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Good afternoon, everyone. Thank you for standing by. Welcome to the TECSYS Fourth Quarter Fiscal Year-end 2019 Results Conference Call. [Operator Instructions] Please note that the MD&A and financial statements were filed on SEDAR aftermarket today, July 3, 2019.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 Wednesday, July 3, 2019, at 5:00 p.m. Eastern Time.I would now like to turn the conference over to Mr. Peter Brereton, Chief Executive Officer of TECSYS. Please go ahead, sir.
Thank you, and good afternoon, everyone. We appreciate you joining us for today's call. Earlier today, we issued our fiscal '19 fourth quarter and year-end financial results. And as already stated, a copy of those results is available on SEDAR and on our website at tecsys.com. The full year results are audited. Joining me today is Mark Bentler, our Chief Financial Officer.I will start by summarizing the key events of fiscal 2019 and reviewing our financial results. Mark will walk us through the financials in more detail. I'll then close with some comments on our outlook followed by a Q&A session.There are 5 key highlights that I would like to focus on as I reflect on the past year: acquisitions, branding, partnership, expansion of our target markets and the move to a SaaS model.On the acquisition front, TECSYS acquired OrderDynamics in November of 2018. This acquisition expanded our omnichannel distribution capabilities for e-commerce companies as well as adding omnichannel support for our complex distribution market.Just recently, in February of this year, we announced the purchase of PCSYS, a leading European supplier of software and hardware solutions for warehouse management, transportation management and labeling.I am pleased to see that the integration of these companies is currently underway and going well.In January of 2019, we announced a new brand identity and logo. This is anything but cosmetic change. From the outset of the rebranding process, we recognized that a great brand should reveal the purpose and ethos of an organization.We believe the new brand evokes, at once, both the warmth and high standards of quality that the company represents.This new identity is driven by our inherent culture of excellence and highlights the purpose of empowering good companies to achieve greatness by clarifying uncertainties and overcoming challenges in their complex supply chains.We've had great feedback on the new branding, and we see concrete results in boosting our profile in the marketplace.I have spoken before on these calls about our partnership ecosystem. Our foundational relationships with companies, such as Workday, continues to expand. In this past fiscal, we won 3 new accounts in the healthcare market with Workday, and our work with them continuous. We also continue to expand our partnerships with systems integrators and see them playing a key role in our deployment strategies. It's difficult to overstate the importance of these partnerships to our business.The growth in the ecosystem improves the array of services that our customers can take advantage of and expands our market reach.Turning to the subject of our target markets. Pardon me, I'm in day 7 of a cold, so you may hear this cough a few times.But turning to the subject of our target markets, fiscal 2019 was the year that healthcare returned in very a significant way. Bookings from hospitals soared 65% over the prior year as we signed 6 new IDNs, and many existing accounts expanded their solution footprint with us. These sales included solutions for pharmacy, OR, cath lab, nursing supplies as well as warehouse and transportation and demand planning and forecasting. This momentum carried right through to the end of the year. We believe it's an excellent sign of things to come.Finally, as many of you know, at the beginning of fiscal '19, we undertook to establish a more robust longer-term recurring revenue stream to gradually replace our existing economic model of perpetual licensing.As Mark noted in the press release that we put out today, we are making good progress, but it is not without some sort of short-term financial impact due to the requirement to recognize revenue over a longer period. The short-term impact will be discussed in more detail later in this call. At a big picture level, however, this is an exciting transition as we move the business to a recurring revenue model. We look forward to providing a more holistic solution for our customers and to providing a far less lumpy operating model for our investors.At this point, I want to turn to the financials. Total contract value bookings for the year reached $63.2 million, a 31% increase compared to $48.1 million booked in fiscal 2018.We added 23 new accounts over the course of the year compared to 12 in fiscal 2018. Our contract bookings in the fourth quarter of fiscal '19 demonstrated how our momentum increased through the year. We achieved $19.2 million in bookings in Q4, a 31% increase over the $14.7 million of Q4 of 2018. This growth reflects continued growth of our healthcare business.Mark will now provide some details on our financials for the year and the quarter.
