SYZLF - Sylogist Ltd. (SYZLF) Q2 2023 Earnings Call Transcript
2023-08-10 14:50:22 ET
Sylogist Ltd. (SYZLF)
Q2 2023 Results Conference Call
August 10, 2023 10:30 AM ET
Company Participants
Jennifer Smith - LodeRock Advisors
Bill Wood - President and Chief Executive Officer
Sujeet Kini - Chief Financial Officer
Conference Call Participants
Gavin Fairweather - Cormark
Adam Wilk - Greystone Capital Management
Presentation
Operator
Good morning, ladies and gentlemen. Welcome to the Sylogist Q2 2023 Earnings Call.
I would now like to turn the turn to Jennifer Smith of LodeRock Advisors. Please go ahead, Ms. Smith.
Jennifer Smith
Thank you, Patrick and good morning. Joining me today to discuss Sylogist's Q2 fiscal 2023 results are Bill Wood, Sylogist's President and Chief Executive Officer; and Sujeet Kini, Chief Financial Officer.
This call is being recorded live at 10:30 a.m. Eastern Time on August, 10, 2023. Our Q2 press release, MD&A, financial statements and accompanying notes, have been issued and are available to download with SEDAR.
Please note that some statements made on the call may be forward-looking. Actual events or results may differ materially from those expressed or implied and Sylogist disclaims any intent or obligation to update or revise any forward-looking statements, whether as of a result of new information, future events or otherwise. The complete safe harbor statement is available both in our MD&A and press release as well as on sylogist.com. We encourage our investors to read it in its entirety.
We are reporting our financial results in accordance with International Financial Reporting Standards or IFRS. As before, we will also discuss non-GAAP performance measures, which should be viewed as supplemental. The MD&A contains definitions of each one used in our reporting. All of the dollar figures expressed on this call are Canadian unless otherwise noted.
I'll turn it over to Bill first for opening remarks, and then Sujeet will review our Q2 financial performance, after which Bill will conclude with scripted remarks with an outlook on our business at which time we'll open it up for questions.
So with that, I'll hand it over to Bill.
Bill Wood
Thank you, Jenny. Good morning, everyone. As most of you already know, Sylogist is a Software-as-a-Service or a SaaS company that provides mission critical solutions to over 2,000 customers worldwide, primarily in three public sector verticals, education, non-profit and government.
We help mid to up market public sector organizations more effectively fulfill their mandates with flexible, advanced SaaS solutions that address their unique needs. Our platform scale, deliver clear ROI and provide user-friendly and highly secure technology to our customers.
We delivered another quarter of strong profitable organic growth in Q2. The results we achieved were due to a talented dedicated workforce, industry best 100% SaaS solutions, a customer centric mindset and a data driven culture to measure and adjust the execution of our strategy.
With our continued momentum, our total revenue reached a new record of $60.6 million in the quarter, that's year-over-year organic growth rate of 21% or 18% at constant currency basis. Reoccurring revenue was strong in Q2 at $9.7 million, up 8% year-over-year and this was led by our SaaS subscription revenues which were up 9% year-over-year, as this organic growth is supported by a solid foundation of profitability as evidenced by a Q2 EBITDA margin of 26%.
In short, we continue to execute our profitable growth plan effectively, culminating in an overall posture of 47 against our rule of 40 benchmark or 44 on a constant currency basis. New bookings in Q2 were 6.1 million. We're very pleased with the quarter's booking achievement, given the typically slower seasonal deal contracting period of Q2 when the public sector is consumed with fiscal year end close activities and awaiting new budgets to become available July 1st.
Before handing it over to Sujeet to review our Q2 numbers in more detail, I'd like to draw your attention to a couple important points and provide an update on our key initiatives that we expect will continue to make positive contributions to our top and bottom lines in future quarters.
First, the strategic R&D and go-to-market investments we've made are unquestionably driving our strong organic growth results. Our marketing and sales motions are creating high quality ideal customer profile, or ICP leads, and our win rate in Q2 with stronger than at any time since I joined the Company.
I also want to point out that our spend on R&D has largely plateaued and that our marketing and sales investments remain sub 10% of total revenue, underpinning the effectiveness of the investments we're making to deliver the impressive profitable organic growth that we've achieved over the last three quarters.
Additionally, as I've highlighted over the last couple of quarters, building out a high performing partner channel has been a top priority as a means to increase our awareness and expand our sales and delivery capacity in a leveraged manner. To that end, partner led bookings increased 3x in Q2, an indicator that our strategy is taking hold and beginning to pay dividends.
