Pivotree Inc

XTSX:PVT

Earnings Call Transcript 2021-Q4

[Dennis Fong, executive]

[Operator Instructions] Before we begin, Pivotree would like to remind listeners that certain information discussed today may be forward-looking in nature. Such forward-looking information reflects the company's current views with respect to future events. Any such information is subject to risks, uncertainties and assumptions that could cause actual results to differ materially from those projected in the forward-looking statements. For more information on the risks, uncertainties and assumptions related to forward-looking statements, please refer to Pivotree's public filings which are available on SEDAR.

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 see our MD&A for additional information regarding our non-IFRS financial measures, including for reconciliations to the 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. Good morning, everyone. Thank you for joining us on our Fourth Quarter and Year-end 2021 Conference Call. With me today is Mo Ashoor, our Chief Financial Officer.

2021 was a significant year of investment, and fourth quarter was a great example of how our business looks as the strategy starts to come together across our 3 major categories of commerce, data management and supply chain. We exited the year as planned with the end-to-end capabilities that will position us as a leader in frictionless commerce moving forward.

I'm pleased to report continuing improvement in all of our key metrics. Our Q4 results had record revenue and record total bookings, included a full quarter of contribution from Bridge Solutions, which was our supply chain entry; and 2 months of Codifyd, which expanded and extended our data management business.

Right out of the gate, we're excited about how these 2 businesses are performing. We're winning new logos, landing expansions with existing customers. We saw, even opportunities where we had been in as independent groups, bringing together these 2 companies, Codifyd and Pivotree, as an example. We were able to close both Professional Service as well as Managed Service on the back of it. So we're really starting to see some of the benefits of what we had projected.

The new project activity continues to be very strong and total revenue improved by almost 40% from the third quarter. So we're up to $22 million now. Recurring revenue has shown 2 quarters of sequential improvement now with ARR improving by 9% from the third quarter. And with $16 million in bookings in the fourth quarter, we're set up really nicely heading into 2022. We're obviously seeing a new standard and a new level for our quarterly bookings, and we are confident we'll see that continue.

We had record ARR bookings at $3.6 million, which is one of the positive indications of our NRR opportunities building. The $11.2 million of Q4 NRR is the strongest it's been since we IPO-ed. It's important to note that, traditionally, Q4 is a strong NRR quarter due to the seasonal nature of many of our largest clients. Our clients all had very strong Q4s, with many of our largest clients reaching new records, and our system is delivering peak performance throughout.

While I'm pleased with the early signals of the NRR growth, we're still in the early periods of commercializing our new NRR services and solutions. It will take time for these new NRR products and services to reach a consistent and predictable scale. I don't expect this to be a straight line up and to the right in 2022, but we continue to lay strong foundations in each of the business units.

I'll continue to remind everyone that our strong revenue growth was offset by the continued migration of Oracle Commerce clients on to other platforms. So again, we did all of this great growth, including the strong organic growth, with the continued Oracle transformation and transition. We helped a number of clients actually move in 2021, and we expect that shift to continue in 2022.

We expect to see a combination of churn, which is actual fully lost customers; and melt, where we retain the customers, but with lower or different revenue than the Oracle business. And again, we're seeing that today. We have multiple customers now that buy in multiple categories from us, especially the Oracle Commerce customers. So we're expecting and planning for lower churn, but we will see melt.

One of the things I'm going to point out as well is we have also seen some early indications of planned departures getting delayed. So many will recall, last year, we had a surprise quarter with some early exits. Right now, we're experiencing a little bit of the reverse, known transitions and transformations that are delayed because it's -- we're into the very complex customers that are migrating. So -- but again, I want to reinforce, these are simply delays. These clients will eventually migrate their platforms. So we're being prudent about our growth expectations for 2022 with this in mind.

Now through the acquisitions of Bridge and Codifyd, we have significantly diversified our business. That really is the benefit of you're getting a focused frictionless commerce, but within frictionless commerce, we've got a diversity of products and services that balance each other out.

In the fourth quarter, data management accounted for nearly half of the total bookings, and we had both record organic bookings in data management practice plus the 2 months of contribution from Codifyd. Supply chain was also a very strong contributor as a new category and digital commerce was steady.

We showed this chart last quarter, and it speaks to the shift we see in how large enterprises are investing in their commerce infrastructure. We saw the big lift in online sales from the chart on the left when the pandemic hit. And over the past 3 quarters, we've been in a post-pandemic phase, where there's still growth and the industry is much larger, but the investments to spool up capacity in the digital commerce front-end piece is normalized.