Thanks, Peter. Total revenue in fiscal year 2019 was $76.4 million, up 8% over $70.7 million achieved in fiscal 2018. In the fourth quarter of 2019, total revenue was $23.2 million, about 23% higher than Q4 of 2018, when we achieved $18.9 million.At the end of fiscal 2019, annual recurring revenue, which includes any contractually committed purchase of SaaS, proprietary and third party software maintenance, customer support and hosting services, was $38.3 million, up 46% from the prior year.Cloud, maintenance and subscription revenue recognized during the year was $31.3 million, representing 16% growth over fiscal 2018.The acquisitions of OrderDynamics and PCSYS contributed 11% of the growth, while SaaS and maintenance growth in our organic business contributed 5%.Cloud, maintenance and subscription revenue was $9.4 million in Q4 of 2019, $2.5 million or 36% higher than the same period in 2018. The majority of the growth was the result of the OrderDynamics and PCSYS acquisitions, which contributed 30%. Organic growth contributed 6%. Proprietary product revenue, defined as internally developed products, including proprietary software sold as perpetual licenses and hardware technology products, was flat from 2018 to 2019 at $6.9 million.The steady proprietary product revenue was a result of an offsetting decline in perpetual license revenue in our organic business and an increase in both perpetual license revenue, resulting from the PCSYS acquisition and hardware technology revenue in all our organic business.For the quarter, we saw 48% decrease in proprietary product revenue to $1.6 million primarily due to a decrease in proprietary software license revenue compared to the same period last year.Q4 2018 had a significant health system deal with a higher-than-average perpetual license amount. And importantly, during Q4 2019, approximately 60% of our software product bookings were SaaS compared to just 4% in Q4 of 2018. This had a significant impact on revenue and profit in the quarter as SaaS subscription revenue was recognized over multiyear terms, whereas perpetual license revenues are typically recognized up front in the quarter of signature.Third-party products revenue was flat at $6.8 million in comparison to fiscal 2018 with a decline in our organic business offset by third-party product revenue resulting from the PCSYS acquisition.Professional services revenue increased 5% to $29.3 million during fiscal 2019 due to the acquisitions of OrderDynamics and PCSYS with a slight year-on-year decline in our organic business. The fourth quarter of 2019 saw a return to professional services revenue growth in our organic business, with our revenue up 19% from the same quarter last year.Gross profit for fiscal 2019 was $37.4 million, a 7% increase compared to $34.9 million in fiscal 2018. This is mainly attributable to a higher services margin of $2.4 million and a higher product margin of $0.1 million. The gross margin as a percentage of revenue was 49% for fiscal 2019 consistent with fiscal 2018.Fourth quarter fiscal year 2019 gross profit was $10.9 million or 47% of revenue compared to $9.6 million or 51% of revenue in the previous year.Total operating expenses for fiscal 2019 were $39.2 million, 28% higher than $30.6 million in 2018. The increase was due in large part to the acquisitions and operating costs of OrderDynamics and PCSYS.Looking at operating expenses by function. Sales and marketing expenses were up 19%, while our G&A expenses increased 47%. G&A expenses were impacted by both acquisition costs and stock-based compensation costs. R&D expenses increased to $12.7 million from $9.8 million in fiscal 2018.Adjusted EBITDA in fiscal 2019 was $2.8 million, down from $6.5 million in fiscal 2018.Looking at adjusted EBITDA on a quarterly basis. We generated $0.7 million in Q4 of 2019 compared to $2.3 million in Q4 of 2018. The decline in Q4 2019 compared to Q4 2018 is primarily attributable to the decline in product margin resulting from lower proprietary software license revenue, which was partially offset by higher organic services margin and the $9 million -- $0.9 million loss related to OrderDynamics. The shift to SaaS negatively impacted full year 2019 revenue and adjusted EBITDA by roughly $3 million.This number is based on a what if the SaaS bookings in the period were sold as -- instead as perpetual licenses. For this, we use an estimated license value of 2x SaaS annual subscription value. The negative impact on Q4 2019 results for this shift to SaaS was roughly $1.5 million.The company incurred a net loss of $0.7 million during fiscal year 2019 or $0.06 per share compared to a profit of $3.9 million or $0.30 per share for fiscal year 2018.During the fourth quarter of fiscal 2019, net profit was $0.1 million or $0.01 per share compared to $1.8 million or $0.13 per share for the same period in fiscal year 2018.Once again, these figures are largely a result of our acquisitions and shift to SaaS.We ended 2019 in a strong position with cash and cash equivalents of $14.9 million, an increase of $1.4 million from the end of our previous fiscal year. We've mentioned several times on our -- during this call our shift to SaaS. With this shift, we intend to provide disaggregated information about bookings, including software product bookings comprised of perpetual licenses as well as SaaS annual recurring revenue bookings and professional services bookings.Accordingly, we expect to phase out the reporting of total contract value bookings. Furthermore, we believe it is becoming more relevant to measure backlog from 2 different perspectives: one, professional services backlog that includes the value of contracted orders for the delivery of professional services, including those contracted orders that may extend beyond 1 year; and two, the natural backlog that is created by annual recurring revenue.As such, we expect to phase out the reporting of aggregated backlog amounts. We believe this disaggregation will provide greater visibility to stakeholders as we continue this transition to SaaS. We will start this disaggregated reporting in Q1 of fiscal 2020.I will now turn the call over to Peter to provide some outlook comments.