Secondly, I want to share a quick update with respect to the nonprofit government in education markets. As expected, the SylogistMission pillar of our strategy has driven the majority of the organic growth we've seen to date.
Our thesis to offer an industry first 100% SaaS, fully integrated Microsoft-based fundraising and finance solution is driving an uptick in combined ERP and CRM opportunities. The SylogistMission platform gives us the flexibility to sell to the customer's pain point and then pull through the rest of our platform once they see the benefits it represents, and come to value us as a trusted partner in their success.
I also want to highlight that Microsoft originated leads are being funneled our way in an increasingly material manner, which is a very good sign in terms of our expanding strategic relationship with Microsoft and their partner ecosystem. Our SylogistGov beta customers will be transitioning to our new gov platform in early Q4.
Realities were such that we decided to push their cutover to SylogistGov out approximately 60 days from the originally planned date due to the customer's limited bandwidth during their fiscal year-end close. Feedback from users has been exceptionally positive and they're looking forward to cutting over to the new Sylogist platform very soon.
We expect these early successes will act as a catalyst for the next wave of new and existing customers to move forward with SylogistGov in the first half of '24. Also on the SylogistGov front, we are now weeks away from another State going live on our gov police SaaS Victim Notification Solution. This is noteworthy because it positions us well to win additional large multi-year contracts in other states going forward.
On the SylogistEd side, following the successful lift and shift of our software platform from Oklahoma to North Carolina in a top-10 school district in North Carolina, having gone online on live on SylogistEd right on schedule. We are seeing several other districts leaning into follow suit. I see us as very well positioned to accelerate in North Carolina over the next 12 months and elsewhere in the back half of '24.
As I've said before, we're just getting started in the SylogistGov and SylogistDev markets and the value creation opportunity we see ahead is large, very large.
I'd like to now turn things over to Sujeet to go through our Q2 financial performance in more detail.
Sujeet?
Sujeet Kini
Thank you, Bill. It's been a busy and exciting few months since I joined Sylogist. I've had my head down ramping up on my understanding of Sylogist business and operating model, reviewing the metrics we discussing this close and listening to feedback from the street. In June of this year, I had the unique pleasure along with BoD and the rest of our management team of speaking with many of our investors in analyst at our Investor Day. I look forward to continuing this outreach and in pleasing village profile across the financial community.
Let me now take you through the highlights of this quarter's financial performance. Q2 has demonstrated again the successful execution of our profitable growth plan. Revenue was $16.7 million, up 2.9 million or 21% relative to Q2 2022, and 18% on a constant currency basis. Recurring revenue grew 8% driven by increases in both of subscription revenue and maintenance and support revenue.
The increase in revenue was driven by growth in Sylogist mentioned including implementations in upgrade to our staff offering and continued growth in our SylogistEd and SylogistGov offerings. The increase in maintenance and support revenues was driven primarily by Sylogist services and SylogistMission. Logic services revenue grew by 44%, primarily due to customer upgrades and new implementations in Sylogist solutions.
I'll point out here that project services revenue attached to our software was at 64% up significantly from 59% at the end of Q1 2023. Our backlog continues to be strong at 28.9 million compared to 28.1 million in Q1 '23, our gross profit margin was 61% compared to 60% last quarter. Total OpEx was 36% in revenue, the same as last quarter, and we continue to make investments in our sales and marketing team with a focus on go-to market initiative, including partner related expansion and enhancing our spending on sales and marketing related events.
Adjusted EBITDA was $4.2 million resulting in an adjusted e margin of 25.7%, up from 24.1% in Q1 '23. We believe these results demonstrate our strategic ability to continue investing in our business while at the same time growing at sustainable rate. Through the combination of an improving EBITDA profile, visibility on our backlog of future revenues and increased confidence in achieving organic revenue growth in the mid-teens, we expect to see operating leverage and efficiencies of scale by mid-2024.
At the end of Q2, we had $9.8 million in cash which is in line with the seasonality of our business and our customer renewal cycles. We maintained a strong and discipline balance sheet with debt holding study at $21.2 million. We will continue to allocate capital in a measured and flexible way and that is with highest and best use including buying back our stock and add advantages to our shareholders.
With that, I will hand the call back to Bill for some final calls. Back to you Bill.
Bill Wood
Thanks, Sujeet. In closing, it said that three data points make a trend. To that end, Sylogist is posted three consecutive quarters of strong, profitable growth. As a result of the strategic investments we've made, a pivot to a customer first orientation in everything we do, an unwavering commitment to delivering nothing less than industry best, highly secure, 100% SaaS offerings and impressively strong execution over the last two years.
