Pivotree Inc

XTSX:PVT

Earnings Call Transcript 2022-Q4

[Dennis Fong, executive]

[Audio Gap] following the presentation, we will open the line for question-and-answer session for analysts. [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 these 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 are 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 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, and good morning, everyone. Thanks for joining us on our fourth quarter 2022 conference call. With me today is Mo Ashoor, our Chief Financial Officer.

Let me start off by saying most of our Q4 results reflect the steady progress we've been demonstrating for many quarters. Overall, we are pleased with where we ended the year.

And I want to thank all of our terrific employees for the work they did to deliver these results and help set us up for a solid start to 2023.

The summary headlines, we had a really good quarter on revenue metrics and leading indicators like bookings. As you know, we pre-released what our bookings were, and they were among some of the strongest we've seen. We continued organic growth on the back of our acquired businesses and focused efforts on OpEx in Q3 led to the predictable outcome of positive EBITDA in Q4. That was a $1.7 million positive swing from Q3, and it resulted in an adjusted EBITDA margin of 5% for the quarter, which is pretty much where we had been indicating and committing to folks, we would end the year.

Now industry tailwinds tell us we're in the right space. We're doing a lot of the right things, which will carry us well into the future. And economic headwinds are telling us to be very cautious. We're focused on the things we can control and not be careless when we are chasing growth.

So while revenue and booking metrics were some of the strongest we have seen, I really want to focus people's attention on the EBITDA, which is a result of the combination of the revenue success we've been talking about and the steps we took in Q3 to bring our OpEx in line. Midway through 2022, we shared our expectations of exiting the year with sustainable EBITDA.

And a number of initiatives over the course of 2022 helped us to deliver on that promise. Those included some of the organizational changes we made, product rationalizations, tighter focus on utilization rates and a modest increase in pricing areas we haven't really changed in some time. And of course, the seasonal peak in Q4.

We expect to maintain positive EBITDA moving forward. This really was step 1. And although, again, most of our quarters were pretty close to that neutral, we had been very clear, there was a number of onetimes and things that helped us achieve the first couple of quarters positive results. This is really about sustainable EBITDA. And I would say Q4 is a reflection of that sustainability.

Now I will say the extent to which we achieved that EBITDA in Q4 was a combination of things, including some very strong seasonal revenue performance and some revenue true-ups in some of our PS project milestones.

So the team has identified further efficiencies and cost savings that will continue along with a strong focus on bottom line production to produce EBITDA through 2023. That's really the storyline that we've been building towards that -- and this is something that we think is really about controlling our destiny. Producing cash flow opens up a lot of other opportunities for us.

I did spend some time in my CEO letter digging into a bit of this on our record bookings, and I think it warrants some explanation. Now we've had record bookings in 4 or 5 quarters. And obviously, that's very positive, and we're happy about that. And that, again, speaks to the notion that we're in the right space, doing the right things and that our customers value these types of services and products that we're building.

But I think it's also really important to note that through our analysis of these contracts, these are really increasingly bigger in size in the Professional Services, in particular. And they are, in fact, converting the revenue over multiple quarters.

In fact, just this week, we were doing a much deeper dive, analyzing the biggest contracts in more detail. And we observed many of them are stretching into 4 and 5 quarters of revenue.

Now this is good in terms of planning and predictability. I'm a really big believer in having that strong visibility, trying to extend those project-based revenues over longer periods of time because it allows us to staff properly. So there is some risk and some challenge to having that revenue spread over multiple quarters. But we ultimately believe this is a better way to run the business, and that includes our -- again, our ability to manage utilization rates and make sure we have visibility to what's coming in the coming quarters.

So the short story there, though, is don't expect to see record revenue every quarter as a result of record bookings. But if we keep up this relative steady pace on these bookings, we should start to see the conversion of these stack over future quarters. So again, these record quarter bookings over the last couple of quarters, another good news is it gives us visibility. It isn't leading, and it's not going to lead every quarter to record revenue. But we -- again, we believe it will reduce some of the volatility over time.

And look, the only other thing that I would flag, and I think it would be difficult for anybody to be overly optimistic in these current economic conditions, and we are seeing some market concerns. We've seen customers in some of our areas like retail and B2B, they're closing geographies, they're closing on profitable stores. Everybody is apparently focusing on bottom line. And I don't think we're any different. You've seen our own behavior.

