Copperleaf Technologies Inc

TSX:CPLF

Earnings Call Transcript

[Operator]

Good afternoon, and welcome to Copperleaf's Third Quarter 2022 Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, November 10, 2022. Your hosts today are Judi Hess, Chief Executive Officer of Copperleaf; Chris Allen, the Chief Financial Officer; and Paul Sakrzewski, President.

Before we begin, I'm required to provide the following statement respecting forward-looking information during the call today. The company will make forward-looking statements that are based on assumptions and, therefore, subject to risks and uncertainties that could cause actual results to differ materially from those projected. The company undertakes no obligation to update these statements, except as required by law. You can read about these risks and uncertainties and regulatory filings that were filed earlier today.

Also, the commentary today will include adjusted financial measures, which are non-IFRS measures. These should be considered as a supplement to and not a substitute for IFRS financial measures. Reconciliations between the 2 can be found in the company's regulatory documents, which are available on sedar.com or on our website.

In addition, commentary today will include key performance indicators that help evaluate the business, measure performance, identify trends affecting the business, formulate business plans and make strategic decisions. Such key performance indicators may be calculated in a manner different than similar key performance indicators used by other companies.

And with that, I'd like to turn the call over to Judi Hess.

[Judi Hess, executive]

Good afternoon, everyone.

On today's call, I will be making opening remarks before passing the call over to Paul to provide an update on client activity. After Paul's remarks, Chris will provide a detailed review of the financial results. Following our prepared remarks, we will open the call to questions.

Continued growth in subscription revenue drove a 27% increase in annual recurring revenue in the third quarter of 2022, highlighting the sustained demand for Copperleaf's solutions and continued strength in the decision analytics market. Our focus on delivering exceptional client value results in long-lasting partnership and has earned us a 100% client retention rate for those who have implemented our solution, which, in turn, creates high-quality, sustainable cash flows for Copperleaf. Part of the rationale for Copperleaf's IPO was our belief that we were at an inflection point in our $12 billion market based on multiple external forces that have been driving our strong backlog and record pipeline.

In the current economic climate, investors are asking if our outlook has changed and whether ESG will continue to be a tailwind for Copperleaf. My answer is simple. The long-term outlook for Copperleaf remains extremely robust and sustainability is continuing to take center stage. We are not seeing signs of companies backing off from these commitments. Honeywell recently launched an Environmental Sustainability Index, which demonstrates some of the trends we have been discussing over this past year. The index provides quarterly indicators of key trends pertaining to global efforts in climate change mitigation and other substantial -- and other sustainability initiatives.

The global survey conducted last month included over 600 respondents and revealed that nearly 90% of organizations are planning to increase sustainability budgets over the coming 12 months. And sustainability goals were perceived as the top corporate priority cited by 65% of organizations. Results from this data-driven index reinforce our belief that powerful secular tailwinds will continue to drive our long-term growth, investment by the world's leading companies demonstrates the importance of sustainable practices becoming a mandate from consumers, investors and company boards all around the world.

ESG has always been a significant growth driver at Copperleaf. And during the third quarter, we commenced 3 new projects focused on creating client solutions to drive new environmental, social and governance investments, allowing organizations to deliver on their GHG reduction targets and other ESG-related objectives. Globally, technology-driven approaches to sustainability are being increasingly prioritized by businesses, and Copperleaf has proven solutions to meet the rising demand in the space.

I will now pass the call to Paul to provide some insights on recent customer interactions and wins.

[Paul Sakrzewski, executive]

Thanks, Judi.

Q3 marked one of Copperleaf's busiest quarters for sales lead generation, which continues to drive our pipeline growth. This elevated activity has been driven by the increase in our global sales force coverage, more in-person travel and events as well as increased partner ecosystem traction. Beginning in the fourth quarter of 2021 and continuing into 2022, Copperleaf invested in attracting top sales talent and conducting sales enablement activities to improve our ability to prosecute the growing market for our solutions. We are currently seeing the recent cohort base deliver leads and pipeline activity, which are leading indicators of sales performance.

In Q3, Copperleaf held 2 of its 3 in-person regional community summits in London and Vancouver. These were the first in-person summits held at Copperleaf since May 2019, providing an opportunity for us to interact with our clients, partners and prospects and share the company's new products and road map. During the summit, Copperleaf's subject matter experts shared state-of-the-art usage of our products, demonstrated newly launched features and led productive discussions on pressing topics such as vegetation management, grid resilience and of course, ESG. The most impactful element of any Copperleaf Summit is having our clients share their insights and experiences with the community.

