve their road map to long-term success. And look, I think one of the things that folks have questioned for a while about, are we a PS business or we manage service or real product?

We're really trying to demonstrate with clarity. The PS business is a critical part of our business. It drives revenue, it drives gross margin and contributes to our cash flow. But more importantly, it creates client intimacy and it gives us the information and the knowledge we need to affect our product road map. And so for us, it's critical that, that part of our business is healthy, but not the least of which is for the product insights we gain from our client and we can see in our client relationships.

So again, this is important. We're going to continue to push for success in that business. But ultimately, it's to drive our product wins and our product successes. And again, I think we're seeing the evidence that, that is, in fact, working. Now these 2 charts will point to the positive long-term progress that we've made with our strategy and how we intend to grow our underlying value through the economic cycle.

Our focus on gross profit and gross profit per share as a result of continued optimization on labor. And we've been setting a foundation to expand margins as our digital products gain traction. Again, a number of the changes that you saw us make in Q2, you will again see play out in our Q3 numbers, particularly around gross profit and obviously driving the EBITDA. Now we've continued to maintain positive EBITDA for the past 3 quarters, and our commitment is to get a place of sustained profitable growth. The transformation we've been making on the way we operate, we believe, is now reaching a more optimal level relative to the size of the business and the growth rate. The key now is to start to generate that growth in PS again as we're growing the product side.

So you'll notice we had approximately $800,000 of restructuring charges impacting our reported EBITDA, but the annualized impact of that restructuring is closer to $10 million in annualized savings. One of the things I'm not going to do is give you guidance on just how much of that is going to stay the bottom line because, again, our strategy is produce our own cash in order to invest in our products. And again, as our products are starting to gain traction, we are looking at investing more into them. We have much more control over the cash flow in the IRRs then as you will hear from my M&A update, then we can get from some of what we're seeing in the acquisition marketplace.

So Mo will talk more about those financials in a moment. But again, this continued improvement for profitability is an absolute necessity of what we would consider the Phase I to our Phase II of product investment growth. I don't have a lot new to report for you on M&A. We continue to be active with a number of opportunities in the pipeline. I will tell you, we've modified our M&A approach in order to help identify more closable opportunities. So what I can share with you is it hasn't been for a lack of interest in the pipeline. We've had a number of deals that we've moved through various stages of diligence. But inevitably, the gating hurdle that we keep getting caught at is getting to a valuation that makes sense for us and for the counterparties.

And so part of the shift is how we find the right deals that are closable, and we are modifying some of our tactics in that regard. And M&A continues to be a key part of the mission and vision. We look at it as a way of filling strategic elements of our product offering set, think you will see less acquisitions in professional services that aren't specifically related to some of the product initiatives that are underway. Again, the key to was finding closable deals, the good news continues to be we have cash on our balance sheet. We have a great line of credit and a good relationship with our financial institutions that we'll see that maintain. And probably most importantly, particularly through the last couple of slides, the EBITDA production is paramount to us controlling our destiny in this regard. So continuing to produce EBITDA and cash flow makes acquisitions possible in the future.

So with that, I'm going to turn it over to Mo to provide an overview of our financial performance.

[Moataz Ashoor, executive]

Great. Thanks, Bill. So I'll start with revenue as usual. The blue bar shows the managed service revenue, which has shown steady progress with the sixth consecutive year-on-year growth. It demonstrates the progress that we've made to offset some of the churn in melt illustrated with our 89% net revenue retention rate. It points to the solid and grow -- organic growth we have seen for new managed services and products, and it includes professional services that are now managed services, which is offsetting the declines of Oracle and legacy within our business.

We are also pleased with the progress we're seeing, as Bill mentioned earlier, the pipeline that we're building in digital products and feel good about the foundation we're building for setting ourselves up for future ARR growth. You can see professional services in Q2 at $12 million, which is down in comparison to the record levels that we set in Q2 of 2022. Some of it is the results of projects being delayed and some more put on cost to revaluation scope. And we also saw a reduced number of new customer, new logo wins, as Bill alluded to, which typically are there and important to replace some of the natural ramp down on professional services.