There's some consistency in the market today. And I think that consistency ranges from cautious pessimism to cautious optimism. And I'd say, ultimately, we are being cautious as we go forward. So overall, really pleased with all the results. Pleased that we're doing and building the right kind of things for our customers. Has been cautious about what the economic headwinds mean for everyone today.

So just explaining where some of these results are coming from, and I think you're used to hearing this narrative from us. A lot of those bookings in Q4 were driven by continued strong logo activity in Data Management. We did have a pickup in new logo activity in Commerce as well as continued renewal and expansion bookings in Supply Chain.

The Commerce and Data Management group successfully secured a multi-quarter new logo with a very large prominent homeware retailer. Now what gets us excited about that, in particular, is the strategic benefits of multi-BU contract right out of the gate. This really talks the cross-business unit's capabilities of selling together and demonstrating value to our customers, again, in multiple BUs.

At the end of the day, our customers participate in all the categories that we work in. They have varying degrees of challenges that sometimes start in one BU and then pollinate to another. What got us excited this quarter, in particular, this is a very large retailer who is embracing multiple BUs right out of the gate.

We're also investing to drive innovation at the BU level. And again, you've heard me talk a lot about our focus on product. Our goal in 2023 is to expose and create more visibility to the revenues that are associated with that. So starting this year in our Q1 results, we will be laying out a little bit more of that visibility and clarity, but we continue to invest. We recently launched our own Pivotree Corporate Store, and that was for both employee use internally but also for testing and for creating some of those applications that are going to drive frictionless.

In fact, no surprise, one of those apps that we're currently integrating and testing is leveraging ChatGPT. And we're already starting to see some exciting results with this store and the ability to test new things.

In Supply Chain, we are making progress in transitioning our warehouse management software to the new SaaS version 2.0. Again, what's exciting there is we have already over 500 warehouses currently supported on the older software. And we're seeing signs that our customers are embracing the new capabilities and the new features, and we expect to see more starting to convert to our SaaS model. And again, you should start seeing that evidence show up in the revenue.

Now this is a fairly large -- when you buy all the modules, a fairly large package of software. What gets really exciting about this is the microservice nature of it, the modularity of it. It really does mean our customers can buy components and elements and start to advance and innovate on their warehouse management systems, allow them to start accessing things like robotic picking without having to rip and replace some of their pre-existing monolithic solutions. What this really does is it allows an easier migration from old to new.

And again, we're starting to see partners and others get thoroughly excited about what this can mean in terms of being able to support their existing customer base.

One of the other things that I'll flag, again, if you've been following our IP, we've talked about products like DIVE which is our own machine learning application. And actually, we did some benchmarking when we compared it against ChatGPT. And we're very excited about the results. I mean frankly, contextually, with very specialized use and with the context we use to teach our machine learning modules, we've been able to demonstrate that our own machine learning is more accurate, faster, in today's terms, versus something like a more generic and generalized ChatGPT.

What gets really exciting, though, is some of the advanced features that we can imagine now watching what ChatGPT is capable of, and we've started integrating the 2 of them together under some exciting results.

Probably the last thing I'll leave you with on this front is our internally developed IP including Natalie and DIVE and Control Tower is being leveraged into 22% of all of our data projects at the moment. And it's going to start taking a more prominent role in our reported revenue. That BU is very committed by the end of the year, but the majority of our deals and projects will include our IP.

And again, based on some of the preliminary results we're seeing on efficiencies, it really drives value to customer.

I know you're all waiting for our next deal. And on the M&A front, we continue to have a healthy pipeline of opportunities. We've been nurturing a number of relationships for multiple quarters. Our key requirements remain unchanged, and we will continue to be patient, establishing good working relationships with the business leaders we're interested in. And as our interest gets closer to intersecting with each other, I'm confident we'll get some deals done.

We have enough cash and are more comfortable using our credit facility now that we have positive cash flow and the ability to service that debt. So effectively, we have over $30 million available for M&A. But we're also happy with our organic growth and product development initiatives to wait for the right deals.

There's a number of strategic opportunities out there with quality management teams that we're excited about. We'd like to do something with. Our biggest challenge, frankly, is again, just the current level of our stock price and looking to do properly accretive deals. Again, if we can do all cash, it makes it easier. But we are observing that a number of the folks we're talking to like our stock price and would like more of our stock. So this becomes the balancing act that we're working through as we try to consummate some deals.