We have effectively gone from a company that was backsliding in terms of organic growth, to neutral to slightly positive to now a third quarter of 20% organic growth, all while keeping EBITDA margin in the mid-20% range. The scaffolding support continued profitable growth is in place and we are just hitting our stride.
With each passing quarter, we are increasingly better positioned to continue seizing opportunities and to growing both organically and inorganically through strategic acquisitions that makes sense and doing necessarily dilute our focus away from the high ROIC organic growth opportunities that we have teed up.
Above all this, the successes we are achieving are a result of having the most experienced incredibly talented and dedicated management team in the business. They are the reason, the transformation that's taken place over the last two years has happened and for the material value creation upside headwinds.
Delivering results that reflect our commitment to profitable organic growth, disciplined capital allocation, strong self-funding capability and Rule of 40 plus posture, combined with expanding well regarded analyst part providing third-party research coverage and buy ratings, we look forward to a strengthening share price that better reflects the results we are delivering and the strong value creation opportunity ahead of us.
I want to end by again personally thanking our customers for their confidence in us, our shareholders for their support, our Board of Directors for their trust and guidance and every team member at Sylogist for their incredible commitment and energy. I'm extremely proud to represent you every day.
Jen, let's go to the questions as time allows.
Question-And-Answer Session
Operator
[Operator Instructions] First question is from Gavin Fairweather from Cormark. Please go ahead.
Gavin Fairweather
Congrats on the quarter. Just wanted to start out on the recurring revenue line kind of flat sequentially although I understand some of the seasonality around the budget cycle. So I guess the question is, what are you hearing from your customers on the availability of budget for the year ahead? What are the spending priorities on their end? And then what is your pipeline telling you around your ability to accelerate recurring revenue growth?
Bill Wood
Gavin, good morning. We're not seeing any pullback relative to what we're hearing from prospective customers and customers. The number of RFPs that we are being made available in the markets as well as our positioning in those is strengthening and budgets overall. They're feeling very good about their dollars being targeted toward the digital transformation that I talked about previously, and queuing those up for the '24 and '25 year. And that's really reflected in the strength of our pipeline. It's as strong or stronger than it's been since I joined and the blend of deals -- in terms of our core focus areas, which is mid-market and up market are perfectly aligned with what we've been trying to do. And I think those will matriculate to effectively year over the coming quarters.
Gavin Fairweather
That's great. And then maybe just on the partner channel. Appreciate the commentary in terms of the number of partner influence deals. Maybe you just speak to where we are in the process of building up that partner channel? How you're attacking partner enablement now just in general that ecosystem of developing?
Bill Wood
Yes, overall, I give a lot of credit to the team overall in terms of what they've been able to do to identify the kind of partners that we feel are a good fit with us and have roots and relationships in the markets we're looking to expand on and into. What we have been doing, and I kind of shared this a little bit at investor day is, we have developed and refined our own playbook and implementation playbook relative to what we're asking them to spin up on.
So that is being done by them shadowing us over these first few deals in combination so that they understand kind of what our voice is what our priorities are, and the ability for us to represent our software with them in front of the customer. So, the building blocks for the early customers we feel are in fairly early, partners are in place. And we see many others that are now knocking on our door with interest out of the Microsoft ecosystem and beyond to be able to now want to lean in and get access to the availability to represent our solutions.
So, we think the foundation that we've laid, the motions that we've put in place that are repeatable, the ability for now have three more resources aligned with the partner channel in terms of sales engineers, relationship managers to make sure that they have the information that they need to be successful. And then, the ability to in the near term have a dedicated implementation specialist aligned with them that can bring in the appropriate resources to make sure that we're successful.
Gavin Fairweather
And then on margins, nice to see the EBITDA margins bounce back this quarter. Maybe just thinking about the commentary that was provided by Sujeet there, should we think about progressive expansion over the back half of the year? Or do you really see that reacceleration and operating leverage kicking in '24 as turn on more of these customers in your pipeline there?
Bill Wood
Sujeet would you?
Sujeet Kini
Sorry. Bill, do you want me to take that?
Bill Wood
Yes, please.
Sujeet Kini
Yes. So, our general sense is more that the benefits from an operating leverage perspective as well as gaining the efficiencies of scale will be seen more going into 2024 and I mean kind of more mid 2024. That's our general sense in terms of the efficiencies kicking in.
Operator
Thank you. The next question is from [Bob Shaw] from Canaccord Genuity. Please go ahead.
Unidentified Analyst
Nice quarter. I want to dig a little bit deeper into the pipeline and try and understand the sense -- get a sense about how recurring revenue versus professional services is trending? And any other color you can provide that on mission versus gov the mix there, any color that would be helpful?