The volatility in this environment will likely persist for the second half of the year, as we've been describing. And as Bill said, the qualified sales pipeline remains strong for us and we continue to remain focused on progressing and converting that pipeline to revenue in a manner that supports our customers in this environment. If we go to the next and P&L. Gross margins were 45.5%, an improvement from the 45% we delivered last year Q2. Managed Services contributed significantly this with gross profit margins improved to 56% and in comparison to last year is 50%. And we continue to remain focused on optimizing cost and driving more profitable recurring business. Professional services growth margins declined to 36% versus last year's 41%. And largely driven by professional services revenue ramp down in decline, which is obviously resulting in lower utilization rates. With the restructuring and the actions that we've taken in Q2, we expect utilization rates to improve going into Q3 and improve our margins and get them back to the 40% range.

Operating expenses were $12.9 million. As you can see on the slide, it includes $800,000 in restructuring, which is compared to a $14.7 million operating expense for the same quarter last year. This OpEx improvement of $1.8 million, which includes the restructure charge as well. As Bill -- as Bill said, we've identified up to $10 million of annualized cost savings off of the levels we were running in Q1. Various initiatives, some of that was realizing Q2 to deliver the results to help offset the revenue decline, and we expect additional benefits going into Q3 and Q4 through those initiatives.

Adjusted EBITDA was a positive $37,000, which includes a $400,000 FX loss. With that FX loss is still a year-on-year improvement of $150,000. So while revenue contracted, we have adjusted our costs in a timely manner to continue to deliver positive EBITDA results and the year-on-year improvement. We'll remain focused to be able to highlight is continue to manage EBITDA and free cash flow.

Turning to the balance sheet. The primary use of cash in this -- in Q2 was related to working capital charges and there were some catch-up and seasonal payments that typically fall in Q1, but they did move in Q2. This is something we pointed out when we reported our Q1 results last quarter. Aside from this, cash used in operating activity was fairly neutral. It includes the charges we took in the restructuring activity. We expect adjusted free cash flow to improve through the second half of the year. We ended the year with $11 million of cash. We have not tapped into a credit facility, and we do not plan to do so until the right assets become available, and we are comfortable generating positive free cash flow, which we believe we're on track to deliver.

We are also in active discussions to had to renew the credit facility as it approaches maturity in Q4. While the right acquisition opportunities might have been hard to come by to deploy our capital, we believe our stock is trading at a significant discount to its intrinsic and future value. And those that have been following or filed filings and press releases would notice and would understand it would be more aggressive in buying our own stock. And we'll continue to deploy our cash to NCIB at the right discount levels.

Year-to-date, we've acquired over year date July, we've acquired over 230,000 shares at an average price of $2.47. So that's just over $0.5 million of cash deployed to the NCIB this year.

So I'll turn it back to Bill for a closing summary.

[William Di Nardo, executive]

Thanks, Mo. To reiterate what we've said all year, our focus is on the things we can control, and that is to run the business for profitable growth. The team has done a great job in finding ways to operate more efficiently while making the investments set the stage to grow product and recurring revenue business. And we're seeing the right positive leading indicators here. Customer behaviors have shifted to dividing projects into chunks. The total contract values haven't changed and our qualified sales pipeline remains the largest in our history.

So again, the customer need is there. The timing for them to get their approvals and budgets released is probably one of the challenges, but nothing's changed, we believe, from the sector tailwind, which is there's a lot of digital transformation still going on and required for the company needs to meet their objectives. Through our B orientation and digital products initiatives, we've strongly positioned to execute against these opportunities and show value at each step. While M&A continues to be part of achieving our mission and vision, we will continue to adapt our approach to find and close the right deals at the right price. And particularly, while our stock is the one of the best deals on the market, it always is a challenge, in deciding where best to deploy capital.