So to put the last 3 quarters in perspective, and I think this end of year is a great time to do that, we thrived through COVID. Now that was despite a rocky start in 2020, but that COVID period really allowed us to accelerate and enable us to do a successful IPO. We raised a significant amount of money. And on the back of that, we acquired 2 material new businesses in 2021.

We've been able to continue organically growing those businesses. They've been major strategic positives.

And we completed the integration in 2022 and shifted the team's focus to accelerating a path to profit, which we exited 2022 with strong sustainable EBITDA. So it's been a productive couple of years, and I think all of the key metrics and leading indicators, we've grown revenue 60% in that time frame. Our annual bookings are up 174%. We acquired a number of new product initiatives and have been accelerating those. We're going to start to see that MRR growth again.

We've managed our capital very efficiently, and that's evidenced by a 71% revenue per share growth and an 84% gross profit per share growth from the low points in 2021 versus our Q4 performance. So again, I think it's been a productive couple of years. And Mo is going to take us through more of the financials. Again, I think we've been pretty clear, EBITDA expansion is going to continue to be one of the key measures of success for the business overall and in all the business units.

The real test for Pivotree will be expanding our EBITDA while simultaneously increasing the investment dollars in our new product initiatives. We'll once again, this year, do a product day for analysts in those that are interested. But I think folks will understand why we're motivated to continue investing in these products as they really represent our future, and we're starting to see their penetration in our business today.

This is also the stuff of frictionless commerce. This is where our future is. We're driving to that eventual state. It's still many years out in front of us, but we want to make more advances with our products to help drive that faster.

And I know that many folks, especially those that are paying attention, are asking for better visibility into seeing how those investments are paying off. In 2023, we expect our reporting to expose more of those product metrics and make much clearer how those dollars are being spent. Obviously, we could be a significantly more profitable or with higher EBITDA if we weren't making those investments. But we believe that's the balance that is -- the priority of a good leadership team is to look into the future and make the right investments today to get us there.

Now when we analyze all of our deal metrics, we clearly see a path to 50% gross margin. Those 2 to 3 points of additional margin, just to break through the 50%, really revolve around utilization rates and reducing overhead on managing projects. The real breakthrough, though, the stuff that gets us into the 60% plus, that's going to come from increasing our IT penetration into our deals.

So again, we're going to run the business better every day. We'll achieve better gross margins in the near term. But to really accelerate those, it's the product initiatives that are going to drive them. So we'll continue to be motivated to find operating efficiencies to fund those increased investments. Again, our view is we are responsible for generating capital to make these investments. and that's why those 2 things go well together. We effectively -- our goal is to double cash flow in order to double investments in new products over the next 24 months.

So let me turn it over to Mo to give you a better view of our financial performance.

[Moataz Ashoor, executive]

Great. Thanks, Bill. So if we can move to Slide 9, Bill, thank you. So as Bill noted, more than 85% of our revenues are U.S. dollar-based. So we benefit from the currency tailwinds.

Revenue for the fourth quarter grew 18% year-over-year and 11% in constant currency. Total organic growth was 10%. Professional Services grew 8% organically, while Managed Services grew 13% organically as we added new services into Managed Services and increased demand over the peak holiday season.

There's approximately $900,000 of seasonal consumption revenue in Q4 that will drop off in Q1, as we would expect. Net revenue retention was tracking close to 100% in Q4, benefiting from upsell and some of our key customers, while also benefiting from the seasonal demand that I just mentioned.

We can still expect occasional bumps as the remaining Oracle MRR transitions off over time, but we are seeing less of an impact right now.

As Bill mentioned, the multi-quarter nature of some of our larger Professional Services contracts, they give us better visibility towards our nonrecurring revenue base into 2023 than we have had in prior years. Although we are planning for modest growth -- organic growth in 2023 due to macroeconomic uncertainty, that added stability in our revenue, will allow us to focus on improving our profitability profile.

So moving on to the P&L. Gross profit margin improved 47% from 44% last year, Q4, and 45% from the recent reported Q3. The improvement in our gross profit margin is a result of higher managed service demand and revenue milestones that Bill mentioned, improving our overall margins.

Total operating expense of $12.8 million, that increased by $0.3 million versus prior year period, and it was $2.4 million lower than the $15.2 million we reported in Q3 of 2022. The sequential reduction in operating expense was primarily a result of the realignment actions we announced back in October of 2022. These changes primarily impacted the various OpEx -- operating expense line items as we consolidated and centralized activities into the business units.