Bill Wood
Good morning and thank you for joining the call and your question. We're very pleased with where we are in terms of the project services attachment rate continuing to increase as we highlighted on this call to now 64% of the overall project services revenue was tied to our RFP. So, that is -- as we mentioned in the prepared remarks, that's a very clear leading indicator of then the SaaS revenue, which takes a full 12 months to then blossom.
So the idea of what we're doing in terms of our implementation now, there's an obvious lag as a SaaS provider to be able to get the fulsome miss. If we were selling licenses, it would've all showed up and we would've been able to more clearly associate that, dollars with the services. But the indications that we're seeing is a very strong pipeline in terms of our professional services. The backlog continues to not just grow in a dizzying manner. We need resources and we've built up to be able to deliver on the backlog that we have.
But project services right now are very much tied to the blossoming of our subscription revenue that will come over the next 12 months.
Unidentified Analyst
And then maybe a little bit more about, you said, mentioned higher win rates. How much of that is RFPs versus greenfield opportunities? I'm guessing there's a bit of competitive displacement there, but any information that you would like to share there?
Bill Wood
We have very few deals that aren't RSP related parts. And so to that end, these are competitive situations. We feel we now are very well positioned in terms of our full SaaS posture, the integration of our platform and the desirability of Microsoft in our three primary markets. It is turning in our favor, as I mentioned, in terms of the number of Microsoft originated leads being handed to us or them walking us into to opportunities that they've been nurturing at a much higher rate than we've seen since I joined two plus years ago.
And so to that end, I think it's a very good dovetail in terms of our overall effectiveness of our marketing strategy, driving ICP leads, not just celebrating leads overall, but are they good fits for us is our messaging right? Are the right kind of people knocking on our door, and becoming aware of us. I think all those things are going on now and a much higher clip than we have seen in the past.
Unidentified Analyst
Got it. And then just one last one for me. The North Carolina expansion, any update there? You did mention a few new school districts, but where do you see North Carolina heading maybe more towards Oklahoma or majority market share there or gradual progress? Thank you.
Bill Wood
Overall, we have solid market share in North Carolina. And as some who have been with the store for some time, they were in the process of exiting and going to some other solutions that have been anointed by the state. Well, that's now all been unwound. And to that end, we feel very solid about not only transitioning our existing customer base, but growing new market share in the State of North Carolina, because of the, I guess, the credibility that we have earned.
As I've said, we wanted to take it slow there. We wanted to make sure that our successes were clear and really did not replicate the struggles that a couple of our competitors have faced in that in that State. And that is to our benefit, as now the State has kind of pulled back on anointing any particular vendor. And actually, we are in very good relationship with the State and with key stakeholders in the State to be able to accelerate now on back of the new customer that we just made our contact.
Operator
Thank you. The next question is from Adam Wilk from Greystone Capital Management. Please go ahead.
Adam Wilk
Good morning. Thanks for taking my questions. Just one for me. I appreciate the commentary surrounding the opportunity in education kind of answers my original question, but wanted to maybe try to drill down on that a little bit more. Can you maybe quantify the opportunity set at this stage or provide a little more color on kind of how those talks with various states unfold? It seems like based on the channel checks I have done, it seems like there is pretty significant as you mentioned, both in terms of white space, but also sort of given the struggles of some of your competitors. And I'm wondering if there is again like the ability on your end to quantify that opportunity set or maybe talk about some of the dynamics surrounding how you get your foot in the door or expands your existing customer base over time?
Bill Wood
Good morning, Adam. It's a good question and one that I will add a little color on to the degree that I can. Our ability to lift and shift from the Oklahoma dominance into another state, we did thoughtfully and actually in a more expansive way than, if we were just trying to get to North Carolina alone. By that, I mean, we took out all the hard wiring that was Oklahoma specific when we lifted and shifted the code into North Carolina, so that it is now relatively state agnostic.
By that I mean it's all toggle switches and set up information that depending on state requirements, reporting requirements so on and so forth. We now have the ability without material R&D investment as we made going from Oklahoma to North Carolina to be able to now have a platform that we can take elsewhere. So, I feel very good about how we're positioned.
I wanted to prove, we wanted to prove it out in another state first, not only the software, but our ability to deliver this kind of relationship that is a lot of these states have enjoyed with their legacy provider, us being one of them, and really where others that have come in and tried to offer a shiny new object have really struggled, because the idea of delivery, ongoing service and relationship with those customers or those in various states has been weak. And it's been something that's created opportunity for us.