Thanks, Mark. In fiscal 2020, we are looking forward to delivering growth for our primary business sectors with a particular focus on the healthcare segment. Concerns over the uncertainty around U.S. healthcare legislation seems to have abated, and the trend toward cost savings and efficiencies continues to preoccupy U.S. hospital executives.Our value proposition to this group continues to strengthen.Once again, Gartner released its 10th annual healthcare supply chain top 25 ranking in the best of the best Masters Category, recognizing supply chains that have been consistent leaders over the past decade. I'm pleased to report that the top 3 healthcare supply chains are TECSYS' customers.I want to close out with our outlook for fiscal 2020.First, we will maintain a laser focus on development and growing our SaaS revenue model, in particular, an annual recurring revenue generation specifically.As we move through the year, we will be providing you with sufficient metrics to gauge our progress.Secondly, we will continue to expand our partner ecosystem. This is key for us, and we now have partners working with us in both North America and Europe. We'll keep you posted.Thirdly, we will continue to expand our omnichannel business platform. We continue to see exciting opportunities in the convergence of retail and distribution supply chains. Remember, change is what drives our business, and this is a monumental change that continues to turn the traditional supply chain on its head.Finally, we have a strong focus on improving our margins. This will take some time as we undergo the transition to SaaS, but we are pleased to see the speed with which the transition is happening and look forward to having this transition behind us. We believe that a growing SaaS business in 2 exciting markets will provide great value for shareholders.With that, we will open the call up for questions. Thank you.
[Operator Instructions] Our first question comes from the line of Nick Agostino with Laurentian.
I guess first, if I can just start with a couple of housekeeping items. I just think I may have missed some of the numbers. On the recurring revenue, I heard $38.3 million exiting the year. What was the growth rate on that?
That growth rate was 36%.
36%. Okay. And the other one was you spoke about the shift from perpetual to SaaS and the impact it had on the quarter. I heard a $1.5 million number. What was that in reference to?
Yes. That's roughly $1.5 million. We calculate that number by looking at how much SaaS ACV or annual recurring revenue we booked in the quarter. And we convert that into a license equivalent by a factor of 2. So we take that ARR number times 2 to sort of help us understand what that would have been sold for as a license. And that's approximately how the pricing of SaaS licensing works.
And that was on the EBITDA? That's -- the reference was to EBITDA?
Yes.
It hits both, right? It comes off of, basically, a reduced revenue by $1.5 million and a reduced EBITDA by about $1.5 million.
Okay. Yes. Fair comment. And then just on the questions. You mentioned last quarter you indicated partnerships were going to be -- played a strong role in fiscal Q3, they would do the same in fiscal Q4. On the call, you highlighted Workday. I believe it was 3 healthcare deals for all of fiscal 2019. And you also highlighted the SIs were a bigger contribution this quarter as well. Can you just give a little more color as to what Workday exactly contributed on the quarter and what specifically you were seeing out of the SIs relative to, say, fiscal Q3?