We also benefited from the completion of some of the amortization on our intangibles.

Adjusted EBITDA was a positive $1.3 million, representing 5% of revenue, and EBITDA was $1.1 million. Adjusted free cash flow improved by $1.3 million from prior year period to $0.7 million. We expect to maintain positive EBITDA moving forward. But important to note that Q4 represents a combination of strong seasonal revenue performance and revenue true-up on specific milestones, which do not carry into Q1 2023 results.

The better-than-planned EBITDA production throughout the year resulted in positive adjusted EBITDA of $1 million for the full fiscal year. The team has identified further efficiencies and cost savings that will continue to be a focus for us in 2023 to produce EBITDA and also provide for investment capacity.

We also benefited from the FX rate during the fiscal year and have taken steps to hedge our currency exposure into 2023. We reported fourth quarter net income of $1.5 million, is a significant improvement from historical quarterly results. This improvement can be explained by the improved EBITDA and year-to-date tax provision adjustment of approximately $1.8 million favorable to reflect cost allocation in alignment to our transfer pricing requirements. A more normalized net income for Q4 would be closer to a negative $300,000.

So turning now to the balance sheet. With positive adjusted EBITDA and adjusted free cash flow this quarter, we ended the quarter with cash increasing to $17.3 million, as we have yet to tap into our $25 million undrawn credit facility. As Bill mentioned, we are now more inclined to use this facility if the right assets become available, and we've got a healthy pipeline there, providing us with $42 million of total capital available. We think our patience will continue to pay off as we pick up transformational assets like we did in 2021 that delivered compelling returns.

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

[William Di Nardo, executive]

Thanks Mo. As we position the company for 2023, we're going to be focused on profitable growth. Again, you heard that theme probably repeatedly and regularly in the industry today. You heard it from us last year. We've got a strong backlog of bookings and a highly qualified sales pipeline that gives a solid base in 2023. .

Okay, I think the key theme is we've got a great business focused in the right sector. We've got years ahead of us. And I think that surprise at the beginning of this year with ChatGPT is just a further demonstration of the rate and pace of change in the market. And we're very well positioned to adapt, bring those things in and commercialize them to our customers' benefit. And that's going to keep happening well into the future.

And that's really the business we're in, adapt relentlessly and help our customers to adapt. Those kinds of changes are going to bring enormous value, particularly through automation. I mean machine learning really is an automated process around data, and those things will benefit our customers. And that's what we're in the business of [ doing. ]

So again, we look at the long term, we're going to continue to manage for the long term. We're getting good short-term results, and those short-term results are going to help fund the future. So even though there's some market uncertainty, again, we've talked about some of the large retailers and B2B clients pulling back on unprofitable markets and closing physical stores and regions, we believe this bottom line focus is going to drive more uptake of these products that we're building and the kind of services that we bring into the market.

So again, there's clouds, but there's silver lining in those clouds. And I think our recent results demonstrate the opportunity for us to participate effectively well into the future.

So we'll continue to balance our investments with the profitable running of our business, then we're going to help our customers to do the same. We are effectively cash flow neutral to slightly positive with the investments we're making with a healthy cash balance and a cautious leadership team and a very, very bright and creative group of employees around the world, capable of adapting to the change in the market conditions.

So again, I'll thank that team. I think they produced great results, and I get the benefit of being able to tell their story. Hopefully, everyone feels the same after seeing what they did this past quarter.

And with that, I'll turn it over to our friendly analysts for questions.

[Dennis Fong, executive]

Thank you, Bill. We'll now take questions from the analysts. [Operator Instructions]

[Dennis Fong, executive]

The first question comes from Rob Young at Canaccord Genuity. Rob, go ahead.

[Robert Young, analyst]

Okay. First question would be around the bookings. I know that Managed Services and Professional Services recurring and nonrecurring, there's some overlap there. But from the chart that you presented, it looks as though the overwhelming bulk is driven by Professional Services. And so I was hoping that you could maybe expand on the prepared comments around what's the evolution from Professional Services towards Managed Services and recurring revenue? And what kind of implications does that have on your margins? And just to sort of maybe clarify that and put it on one spot would be helpful for me.

[William Di Nardo, executive]

Mo, do you want to take a crack at that from a financial perspective? And I'm happy to give some color on some of what we're seeing from a product perspective. Mo, you're on mute.