Going forward, we already have some customer density in a few other states as a result of legacy software, our legacy software that exists there. So, we already have outposts, not nearly to the density of North Carolina, but we've already built kind of a mode around those customers. We expect to build bridges now to those states and other in that state where we've assessed the opportunity in those respective states and feel those to be material. So, we do have our site set on two to three additional states in '24 where we'll look to penetrate beyond just North Carolina.
Adam Wilk
Okay, great. That's helpful. And then as a follow up. Are the education market similar to other public sector areas where the environment is similarly collegial or how do you guys kind of look at that the opportunity across states?
Bill Wood
I think there's always the willingness to share, I think school districts by the nature of what they do as a kind of a public and national forum, if you will, of why their state idiosyncrasies. There's an overall initiative at the federal level to make sure that students are learning well and effectively.
And to that end, I think that within a state it's extraordinarily collegial, even maybe more so than states and the nonprofit space. It's very much one leads to three leads to seven leads to nine. And they largely, I think as most of once they are on a new platform and feel that the vendor is providing this kind of relationship and service and partnership that they're looking for, they stay for quite a long time.
In terms of the stickiness, I'm not talking, you know, years. We're sometimes talking decades. And to that end, we feel good about being able to effectively leverage our very high NPS within the ed space as it sits right now. It's off the charts in terms of the relationships and the trust that our customers have with us as being a partner. And we think that'll play for us very well as we go forward.
Adam Wilk
Okay, great. Yes, and also appreciate the high win rate comment earlier as well. That's great to hear. And that's it for me. Great job this quarter and keep up the good work. Thanks.
Bill Wood
Thanks Adam.
Operator
[Operator Instructions] The next question is from [Amar Azad] from Industrial Alliance. Please go ahead.
Unidentified Analyst
One follow-up on your comments, Bill, in your prepared remarks on R&D spends. Did you say there we should expect them to decrease or are they plateauing?
Bill Wood
Yes. Good morning, Amar. Thanks for coming in and joining. I use the term at this point plateauing. I still think there is quarters ahead where we see our R&D and what we want to get done as but we don't see those on the rise. And we do see a point in time as Sujeet has indicated, and I did an Investor Day, where we expect those will start to decline as a percentage of overall revenue and the leverage that we talked about in '24 starting to materialize.
Unidentified Analyst
So, decreasing as a percentage of revenues then the dollar amount might be the same is what I understand.
Sujeet Kini
Yes, Amar, I'll quickly jump in there. That is overall an accurate assessment. In terms of R&D, the one thing I will point out this quarter is we had an element of a true up on account of additional capital dev projects identified. So, there was a -- if you will a bit of a trough from an R&D expense perspective, so it'll level off going to next quarter. But the overall since we have from an R&D perspective is as a percentage of revenues it will move downwards.
Unidentified Analyst
Then I've got one that might be tougher for you. So like appreciate the EBITDA up quarter to quarter, but if I'm implying correctly, your cap wise software development costs are the highest I've ever seen them. $1.2 million in the quarter versus last quarter $700,000. So, I'd like to try to get a sense of what is happening there and how should we expect your cap wise software development costs to evolve over time?
Sujeet Kini
So, maybe if I sort of break it up a little bit. So, cap dev as a percentage of revenue in the current quarter is around 5%. We were trending in the 8% to 9% in prior quarters. Some the impact of cap dev, the cap dev credit product development as a percentage of revenues was in the 12% range.
Going forward, our expectation is that the 5% that you saw in the current quarter, which I indicated was an account of a true up relating to additional projects identified, that 5% will continue in the, probably in the 7% to 8% kind of range. So, it'll tick up or it'll go up versus the 5% in the current quarter, but we see it not going up to the levels that we saw at that kind of 9% range, if that helps.
Unidentified Analyst
So the true up happens on the expense portion of the R&D as opposed to the cash wise portion?
Sujeet Kini
Correct. Yes, the true up happens. So essentially, R&D costs prior to the application of the cap debt credits were in the 12% range. And basically, there was a true up on account of additional projects identified some of that true up related back to projects that was started in Q1, and so we did that true up.
Unidentified Analyst
Maybe we could discuss that offline as well. Appreciate the color. I'll pass the line.
Operator
Thank you. There are no further questions at this time. I would like to turn the meeting back over to Mr. Wood.
Bill Wood
I just want to thank you all for your continuing interest in and support our effort here at Sylogist. We're very excited about the opportunities we see ahead and sincerely appreciate the support and growing support for what we're executing on here at the Company. Have a good day. Bye for now.
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Sylogist Ltd. (SYZLF) Q2 2023 Earnings Call Transcript