In the absence of those opportunities, as Mo said, we will continue to buy. For those that want to give us their stock back at the kind of prices they're at, we will happily take it back. And at the end of the day, we've been pretty consistent about the things we have said are important. We're continuing to execute on those things. And I think one of the biggest challenges that's in front of us is the transformation to a product company. And again, I'm really pleased with the way the team is making that transition. It will affect our sales cycles without a doubt, but we're maintaining great customer relationships. We're seeing them be buyers of all the things that we do and giving us great insights into how we build those products most efficiently and effectively. So I think we're on the right track. And I'm excited about the next 24 months where the business can go. I'm also looking forward to the recurring threat of [indiscernible] and everything that comes with it to finally be over so we can get back to more of a business as usual environment.

So thank you for taking the time to attend our call, and I look forward to updating you on our progress next quarter. And with that, we'll turn it over to our analysts for your questions.

[Operator]

Thank you, Bill. We'll now take questions from the analysts.

[Operator Instructions]

Our first question comes from Robert Young at Canaccord Genuity.

[Robert Young, analyst]

So I guess, first question for me would just be to dig deeper into -- is this delay? Is it pause? -- lengthening proof of concept. Like are there actually any cancellations? Like are you -- other than the legacy Oracle ATG, like other clients that are disengaging -- or is this really just pause and lengthening?

[William Di Nardo, executive]

Yes. Honestly, Rob, the reason I'm remaining as confident as I am is we aren't losing deals. I think we are seeing pressure. I think we've seen even deals we've signed where customers have come back and asked to restructure them or to look at different alternatives to break them up. And so I think we're seeing the pressure on our customers is really about justifying spend to the C-suite. So yes, I would say some of the big changes even internally that we've been working through is training and teaching our sales force around ROI calculations and business case making.

For a period of time there, those were not as important to get deals closed. And I would say it's probably now the exception where that isn't being done. Even some of the bookings from this quarter past slid into this quarter and we thought would happen quickly, they've come, but they've come even 4 weeks later than we expected because a CFO or a CEO injected into the process, the business case gets made and it gets approved but it is so far, all the evidence points to delays and tightening of process rather than cancellations.

[Robert Young, analyst]

Okay, okay. And then the proof of concept or discovery phase, that isn't a competitive situation where customers are looking at you versus other alternatives. Is this after they've chosen Pivotree as a partner? Or maybe if you can just explain the dynamic there, like how confident you are that those fall into revenue or it's just timing.

[William Di Nardo, executive]

No, I think this is -- this is in situations where we've won and been chosen. We're seeing that the first phase is let's do a discovery, let's prove the things that we've been told as a client in some microscale form, give us confidence in the outcome. And I think one of the biggest shifts, to be honest, Robert, is I think we're seeing businesses that are becoming more cynical about promises being made by software vendors, not to solve a technical problem, but to solve the business problem. And I think those are getting harder to be able to demonstrate in proof of concept.

How do we prove that this is actually going to solve the business problem rather than just a technical, the tests in the past might have been, can you finish on time and on budget, but those are increasingly becoming tertiary question. When you're finished, is this going to do what we think it's going to do. And I think that's part of the extensions. And I think part of that is software for decades, has been selling the promise and has often met the trough of disillusionment and I think CFOs and CEOs in this Climate are taking less risk on those outcomes. So it is an extension of show me, don't tell me.

[Robert Young, analyst]

Okay. And then one more for me, and I'll pass the line. The -- you said you have a commitment to positive EBITDA. What does that mean exactly? Does it mean you're going to see cost reduction to make sure you have positive EBITDA? Or -- is -- are you saying that the $10 million in cost reduction you've identified this quarter. And I think that's brand new. I think you said that a couple of times. I just want to absolutely confirm that it's new for everyone listening. And what does the commitment mean?

