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Good morning, everyone. Welcome to Tecsys Third Quarter Fiscal 2023 Results Conference Call.
Please note that the complete third quarter report, including MD&A and financial statements were filed on SEDAR aftermarket close yesterday. All dollar amounts are expressed in Canadian currency and are prepared in accordance with International Financial Reporting Standards.
Some of the statements in this conference call, including the question-and-answer period, may include forward-looking statements that are based on management's beliefs and assumptions. Actual results may differ materially from such statements.
I would like to remind everyone that this call is being recorded on Thursday, March 2, 2023 at 8:30 a.m. Eastern Time.
I would now like to turn the conference over to Mr. Peter Brereton, Chief Executive Officer at Tecsys. Please go ahead, sir.
Thank you. Good morning, everyone. Joining me today is Mark Bentler, our Chief Financial Officer. We appreciate you joining us for today's call.
Now before getting into our third quarter results, I wanted to take a moment to welcome Shannon Karl to the position of Chief Marketing Officer. Shannon comes to us with an impressive reputation at organizations like SAP, IBM and PricewaterhouseCoopers. As we scale up our sales and marketing efforts, we're excited to have Shannon onboard and look forward to the positive impact she'll have on our marketing pipeline and demand generation activities.
Our company began fiscal year 2023 with strong growth, underscored by solid SaaS bookings, and that momentum accelerated in Q3. This quarter, SaaS bookings at $5.8 million set a new record. Bookings in the quarter spanned both new and base accounts, the latter of which included six significant SaaS migration and expansion deals, highlighting the ongoing value that our existing customers see in the Tecsys platform.
We also added another healthcare IDN. In fact, we have had 15 healthcare networks either buy into or expand their engagement with Tecsys SaaS so far this fiscal year. Our SaaS offering has proven to be a system of choice for organizations grappling with supply chain complexity.
I'd like to take a moment to summarize some of the key announcements that we made during the quarter on partnerships as well as a product launch and then the key events of the third quarter of fiscal '23 and results of operations. Mark will then walk us through the financial results in more detail. And finally, I will comment on our outlook, followed by a Q&A.
Since our last results call, we made two notable partnership announcements. With respect to healthcare -- pardon me, we announced our certified integration status with Workday, an important milestone that supports the work we do at customer sites like Prisma Health, South Carolina's largest health system, and Corewell Health, the Michigan-based merger of Spectrum Health and Beaumont Health.
With respect to warehouse automation, we also announced our partnership with SVT Robotics, a key technology partner that provides integration software, which will give our customers broad access to new and emerging robotic solutions as these technologies become more and more important to be competitive in the industry.
We also officially launched our warehouse-in-a-warehouse e-commerce fulfillment solution designed for the converging distribution market. This is a warehouse management solution that helps run an e-commerce fulfillment business inside a wholesale or distribution warehouse already running a more traditional pallet and case-oriented software package. We are pleased to share that we have implemented this model for a global luxury cosmetics retailer whose existing ERP wasn't agile enough to handle their growing e-commerce business.
There are a couple of key indicators I'd like to highlight, which are contributing to our continued track record of stable growth as a SaaS organization. Last quarter, we highlighted an important milestone when our SaaS revenue became our most dominant recurring revenue stream, representing over half of total recurring revenue. We're now reporting a 36% increase in SaaS revenue for this quarter compared to the same quarter last year. Based on bookings in Q3, we expect SaaS revenue to exceed $10 million in Q4, another interesting milestone. And we feel like this is just getting started. On top of that, our gross and net retention levels remain very robust.
Our SaaS ARR bookings are up 152% in the quarter and up 68% for fiscal 2023 year-to-date through three quarters compared to the same period last year. Due to strong bookings in the quarter, our professional services backlog of $38 million is up about 29% from the same time last year. We believe that this is another leading indicator of where revenue growth is heading.
With growing SaaS backlog and many major delivery projects in the backlog, we are seeing traction for the Tecsys value proposition across all industries in which we do business within a market that is highly engaged. Tecsys is proving to be among the best cloud-based solutions available in the markets we serve, and we have the people, the products and the plan to provide what the market demands.
Mark will now provide further details on our third quarter and first nine months financial results.
Thank you, Peter.
We are very pleased with the strong performance in our third quarter ended January 31, 2023. Total revenue was a record $38.9 million, 10% higher than $35.4 million reported for the same period last year. Total revenue, excluding hardware, increased 12% compared to the same period last year or 10% on a constant currency basis. As many of you know, the significant portion of our revenue, in fact, about 68% this quarter is denominated in U.S. dollars. As a result, movements in foreign -- in currency exchange rates have impact on our reported revenue and growth.
We continue to experience strong and steady revenue streams underpinned by a 36% increase in SaaS revenue, up from $7.0 million in Q3 2022 to $9.5 million in Q3 2023. On a constant currency basis, SaaS revenue was up 33% compared to the same quarter last year.
SaaS remaining performance obligation, also known as RPO or SaaS backlog, was $128.3 million at the end of Q3 fiscal 2023. That's up 63% from $78.5 million at the same time last year. On a constant currency basis, that growth was 58%.