Sure. I mean, of the 6 healthcare networks that we signed in the fiscal year, 3 of them were signed jointly with Workday. And it was a cooperative effort. I mean, Workday sells their software, we sell ours. There is no, sort of, reseller arrangement on either side, et cetera. But it was team work together in the field to go after those accounts and land those accounts. And we believe we were helpful to them, and they were certainly helpful to us. So it was a very positive process. And we continue to work on other opportunities with Workday, both inside of healthcare and outside of healthcare. So those were -- but it was certainly very significant...
If there was -- sorry, if I could just ask there, you had 2 healthcare wins or 2 IDN wins in the quarter itself. Did those come through Workday? Or at least, was there a split there?
Both of those were jointly with Workday.
Okay. Perfect. And then sorry, Peter, continue on the SI side.
Yes. On the SI side, it's -- we continue to sort of see the most progress more in the middle market space with SIs. We're doing a lot of work for instance with OSF. They're based at Quebec City, but they've got a sizeable presence in France. Doing some work with them. We continue to work with RiseNow. It continues to grow in the space out there in the market. We've got multiple projects underway jointly with Avalon that I've mentioned before. But we're also seeing that with the -- we're doing -- the work we are doing now jointly with Workday, we're seeing more interest from some of the larger integrators as well. So we're -- at this point, it's still approximately probably 20% of our projects that have integrators directly involved in them, but. We're seeing that continuing to rise. There are deals also in our pipeline right now that have been brought to us by integrators. So that's where you start to see that nice 2-way flow sort of their -- them getting business through our efforts. But in addition, the flip side to that, them bringing us new account opportunities.
Okay. And then in the past -- or at least you said earlier that when we get through the SI transition period, and in the past, I think, you've tried to quantify that somewhere between 1 year, 1.5 years. You also indicated that the -- that, that transitions have been faster than expected. Can you maybe just give an update, now that we're, I guess, 2 quarters through, how much longer you see the transition period, I guess, lasting before we start to post -- sorry, organic growth on the top line starts to see the benefit on the EBITDA?
I mean, I think, Nick, it's going to be -- it's still going to be a gradual transition. It's going to be -- you're really looking out sort of -- I mean, it's going to be a -- the bulk of it is going to be this fiscal year. Let's put it that way. I mean, we saw this past fiscal year, it hit license revenue by about $3 million in total in terms of dragging it down. But at the same time, it added $1.5 million of recurring revenue that's already going to be coming into this fiscal year. Now this fiscal year, what do we anticipate? Well, we think the bulk of our new bookings are going to be in SaaS. So we anticipate a further decline in license revenues this year but some pretty nice growth in recurring revenue. So I think the process, I mean, the time line is still over about an 18-month period. Now but it's -- that's -- it's certainly more front-end loaded than we anticipated.
And I would say that we're seeing, Nick, that the increase in professional services revenue in particular starting to flow through now. If you look at our Q4 results this year in our professional services revenue number, they are up pretty substantially from the same quarter last year, up about 9%. And that starts to speak to some of that backlog starting to come through professional services now.
Our next question comes from the line of Amr Ezzat with Echelon Partners.
A couple first on the acquisitions. Maybe first on OrderDynamics. The MD&A suggests that you guys had operating losses of $1.2 million at OrderDynamics. It's a little wider than I had anticipated. I'm just looking for a bit of color on the dynamics there and what is driving that loss. And maybe tell me are they wider than what you guys had anticipated.
Yes. Amr, I'm impressed with the speed with which you can read through an MD&A. But yes, the loss in OrderDynamics is wider than what we had anticipated. Not by a wide margin. We had anticipated a fairly substantial loss in OrderDynamics, but it is a bit wider than we'd anticipated. And we are working with them both on the sale side and the revenue and pricing side as well as on the cost side and expect that, that will narrow pretty dramatically throughout this fiscal year. And we anticipate that by the end of the fiscal year they'll be effectively at a breakeven EBITDA.
Okay. So still in line with what you guys had anticipated, 12 to 18 month, I think, you guys said until they break even. So.
Yes.
Okay. So switching gears on PCSYS. Again, there I think they -- it was $300,000 in operating profits. And when you guys made the acquisition, you reported that their fiscal '18 was $1.8 million in operating profits. Just looking to get more color there as well.