As we talked about, a lot of the discoveries through the pandemic were more about the supply chain hits. And again, modifying and being more agile with supply chain requires systems investments, and that's where we've seen a lot of the improvement on our end, is back-end systems, supply chain and data management. We know the supply chain remains challenged, and it's going to continue to be challenged. We think there will be continued investments.

And data management is proving again to underpin everything. So we're excited about the prospects of these additions to our business. Improving data management, in particular, is about driving efficiencies in the business. It is the foundation for creating better frictionless experiences, and long-term, reducing costs. We're, again, very optimistic that we've got the right mix that's going to drive long-term transformation with our customers.

We are seeing the platform discussions shifting. While we are talking about front end, we are seeing a lot of conversations around shifting those back-end and data systems. And now we can help our customers across multiple fronts, and I'm actually really pleased with our advisory business growth this past year. We're seeing customers want more of a journey map and a real understanding of where the friction is in their system and which projects to do in which order. So again, we're really focusing on capacity across all of the different components.

And the wins in the fourth quarter continue to tell that story of how we're helping our customers go frictionless. In commerce, we're helping our existing Oracle customers extend the life of their platforms and migrate to the new. Whether it's moving from -- with our current environment to the AWS cloud or to newer platforms, like Shopify Plus, which we did for Lorex ahead of the holiday season.

CAE has been a tremendous success story for us. As a new customer, we added, by partnering with VTEX earlier in 2021, they're now one of our larger customers with 4 digital storefronts recently launched on their B2B marketplace.

As I said earlier, we've had record activity in data management, and this is a category that really lends itself to manage services longer term. We did complete a data management cross-sell to one of our long-term commerce customers, and we signed a significant Content as a Service agreement with one of North America's largest distributors of industrial components. This is a really interesting solution. It's got significant upside for our customers. It's got a real theme around frictionless, lowering cost, increasing agility. We think this category is going to grow and be an exceptional one for both us and our customers.

I think it's worth pointing out that a lot of business we're winning is in B2B, which, as a whole, represents a GMV that's 4x larger than that of the B2C market. In supply chain, Bridge brought expertise in both the older legacy Sterling OMS systems and the new Fluent, and we're winning business in both. Each of these BUs are providing solid, positive contribution margin to the overall business, and we are reinvesting these dollars in areas like Pivotree's digital solutions.

Pivotree digital solutions represents the investments we're making in new NRR products. We categorize them into compiled solutions and proprietary solutions built on our own IP. Again, compiled solutions are where we package up multiple different market-available products and services and deliver them as a complete solution to solve a business problem. And the proprietary solutions are the ones that we build using our own developers and our own IP.

We have a number of packaged products available and soon to be available. There's Yantra, which we're moving to a SaaS microservice architecture; DIVE, which we have been actively selling as part of our data management; our Security Watch package; and content as a service, which landed a big customer in the fourth quarter and a number of new ones coming that we'll be announcing shortly.

Today, each of our main BUs are flowing positive EBITDA into the business. And over time, we expect digital solutions to be a great source of leverage and margin enhancement to what we're doing in the BUs. The use of those funds, as I was just explaining really here, is corporate spend as well as our investments in R&D. So each of the business units is contributing in a profitable way to the corporate Pivotree, and then that money is being reinvested in accelerating growth in new products and services.

I spoke last quarter about some of the metrics that matter, and I've written about it in my CEO letter as well, and that's revenue per share being a key measure of success and our ability to drive non-dilutive growth. Post-IPO, we were hovering around $2.60 per share and I was confident we would deliver closer to $3.50, so it shouldn't be a surprise to anyone we hit $3.51. Given the limited equity we've been offering with recent deals, I expect this number to keep climbing in 2022.

I would also offer up that our gross profit is likely our best indication of future profitability. And a result -- as a result, gross profit per share should also tell us how we're tracking to longer-term profitability. With the recent pullback in revenue multiples for tech stocks, we're seeing more value investors emphasizing bottom line results or trajectory. We've been tracking close to $1 per share in GP this last quarter, coming in closer to $1.50 recently, 42% increase over Q3 and 17% increase versus Q4 of 2020.