[William Di Nardo, executive]

Yes. So let me just clarify and Mo can jump in because to be clear, like this is an initiative Mo's been working the hardest at with the leadership team consistently to size the business to where we are. I think we've talked about this in the past, but we were sized coming out of the IPO into where we wanted to be and to build towards profitability. We've said and particularly in this climate, that's no longer acceptable, we have to be sized to where we are. That $10 million, again, I want to clarify, it's not identified. It's been executed on. So we identified it previously. We were starting to execute Q2. We put the full throttle down on we need to get there now. And you see the outcome of that is the restructuring charge. But you can expect that, that $10 million is now coming out of the business and an annualized $10 million has come out of the business. You'll see it take effect over Q3 and Q4 as some things are rolling off. But the reality is identified, executed and expect to start seeing it in the results. Mo, I'll let you kind of elaborate further.

[Moataz Ashoor, executive]

Yes. I mean our COGS and OpEx essentially was running on the $25 million business in Q1. So looking at our Q1 COGS and OpEx, we've gone through an adjusted debt for the reduction in revenue that we saw and also drive EBITDA and reinvestment back in a net offer the Q1 levels, $10 million annualized is coming off those -- to that level of spend to this year. I mean, again, a portion of it, you'll see if you take our COGS and OpEx and compare it to Q2, you've already seen we've realized some of that benefit, but it's still not a $10 million annualized. So expect more in Q3 and Q4 as those initiatives but the emissions have been identified actions, and it's just the timing of when the benefit would...

[William Di Nardo, executive]

I think the key Rob to reflect on this is we brought the business through onetime changes and a number of process improvements, some renegotiations with vendors. We've brought the business to what we believe is a sustainable profitability level and the goal will regardless of what the revenue outcome is in any given quarter that we sustain that EBITDA. So as the business grows, we actually think there's not a lot of additional costs we're going to have to push into the business to achieve that revenue growth, the $25 million to $26 million a quarter level, which means our EBITDA should expand even further. But the reality is we have better levers now, and we are being much more disciplined around maintaining EBITDA to the revenue levels. So no more -- I don't think we're going to see many more onetime large but you will see the business constantly adjust to what is the current revenue posture.

[Operator]

Our next question comes from Daniel Rosenberg from Paradigm Capital.

[Daniel Rosenberg, analyst]

My first question was around the legacy business. I know in the past, you had mentioned so people are hanging on and to your benefit longer than expected. Are you still seeing those trends or any changes in behavior?

[William Di Nardo, executive]

Yes, we're still seeing them. And I think the -- we've talked to you about this in the past, Daniel, it's a very long tail. These are what's left in that business is large, complex generally $1 billion or multi billion dollar revenue values on these platforms. We -- some of them have re-upped for another 2 years. Some of them are moving to cloud. We're getting most of them out of data centers. Which will probably again extend the life of those platforms. But again, make no mistake, they are transitioning. The -- probably the best news that we're seeing right now is the biggest and the most important ones are now working with us on the transition plan to us taking them to that destination platform and providing managed services on it.

So again, don't want to get way out on our SKUs but I expect over the next few quarters, you're going to hear about a number of these customers that are staying with us on MRR, but changing the platform that they're running on. And there's some really good signals in the Commerce Group that our net revenue retention should maintain decent levels but on different platforms. And that was always our thesis, but I think we're finally starting to see that come to fruition.

[Daniel Rosenberg, analyst]

And then on the behavior you're seeing on the customer front, some delays or longer decision process. Is there anything to say about the geographic mix of these customers U.S. versus Canada versus...

[William Di Nardo, executive]

They're North America. And again, remember, most of our revenues are U.S.-based, right? The majority of them are U.S. So when you look at new logo delays, it would probably be U.S. again. We don't rely heavily on Canadian revenue. But our Canadian clients have continued to be the same Canadian clients for many years and are continuing to spend with us. We've talked about this in the past, too. They moved the spend. I think we've seen probably the greatest movement between our BUs in some of our Canadian customers. But no, I think these delays we're seeing are primarily U.S.-based.