Maintenance and support revenue for the three months ended January 31, 2023, was $8.4 million, up 2% compared to the same quarter last year or flat on a constant currency basis. Maintenance and support revenue generally follows the trend of license revenue, and we expect that as current customers migrate to our SaaS offering, maintenance and support revenue will decline overtime.
Professional service revenue for the third quarter was $13.6 million, up 5% from $12.9 million reported for the same quarter last year or 2% on a constant currency basis. As we've noted in the last few quarters, we're starting to see the impact that our transition to SaaS will ultimately have on our professional services revenue line. That is, we're seeing a continued reduction in custom development work as customers opt for more out-of-the-box approach to platform implementations. We're also continuing to experience the increased collaboration of our partner ecosystem and helping to implement our systems. While we expect that overtime, these factors will continue to moderate our professional services revenue growth, we had a very robust professional services bookings quarter, which I'll get to in a second.
As we discussed in our published MD&A, we expect total services revenue, so that's combined SaaS, maintenance, support, as well as professional services, ranging between $32.5 million and $33.5 million per quarter in the short term.
License revenue in the quarter was $1.1 million compared to $0.9 million in the same period in fiscal '22. As we have stated before, with most of our SaaS bookings -- with most of our software bookings now SaaS, we expect license revenue to decline in general overtime. In the current quarter, we did book one new logo license deal. We certainly don't see this as a trend, and we had some user count expansions on the base.
Hardware revenue in Q3 fiscal 2023 was $6.4 million, flat compared to the same period last year. By way of reminder, we sell primarily third-party hardware to our customers for warehouse operations and in-hospital point-of-view storage and tracking. This part of our business tend to be lumpy and revenue recognition here is tied to delivery timing. That said, like last quarter, our hardware backlog remained strong, driven primarily by hospital network point-of-use orders.
Turning now to bookings. SaaS bookings are reported on an annual recurring revenue basis. As Peter mentioned, SaaS bookings were up 152% in the quarter to a record $5.8 million compared to $2.3 million in Q3 last year. I would point out that while SaaS bookings can be somewhat lumpy due to the timing of quarter deal closings, it's also helpful to look at a longer-term period to see the positive trend on SaaS bookings. We have been seeing some sustained momentum with SaaS bookings up 68% year-to-date compared to the same period last year. Of course, this is a leading indicator of SaaS revenue growth.
Professional services bookings were $19.8 million in the quarter, up 112% compared to $9.3 million in the same quarter last year, and that's up 6% year-to-date compared to the first nine months of fiscal '22. This highlights the lumpiness and impact of timing on reported quarterly bookings. As Peter noted, professional services backlog was a robust $38.2 million at January 31, 2023, up 29% from the same time last year.
For the third quarter, total gross profit was $17.0 million. That's up 12% compared to $15.2 million in Q3 of last year, led by higher gross profit contribution from SaaS, maintenance, support and professional services. As a percentage of revenue, gross margin was 44% compared to 43% for the same period last year. Combined SaaS maintenance support and professional services gross profit margin for the three months ended January 31, 2023, was 47%, flat compared to the same period in fiscal 2022, but up sequentially from 46% compared to Q2 of fiscal '23.
We expect to see continued services margin improvement in the coming quarters as the business continues to scale and as we focus development and operational energy on optimizing platform efficiency. In fact, we added a new slide to our investor presentation, which is available on our website that provides some directional indication of where SaaS and combined services margins would end up under certain projection assumptions. As I said last quarter, we see this as a multiyear journey with incremental benefits building overtime.
Switching now to our expenses for the quarter. Operating expenses increased to $16.0 million, higher by $2.1 million or 15% compared to $13.9 million in Q3 of fiscal '22. Operating expenses are up compared to the same quarter last year, primarily because of higher sales and marketing costs and higher research and development costs, including the impact of unfavorable foreign exchange rates.
Sales and marketing costs were up sequentially in Q3 on higher marketing program spend and employee-related costs. We expect an increase in sales and marketing costs sequentially in Q4, that will be slightly more modest than the increase we saw in. I'd also draw your attention to another new slide we added to our investor presentation that provides some insight into how we measure sales and marketing efficiency by comparing customer acquisition cost to lifetime value of expected margin contribution.
Now moving to research and development costs. Compared to Q2, research and development costs were down slightly in Q3. Q3 actually benefited from a $0.4 million true-up of R&D tax credits and e-business credits. As a result of this and increasing run rate costs, we expect Q4 research and development cost to increase relative to Q3.
Net profit for the quarter was $888,000 or $0.06 per basic and fully diluted share compared to $940,000 or $0.06 per share for the same period in fiscal '22. Adjusted EBITDA was $2.8 million in Q3 of '23 compared to $2.7 million in Q3 last year. Net profit and adjusted EBITDA were both positively impacted by a favorable foreign exchange of approximately $0.2 million compared to the same period last year.
Turning now very briefly to our results for the nine months -- first nine months of fiscal '23. Our total revenue was $111.2 million, up 8% compared to $102.9 million for the first three quarters of last fiscal year and up 6% on a constant currency basis. SaaS revenue for fiscal year '23 year-to-date was $26.3 million. That was up 37% compared to $19.2 million in the same period last year, and that's 33% growth on a constant currency basis.