Yes. So a part of that, Amr, is -- the $300,000 number that you're quoting there, it has amortization in it as well from purchase accounting. So if you take that out, the number is more like $600,000 that we recognized in the quarter.So that kind of squares back around the run rate of EBITDA that we expected, in fact maybe...
Oh, it's even higher.
Slightly ahead of that run rate.
Okay. That's good color. Then Mark, maybe back on the 2x factor that you chatted about to convert the SaaS bookings to upfront licenses. Is that consistent with the pricing model that you guys are using? Or maybe you could give us a bit more color on how the SaaS pricing compares to the upfront license on average.
Yes, it is. We usually use a rule of thumb in pricing of 2.5x, anywhere between 2.5x and slightly more of maintenance is the SaaS number. So if we were going to sign a license -- perpetual license deal at a $100,000, we would typically charge maintenance at 20%, right? So that would be $20,000 of maintenance. And we usually think of SaaS at about a 2.5x that maintenance number. And so that $20,000 of maintenance would turn into $50,000 of SaaS, right? So now you can sort of see the 2:1, the $50,000 of SaaS equals $100,000 of license.
Understood. That's helpful. I maybe missed it in my MD&A reading, but can you give us the latest company head counts, including PCSYS and OrderDynamics, and how should we think about the hiring plans over the year?
Yes. We're at about 480 exiting the year, 480 people. And I mean, the way we're thinking about the future is we're going to invest a bit, but mostly the investing that we're going to do is around revenue, revenue generation. I think we'll -- we've got -- we've certainly got an outlook to continue to increase our sales and marketing head count. We'll have a little bit of R&D investing -- investment as well. But most of the head count increase will go into revenue-generating people and services.
And our next question comes from the line of Andrew McGee with National Bank.
Just wanted to touch on the bookings growth that you saw and the pivot to SaaS and how that's accelerated. I was just wondering if there's any 1 or 2 large deals in that number that would have seen that number accelerate even faster. Or is that the pace that we should expect going forward?
Yes. there were no -- I mean, if you look through the year, there was -- I mean, if you look at total -- the old total contract value number that we used that was -- sort of hit into the -- through a $63 million, $64 million, I think the largest single deal in there would have been about $5 million. So there was no -- I mean, I -- I mean, some years, we have one of those, where you have sort of one deal that sort of changes all the numbers. But we didn't really -- I mean, most of these were fairly average-size deals. If you look at all the new hospital networks we signed for instance, they range in size from sort of one very small one that sort of started just with the transportation management module up to sort of a bulk of them were in the sort of $1.5 million to $2.5 million range kind of thing as initial contracts. So it was all pretty typical I would say.
Okay. And then as we think about you retooling the sales model or adding sales and marketing, the bulk of your additions has come kind of in recent quarters. But this acceleration to SaaS seems to have come quicker than expected. I'm wondering is it may be a change in the way your customers are buying products. Or is it related to the sales model and how you've maybe changed compensation structure to favor the SaaS model? Is it one or the other?
No, we actually changed compensation to favor SaaS, probably, I don't remember now, 2 or 3 years ago. And we're seeing very, very slow uptake in the market. There -- a lot of -- especially in healthcare, sort of general approach seemed to be sort of there's no way we're going to allow anything close to patient data to get out into the cloud. It's got to be protected, it's got to be in our premises and so on. And somewhere around a year ago, that just started to shift, and it started to shift very rapidly to the point now where many of the CIOs are sort of feeling like it's maybe safer in our cloud than theirs kind of thing. So there is a shift happening there. I think our work with Workday was an accelerator to that because, of course, everywhere Workday goes, they are promoting a pure cloud message. So that was definitely an accelerator. But there is no question there was an overall sort of shift in the general market. It's like sort of all this preaching about cloud for the last number of years finally really just caught fire in the last 12 months.
Okay. That's good to hear. And then just maybe touching on Workday in your SI. I'm wondering if you can provide any context into the size of how much they've contributed to your pipeline and whether or not it's expanded it by a factor of whatever percent or multiple. Is there any context that you can wrap around that in giving us a sense of what you guys are now seeing versus maybe what you saw last year?