During the event, representatives from Duke Energy, Alectra Utilities, Anglian Water, National Highways, National Grid, Enbridge and AES had the chance to present the business benefits and process improvements they've realized using Copperleaf's solutions. At the Americas Summit in Vancouver, one client presented a case study on how they built a defensible plan to streamline regulatory approval using the Copperleaf solution, quantifying $6.8 billion in benefits for a $2 billion investment. Previously, the Utilities Regulatory Commission denied their first plan submitted in 2016 and eventually only approved 75% of their requests after 22 months of negotiation. Using Copperleaf, 100% of the $2 billion plan was approved in a record 7 months.

At the EMEA Summit in London, David Riley, Head of Carbon Neutrality at Anglian Water, presented a case study showcasing how Anglian Water through the use of Copperleaf's decision analytics solution delivered a 62% reduction in capital carbon, increased productivity and enhanced decision-making to increase the value delivered to stakeholders. As Judi mentioned, we continue to see strong demand from clients and prospects for decision analytics and support for their ESG initiatives, and we're pleased to have made significant top-of-sales funnel progress despite a softening economic backdrop. Our pipeline has grown over 30% in the past 12 months, which speaks to the strength of our value proposition and the new go-to-market team we've been building.

Looking at the macroeconomic headwinds, the long-term picture looks robust. However, a lack of client resource and a tight labor market continues to delay some client deployments and elongate some prospect sales cycles. This year, we're seeing an accelerated move to SaaS deals, which reduces initial year revenue that creates a larger recurring revenue flywheel for the future. We're also seeing some prospects opting to smaller step-in solutions as a starting point, which leads to a phased approach over time. A strong positive trend is the return to in-person client prospect and partner meetings in the second half of this year, which is having a significant impact on moving our deals forward.

I'd like to now briefly touch on a number of recent operating highlights. Copperleaf H2O, a rapid start solution for the water market continues to gain traction with the addition of Portsmouth Water to our growing list or clients. Building on the success of the H2O solution, Copperleaf introduced a new rapid start solution for electric distribution companies to improve implementation times and reduce sales cycles for smaller regional utilities. Copperleaf expanded to new geographies in Q3 with the signing of 3 new pilot projects in France, Italy and the Middle East as a result of the company's recent go-to-market investments. Copperleaf's first rail client went into production in Q3, which provided a primary beachhead in this new industry. Additional sector expansion has been made this quarter with pilot projects in both pharmaceuticals and mining.

The company released Copperleaf Suite version 22.3, which, among many features, include new options for native geographic information system support and strategic dashboards for executive reporting. The advanced analytical software for system level modeling went into production for the first time and Copperleaf turbocharged its scenario analysis support with a fourfold increase in performance, delivering the best decisions faster. These new options will provide high value to clients and deliver incremental revenue streams.

In Q3, strong engagement continued with Copperleaf Labs, where the company collaborated on 63 separate client engagements, supporting its strategy of innovating together within the Copperleaf community. Copperleaf's decision analytics solutions address problems faced by companies across multiple sectors in the global economy. Although we're not immune to the macroeconomic environment, our clients who are large critical infrastructure owners provide us with a degree of insulation as they're making both current and multi-decade investment decisions.

We continue to focus our growth in our core market sectors, adding new clients to our installed base and increasing the value we can deliver to our clients. We are the leaders in this emerging market and continue to see sustained growth tailwinds and a large untapped opportunity. We currently have a larger sales pipeline than any point in the company's history, and we're excited about the future.

I'll now turn the call over to Chris to review our third quarter financial results in more detail.

[Chris Allen, executive]

Excellent. Thanks, Paul, and good afternoon, everyone.