[Moataz Ashoor, executive]

You summarized -- where you're headed, Rob, in terms of the nonrecurring, large portion of it is based on Professional Services. And Data Management was a critical contributor to some of the strong bookings there. And we see -- we do see a close relationship between a lot of the Professional Services that we have now in Data Management and some of the product investments we're making in DAS to transition them over to what a recurring profile is. So there's certainly a connection with the services that we're performing today through some of those bookings and in connection to the DAS recurring that we've been talking through to continue to support our customers to maintain a good view of their data across multiple technology and systems within their ecosystem.

But it is project-based, and that's, again, the entry tip of the spear to get us to more of the recurring space.

[Robert Young, analyst]

Okay. Maybe a second question for me would just be on your expectations around profitability, some comments around being sustainably profitable. And then some other comments in the CEO letter that suggests that you're going to be aggressively investing in some parts of the business. And so I mean maybe if you could just give us a sense of where EBITDA margins may go for the near term, maybe 12 months, 24 months, that could be helpful for modeling.

[Moataz Ashoor, executive]

Yes. I think the direction that we're on is we're going to continue to deliver positive EBITDA, again, while balancing, making sure that we are also flowing through enough cash to meet positive free cash flow as well. So I think within that mix, it is still, I would say, more in the single-digit EBITDA range. And then that would also allow us to have some flexibility to reinvest back into the business. Some of the products that are really showing momentum has legs beneath it.

So there are very focused investments. When we say aggressive, I don't think we mean aggressive in we're going to start putting a lot of dollars towards the investment, but it is around being very focused where there is product potential and there's good progress on the investments that we're making to continue to invest in those and accelerate and turn them into recurring revenue. All those investments are recurring revenue and margin boosters for us.

[Robert Young, analyst]

Okay. The last question for me is maybe just a broader one on your comments, Bill, on ChatGPT. Given you've got this really strong data management group and you're really deep in the weeds, fixing these data pools for your customers, what kind of an advantage does that give you for helping your customers sort of understand this or maybe even building IP around it, just thinking of the arc here on your ability to sort of build product and maybe future margin off of the ChatGPT and AI broadly?

[William Di Nardo, executive]

Yes. I got to tell you, it's just exciting to see these kinds of innovations expose themselves. The practical reality is not uncommon with emerging tech. It's not exactly ready for commercial application. But what it does do is allow you to demonstrate we're getting a lot closer to that frictionless data state that we think about. Our team is already starting to embed it. We built some reference applications recently. A simple example I can give you is taking attributes that you might find from a PIM system and being able to dynamically generate product descriptions.

So we've got a lot of demonstrations. We're starting to share them with customers. Again, you can imagine a scenario of highly dynamic, highly personalized descriptions off of some base attributes. We've actually been able to demonstrate as well being able to automate a brand-new category with a taxonomy and schema that could take days or weeks of information collection, now pushing a button, we can actually stand up a whole new category for a customer and then start to populate it with the data that we've got using our machine learning.

So the practical reality is, I think it's still probably some time away from full complete commercial capabilities, but it is a hell of a lot closer, I think, than most people expected. And I think that's where we're well positioned. We've been talking about it and doing it and actioning it for the last couple of years. Data has been a priority for us overall in terms of what we believe its foundations are to frictionless. And I think what you're going to see is more and more attention getting paid.

I think we've got a head start because we've been using machine learning. And again, our data models to both leverage and acquire more information around how to best categorize the products that our customers care about. I can imagine the future not too far away now where we'll be syndicating data.

[Robert Young, analyst]

One add-on to that, just should we think of this as an IP opportunity for you that you can build maybe tools? Or is this something that where you'll be using open-source tools to help your customers leverage what's already out there? Like is that a services or is it an IP opportunity or both, I guess?

[William Di Nardo, executive]

It's both, Rob. And I think this is 1 of the things we've been trying to demonstrate to the community in general is there's a reason why we're not typical professional service level margins, right? There's a reason why we've got more recurring than an average PS because of the way we use IP. So initially, it's a tool. As we said, it's like 20-plus percent penetration, is probably higher than that. And I would expect by the end of the year, we're going to be well over 50% of all of our projects will have our IP embedded in them.

And what you're starting to see is, as our customers understand how the IP affects our speed, our quality and the quantity and volume of data that we can enrich for them, it's starting to convert to more of a recurring revenue solution set. And I think the ultimate question that you may be asking and we're asking ourselves at some point, do we no longer provide the service part of it and we just provide the tool or the technology? And I think that's open for a discussion to see where this goes with our customer base.