Yes. Some of that is very subjective. I mean, overall, our healthcare pipeline is virtually double what it was a year ago. How much of that is directly tied to Workday? How much of it is tied to the fact that the whole -- all of the tension and fear around the Affordable Care Act is gone and the healthcare market has sort of come back with a vengeance in general? It's hard to sort of split that out in a way. But if you look at sort of the active deals in our pipeline in healthcare, right now about 20% of them roughly are clearly tagged as sort of Workday partnership deals. The -- so it's significant, but it's not the only driver in that number.
Right. And then my last question here is you mentioned in your opening remarks that the healthcare bookings, the momentum, you're expecting to see that to continue through the year. I imagine that, that's a number of factors. But I'm wondering if you're seeing any shortening in the sales cycle.
We are seeing a shortening in the sales cycle. And I think there's 2 -- there's probably 2 reasons for it. One is just sort of our general acceptance in the healthcare market continues to rise. So there is less sort of fear around making a TECSYS decision. But I think the other factor is that more and more of our -- but if you look at the total mix -- I mean, we added another 6 IDNs in the year, so we're now up over 40 IDNs. So a bigger and bigger percentage of our healthcare bookings are actually coming out of our base. And our base, they already know us, they already trust us, they already got proven results from projects they've done with us. So decisions made by our base to expand the relationship and add another department or add another hospital, those are definitely made much more quickly than the initial deals.
[Operator Instructions] Our next question comes from the line of Daniel Rosenberg with Haywood Securities.
I was wondering if you could provide some additional insight into you mentioned your goals for the next fiscal year of focusing on margins. I was wondering how much of that is going to be driven by a natural shift to SaaS revenue coming through the door versus some cost focused on your -- in terms of improving some efficiency.
Yes. I think there is a couple of different dynamics there. I mean, the organization, as we start to scale up and have more SaaS bookings, it's going to create some natural kind of margin expansion opportunities, I think, in our recurring revenue business. So I think that will be just a natural driver once we get some more scale there. So that's number one. Number two, I think our OrderDynamics margins in the recent history that you've seen were not robust, and especially on the services side. There's scale in that side of business, too, on the SaaS side, but on the services side, I think there's room. You'll see some expansion happening there that will contribute to overall sort of obviously some tailwind in gross margin. Of course, the thing that's coming -- sort of the other direction against that is a couple of things. One, we've got this shift to SaaS, which is sort of trading SaaS revenue for, which is good margin, for license revenue, which is super high margin. So I think as we go through that sort of dip and the revenue tips down and you lose that 98% proprietary license margin on that stuff and it starts to get building over time with SaaS, the dollar contribution is going to be accretive for sure, but it's going to take a while for the margins to -- margin percentage to become accretive there.The other thing that throws a little bit of difficulty into our sort of picture of margin is the PCSYS business, which has a pretty big chunk of hardware in it as we've talked about a little bit. And so that has a tendency to kind of bring down margins a little bit as it becomes -- it's only -- we've only got 3 months of that in our numbers right now. But that's another sort of dynamic that's going to put some headwind pressure on just gross margin expansion.
Okay. And in terms of the PCSYS and OrderDynamics acquisition. I know it's early days, but I know there is some talk of cross-selling opportunities or maybe some of your existing client base expanding their services with you guys to Europe. Could you speak to any examples or indications that you have of cross-selling opportunities?
Yes. I mean, we're still -- on PCSYS, first of all, we're still very early days. So we're getting to know them. We're looking at sort of how to cross the brands over and how to bring that together and so on. So that's early days.On OrderDynamics. I have to say I'd actually hoped that by this call, I'd be able to say we'd signed our first one. There was a joint account between the 2. We've got a few we're going after that we're -- we think we're getting pretty close to. But unfortunately, I can't tell you that we've signed one at this point. But certainly, we're seeing the interest. We're seeing the opportunity. And we're working with the OrderDynamics sales team, which is now part of our main sales team to not only continue to pursue some great opportunities in the retail and brand space but also bring that over into our complex distribution business. So hopefully, we'll have more news on that soon.
And gentlemen, there are no further questions at present time. I'll turn the presentation back to yourselves.
Okay. Well, thank you all very much for your time today. And as always, if you have any additional questions, please don't hesitate to give Mark or I a call. And we look forward to talking to you just after Labor Day to discuss our first quarter results. Thanks very much. Bye for now.
Thanks.
And that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.