Our net profit for fiscal '23 year-to-date was $1.6 million compared to $1.9 million in the same period last year. Foreign exchange movements had a positive impact of approximately $1.2 million on profit and adjusted EBITDA compared to the same period last year. Adjusted EBITDA was $7.0 million for the first three quarters of fiscal '23 compared to $8.4 million last year.
We ended Q3 fiscal '23 with a solid balance sheet position. We repaid our long-term loan in December of 2022. And as a result, we're now debt free. On January 31, 2023, we had cash and cash equivalents and short-term investments of $27.9 million. That was down $15.3 million compared to $43.2 million at the end of fiscal '22. The decrease results primarily from the repayment of long-term debt, seasonal working capital fluctuations and payment of dividends.
I'll now turn the call back to Peter to provide some outlook comments.
Thanks, Mark.
Tecsys' performance in the third quarter of fiscal '23 was strong. We have a strong balance sheet and a robust backlog and excellent sales pipeline. We are seeing widespread buyer intent across target markets, solid opportunity cycles and a highly capable sales team with the tools and talent to capitalize on a market that is ready to invest in new technology.
Our increasing market share in healthcare, supporting supported by an increasingly robust partner network and growing acceptance of the clinically integrated supply chain and consolidated service center model, together with our expanded healthcare sector offering, gives us confidence that the healthcare sector will continue to serve as an important revenue stream for us.
Turning to converging distribution. We continue to hone our sweet spot there and carveout our share of a massive market opportunity, driven by fundamental changes to the supply chain industry, changes spurred by aging existing systems, digital adoption and a realization that heightened consumer expectations are here to stay.
We are pleased that our third quarter of fiscal '23 continues to demonstrate our dominance in key markets and emerging opportunities in growth markets. It isn't hard to see that accelerated changes on the horizon when it comes to supply chain management and companies are starting to invest in that change. We believe that the remainder of fiscal '23 is tracking well against our internal KPIs, and we are well positioned to expand our footprint in this growing market.
In summary, I want to remind analysts and investors of our key themes as we look to a successful fiscal '23 and beyond. First, we'll continue to maintain a laser focus on expanding our SaaS revenue model. Secondly, we'll continue to deepen and strengthen our partnership ecosystem. This is key for us to scale rapidly into North American and international markets. Third, we will continue to expand and refine our distribution and omnichannel business platforms to service evolving needs in both our healthcare supply chain and converging distribution market segments.
Across our markets, we will place emphasis on customer success. We have long stood by the philosophy of customers for life, and a big part of that formula is to deliver value fast, stay connected and expand on the value delivered.
With that, we'll open the call up for questions. Thank you.
Thank you. [Operator Instructions] One moment for the first question. And it comes from the line of Suthan Sukumar with Stifel. Please proceed.
Good morning. Thanks for taking my questions. It's Daniel on for Suthan today. So, for my first question, it's on professional services. So, it looks like bookings grew at a healthy clip this quarter. I know you mentioned in the past that you're shifting some more work to your partners. So, for the quarter, are you seeing stronger attach rates? And is the work still more centered on the client service side or has that changed?
Yes, I think, I'll take that one, if it's okay, Peter. Hey, Daniel, thanks for the question. Yes, we're seeing -- the attach rates are moving around a little bit. I mean I think with what happened in the quarter with this very significant booking level, just in general, with SaaS, 5.8%, we saw over $19 million of PS bookings come in. I think we got -- we've got a reasonably good attach rate there. We still see a lot of activity with our partner ecosystem. We see more and more interest in -- from SIs and potential SIs. So, we see positive things there, but that attach rate and the level of bookings that we saw in the quarter were definitely robust.
Thanks. For my second question here with regards to IDN win, I think you mentioned that you added one new IDN win this quarter in your prepared remarks. Can you provide us an update on the deal and implementation cycles within healthcare at the moment?
Yes. I mean from the standpoint of overall deal flow, I mean, it always sort of ebbs and flows a little bit. At this point, we're at -- what would be at, Mark? I should know this. Are we at six year-to-date now signed?
Yes.
Yes. So, six IDNs signed this fiscal year. We still think we're going to continue to see some pretty good momentum there. Our objective is to get that up to 12 per year and then eventually up to 20 per year, and we think we're on track to do that. We see actually our -- even some of the sales reps that have joined us within the last 12 to 18 months are now driving very significant pipelines in healthcare. So, the deal flow looks very strong, and the average deal size looks very strong. So, we're very happy with that.
The implementation cycles really haven't changed, I would say. We are starting to make some headway in using sort of some artificial intelligence techniques to refine data -- master data. And that is having an effect on some of the implementations to accelerate the implementation cycles. We'll see how that plays out.
But the quality of master data in healthcare has always been a challenge. You'll often end up even within a network, if they've got 20 hospitals in the network, sometimes different hospitals are calling the same item by different item numbers and different descriptions and so on. So, when you start putting in an integrated end-to-end supply chain platform, obviously, that's a problem. You need the same item identifier to be able to do consolidated forecasting and demand planning and run an efficient supply chain. So, we're now -- that sometimes used to take months to cleanup that data.