We're pleased to report that our third quarter results continued to deliver growth across our key financial metrics. Revenue for the third quarter was $18.1 million, an increase of 7.5% from $16.8 million in the comparative period, driven by an increase in new clients and the expansion of existing clients. Subscription revenue for the quarter ended September 30, 2022, was $10 million, an increase of 22% from the prior year. Perpetual and term-based license revenue was $0.4 million for the third quarter compared to $0.7 million in the prior year as we continue to see our deal mix shift towards SaaS. Subscription revenue represented 55% of our Q3 revenue, whereas perpetual and term license revenue represented 2.2%, but perpetual and term license revenue will vary period to period due to the size and timing of individual deals. Professional services and other revenue for the quarter was $7.6 million compared to $7.9 million in the prior year, and this segment represented 42% of Q3 revenue.

Our annual recurring revenue at September 30, 2022, was $42.3 million, a 27% increase compared to $32.2 million at September 30, 2021. As of September 30, 2022, our net revenue retention rate was 109%. This percentage will vary period to period due to the timing of large expansion contracts within our existing client base and the mix between perpetual and SaaS expansion deals. Revenue backlog was $93.1 million at September 30, 2022, an 18% increase from $79.1 million at September 30, 2021. Gross profit for the third quarter was $13.3 million compared to $12.9 million in the prior year, representing a gross margin of 73%. The increase in gross profit was primarily due to growth in subscription revenue from the addition of new clients and the expansion of existing clients, offset by a lower mix of perpetual and term licenses.

Net loss for the quarter was $7.5 million or a loss of $0.11 per share compared to a net loss of $3.3 million or a loss of $0.20 per share in Q3 2021. We had an adjusted EBITDA loss of $8.1 million for the quarter compared to a loss of $1.4 million in Q3 2021. And we finished the third quarter with $147.1 million in cash compared to $161.4 million in cash at the end of fiscal 2021, which places us in a strong financial position to build on our advantage and further penetrate the investment planning and decision analytics market.

In our experience, the critical infrastructure market is more resilient in a recession than many other sectors. And prior to going public, we've responsively managed our cash reserves through multiple cycles, while continuing to invest in our long-term growth strategy. Considering the macroeconomic environment, we remain focused on rigorous business management and accelerating our path to profitability. With a deep sales pipeline, our market-leading products, a strong balance sheet and marquee reference clients, we continue to be well positioned to further strengthen our leadership in the decision analytics market.

That concludes our prepared remarks. And I'll now hand the call over to the operator and open it up for questions.

[Operator]

[Operator Instructions] Your first question comes from Dylan Becker with William Blair.

[Dylan Becker, analyst]

An encouraging pipeline commentary you're calling out. Maybe I wanted to touch on the level of customer conversations and maybe how they're thinking about their investment expectations going into next year there. You're probably going through that budgetary process right now, but maybe how they're thinking about their own IT spend prioritization? And is there any benefit as they're thinking about their own internal processes, your capabilities are kind of striking while the iron is hot, obviously, that's a key value proposition you can deliver to them.

[Judi Hess, executive]

Thanks, Dylan. Thanks for the question. So maybe I'll start and then maybe I'll pass it to Paul to maybe embellish it a little bit because he's been working closely with our clients. When we look at the cycle, the sales cycle, we are always working with our clients to ensure that if our deals are planned for next year that we get them in that budget cycle of those clients, and that happens as part of our sales process as we go forward. And when we look at our clients, I think that the value propositions that we have are very compelling even in challenging economic climate, so like we have today. But we do see this focus on infrastructure in the world.

We do see the ESG drivers and we're seeing our clients and this additional spend that they expect to put into sustainability, which is what I talked about earlier. But even on the supply chain visibility, we can give them early supply chain visibility. We can give them agile opportunities to change their plan as things change, and we can obviously help them make trade-offs to pick the best investments that they can possibly make. So we do see that our clients are excited about what we can deliver and are planning as far as we can see from the visibility that we have to invest in solutions like Copperleaf moving forward because it can really address some of the challenges that they're seeing right now.

Paul, I know you've been working even more closely with our clients recently, looked from both Europe to Americas to APJ. Maybe you also have some commentary on this.

[Paul Sakrzewski, executive]

Yes. And without reiterating too much of what you said, Judi, I think one thing to add is that budget cycles are different in different places. The Japan budgeting process happens to coincide with their financial year, which ends in March. Australia has different budget cycles, again, sort of most of them ending in June and starting again in July. So there's a good spread of budget cycles through the year. And as Judi said, it's absolutely part and parcel of our sales process. So we work with our clients to ensure that we are part of their budgeting process and part of their IT plans going forward.