[Dennis Fong, executive]

Our next question is from John Shao at National Bank Financial. Please go ahead, John.

[Meng Shao, analyst]

Congratulations on quarter. So Bill, could you expand your comments a little bit and give us an update on the macro outlook for 2023? What are the opportunities? And what are some of the risks that you see for the year ahead?

[William Di Nardo, executive]

Yes. I think, again, not having a crystal ball and really responding to the almost self-fulfilling prophecy, right, you keep cranking up interest rates. You keep talking about recessions. It seems like that's an inevitability, although it seems like we're doing our gambits to fight it as a community. But we're seeing a lot of this pessimism, and I think that affects people's behaviors. We're seeing a lot of layoffs continue. It's almost like it's become in fashion to pare back everybody's doing it. That's bound to have an effect at some point in this next 12 months if it hasn't already happened to other folks in the market.

We've been fortunate. We haven't seen the full impact yet, but we also aren't naive, and we think it would be silly for us to stand up and celebrate today on the basis that this is going to continue for us forever forward. So we're cautious. That's all I'd say on that. I really don't have a crystal ball.

Our customers are behaving somewhat consistently. But some of that consistency includes like we're coming into the final couple of days of the quarter, and we've got enough contracts sitting there right now for signing that could make or break the quarter. That wasn't happening as much before. We were seeing those signings happening at the beginning of, let's say, March instead of the end of March.

So again, we've seen these more cautious approaches. There's more signatures required. There's more business cases being required to spend money. So all those things create a little bit of a drag, but in the end, those contracts seem to be getting signed right now, and they seem to be converting into work and revenue. And in fact, those commitments seem to be getting made for a longer period of time because the projects are bigger.

Where I see the big opportunity is this heavy focus on everybody's bottom line, the more we can demonstrate, particularly with our IP, an ability to reduce cost, increase time to benefit. I think those will continue to be more valued than discretionary spend projects. So the opportunity for us is to demonstrate this value. One of the best examples I can give you on our WMS, the modular nature of it means you can literally buy the features you need and integrate it to your existing WMS, start to take advantage of something like robotic picking, which some of the older WMS systems don't enable. We can sell you the module instead of having to sell you the whole application today.

Those kind of things reduce investment, reduce upfront capital spend, reduce risk. Those are the kind of things we can do for our customers. And frankly, I think this is one of the benefits of this microservices architecture we talked about. The more modular it is, the smaller amount of time and money it takes to see benefit and make the easier the sale is. So again, I'm expecting to see more of these small starting point conversations with customers. But once you land them, again, the full feature set of our capabilities starts to become available to them, and they can take their time acquiring them as their capital budgets permit where they're operating.

[Meng Shao, analyst]

So Bill, I just had a question on the warehouse management solution you have -- you just mentioned. I also understand there's a SaaS transition going on. Any early feedback from the customer regarding that transition and what are some of the catalysts to push for that transition?

[William Di Nardo, executive]

It's everything I just said, John, right? The WMS is a shift to SaaS. It's a shift to modular. You can imagine 26 modules inside the average WMS old legacy systems. We're in the process of converting each of those modules to a SaaS consumable on its own module, and we're getting rave reviews when customers are -- existing customers are embracing converting, new partners are showing up, excited about the prospects of what this modularity could mean. So I'm very optimistic about that product's future.

[Meng Shao, analyst]

Okay. And last question from me is on the M&A front, how should we think about the valuation level in the market right now given the pressure on the public sector? In terms of then your next M&A, should we expect to be a tuck-in acquisition to complement your offering? Or is more of a move to consolidate the market share or both?

[William Di Nardo, executive]

It's unchanged really from what you've seen us do in the past, John. We acquired skills, capabilities that we think have growth trajectories and serve our clients' needs. And so there's a number of different ones we're looking at today that meet our criteria in terms of growing positive EBITDA, strategic fit. I'd say they're still in the area of PS. And the reason for that is the, I'll call them, the SaaS-type companies that we're interested in are just still very expensive relative to the cash that they produce. So a lot of them still burn cash, and we're not looking to acquire anything that burns cash at the moment.

So we're looking for companies and segments that our customers are telling us they need help with that we're trying to build capabilities in. They're generally PS today, but they must bring some aspect of IP capabilities and derivative work that will allow us, again, to move in this constant direct-store product. So those are the criteria. They remain unchanged, and it's just really about trying to get convergence on valuation and alignment.