We're now -- we've developed an artificial intelligence product that we're just in the process of working through to a final release, but we're already using it in the field. And it's working out quite well. So, we'll see how that continues to playout. That may end up being able to shorten some of these implementation timeframes. But other than that, they've remained pretty fun. I mean if it's a straight consolidated service center, the implementation will typically be sort of six to eight months. If it's a full end-to-end rollout across a large hospital network, it will take a couple of years.
Great. That's good to hear. And just one last quick question for Mark here on growth investments. Can you provide us an update on the expected size and timing of ongoing growth investments and their impact to margins in the near term?
Yes. Can you just -- I didn't quite hear you said on what type of investment?
Growth -- ongoing growth investments.
Okay. Yes. Just in general, I get it. So, I mean, a couple of different vectors there. We've been talking about professional services and how we've invested there. I mean we've got a pretty significant team there, and we've been -- we have been growing that team very rapidly here. We've got what we think is capacity that will -- with the existing team that can drive slightly higher revenue than where we're at right now on that line. So that's probably in pretty good shape for a while.
I think in terms of sales and marketing and R&D, I think we continue to grow there. In the prepared remarks, we made some comments about how we think about investing in sales and marketing. And in fact, we added a new slide in our investor presentation that's on our website there, which describes how we measure sales and marketing investment and efficiency. And our near-term expectation there is that we're going to continue to invest to capture market share. So, no change there.
On the R&D side, as I mentioned in my prepared remarks, what we saw there in the current quarter was a slight -- we had a bit of a true-up that we recorded in the quarter on R&D tax credits. So, the R&D expense that came through in Q3 was a little bit lower than what it will be next quarter without that adjustment and with some continued increase in run rate costs. But, yes, we continue to see some investment happening in those areas going forward.
Great. That's helpful. I'll pass along here.
Thanks.
And our next question comes from the line of Gavin Fairweather with Cormark. Please proceed.
Hey, good morning.
Hey, Gavin.
Good morning.
Just to clarify, did you say six SaaS migrations this quarter?
Yes, we did.
Yes.
We said six migrations and expansions.
Okay. I guess I'm just curious how you're thinking about this going forward. I think in the full product release is going to be SaaS only. So how is that kind of changing the nature of conversations with the base around migration? Like, do you expect that to be a catalyst to continue to drive this trend forward?
Yes. I mean there's no question. I mean we -- as you may know, our 22.1 release that we -- so that was the release we released in last year in the spring. That was our last on-prem release. So, I mean anyone now who is looking at -- anyone in our customer base that is looking at our latest product releases, all the work we're doing around the Drug Supply Chain Security Act, work we're doing that I mentioned there about using artificial intelligence to accelerate data master cleansing, all of that kind of enhancement and for movement is only on the SaaS platform.
So, because of that, we're seeing a steady rising interest in the SaaS platform, combine that, of course, with the fact that increasingly, organizations find it's getting -- while it's just getting more and more difficult to operate your own data center. It's hard to keep the people. It's hard to maintain security. It's hard to protect against ransomware. So, there's a variety of reasons why sort of interest in public cloud is rising and combine that with the fact that all of our new developments and features and functionality are only on the SaaS platform, we're definitely seeing an accelerating move to migrate to the SaaS platform.
And I know that you -- I mean, you typically sign multiyear contracts. So, should we think about that maintenance stream over the next kind of three to five years really declining quite significantly with obviously a big upsell and revenue accretion on the SaaS line?
It should, Gavin. I mean it's held remarkably steady so far. Frankly, we've been pleasantly surprised how it's held steady, but it has to begin to decline. I mean the migration over is just becoming quite significant and is definitely outpacing price increases and expansions on the on-prem side of things. So, we certainly expect the maintenance revenue line to begin to turndown really within the near term.
I mean, Mark, I don't know if you want to add any more color to that.
Yes. No, I think that's exactly the point. I mean, in the quarter, Gavin, what we saw here was it was -- it's pretty extreme from what we've seen historically in terms of the number of migrations in one quarter. So that will start to move the needle on maintenance revenue. On the other hand, we did see -- while we keep saying expect license revenue decline, we did see another $1 million license quarter. And that's back-to-back million license quarters and we definitely don't expect that to continue. So that will also put pressure on lower additive maintenance coming into that line at the same time that migrations are sort of taking maintenance and shifting it up to SaaS.
Got it. And then maybe just on converging distribution. The Manhattan commentary was, I'd say, cautiously optimistic on kind of the demand environment there. Curious if you've seen any kind of green shoots on that side of the business or whether the sales environment has shifted at all in kind of the past three or six months?
Yes. I mean, we're definitely seeing the same green shoots. So, it's interesting. We're -- Steve Sybert is the VP of Sales that heads that sales team. And I know I started a pipeline review that he was leading the other day. And I mean his -- you can tell, I mean, his confidence and optimism is way up from six months ago. I mean in the fall, there was still a lot of -- pardon me, I had a cold that ended last week, but this cough won't go away. But the -- in the fall, we saw a lot of top-of-funnel activity that I think I talked about on a fall conference call. We saw just a lot of tire kicking, but not a lot of movement into the actual sales pipeline. And that now seems to be shifting. We're seeing a lot of good activity moving right into the sales pipeline. So, we're certainly optimistic that, that business is starting to heat up again.