We do feel that this is an opportune moment for us to be stepping in and helping our clients. They're going to find themselves in constrained environments and in some cases, with increased spend around climate resilience and a lot of the infrastructure spending that's going on at the moment, we're part of those conversations as well. So in these sorts of times, we can help to stretch their dollars further and it's certainly central to the value proposition that we provide.

[Dylan Becker, analyst]

Got it. That's super helpful. And then maybe switching over to Chris or Paul as well, too. You guys talked about prudent kind of expense management going forward. Would love to get a sense of how you're thinking about your internal prioritization areas, right? As you think about investing in new market opportunities, ongoing innovation, kind of the R&D side as well as it sounds like you've got kind of some of the prior sales and marketing investments ramping now and contributing to that pipeline growth, but thinking about how you guys are kind of prioritizing your own investment between those 2 areas?

[Chris Allen, executive]

Yes. As you say, we've made a reasonable amount of investment in growing our capacity over the past 12 months. Going forward, we believe that we can maintain the current level of capacity and that we're set up well in terms of our ability to prosecute 2023 and possibly into 2022 in some areas of our business. So I think maintaining our current levels and maintaining -- and making sure that we're working on our current headcount and getting the best out of that group is certainly the answer to that question.

[Operator]

Your next question comes from the line of Maxim Matushansky with RBC Capital Markets.

[Maxim Matushansky, analyst]

I wanted to start with the H2O solution. You mentioned that the H2O solution is a streamlined implementation of Copperleaf portfolio, not introducing kind of the rapid start for electricity distribution. Can you talk a bit about what kind of off-the-shelf capabilities it provides and whether this has the potential to shorten sales cycles?

[Paul Sakrzewski, executive]

Yes, good question. So it is that a rapid start solution. It is a kind of low configuration version or an off-the-shelf configuration version of our standard product. The plan for that is that we step in, we provide a quick path to early value in the areas that our clients are most concerned about. And then after that, we have a plan going forward to expand out into the rest of the fully deployed suite. So it's part of our land-and-expand model. It's not really any different to that. And yes, the answer is definitely yes, it is shortening our sales cycle, as you can see in the U.K. water market where it's been initially launched.

[Maxim Matushansky, analyst]

Got it. Okay. That's helpful. And on the -- moving on to seasonality, you typically see the bulk of your bookings in Q4. Is there any progress that you can provide on that? Is that kind of progressing? How you've been expecting? Or is there any change to that seasonality given, like you mentioned, that now the budget cycles are potentially more spread out throughout the year?

[Chris Allen, executive]

Yes, it's a very interesting question. I mean, Q4 is always a big quarter for us. It's generally more than 50% of the bookings for the year, and this year is no different. The question around whether it spreads out through the year because of the different budget cycles globally, it does, but the predominant still lands in Q4, and we find ourselves like most global software companies to be Q4 heavy. We had good pipeline to prosecute Q4. So although it's always a big quarter for us, we can certainly see the number. And we are starting to see the progression to SaaS accelerate and there might be a little bit of downside pressure on perpetual revenue, but it builds up our ongoing recurring revenue flywheels over the long term, that's good for us. But the answer is always that Q4 is a fairly big year, and we'll be working on that going forward in terms of producing linearity through the quarters, but it's likely to remain quite big.

[Maxim Matushansky, analyst]

Got it. Okay. That's helpful. And switching to the consulting partners. I think you mentioned the strength in this quarter as well. Can you talk a bit about how that kind of current relationship has been playing into your go-to-market strategy across the sectors and geographies in terms of has there been any change in how many of your deals are partner influenced or noticeable shortening of sales cycles or have those stayed about the same? And I guess just adding on to that, like with the existing partners that you have, have already fully built out their Copperleaf practices by now? Or is there still room to kind of ramp up within the existing partners?

[Paul Sakrzewski, executive]

Yes. We're seeing increased partner activity. And I'd say that the number of deals that we see that are touched by partners as a percentage is increasing year-on-year. We're getting more programmatic as to how we approach our partners, and I think they're more of a programmatic part of our go-to-market now than ever they have been in the past. In terms of whether they've built out their practices and they're fully ramped, I'd say they're far from it. They're really, in most cases, just starting. And I think we've just got to the point where we're of scale so that they can really see a pathway to investing more in building a practice with us. So there's a long way to go. And currently, we are in a certain number of sectors. And I think as we grow, they'll build out different sector practices as well. So great start, good momentum and still a long runway to go before we're tapped out.