Our strong margins positively benefited from the exceptional contribution in the acquired Codifyd business, but were offset by continued investments into new application areas and the decline in the Oracle business. We're confident that gross margins will improve in the back half of 2022, and the additional flow-through margins will begin to fall to the bottom line. Again, the businesses we acquired are very much solution-based selling, they're not hourly rate-based selling. And we find, as a result, that the gross margins are on the higher end, and again, will be pulling up our overall margins in the coming quarters.

I get a lot of questions about when we will complete our next acquisition. We invested a lot of energy last year building out a scalable M&A approach. I'm confident the process will continue to yield good opportunities that meet our strategic requirements, fit culturally and are economically sound.

I do really emphasize process in the sense that we're building something that should continue to build pipeline and should yield good results. But what I can't predict is when counterparties will agree to sign off on the valuations. And so I won't tell you when, I won't tell you exactly what the deals are going to look like, but I'm quite confident that our process is the right process.

You know that we work very hard not to compromise on any of the value drivers. Strategic is one, but it's not the only one. Cultural fit, and I think is evidenced by the 2 recent acquisitions and how quickly they become part of Pivotree, is critical. But of course economically sound. You've had a chance to review and see the economics around the deals we completed at the end of the year, and I think they are great benchmarks for the kind of deals we want to do going forward.

Our program of outreach over the last 4 months has hit over 1,000 prospects. If there's any questions about whether there's enough deals out there, enough companies to acquire, the short answer is yes, there's more than enough. More than enough for a whole number of folks to be able to participate.

Just in 4 months, we've reached out and had some kind of dialogue with 1,000 prospects. We have over 150 prospects in the actual pipeline at various stages. Our commerce team added the most new opportunities this quarter. And we have 3 to 5 deals that are currently expected to move to some later stage. I would not say that being in this stage is a good indication of ability to close, just to say that we're interested, the early valuation indications are sufficient to continue dialogue. But there's still many steps before you get to the finish line.

We are still seeing a bid-ask spread in the private to public comparables, and I think that will be one of those headwinds that will make the acquisitions a challenge to close this year. It may require another quarter for the privates to see what exactly has occurred in the public markets of late and to catch up. I do think it will catch up. I do think it will create more buying opportunities at more realistic valuations, but we still have some small subscale businesses that are primarily professional services that think that they're 4 and 5x revenue valuations, and we disagree with. So this is, again, a continued story and a continued process that I think will eventually bear fruit.

Now I do expect Q2 will give us more clarity on these deals as to whether there's enough common ground to move forward, and we should be in a better position to tell you how things are shaping up at our Q2 report.

I want to again remind everyone, we still have a very strong balance sheet and a strong cash balance after our recent acquisitions. And we have an unused acquisition line of credit that will enable us to close the deals we find motivating moving forward. So this won't be about capacity.

And again, with our current stock price where it is, it is unlikely to include much in the way of equity issued by us. As we did at the end of the year, we actually pulled back on equity offers and limited everything to cash. So we have enough cash. We're quite confident there. We start to see movement in our stock, we'll also have some additional leverage from being able to issue equity.

With that, I'll turn it over to Mo to speak more about our financials.

[Moataz Ashoor, executive]

Great. Thanks, Bill. As usual, I'll start with the top line. We've seen revenue base stabilize and grow from Q2 levels, and it grew organically 5% from the third to the fourth quarter, and 39% with the contribution of Bridge and Codifyd.

A lot of the growth has been from product revenues, but recurring revenues also improved from $10.3 million in the third quarter to $11.2 million. The scale we added to the business is giving us a lot more flexibility in how we invest in growth and also diversifies our sources of revenue as we push into positive EBITDA territory.

This -- the graph here showing the trend from last year Q4 to our more recent results and showing both revenue in the bars and the margin and profit improvements at the bottom. Gross profit for the fourth quarter increased by $1.6 million or 20% year-over-year, driven primarily by the growth in both organic and inorganic Professional Services revenue from the 2 acquisitions.

Codifyd acquisition was a strong contributor, as Bill described, both in terms of gross profit dollars and in terms of gross margin percentage. Bridge also contributed to both revenue and gross profit growth. Offsetting this was foreign exchange, some of the Oracle and legacy churn we've seen on a year-on-year basis and a bonus accrual true-up at the end of the year.

Moving to the next slide to look at the quarter-over-quarter change, sequential change in revenue and gross margins. Gross profit for the fourth quarter increased by $1.6 million -- sorry, let me switch to -- on a sequential basis, gross profit improved by $2.6 million from the third quarter of 2021 and declined 50 basis points as a percentage of revenue. While we drove organic contributions, Codifyd was the biggest contributor to both revenue and gross profit and margin percentage.