I mean their supply chain issues have largely smoothed out, right? I mean, a year ago, I mean, they couldn't get product from China, the factories -- so many factories were closed down, and the container costs were extreme and the backlogs and the ports were crazy and whatever else. And that's all smoothed out. I mean you've probably seen the Port of San Francisco now has actually spare capacity here -- sorry, Port of Los Angeles, I mean, now has spare capacity and the price of a container has come backdown to not quite to pre-pandemic norms, but it's come the vast majority of the way backdown again. So, everything is really starting to flow again. And as a result, a lot of these organizations are able to start looking towards the future rather than just focusing on current crisis.
No, that's very helpful. And then I appreciate your commentary on sales growth productivity and I haven't yet gotten to the slide in your deck. I'm curious like how many of your AEs within healthcare are kind of relatively new, let's say, kind of added within the past 18 months? And maybe just touch on kind of the pipeline generation in that newer cohort and maybe how much bookings upside there could be as the newer reps mature?
Yes. I mean, we'll see how that continues to turn out. That's something Bill King is tracking very closely. He sort of talks about his juniors and sophomores and seniors and looks at sort of how their pipelines are moving. And it's interesting. I mean, our long-term sales reps that have been with us a long time in that market. They currently are carrying, I think, roughly a third of the pipeline. Two-thirds of the pipeline is really being carried by reps that have joined us in the last -- really over the last three years.
I don't know if I want to give more detail than that, but we're pretty happy to see the success in pipeline building that's happening. And of course, it factors into the strategic planning process we're going through now as we look at our next fiscal year to say, okay, how much do we grow that team, how fast we grow that team, et cetera. I mean the success in pipeline building that has happened with the ones that joined us two years ago and the ones that joined us a year ago, certainly encourages us to keep the investment going.
That's great. I'll pass the line.
And our next question comes from the line of Nick Agostino with Laurentian Bank. Please proceed.
Yes. Good morning, guys.
Good morning.
Circling back to the comment you made, I guess, on the complex distribution pipeline improving over the last six months, I'm just wondering what are your clients -- obviously, as we go through 2023, there's a lot that continued recessionary fears. So, what are your clients thinking that is maybe changing their approach specifically in complex distribution and just maybe any other comments you might have on the other market segments, healthcare and retail when it comes to the economy and a potential recession in general?
Yes. I mean what we're seeing is that, I mean, complex distribution in many ways is more of a horizontal than a vertical, right? So, it spans many industries. And the recession fears are very much centered in certain industries. I mean, we've got clients that, for instance, mainly sell sort of truly high-end luxury goods. They don't seem to be worried at all about recession. We've got clients that are selling wine and spirits. They're not worried. We've got clients that are supplying the construction industry. They're not worried. They've gone through a period of time where there were so many supply chain shortages. They had sort of some bumper years, and they're seeing more of a return to normalcy, but they're still seeing perfectly healthy demand looking ahead into the future.
There are some segments, giftware, some home furnishings areas, et cetera, where there seems to be more caution. But our -- I mean, our approach always in the converging distribution market has been to sort of focus on this year's hotspots, and those hotspots try to move around. So that's why right now, for us, even though there are some segments that are definitely acting cautious, there's plenty of segments that are not acting cautious at all and are saying, "You know what, we've come through some pretty strong couple of years here, and we now need to invest for the future and so on." So, we're seeing that overall activity level up quite significantly. We'll see how it plays out. In some ways, you don't really know until the deals start to sign and actual deal signature is still slow in that space. But the pipeline movement is now looking quite healthy.
In healthcare, specifically the hospital space, it's -- I mean that market just continues to be on fire. I mean, I've never seen that market in such a hurry. They are anxious to get supply chain platforms rolled out, whether they're using our services or third-party services, other sort of members of the ecosystem right now, [Deloitte] (ph), et cetera, it's sort of, "Okay, let's get this done. Let's get this in. Let's get much better at managing our supply chain issues."
I mean, the backlog issues and the allocation issues that plagued that industry during the worst to the pandemic have settled down for some supplies. But by and large, there's a growing recognition that the supply chain issues that have plagued if I -- if you ignore the blip, that is the pandemic, the supply chain issues that have plagued healthcare over the last 10 or 12 years are only getting worse. So, there's a real focus on saying, we need agile supply chains that are real-time digital platforms that can help us to deal with these issues. So that market is only getting hotter.
Okay. I appreciate that. It was excellent color. Just curious on that license deal that you guys announced for the quarter, just given everything you said about the shift to the public cloud, maybe just a little bit of color as to what sector that customer was in and maybe what the basis was for signing a license deal as opposed to expecting a SaaS deal?
Yes. That was a bit of a unique situation. It's -- I don't want to give out names or whatever, but that's a general industrial sort of supplies type company. And the internal sort of thought process in that company is that they weren't ready to adopt SaaS yet. So, they knew they were literally buying the last release of an on-prem product line. They knew there was going to be no upgrades coming as part of the product line, but they had searched the industry.
They had looked at all of the usual suspects. They checked out NetSuite. They checked out Microsoft. They looked at some of the Oracle and SAP products and so on and end up coming back and saying, you really have the best product for a true sort of business-to-business wholesale type platform. And so, they decided to just go with it anyway. So, we decided to take them on.