[Operator]

Your next question comes from the line of Thanos Moschopoulos with BMO.

[Thanos Moschopoulos, analyst]

Maybe just to clarify the commentary on sales cycles. I mean, so on the one hand, you alluded to the resource challenges that customers have and the macro uncertainty. On the flip side, you've got the rapid start initiatives, trying to shorten that. You mentioned the return to in-person sales, which maybe helps. So should our takeaway be that near term has been some lengthening, but with some of these initiatives that could be sort of an offsetting for us? Or just how do we think about the mix when we think about the overall sales cycle?

[Paul Sakrzewski, executive]

Yes. I mean there's puts and takes in there, and we can't see the future perfectly, but it feels like our clients are taking a little longer these days to make decisions. That's certainly what we're seeing. We're doing everything we can to shorten sales cycles through sales enablement, through rapid start and through partner enablement and leveraging the partner network, both in terms of some SIs and other partners. And -- but we certainly see pressure on the elongation of sales cycles going forward, and we're doing everything we can do to mitigate that.

[Thanos Moschopoulos, analyst]

Okay. Now you mentioned a number of pilots that are underway, including in new verticals. Just typically, what's the time frame for a pilot to convert to sign a deal?

[Paul Sakrzewski, executive]

Yes, it's a good question. I mean, generally, these pilots take 2, 3, 4 months to complete, and then there's some kind of an evaluation period after that. And then it needs to fit into the natural buying cycle in the annual kind of budgeting cycle of the client. So it's a little hard to put a direct number on how long it takes to go from proof of concept or proof of value as we like to say, to purchase. But that's been the general trend. It's usually 2, 3, 4 months of work with the clients then a joint evaluation and then after that, they go into their buying cycle.

[Thanos Moschopoulos, analyst]

Okay. Great. And then finally, on newer verticals. I mean, you obviously mentioned the couple of pilots you have going on. As you look at the pipeline, are you seeing more of a trend of some newer industries, imagine still predominantly weighted toward traditional industries, but just any commentary in terms of what you're seeing more vertical mix would be helpful?

[Chris Allen, executive]

I'll jump in on that one, Thanos. Yes, it's similar to what we've seen in the past. We're just, as you said, the majority of it is still core sectors, electricity, natural gas, water to the tune of 80-plus percent. But obviously, we've invested heavily in the market development team to look at some of these new sectors, and we're starting to see that pipeline build with exactly that investment starting to pay off.

[Operator]

Your next question comes from Gavin Fairweather with Cormark.

[Gavin Fairweather, analyst]

I thought I'd just start out on the mix of kind of SaaS versus on-prem in the pipeline. It sounds like from your commentary, you're seeing an acceleration in that trend. Curious if you'd agree with that assessment or whether we're just kind of continuing on the longer-term trend that you've been seeing for a few years?

[Chris Allen, executive]

I'll take -- I'll jump in and others can add, I guess. Certainly, that is the long-term trend. We've absolutely started to see or for a while now, started to see the transition from perpetual to SaaS. But yes, certainly, in Q3 and Q4, as we bunch up for what's typically a big quarter, we're seeing a combination of deal elongation, as Paul was just mentioning, that does have a tendency to push some deals into 2023, the next fiscal year. And we're also seeing some of those perpetual deals actually convert to SaaS. So it's interesting. And it's because we're dealing with relatively few deals in the grand scheme of things. As you know, our deals are quite large compared to our relative size. So any one of these individual deals that converts from perpetual to SaaS can actually have quite an impact on our in-year revenue.

[Paul Sakrzewski, executive]

And one thing I would add to that is we still see geographic pre-election towards certain flavors of software. So Japan in the electric sector, for example, still remains largely perpetual base. So we're seeing geographically, there are some areas which are slower to convert across to SaaS and others.

[Gavin Fairweather, analyst]

That's helpful. And then Paul, you were touching in your prepared remarks on some of the newer members of the sales teams and looking at that cohort specifically and how quickly they are kind of developing pipeline. Can you just maybe discuss the trends that you're seeing on that front and how you're thinking about kind of the time lines towards ramp in, in bookings and sales force productivity from that newer group?