[Daniel Rosenberg, analyst]

Maybe just a couple more for me. So on the product pipeline, I mean you -- it seems to be kind of continuously introducing new features, new functions -- any early indicators or things you're excited about in the near term are coming down the pipeline on the product front? And then the last one, just one for Mo on the working cap. There was a kind of swing to your detriment on the year-over-year in that slide you showed. Just how should we think about working cap in the next couple of quarters.

[Moataz Ashoor, executive]

Do you want me to start on the working capital Bill and you can take the product.

[William Di Nardo, executive]

Yes, sure, go ahead.

[Moataz Ashoor, executive]

Yes I think this Q1 we fared significantly better on a working capital perspective because we were managing our payables differently. This is just catching up. So I think Q2 is an anomaly if you look at the accounts payable line specifically, that's the one that was in nominally, there was a bit of catch-up in there. And we also had the severance payments from last year's restructuring, starting to close out and get cleared out as well. So that was really the impact. And I would call it an anomaly in the accounts payable line, and I expect that to stabilize and get closer to a better trend line in connection to our EBITDA and free cash flow metrics over the rest of this year.

[William Di Nardo, executive]

On the product side, I would say, Daniel, the one that's got me excited, but again, they're early days. It is control tower. I mean, control tower is gaining traction. It's got a low price entry point the ability to prove value is pretty quick with it. And part of it is just the business insight it can extract from the applications running underneath it the time to benefit is pretty fast. So part of what we've seen is where we've injected it into relationships and customers start to use it, they are coming back with more requirements and requests, which is helping drive a more insightful road map on it.

We're actually starting to layer Control Tower into other parts of our business. And all of our BUs are actually seeing control tower with the potential to drive the connective tissue between all of our business units. Some of those managed service contracts I was describing from our Oracle to next-gen switch. Control Tower is becoming a part of that conversation as well. So I would say that one holds a great deal of interest into the group. I think it also demonstrates the most capital-efficient product realization that we had in the company. It has not been a capital-intensive spend. It's really leveraged existing client relationships and existing team to drive that one forward.

In fact, it probably has the lowest invested capital so far. I don't think it's going to stay that way because the early traction we're seeing with it is inspiring a lot of confidence all the way up to the board. But again, just like on our M&A, we're really disciplined in our product stuff as well. Until we really feel like we've cracked the nut on understanding customer issues and challenges that we're solving, and we see real evidence of uptake in customer-driven road map. We're being careful about how we throw our investment dollars into product.

[Operator]

Our next question comes from Jesse Pytlak from Cormark Securities.

[Jesse Pytlak, analyst]

I think in the past, you kind of indicated towards maybe 200 to 300 basis points of gross margin expansion because of the larger contract sizes that you were seeing earlier this year? Which kind of a shift to bring things up into these proof-of-concept and discovery phases, -- does that outlook change now?

[William Di Nardo, executive]

I'll let Mo answer to it because he's a beast on managing these things.

[Moataz Ashoor, executive]

I don't know if that's a complement or... I think we're still focused on the margin the 200 basis point improvement. So I think that's still on track. We're still heading there. Obviously, with a clear line of sight on how we can improve our Q2 results, given the PS margins. I don't feel concerned that we can improve it over the remainder of the year. So still on track. That doesn't change it. Obviously, longer-term contract does help with visibility in managing utilization. But the team still has a path and to continue to accelerate and drive that improvement for us.

[Jesse Pytlak, analyst]

Okay. And then maybe just one other question. Just in terms of the delays you are seeing and some of the changes in behavior. Is it pretty uniform across your customer base? Or are there any similarities or differences based on your customers and customers there?

[William Di Nardo, executive]

Ask that question again. I want to make sure I answer correctly, please.