Our hope is that overtime as they get more comfortable with the SaaS world, and we continue to move forward with more and more capability in the SaaS platform that they'll eventually migrate over to the SaaS platform. But we think given that, that product line, I mean, that they bought is already sort of coming up on its first birthday, we really do think that's probably the last one.
Okay. I appreciate that color. And then, the last question, just on the hardware revenue, it was a strong number this quarter. Just trying to understand supply chain bottleneck you guys talked about in the past. Any movement that would have helped you guys, I guess, [put into] (ph) that strong hardware number? And specifically, on PropTech, has that side of the hardware market improved over the last few quarters or even over the last quarter? I'll leave there. Thanks.
Yes. Nick, we continue to have challenges there on the PropTech side. So that number that you saw in the quarter wasn't pushed upward by supply chain issues being resolved in the quarter on PropTech. But we do mean mixed picture here, like that was a pretty big hardware number anyway in Q3. That said, PropTech supply chain issues do -- they do seem to be starting to come to resolution now. We expect, in fact, to be starting to ship some PropTech stuff, maybe not yet in Q4, but just after problem in Q1 and Q2 and beyond, we're going to start seeing that loosen up.
Okay. Great. Thank you.
And our next question comes from the line of John Shao with National Bank. Please proceed.
Hey, good morning, guys, and thanks for taking my questions. I'm just curious about any other opportunities down the road regarding your product ecosystem. Peter, you already mentioned like your integration with Workday, collaboration with a robotic company and rapid implementation in retail space. So, anything else we should be expecting?
Not really in the short term. I mean, we're really looking to deepen the relationships with the ones that we've already got in place now. I mean there's always some organizations that we work with in the field, where the sales reps from those organizations work with the sales reps from our organization, even though, in fact, sometimes the other companies' head office, things they compete with us kind of thing, and that kind of thing continues to happen.
But in terms of these sort of mainline partnerships, Workday, I mean, we continue to look to deepen that relationship. If you look at what's happening with Deloitte, I think there's huge opportunity to deepen the relationship with Deloitte. RiseNow continues to grow at a very significant clip largely on our platform. I mean, they're hiring people. They're building out resources. They're taking on more projects, largely around assisting with implementing our platform and all of the ancillary work that goes around that. So, our focus really is just continuing to deepen those relationships more than anything else.
Okay. Thanks. I think, Peter, you also mentioned international market in your prepared remarks. So, how should we assess this heightened opportunity? And how should we think about your go-to-market strategy outside North America?
Yes, that is interesting. We'll see how that develops. The latest platform that we released in the fall, the 22.2 release contained a lot of additional functionality for the Western European market space, specifically some of the regulatory requirements for France and Germany. And we're already seeing deployments happening now in that region. We've got some other opportunities in the pipeline that look like they're moving along well. So, we expect to see more of that.
As you know, we had been looking for and continue to look for the right acquisition to really accelerate building out our market presence in that region. Those are proving very difficult to find at least any -- at least at prices that are anywhere near rational in our opinion. So, it may well be that we just begin to build that out organically and we're going to be making that decision in the next -- probably over the next couple of months.
Okay. Thanks. And last question for me is, if I recall from the last few quarters earnings call, there were some challenges with client capacity, talent shortage and supply chain, supply with your hardware. Now when I think about those challenges, can we say that they're kind of moderated, and we're now in a more normalized environment?
They're moderating, but I think they're moderating because of specific proactive steps that clients are taking to deal with them. There's been substantial increases in wages paid for supply chain workers and warehouses and so on that allow those positions to effectively compete for talent with Uber drivers and all the other places that those -- some of those people have gone. There's also agencies that have grown up to help to fill those spaces that are dealing with returning military placements and so on that can really help to fill some of those roles.
And robotics is growing very significantly and is enabling some of these warehouses to get the same work done with less people. I mean robotics sometimes doesn't make any sense when you can hire warehouse workers for $15 an hour. When you're having to pay $30 an hour, all of a sudden, the whole robotics starts to make a lot more economic sense. So, we're seeing a real increase in the rollout of robotics, allowing many of these places to run with smaller pools of users.
So, it is starting to abate, but I think it's starting to abate not because the labor market is changing, but because these organizations are sort of rising to the challenge and finding new ways to attract and keep talent and yet use less of it at the same time.
Okay. That's great color. Thanks.
Great. Thanks.
[Operator Instructions] And our next question comes from the line of Rini Sharma with BMO Capital Markets. Please proceed.
Good morning, Peter and Mark. Thanks for taking my question. So...
Good morning.
Good morning. You've already spoken extensively about the pipeline in both healthcare and flex distribution. Would you be able to provide us maybe some color on the split between the two segments and how you expect that to evolve?
I'm sorry, I missed the one word on the what between the two markets?
The split.
Oh, the split. Sure. I mean, right now, our pipeline overall is two-thirds -- roughly two-thirds healthcare. In spite of the fact that our -- if you look at our company revenue, we're still 55% non-healthcare. So, we certainly expect that in the next -- I would even say the next 12 to 24 months, we expect healthcare to continue to be probably two-thirds of the pipeline.