[Paul Sakrzewski, executive]

Yes. Still with the ramp that we've seen since the IPO, as we've been investing, it's still relatively early days, as you can understand. And most of the capacity build has been focused on generating some positive momentum in 2023 and 2024. We're seeing early good signs. It's great to see pipeline coming through and some deals progressing in -- with the newer salespeople. We generally provide for sort of 9 to 12 months of ramp time before they're fully productive. And most of them are still within that period. But certainly, we're seeing good early signs globally of that team ramping well.

[Gavin Fairweather, analyst]

And then just lastly for me, just given kind of the dynamic macro environment. Can you touch on any kind of shifts in sales tactics that you're taking to respond? And specifically, I'm wondering whether you're kind of doubling down on customer success and driving base expansions just given some of the sales cycles we're seeing for new logos?

[Paul Sakrzewski, executive]

Yes. I mean, part of the go-to-market build has been a build at our customer success management group and our strategic account management group. So we've got people focused specifically on the installed base and making sure that they're achieving the success that we promise, as we went through their initial implementations and that they're progressing into further implementation of the software. But I'd say that other things are extending the offerings in ESG, making sure that we're building our database of success stories, add clients and making sure that we've got those white papers and success stories in place so that we can share those with other clients.

And of course, we're lucky to have a fully referenceable installed base, just about anybody that's implemented our software is happy to speak well with it to other clients. But it's again a little bit in line also with the fact that we help people do more with less. So in times where there is a bit of scarcity and there are some constraints, we also need to lean into that message to ensure that people understand that during these tougher times whether right solution for them.

[Operator]

Your next question comes from Koji Ikeda with Bank of America.

[Unknown Analyst]

This is [ George McGovern ] on for Koji. Just one for me. I was hearing your commentary on the lengthening sales cycles, but it sounded kind of like you're seeing that in some sales cycles and perhaps not in others. So I guess my first question would be, is that the case? Or is it kind of more general? And then if it is the case that you're seeing kind of differences in demand between the verticals that you service, is there anything to call out there? Is there any sort of verticals that are perhaps seeing tougher sales cycles?

[Chris Allen, executive]

I don't think it's vertical by vertical. People coming into sort of tougher economic times usually have their own circumstances individually from a company to company point of view. So it's more about that. They're also in the middle, usually of other software implementation. So there's capacity issues internally as well that we're seeing impact on these cycles and particularly during these times, those things tend to be exacerbated as decision-making criteria. So I don't think there's a trend that I could draw either geographically or within the sectors for you. But generally speaking, we're finding our clients being more cautious and probably pushing things into more levels of signatory authority, so we have to go through more loops is another thing that we're seeing. But yes, I don't think I can draw a pattern for you.

[Operator]

Your next question comes from John Shao with National Bank.

[Meng Shao, analyst]

I just wanted to revisit earlier one regarding your rapid star product. So in a normalized scenario, how much do you think the product has shortened the sales cycle? And also could you share with us some of the early feedback from customers so far?

[Paul Sakrzewski, executive]

Sure. Very hard to give you a number on shortening the sales cycle. But I think the best example of that is, we've gone from having Anglian Water, I guess, a couple of years ago to now having 7 of the sales of the water companies in the U.K. on the product. In addition to our summit that we had in London for EMEA a month or so ago, we went to the water conference, the asset management conference for water in the U.K. in Birmingham. A huge number of the people that were in the room are Copperleaf users now. So that was really positive.

[Meng Shao, analyst]

The other question I'm having right now is I'm just curious about what's driving your sequential increase in revenue retention rate. I know, Chris, you mentioned a few factors like project size. So is that a case for the 2% uptick this quarter?

[Chris Allen, executive]

Yes. I mean, quite honestly, as you know, I mean we've got -- our targets are higher than where we're currently sitting. 115, 120 is what we think we can absolutely achieve based on just the opportunity, the product opportunity that fits within our existing installed base today. So the shift from 7% to 9%, while move in the right direction is really just -- it's indicative of just the period-to-period variability we see even with expansion deals and large expansion deals, right? Some of those can be quite sizable, and we can see quite a large uptick in our NRR in any given period, just from one of those expansions coming into the deal line.

[Operator]

Your next question comes from Todd Coupland with CIBC.