Moving on to the OpEx waterfall and change over prior year spend. Total operating expense of $11.2 million, a decrease of $12.9 million in the prior year period. The increase in OpEx was primarily driven by the additional OpEx from the acquired companies and the increase in sales and marketing that you've seen this year. These additions were more than offset by the IPO-related stock compensation expense and the reduced interest expense in 2020.

Now in more detail at Q4 P&L, larger scale of our business, with both Codifyd and Bridge now included, has helped get the overall business to adjusted EBITDA positive in Q4. This is compared to negative $1 million in the third quarter of this year. Adjusted free cash flow was close to breakeven as well at $0.4 million, $1 million better than our most recent quarter, being Q3 of 2021.

We will continue to look for and invest in growth opportunities that may -- and may take us slightly negative early in 2022, but we expect to be EBITDA-positive as we exit the year. We will continue to look for opportunities to invest into strong gross margin-generating solutions where we see potential and opportunity to solve our clients' biggest challenges.

Now lastly, turning to our balance sheet. Cash at the end of the quarter was $25 million after closing the 2 acquisitions in 2021. With our cash balance, our credit facility, we're positioned to drive accretion in the business through a few more acquisitions at the valuations we've been getting.

I'm going to turn it back to Bill now for a closing summary.

[William Di Nardo, executive]

Thanks, Mo. The priorities for 2022 we discussed last quarter continue to be in focus. We are very focused on integration and ingestion of the 2 acquisitions to drive revenue synergies and be able to offer our customers a true end-to-end frictionless commerce platform.

We have a digital solutions group focused on new products that will drive greater leverage in the business. In an inflationary and competitive labor market, we think it's critical that we leverage the software and the solutions we're building to increase the efficiency of our own employees as well as our customers' employees. That group really is working on removing friction across our own business and our clients.

Our corporate development team continues to push our pipeline forward, and we're in a good position to find deals in 2022 that are similar to the ones we did in 2021.

We recently made 2 important additions to our senior leadership team, welcoming Todd Jurkuta as our President and Edgar Aranha as our Chief People and Culture Officer. You are also about to hear shortly that we have hired a new GM of commerce. And we're very excited, as you will see with the announcement, of the history and industry-leading experience that this gentleman brings to our commerce business.

And as Mo said, we're going to work to deliver greater operating leverage in the business. And you can see this quarter that we're turning on that adjusted EBITDA generation. And again, I'm expecting our flow-through margins that are starting to climb on gross profit will start to fall to the bottom line. As Mo said, we're going to continue to invest it for growth, continue to invest it for greater efficiencies and more leverage in the future, but we have a clear path to EBITDA.

And again, for us, if we're going to win long term, you all know that we're in this for the next decade or 15 years. We're aiming to be the leader in frictionless commerce, a market that we're helping to define. That is not a quarter-over-quarter procession, that is going to be the next 10 years of hard work, and we're focused on the end goal: To be a global leader. I think we're making all the right moves and investments today to do that.

Yes, there'll be some lumpy periods, like our Q4, where we're adjusting a number of things and, again, accelerates our business. I will not pretend this will be a smooth, straight line. But I think when you're innovating and you're trying to drive the kind of change we're driving, it's motivating and exciting for our team and our people, and I think we're really on the right track.

Lastly, as a parting thought, like last quarter, I released a shareholder letter that I hope you find useful. I really try to bring this into plain English, avoid the technical jargon or an overly capital market orientation, that this should be easy for anyone interested in the frictionless commerce space to consume. And I've committed to continue writing this quarterly letter for the intermediate period, for the rest of this year. Really again with the goal to help people better understand the business and our performance. But I will eventually move to an annual letter so I can make the focus of the discussion more strategic with a longer time period to track the progress of our initiatives. I don't find things change quite as much quarter-over-quarter. And I hope by the end of the year, there will be a solid foundation for people to understand our business and we can then revert back to more of a strategic outlook in that dialogue.

I'm going to leave it at that for today. Again, I hope our numbers do a lot of the talking, and I'm happy to take questions from our analyst friends.

[Dennis Fong, executive]

Thank you, Bill. We'll now take questions from the analysts. [Operator Instructions] Our first question comes from Daniel Rosenberg from Paradigm Capital.