[Dennis Fong, executive]

Our next question is from Jesse Pytlak from Cormark Securities.

[Jesse Pytlak, analyst]

Just on kind of the bookings and deal size, can you maybe just talk about how the magnitude of deals has evolved over the past year or 18 months?

[William Di Nardo, executive]

What do you mean Jesse, like the absolute contract size?

[Jesse Pytlak, analyst]

Yes.

[William Di Nardo, executive]

Yes. I think one of the interesting things, and we've been debating whether we should start reporting something like this is our professional service actually behaves a lot like our recurring in terms of a net revenue retention factor. So what you'll find is we have a number of customers in the past that would start with $0.5 million, $1 million projects, and they would last a quarter and then they bring the next one and the next one. And so you would see, over time, they'd either grow modestly or again, depending on how big the next set of projects are, they can grow quite a bit.

What we're seeing now though is there's larger customers coming to us saying, we have X amount of work that needs to be done, we think it's a year's worth of work, and here's a $3 million to $5 million contract, and that's what we're getting signed. So it's still a mix. I can tell you, if we kept signing those and they started stacking, we would really be crushing our bookings numbers.

Right now, it seems to be one of those big ones in each quarter that adds up to an often new logo, the way they start off, then that customer probably will start to add every quarter a small amount of new initiatives as well. So it's -- what's changed is 2 to 3x in size on initial bookings from some of our new customers.

[Jesse Pytlak, analyst]

Okay. That's helpful. And then I guess, based on what you just said, some of it is just because the customer itself is a lot larger. But I guess what element does customers just purchasing more services and wider range of services from you, how is that contributing to the larger deal size?

[William Di Nardo, executive]

Yes. So the large home retailer, as an example, purchased in 2 different categories, right, they purchased in data and in commerce. So no question, Jesse, if they buy more than one category, it will add to a larger starting mix.

One of the things that's helping with that as well is we do customer experience and journey mapping. It's becoming a bigger part of our business now. It's the way we walk in the front door without a predetermined solution, but we're being asked by the customer to guide them through a road map. And so what that allows us to do is look at across all the different technology stacks and business challenges to understand what they need to do over an extended period of time. It gives us a road map, again, depending on exactly where they want to start, it's also resulting in starting with larger projects right out of the gate. But that customer journey mapping has helped drive some of this visibility into future revenue.

[Jesse Pytlak, analyst]

Okay. Got it. Maybe switching gears over to the warehouse management tool. I think a quarter ago, you mentioned it being maybe around 20% converted. Just wondering if you can maybe get an updated number on that and is there a certain percentage where you need to have it converted to the SaaS format for it to really catch fire? Or is it [ already ] at that point?

[William Di Nardo, executive]

No, actually, and going back to what I said earlier with the modularity and its ability to coexist with legacy systems, the exciting thing is it can coexist with itself. And so you can actually get a full WMS from us right now where what appears from the front through UI that it's this modern application architecture. You can get virtually all the benefits, but you might be getting some of it from the old system, some of it from the new. Think over the next 12 months, depending on how fast we spend, we should complete that conversion to the new code base 12 to 18 months.

It's not preventing anything today. In fact, we can demonstrate capabilities right now on a full suite, but there are some added features that are available with the new SaaS version. So that's what we're pushing. We've focused on the first, third, first half of the features that are the most common, in greatest demand that will advance the automation process and warehouses for our customers. So from that perspective, it's not even a -- we may finish all the features, but it's the long tail, right? There's [ now ] a lot of folks that are going to use all 26 modules any time soon.

[Jesse Pytlak, analyst]

Okay. Got it. And then maybe just kind of looking to Q1 '23, just sequentially, how should we kind of think about the top line trend? Obviously, there should be a drop off coming off a seasonal high in Q4, but you are obviously entering the year with a pre-large backlog. Obviously, those deals are extended compared to what you've seen in the past. But should we think that we should see the top line maybe step down a bit in Q1 versus Q4? Or do you think it will maintain the positive growth trajectory?

[William Di Nardo, executive]

I'll let Mo answer that.

[Moataz Ashoor, executive]

Yes, Jesse, I think obviously we highlighted through the presentation that, yes, I think obviously, Q4 had the seasonality, and it did have some of the strong -- some milestone revenues that we were able to get in. So there were some onetime. And you'd start looking at paring back to some of the other more normalized -- to normalize the other quarters as well. So -- and it is a higher than usual quarter. I expect the drop-off is the clear signal we want to send through this presentation kind of going into Q1.