[Thomas Ingham, analyst]

I'm wondering if you could lay out what your hiring plans are over the next 12 months? And what areas of the business you plan to add people?

[Paul Sakrzewski, executive]

Yes. As we've said, we've invested pretty well over the past 12 months, and we've been focused on building our team and building capacity for growth. With what we see of the macroeconomic environment, our focus is going to be on maintaining our headcount through 2023 and building on the existing team. So that's likely to be our plan for the next 12 months. And we feel like we do have capacity to prosecute the plan for 2023 and give us a good start in 2024 as well.

[Operator]

Your next question comes from Rob Young with Canaccord.

[Robert Young, analyst]

Just on the program delays you're talking about, does that have a different impact on perpetual versus software services? Is that part of why the software services taking a little more prominence or you're getting more traction movement there?

[Paul Sakrzewski, executive]

No, we don't really see that there's a difference between the 2 companies have their own criteria as to why they go perpetual and why they go SaaS. And I don't think it's linked to the delays that you're talking about.

[Robert Young, analyst]

And then the professional services line of service is another line, it was down year-over-year, correctly. And so there's a couple of things in the quarter that the lab engagements, with 63 separate lab engagements in the pilots. And so it seems odd that it's down. Just curious what's the driver there or maybe there's some context to better understand?

[Chris Allen, executive]

Yes. I wouldn't read too much into that. Q3 was just a really big services quarter where we were able to book a lot of hours and close some services revenue. So it was -- if you look back to the history, it was quite large. And in fact, what you'll notice is Q3 services are typically our biggest quarter generally. With Q4, there's been a lot of holidays and things like that, and not all of our clients are always available. So it's not unusual to see a big Q3 quarter like that. But yes, nothing in particular that really caused that.

[Robert Young, analyst]

Maybe just 2 other questions. I think you said that the top of the funnel is particularly where there's a lot of growth to the top of the funnel has really widened up. If you think about the funnel top to bottom, like is there any variation to call out? Are deals getting bigger? Are the opportunities getting bigger? Like is there just anything that you could characterize that growth at the top of the funnel?

[Paul Sakrzewski, executive]

Yes. I think we're seeing probably a little bit more variation in the funnel. So there are some bigger deals coming in. We're also seeing some clients often stick to solutions and which leans into our land and expand. There's just a lot more opportunities as we globalize and put more feet on the street in different places around the world and also as we expand out into different verticals, that obviously brings expanded pipeline with it as well. And so as we generate more reference cases in new verticals, every time we do that, it gives us the opportunity to go and approach a whole bunch more people out of that vertical. So that's what's driving.

[Robert Young, analyst]

Last question for me. It just seems like there's a lot of water announcements recently, and we're doing some of the work a year ago. It seemed as though your biggest -- one of the competitors you had is pretty strong in water, in particular, in the U.K. You've won a lot of deals there. And so I was just curious if you could describe why that's been so successful? Is that because you've been able to announce more deals there? Is the competitive set lower? Just really curious about why that is? Now I pass the line.

[Paul Sakrzewski, executive]

Judi?

[Judi Hess, executive]

Yes. No, I just wanted to jump in here, especially on the water side because this is one of my favorite topics. I'm glad you brought it up. I mean being able to effectively take over the market and water in the U.K. against one of our hardest gen, one of our competitors, where in their home country, in their home sector, I think it really speaks to the strength of our solution and also the strength of our solution to be able to move to different sectors, like we've always been talking about the sectorization of what we do and how applicable it is to other sectors. And I think that that's something where you really see that strength there.

And that's going to start -- that will of course supply to other sectors as we go forward, being able to sectorize or verticalize our solution with our value framework is really a very powerful tool. And we've just been able to do that in the U.K., which, of course, is mixing business with pleasure, absolutely for sure. But in addition to that, we're now seeing water expand into other geographies beyond that. So we've created this amazing beachhead in the U.K. And in addition to that, we see that water is, of course, a large sector around the world. And in particular, water is very advanced in the U.K., which also shows the power of our solution to be able to deal with the most advanced challenges that these clients face.

[Operator]

There are no further questions at this time. I will now turn the call over to Judi Hess.

[Judi Hess, executive]

So I want to thank you for joining us today. We are excited about the ongoing business progress that we've made and the tremendous opportunities that we have in front of us, and we look forward to providing future updates as the year progresses. Thank you so much.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.