[Daniel Rosenberg, analyst]

Bill and Mo, congrats on the improvement that we saw this quarter. One area that stood out to me was the bookings in terms of ARR bookings. I was curious to hear from you, which products -- how would you categorize those bookings in terms of which products are seeing the most traction? And how do you view those bookings flowing into the income statement as revenue? Is it a midyear or late year? Any color there would be appreciated.

[William Di Nardo, executive]

I'll let Mo answer the timing of it. I think the one positive thing I really want to highlight, and you will start to get more of this visibility from us at the end of the year as we really start to break out more of our business unit performance. We're not doing it yet, but this will become more obvious by end of the year.

It is across all of our businesses. We even had some new Oracle Commerce business come into it. And so as much as there's a long tail of that transitioning, there's also still some folks that expect to be on it for a while, and we're seeing recurring revenue still in there.

What excites me though is some of the new deals, they're very large deals, but they're in other business units and so in other and newer products and services. That content as a service deal that we recently announced was sizable and there's more coming on the heels of it. So we're seeing a distribution of the new NRR, that is, again, across all BUs. And I'm very, very optimistic about what that means to the business long term.

Mo, maybe you can help answer the question around timing of hitting the P&L.

[Moataz Ashoor, executive]

Yes. Some of these -- I mean, there's a good portion that was new, and that it will probably take a few months for it to actually start converting. So expect it to kind of, and along with the sizable ones within the pool, will take probably 2 to 3 months for it to actually start showing up in our revenues.

But some of this was upsell and some of it was renewals with an increased size of environment as well. And still -- so we still see strong Oracle sales come through within that as well, that is continuing to kind of show that some of our customers, while they're thinking and planning for a -- their next platform destination, they're still increasing size. So they're renewing with Oracle as well with increased environment.

So some of those will flip a bit quicker. But one of the larger ones that we've had in there will take probably 2 to 3 months, I would say, for it to start to convert. But I would say probably half, others, will be a bit quicker to start converting.

[Daniel Rosenberg, analyst]

So that -- and you mentioned a new Oracle customer. I was just curious about your thinking around churn and melt. You did call out about $1 million or so in the quarter as it relates to kind of technology changes around customer preferences using Oracle or other platforms. So how much exposure do you have? How do you think about that unwinding over the course of time?

[Moataz Ashoor, executive]

Yes. And just to make sure you got my -- I think the -- I mean, earlier this year, in 2021, we did have new Oracle customers and that's probably a fair comment. Q4 was all upsell and renewals on existing customers with a higher net run rate. So to make sure I clarify that point.

I think overall thing we've shared in the past, I think we're still -- like there's -- over the next 12 months, we still see kind of the mid-single digits, I would say, in the range of 5% to 10%, but can maybe to 7%, 8% as potential, right? It's something that we're keeping an eye on, keeping a pulse on. It's Oracle customers similar to what we've had before, where they're talking to us about helping them get to their destination or their next platform. But I would say it's in kind of the mid-single-digit range of our current portfolio.

[Daniel Rosenberg, analyst]

And lastly for me. So you established an M&A program. It sounds like you're quite active. I was curious if you could kind of give some color on the size of deals. Has your thinking changed in terms of what is possible compared to what you've done in the past?

[William Di Nardo, executive]

No, I don't think anything has changed materially, Daniel, in that the size of deals you've seen us do are deals we're comfortable doing. We can add value to them. They're, again, mostly focused on skill management. So trying to fill gaps of areas that we've identified as core to long-term growth.

The supply chain, in particular, I just want to get that to a bit more scale. It's doing well, it's growing organically, but it would be a more efficient business unit north of $20 million to $25 million. And so we want to get some scale into that business unit and round out some of the platform capabilities.

Data management is constantly active. They're shifting more of their attention right now, I would say, to software enablement. A number of the things we're describing today really lend themselves to higher degrees of automation and people efficiencies. And so a number of the deals we're looking at really are focused on what software they bring with them. And that doesn't have to mean that they're selling software-as-a-service to the end customer, but they're software enabling their businesses for higher degrees of automation.

But I would say same themes. There's combinations of recurring and project-based revenues, managing skill gaps for us are on strategy, the things we've declared are important. And they're probably in that $10 million to $15 million revenue range, maybe as small as $5 million. We have looked at a couple of really small tuck-ins.

We're doing a few things right now, cleaning up our own house with some contractors that we're going to roll in, but I wouldn't call them our typical acquisitions, and so we don't really refer to them that way. But I would say more of what you've been seeing from us.

Dennis, who are we going to next?