As we look at longer, if you start looking out at sort of the third year, we do expect just because of sheer market size and sort of rising demand, we expect that to come back to probably somewhere more around 50%-50%, but we'll see. I mean, that gets into real crystal ball gazing in terms of how that's going to play out. But certainly, right now, it's -- our healthcare -- our pipeline is absolutely dominated by healthcare.
And so, when you think of growth investments over the next 12 months, would you consider if the demand is lower in complex distribution, a little bit higher on the healthcare side. So, is it a possibility that you would allocate investments accordingly?
Yes. I mean, certainly, our focus here is on the healthcare market. I mean, there are certain functional things that we need -- we know we need to invest in for the general distribution market. And because it is such a sizable market and has so much future potential, we intend to remain very competitive in that market.
So, from an R&D standpoint, we're continuing to invest in the platform for that market. There is a lot of carry over. I mean we're beginning to invest, for instance, in updating the APIs across the platform to sort of the latest and greatest technology, for instance. Well, that really helps both markets. There's no -- that is not sort of one vertical or the other. That's the whole platform and affects both markets.
But certainly, going into our fiscal '24, I would expect, and I've actually got an off-site strat-planning meeting with our Board in a couple of weeks. So, I don't want to come to any conclusions before we go through that strat-planning process. But certainly, all the data would support us pouring the bulk of our sales and marketing effort over the next 12 to 24 months into the healthcare space.
Makes sense. And so, going back to healthcare, are you like -- there's obviously been a lot of momentum, but are you also seeing a [halo effect] (ph) on the pharma side?
Are we also seeing -- sorry?
Are you also seeing any demand on the pharma side in healthcare?
Yes, we are. Two areas actually. We are seeing some interesting demand for the in-hospital pharmacy and the distribution network within a hospital network for pharmacy. Some of that centers around proper management of 340B, which you may know is this interesting sort of U.S. regulation that creates a very low priced sort of supply chain for pharmacy being supplied -- pharmaceutical products being supplied to mainly indigenous people group.
So, if a hospital serves a region of the country that has a significant indigenous population, then they become a 340B licensed hospital and are allowed to buy certain drugs at much, much lower prices and so on. So that our platform manages all that and streamlines the processes and all that and so on. So that we're seeing some interest around that.
And in fact, I think it's this week, we have an event happening out in Seattle, where we're meeting actually at an AWS cloud center there to run a sort of a pharmacy seminar. And last I heard, I think we've got eight hospital networks coming to sort of sit through the seminar and engage in sort of how they need to modernize their pharmacy supply chain and so on. So, we're seeing a good degree of interest in pharmacy there.
We're also seeing some rising interest from the mail order pharmacy market. And we'll see how that evolves. We have one client in that market now. But if you look at the pipeline, we're starting to see some rising interest around mail order pharmacy, which are mainly operated -- those mail order pharmacy operations in the U.S. are mainly run by the big insurance companies. So, for drugs that are that are long-term sort of chronic type drugs, cholesterol-lowering drugs, blood pressure lowering drugs, et cetera, that you're going to be on maybe for the rest of your life. Rather than going to the pharmacy, you opt for the mail order fulfillment and they just arrive in the mail every month kind of thing. So that business is a very significant and growing business in the U.S. market, and it looks like that may be turning into an interesting market for our pharmacy offerings as well.
All right. Thank you. That's a very helpful color. And lastly, if you could provide any details on the IDN you added this quarter, like how big it is and the impact you're expecting on revenue?
Yes. I mean it was a fairly typical sized IDN. It was actually a children's hospital. We're not giving out the name at this point, but it was a large children's hospital. We mainly pursue -- when we talk about the top 300 IDNs that we pursue, we mainly pursue IDNs that are over $1 billion in net patient revenue. And that is the bulk of the pipeline. It's the bulk of what we pursue and it's the bulk of our client base. We've got a few below that, but this one was a fairly typical. It sort of fits right into your sort of average-size deals.
Our average size, if you look at our last sort of 12 months, a typical IDN is coming in a little north of $600,000 of annual recurring revenue. And that's up from sort of $350,000 or $400,000 a couple of years ago. So that's typically where they're coming in. Some of them come in below that, some of them come in significantly above that if they're biting off more at once. But that's a pretty typical type deal.
Excellent. Thank you. That's it for me.
Great. Thank you.
Thanks.
And our next question comes from the line of Amr Ezzat with Echelon Partners. Please proceed.
Good morning. I just have a couple of quick ones for you on the new slides.
Okay.
Can you walk us through the SaaS margin expansion? Is that just on scale?
It is. Yes. The projections that you see in that -- on that new slide in that investor deck is really based upon a certain assumed SaaS bookings growth level, which is disclosed there and a certain incremental margin level, which is also disclosed there. So, we wanted to lay it out in a way that was pretty evident that these are projections based upon those assumptions, but this is how the platform scales given those assumptions and where we would expect margins to go given those assumptions.
Okay. Then what are the costs associated against like the SaaS revenues? Who'd have thought that this would be like already at 80%, 90% margin.
Yes. And you're right, I mean that's the direction. It's going in that direction. But as we've talked about in the past, we have a core -- a bunch of costs that you have to incur in order to run a 24/7 operation, including security and 24/7 ops team and support team. And once you build that up, eventually, you get to the point where you can really scale off of that base of investment. And that's what we're starting to see happening, and that's what we're sort of projecting in that model.