[Jesse Pytlak, analyst]

Just Kind of wondering if based on these new behaviors and the delays, is it pretty uniform across all your customers? Or is it really kind of dependent on who there and customers are?

[William Di Nardo, executive]

It's a really good question because we've been plowing through our customer profiles and looking for similarities and differences. But I can think of now a few examples in discrete categories, whether it's B2B, B2C in a variety of different industries. And I would actually say it's a fairly consistent behavior across all of them. I'll give you an example, Jesse. We in our data business with one of our biggest B2B well-known distributors, we have had a consistent delivery over many years with them. We actually plow through their data requirements that were expected to take a year. We completed them in about 7 months. We did more than they expected. A lot of this has to do with our enabling technology. Project finished and then the team went to go and get budget to bring forward to continue moving through, and they got paused. They were told, you're going to wait until the end of the quarter, you delivered this year. We're not looking for any more right now, and they couldn't free the budget up. And I think that as an example of we overdelivered in some areas.

Our customers are excited about what we're doing, but they're still getting held back at upper levels around everybody's need and drive to improve profit. So I think this has been a universal behavior change in the industry. Everybody is focused on bottom line. and it is changing people's buying patterns and behaviors across all industries. I don't think anybody is not subject to a stronger profitability lens. So our take is now, I don't think if they're in customer, I think it's who's in charge of budgets, and that's increasingly now CFOs on even technical decisions.

[Operator]

Our next question is from John Shao from National Bank.

[Meng Shao, analyst]

Regarding your AR bookings this quarter, how much are they tied to the professional services customers? And how should we think about the future conversion from PS revenue to MS revenue?

[William Di Nardo, executive]

Yes. I think part of what you can't see in the numbers is some of the conversion is installed base and it's not going to show up in big revenue and big bookings right now. And almost all of those product initiatives are linked to an existing customer taking a new service from us, like Control Tower. And so you won't see that as quite as evident. But the existing customer base is having a big impact on our ability to get our early stage products getting used. So it's a very strong link on leading indicators. But again, I can tell you just in one example, a customer has got 5 Control Tower installs and they are looking at a 30x increase on the installation base in the coming months. And so -- and that was in a managed service and partially professional service implementation that led to that. So strong linkage in our opinion, John and again, strong evidence that our initial strategy of use PS to get the customer, get them on a managed services and then product overlays, it never happens as fast as we would like, but we are seeing evidence that, that strategy is, in fact, working.

[Meng Shao, analyst]

Okay. And one more question. How should we think about your partner ecosystem at this point? And any opportunity we can expect from that space?

[William Di Nardo, executive]

I think that's a terrific question. You saw us highlight a number of things that have started to happen too. So as we become more product oriented, new channels are opening up for us. We've got a pretty strong relationship with AWS now. Our products are starting to move into their ecosystem in the marketplaces. We are developing joint go-to-market strategies with them. We're actually pulling some of our other ISV partners into a collective go-to-market attacking certain verticals. So it is changing the way we're trying to sell as well. Again, our history has relied heavily on our ISV partners bringing us into deals. We're now much more focused on changing that dynamic of identifying market needs and opportunities and going direct to them.

I think it's going to change the kind of partner relationships we have. So in AWS is a really good example, but we're also in negotiations with a number of the large consulting firms who tend to have the kind of customers we are interested in. And now we have unique products go to market with them. So early days. Again, a lot of try before you buy lots of POCs with partners and getting them better acquainted with our features and capabilities. So I think this is the evolution. It's going to take a little time before they're very productive for us, but we're seeing what we would expect to see in the early innings interest, engagement POCs and trials together.

[Operator]

I don't see any further questions, Bill.

[Operator Instructions]

I'll turn it over to Bill to close.

[William Di Nardo, executive]

Thank you again for joining our second quarter earnings call. Let us know your feedback after the call. We're always happy to continue improving what and how we report. And we really look forward to bringing forward some good news in Q3, and we'll see everybody then be well.