[Moataz Ashoor, executive]

I know, Dennis is having connectivity issues, but I do see Jesse, John and Parth...

[William Di Nardo, executive]

Why don't we go to Jesse?

[Jesse Pytlak, analyst]

So just coming back to the acquisitions you completed in 2021, I'm wondering if you could maybe just speak to how many cross-sell initiatives have been progressing since the deals have closed. Obviously, it's still pretty early days, but I think just any commentary you could provide would be helpful. Or even if any you have -- any targets you can maybe share on how much greater spend you could potentially capture from your existing core clients from cross-sell would be helpful.

[William Di Nardo, executive]

Look, what I can tell you, Jesse, it's obviously many layers to the discussion, but the oversimplified response is record levels. We're seeing more cross-sell opportunities and more sell-with opportunities. We're getting brought into conversations now where we're not selling one business unit at a time, we're being asked to present a road map that encompasses multiple business units.

We did have a couple of really quick, easy wins. They're -- as you know, we don't tend to name the names of our customers, something that anonymity makes securing them a little easier. But one of them is a great example, where the project was getting closed. They were now looking at Managed Services. We were bidding on that with others in the marketplace, and Codifyd had already won the Professional Service part of it. And it was a quick, easy win to be able to tuck in that Managed Service, and recurring, right after we closed.

So there's been a number of those types of conversations that just accelerate because it's -- they're now dealing with one company that can do all of it. We're seeing great collaboration between the business units. And again, we're seeing more customers requesting combined solutions. So we should be able to give a little bit more numerical clarity by the end of the quarter, but I'd say quite a number of the deals in our pipeline right now are multi-business-unit selling.

[Jesse Pytlak, analyst]

Okay, that's great. And then in your prepared remarks, you talked about commercializing new NRR products throughout this year. Presumably, this is in the digital solutions business. And if that's the case, can you maybe talk about how large do you plan to kind of grow this business over the next, call it, 3 to 5 years?

[William Di Nardo, executive]

Yes, it's a great question. And thank you, Jesse, because I think this is really representative of that group, 5 years from now, will represent frictionless commerce. They're the bridge between all of the groups, the connective tissue. They support each of the frictionless initiatives that these groups are doing inside commerce, data and supply chain. And we're really trying to build all of those solutions on a single platform.

So 5 years from now, our expectation is it is the majority of our business, the way we would represent it. The recurring revenues, the platforms that they're running on, will be products that we've been building and assembling. So I think as part of our evolution, we will be flipping the units on their sides and we will be leading with frictionless commerce. And that will mean that digital group is really central to that conversation.

[Jesse Pytlak, analyst]

Okay, great. And then if I could just squeak in one last question just on the labor environment. And I know you kind of briefly touched on this. But can you just maybe speak to any specific challenges that you could be facing? And then what mechanisms, maybe aside from M&A, that you could have to address any labor challenges that you're facing?

[William Di Nardo, executive]

Yes. I don't think it's exclusive to us, Jesse. I think anybody who relies on highly skilled technical talent is facing global pressure. You can't go anywhere in the world where there's talented technical people and not find labor inflation. In fact, in some of the, what I'll call the traditional arbitrage labor markets, they're experiencing hyperinflation. We saw it in South America. We continue to see it in India. And so the reality is, at least in North America, our observation. Folks are going wherever the talent is. They are selling those services at North American rates. And increasingly, they're seeing margin compressed but still good margins.

Our philosophy continues to be and always has been that, the more we automate, the greater our revenue per employee is the more we're demonstrating leverage on that talent. And that's really why we're investing in more automation, more IP, because we don't think this trend is going to slow down. Talented technical people are going to continue to be in high demand and the pandemic has shown they can work from anywhere, which means you won't safely go anywhere to save money, you will go around the world just to find the talent to fill the need.

So that's where -- we're not counting on long-term regional arbitrages to manage our margin. We're counting on leverage and automation to do that.

[Dennis Fong, executive]

Thank you. Our next question is from John Shao at National Bank.

Apologies, I'm trying to connect John to the line here.

[Meng Shao, analyst]

Bill, so you mentioned a planned departure of some of your clients from Oracle Commerce. So is there a time line we can expect? What's potentially going to happen? Is it going to be like first year -- first half of 2020 (sic) [ 2022 ] or second half? And how should we estimate the size of the melt -- potential melt and churn, especially when compared to the one we saw last year?