Got it. Then will you guys be breaking out your services margins in your financials going forward between SaaS and the rest of it, like maintenance and support?
We're talking about that internally, just providing more insight into that because clearly the market -- the market is interested in that, and that's, in fact, the impetus for that slide. No commitments right now, but we see the interest there, and we want to shine some more light on that because of that interest.
Understood. Yes, that's very helpful. Then if I think at the other side of revenues, I guess, on license and hardware, is 30% margin a good number long term to use, if I were to sort of project that chart for license and hardware?
I mean, it's kind of -- it's a little bit of a fielder's choice there, Amr. Frankly, I mean the PropTech stuff that we sell in hardware is -- it's typically higher margin than that. License, like I said before, we don't expect to have $1 million quarters. I know we just had a couple, but we don't expect to have $1 million license quarters, and that has the opposite effect on that net margin. Our third-party hardware business is -- that margin is down in the 20%-s, typically, it might get up to 30%, but it's kind of in that range.
So, then the question becomes, well, how much of that mix is PropTech out there? And what does that do to the margin? And how much is licensed and what does that do to the margin? So, I mean, I'm giving a little bit of evasive on the response here, but that's kind of why that 30% is showing up in there. And if you look at the future and headwinds and tailwinds, there's headwind on that margin for declining license and there's probably some tailwind on maybe on PropTech mix.
Understood. Thanks. These are very helpful slides. I'll pass the way.
Thanks.
And the next question comes from the line of Steven Li with Raymond James. Please proceed.
Thank you. Hey, Peter, Mark. I have a question on your PS. So, it seems like the growth has been slowing down. Is this temporary, or is this more structural in that maybe more implementations is being done by your partners?
Yes. I mean, the jury is still out on that a bit, Steven. I mean we've been talking about what we see as kind of structural shifts happening over the last couple of quarters and believe that, that is -- that structural shift is going to continue. And that structural shift is driven by a couple of factors. One is the fact that as more and more customers and prospects choose SaaS, they want to be more and more in line with a mainline SaaS version that is easy to upgrade going forward. And that means less custom modifications.
Another thing that's driving down custom modifications, which we bill for, which we've historically billed for, another thing driving down custom modifications is that healthcare customers tend to, not always, but tend to be a lower level of modifications even on our historical platform. So as more shifts towards healthcare, that probably also brings down the custom mod activity overtime. So that's custom mods being one systemic part of decreasing growth rate or moderating growth rate in professional services.
The other thing is, as you mentioned, it's the partner ecosystem point. And we do see that happening. We do see that as a long-term structural trend that's going to moderate professional services growth. And we think that's true in the future.
All that said, what just happened in Q3 is we booked $19 million of professional services in one month. So, there's clearly some inertia there for some strong professional services revenue in the quarter and quarters ahead. We just -- in the results that we just put out, we hit a total combined PS revenue level of sort of mid $13 million, about $13.5 million. And we think we have capacity to drive probably another $1 million on top of that number with our existing team in the short term. And with that $19 million of backlog -- that $38 million of backlog-driven by that $19 million of bookings in Q3, we kind of expect that there's going to be some PS revenue growth coming in the quarter and quarters ahead.
Got it. And I guess, if I take your capacity for another $1 million, so does that mean when you look at your PS organization, I mean, what is the kind of utilization you're running at, like is it above 90%?
Yes. No, nowhere near 90%. And nobody could run a PS organization at that kind of level for any kind of sustainable time. I mean we sort of shoot for something like if we could be around really, really broad terms in the 60%-s, I think you're really at a very strong utilization level that's sustainable.
Some of that comes down to the fact -- sorry, I was just going to say some of that comes down to the fact that different companies sometimes talk about utilization levels in different ways. Some sort of score their utilization out of 1,500 hours a year because they are 1,400 hours a year because they've already taken out vacation and education time and sick days, and you name it, and -- others score it. We score it in very simple terms, literally total number of working hours in a year, how many of those hours are billable. So, it -- but I know there's differences across the industry in terms of how people score it.
Typically, the way we score sort of industry best-in-class tends to hit, as Mark says, the sort of the mid-60%-s up to maybe 70%. It tends to mean that in a crunch, you can wrap that all the way up to the low 80%-s, but the low 80%-s are not sustainable. People would just get too tired running at that pace. So, if you've got a bunch of go-lives all happening in the same month, you might get up into the low 80%-s, but your average over any extended period of time is going to be quite a bit lower than that.
Got it. Thanks, guys.
Thanks for the question, Steve.
And Mr. Brereton, there are no other questions. I'll turn the call back over to you. Great.
Great. Well, thank you, everyone. Thank you for joining us today. And we -- as always, if you have any additional questions, feel free to reach out to Mark or I. And otherwise, we look forward to talking to you again at the end of Q4. Q4, of course, has our audits to follow. So, the actual release of numbers, we would expect to be around the end of June. So, I look forward to talking to you then. Thanks. Bye for now.
Thank you. That does conclude the conference call for today. We thank you for your participation, and ask that you please disconnect your lines. Have a great day.