[Jesse Pytlak, analyst]

Okay. And then maybe just 1 last question. I think in response to one of Rob's questions earlier, Bill, you mentioned targeting to have over 50% of data management projects with their own IP embedded in them. Did you give a time frame on that?

[William Di Nardo, executive]

End of the year.

[Dennis Fong, executive]

Our next question is from Daniel Rosenberg from Paradigm Capital.

[Daniel Rosenberg, analyst]

Bill and Mo, my first one is around...

[William Di Nardo, executive]

Oh! You went back on mute.

[Daniel Rosenberg, analyst]

Sorry, sorry. So we saw Managed Services pick up and continue to grow for the past couple of quarters. I would like to see the strength in this quarter. I was just wondering as a portion of total revenue, as you think about IP that you're building and the market bookings that you have, how is that mix going to change in the next year or medium term? Is this the level that we should think of as a revenue mix? Or are there going to be shifts?

[Moataz Ashoor, executive]

Yes. A lot of what you saw in Q4 -- that Q3 to Q4 that we described was the seasonality. So again, I wouldn't expect that to be a quarterly. Obviously, I expect that same seasonality next year kind of going into Q4. But I would say it's a bit more on -- and it's been holding steady, just given the bookings that we've been reporting on recurring. I think the upside for us is through some of the recurring products that we've been talking about.

So those -- that's where we could have upside, but I'd normalize a bit more to what you've seen kind of outside of Q4. Because we've also seen -- [indiscernible] mentioned Oracle churn hasn't impacted us tremendously but obviously, we've got a close eye on it as well, but it's still a reality in something, we could see some bumps over time with Oracle. It's been somewhat stable overall for us.

[Daniel Rosenberg, analyst]

And then just continuing on that line, Bill had mentioned the idea of IP and how does the future look like, whether you become a kind of IP-focused company above services. So does this mix continue to grow significantly in the next, call it, the medium term, 2 to 3 years? Or will you always have this component of Professional Services as part of the core of the business?

[Moataz Ashoor, executive]

Yes. I think Bill touched on and it's something we're starting to gather and we started to see. And there's a fair portion of our revenues that's really being delivered and supported by IP. And that's something that we're looking to start breaking out because we do see that trend going up from -- sequentially from Q1 of 2022 to Q4 of 2022. I think it's an important metric to highlight is a lot of these revenues are driven by IP.

So I think we're going to call it out and start showing some progress. And just -- maybe just to kind of say a lot, I think probably more than the single digit, kind of range high single digits, and that's something we're looking to expose and start sharing. So I think it'll tell a better story than [ a major ] service descriptor.

[Daniel Rosenberg, analyst]

Understood. And then lastly, in terms of the IP impact, Bill described some of the levers in terms of controlling costs with utilization rates and IP penetration. So could you give us a kind of characterization of the margin profile on the IP side of the business and understanding that there's some variation there. But how high a margin can you get with IP products?

[Moataz Ashoor, executive]

Yes. There's essentially 2 sets. There's essentially the pure IP license and those won't be 70%, 80%. And obviously, some of it will define the pricing strategy to continue to accelerate and scale it. That's kind of the mark -- the watermark that we're driving towards. And then there is the -- the [ other IP ] where it enables us to automate and serve our customers in a more efficient way, leveraging machine learning, leveraging automation. And we expect those to be -- and those might be a project based and those orders might be part of a recurring kind of outsourced service to us. And those we expect to be over 60%. So that's kind of the margin profile that we're seeing through some of our IP supported revenues.

[Daniel Rosenberg, analyst]

Great. And congrats on a strong quarter.

[William Di Nardo, executive]

Thanks, Daniel. Any follow-up questions before we sign off? Great. Dennis, anything you want to say before we finish?

[Dennis Fong, executive]

No, I think I'll just turn it back to you.

[William Di Nardo, executive]

All right. Thanks, everyone, for continuing to show an interest and coming to these quarterly updates. Again, thanks to all of our employees who ultimately make these results reality. So a good quarter, happy with it, excited about what 2023 is going to bring. And we look forward to seeing everyone again, and I guess it's, what, about 60 days now.

[Moataz Ashoor, executive]

We'll see you shortly.

[William Di Nardo, executive]

All right. Thanks, everyone. Have a great day.