[William Di Nardo, executive]

Yes, I'll let Mo get more details on it. But I think the message, John, is it's built into our growth plan. So I think where we had previously been surprised, and we've talked about this in the analyst community, public markets don't like surprises. So we've been very prudent in the way we're forecasting.

I think what you're going to see in Q1 is good news in that, in our own forecast and budgets, we had assumed some of the indications we were getting. They were built in has churn and melt, the reality is they won't. So Q1 is probably a little bit stronger than we originally might have forecasted. But I think it is built into kind of the guidance we've been giving. You will -- we won't be breaking it out any more than we do now. But you will see that it's going to come off this year, but it's being well offset by all the other great initiatives that are going on in the business.

I think the challenges we faced in the past, where it was such a significant portion of our revenue, it was much more obvious when something happened like that. As it continues to shrink in overall importance, the churn and melt won't have the same impact on stalling our growth.

Mo, I don't know if you want to be a little bit more specific.

[Moataz Ashoor, executive]

No. I think similar to -- I think I gave Daniel the range. I think over the next 12 months, we've got visibility to kind of the mid-single-digit range in terms of how much of our kind of current portfolio. We did $22 million in Q4. But I'd say in the mid-single-digit range in terms of what we're, again, keeping our eye on, what could potentially -- they are looking at other platforms and making decisions within that time frame.

So that's kind of the scale mainly that we're keeping our eye on. And obviously partnering with them just like we have in the past to see whether -- if we can be the ones that partner with them and help them get to their end platform or their destination.

[Meng Shao, analyst]

And my other question is bookings are really strong this quarter. And I'm more curious about what you hear from your customer end regarding their demand in 2022. How is that going to be different compared to 2021, especially if we consider the reopenings? Any color on that front would be appreciated.

[William Di Nardo, executive]

Yes. I think, John, the reality for us is we've got many of the same customers coming back to us. We now have twice as many, 3x as many things that we can sell them, and they happen to be in the right sweet spot of things these customers need. So we're finding the demand shifts and moves between these categories now. If they were done and settled down on a commerce project, they're probably talking to us about a digital or a data or a supply chain opportunity. Plus, with this -- these 2 acquisitions, we've picked up a number of new customers that are now asking to learn more about the portfolio of things that we do.

So we're not seeing any slowing of demand. I think you saw a new standard, $16 million of bookings. Previously, I think we were doing $6 million and $7 million. I think $16 million is definitely a great way to think about our new floor, and we're not seeing that let up at all. We are absolutely seeing great demand brewing in our target customers.

And again, I think it's shifting between different services and different offerings. So we've got a diversity that, I think, lends itself to this continued pipeline build.

[Dennis Fong, executive]

Our next question is from Parth Shah at Canaccord Genuity.

[Robert Young, analyst]

This is Rob. Sorry, I had a technical problem, so I had to switch [ cards ]. I missed the call because [indiscernible] like is there any...

[Moataz Ashoor, executive]

We're struggling to hear you.

[William Di Nardo, executive]

Yes, you're cutting out.

[Robert Young, analyst]

Can you hear me better now?

[William Di Nardo, executive]

Yes.

[Moataz Ashoor, executive]

Much better.

[Robert Young, analyst]

So the Codifyd business was a little stronger than we expected. And curious if there's some seasonality that we should be thinking of that's introduced by Bridge and Codifyd that might shift things even more into the Q4 period that we should be modeling. So I guess Codifyd is quite a bit better, the contribution came through [ yet? ]

[William Di Nardo, executive]

Yes. I think it's a fair question. Across the board of the seasonal impact. Q4 was a good seasonal peak for us, as is often the case. We tend to have good performance in Q4, recurring revenue. We've talked about this in the past, too.

And I want to remind everyone that the NRR bookings that -- we don't include it in our bookings number here, right? So you see the benefits of NRR that go beyond the bookings that we report in Q4. You would expect normally some of that would drop off in Q1, probably not as aggressively this year as in previous years. We're just seeing increased demand across the board.

What I will tell you is that there was certain degrees of motivation inside Codifyd to get their project delivered and drive the revenue for the quarter. I wouldn't call it a continuous seasonal peak, but I would suggest some of that really strong performance was the result of their earnout period was ended at December 31. So there's definitely some strength in those numbers that came from people working very hard to exit the year very strong.

The good news is there's going to be continued growth. I wouldn't necessarily model a Q4-peat going forward. There may be some of that drop off a little bit as the earn-out period is now done and we're going to get to business as usual.

[Robert Young, analyst]

Second question would be around the NRR metric that has been continuing to improve...

[Moataz Ashoor, executive]

Hello?

[Robert Young, analyst]

I was -- Just on the NRR metric continues to improve, and you've seen some of the expected drop-off on some of these large Oracle Managed Services engagements are going to last longer than you expected. So should we expect NRR to sort of be above 100% here as we go through 2022? Or should we be thinking that it's maybe a steadier recovery [ about 100%? ]

[Moataz Ashoor, executive]

Yes, I'd go a bit more on the study on this one. And as Bill described, we've got some opportunities, we've got some strong bookings in Q4 that will help contribute to the growth. Some of them were with existing, some of them were -- is new recurring as well. So it won't get captured in NRR number. So it's a bit more steady. I think some of the new stuff won't show up in the NRR metric because it is new and not in an comparable. But that's kind of the expectation set for this year.

[Robert Young, analyst]

Okay, okay. And maybe last question, or maybe 2 more questions. The last would be around the gross margins. Thanks for those waterfall diagrams, they're really helpful.

The Managed Services was a positive revenue contributor, but was a bit of a drag on gross margins. I didn't understand that. That's one thing.

And as I look forward in 2022, the gross margins of the business benefiting from Managed Services sort of recovery, with Professional Services converting, hopefully. I mean, is that the type of dynamic that you expect and we should expect through 2022?

[Moataz Ashoor, executive]

Yes. Let me answer maybe the first question. I don't know how much rounding there is in there. But I think part of what we have is our MS business has typically been with kind of -- [ they were more on the clock ] than it has been. It typically has been a bit lower than the average Managed Services margins that we've been yielding in the past. So it's probably one factor.

There's a smaller factor, but I don't know how material that -- if anything. But there was some onetime costs in there related to prior periods that were just caught up. But I would take the speed is major contributor here.

Can you just repeat your second question, to make sure I got it, Rob?

[Robert Young, analyst]

Absolutely. So I'm thinking of the Managed Services business benefiting from some of the Professional Services activity, sort of converting, maybe cross-selling into longer term, and the gross margin sort of recovering as that dynamic plays out. And so I was just trying to connect the headwind on gross margins here in Q4 versus my expectation that maybe the gross margins would recover or expand through 2022 as that conversion happens. So maybe you've already answered half of that question.

[Moataz Ashoor, executive]

Yes. I mean, I did probably answer some of it. And I think a lot of it is what Bill describes. We continue to invest in automation, and it has also continued to improve the margins that we've been generating in the past. So that's part of what we're looking at. We continue to look at our cost structure within our Managed Services business, and our team continues to find opportunity to where we can get more efficient and support the same in more customers. So those are some of the levers that we've got going on in managing just our cost base that supports the services.

But also with growth, I think that will come. I think we've got some Professional Services opportunities, and some of the bookings that we've had were Professional Services clients converting over to Managed Service. That will also contribute to the margin story as well.

I think all that will help net some of the Oracle churn that we've been flagging. And that's why I'm kind of highlighting somewhat steady on the NRR front until we start kind of working through and growing beyond the Oracle churn as that continues to get smaller.

[Robert Young, analyst]

Okay. Last question, just on the IP contribution, which acquisitions have been helping. Is that something that's increasing as a percentage of revenue? Is that a margin benefit? And then I'll pass the line.

[Moataz Ashoor, executive]

We have opportunities, but it's not something I think we're ready at this stage to declare and set some expectations. Where -- we'll come back and people will ask us, well what happened on that? I mean, there's definitely opportunities. It's a critical part of our story, our success and our strategy around creating scalable and building solutions that close the gaps for our customers. So it's there. We continue to work it, we're investing in it. But I wouldn't say it's something that we're ready to declare at this stage, any scale any size or margin contribution.

[Dennis Fong, executive]

Thank you. It looks like there's no further questions, so I'm going to turn it back to you, Bill, to close.

[William Di Nardo, executive]

That's great. Thank you for attending. Thank you for all your great questions, to the analysts. And again, I hope we've been able to -- between our MD&A, the CEO letter and today's presentation, I hope we've been able to give you enough guidance on where the business is going and how we're shaping up.

Again, we thank you for your support and your continued attention to our business. And we'll look forward to seeing you again, I guess it's the end of May, Mo, with our Q1 results?

[Moataz Ashoor, executive]

That's right.

[William Di Nardo, executive]

Thanks very much, everyone. Have a great spring.