TCYSF - Tecsys Inc. (TCYSF) Q4 2023 Earnings Call Transcript

2023-06-30 12:18:25 ET

Tecsys Inc. (TCYSF)

Q4 2023 Earnings Conference Call

June 30, 2023 8:30 A.M. ET

Company Participants

Peter Brereton - Chief Executive Officer

Mark Bentler - Chief Financial Officer

Conference Call Participants

Gavin Fairweather - Cormark Securities

John Shao - National Bank

Suthan Sukumar - Stifel

Presentation

Operator

Good morning everyone. Welcome to Tecsys Fourth Quarter and Fiscal Year 2023 Conference Call. Please note that the complete annual fourth 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 Friday, June 30, 2023 at 8:30 Eastern Time.

I would now like to turn the conference over to Mr. Peter Brereton, Chief Executive Officer at Tecsys. Please go ahead.

Peter Brereton

Good morning, everyone. Joining me today is Mark Bentler, our Chief Financial Officer. We appreciate you joining us for today's call. As most of you have likely seen in the results issued last night, fiscal year 2023 was another remarkable year for our company, characterized by strong organic growth and important milestones. We believe that our continued momentum, notably in the context of markets and industry volatility, is a testament to our clarity of vision, sustained investment in technology, and obsession with customer success.

At the heart of what we do is empower supply chain users to perform their tasks more effectively, while ensuring that the right inventory is in the right place at the right time. Done right, organizations running these supply chains are able to operate more efficiently, mitigate risk, adapt to market demands, differentiate themselves from competition and seize opportunities to grow.

Our job at Tecsys is to provide the right combination of software services and expertise to meet those business objectives, and that's what we've been doing. We have consistently demonstrated our ability as a technology partner to provide tools that meet and exceed customer expectations.

We see the impact of that [indiscernible] setting momentum in basic account conversations to SaaS in new healthcare customer acquisitions and in a strengthened position in Gartner’s Magic Quadrant, as well as quarter-after-quarter of fiscal performance, all supported by growing partner ecosystem.

I'd like to take a moment to summarize the key events of fiscal 2023 and results of operations, Mark will then walk us through the financial results in more detail. And finally, I'll comment on our outlook followed by a Q&A session.

Our company began fiscal 2023 with strong growth underscored by solid SaaS bookings, and that momentum continued throughout the year. In fact, SaaS bookings were up 38% in fiscal 2023, compared to fiscal 2022. From Forever New, retail outfit in Australia to the Memorial Health System in New York, we are delighted to have added new logos across industries and geographies.

And fourth quarter momentum was strong with total revenue hitting a record and with 20% growth in Q4 of fiscal 2023, compared to the same quarter last year. This growth was led by SaaS revenue, which was up 44% in the quarter, compared to last year and was also supported by solid professional services revenue growth.

In fact, continued momentum in SaaS revenue growth resulted in this being our first full fiscal year where SaaS is our largest recurring revenue stream. It's worth mentioning that our positive momentum and growing SaaS customer base is underpinned by excellent gross and net retention levels.

Given the recurring nature of SaaS revenue, growing SaaS revenue provides greater visibility into our future revenue. And with that in mind, we have decided to start providing financial guidance on several key metrics, which Mark will walk through shortly. This rounds out a fantastic fiscal year that's – so I added business from both new and basic account wins, including nine new hospital network logos, and over 30 SaaS migration or expansion deals across verticals, highlighting the ongoing value that our existing customers see in the Tecsys platform.

With 24 healthcare networks either buying into or expanding their engagement with our SaaS solutions this fiscal year, we are cementing our position as the system of choice for healthcare organizations grappling with supply chain complexity. Due to strong bookings in fiscal 2023, our SaaS RPO is growing at a healthy clip up 47% to a 137.7 million, compared to the same time last year. We believe 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. Our efforts to strengthen and expand our global alliances program continues to gain traction.

Getting new partners involved in influencing and implementing our solutions and deepening engagements with existing partners has resulted in almost 70% year-over-year growth in the value of our partner influenced pipeline. We have seen excellent momentum in the form of co-marketing accreditation tools and training and supporting resources. With respect to health care, 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 that will give our customers broad access to new and emerging robotic solutions as these technologies become more and more important to be competitive in industry.

All of this is translating into positive new SaaS account acquisitions and expansions with about half of our fiscal 2023 new logos having been partner influenced, a significant jump from 22% just three years ago. As we continue to invest in the products we sell and the manner in which we sell them, Tecsys is proving to be among the best cloud-based solutions available in the markets we serve. The steady growth we have experienced affirms our vision and strategy for shareholder value.

Mark will now provide further details on our fourth quarter and full fiscal year financial results, as well as financial guidance on several key metrics.

Mark Bentler

Thank you, Peter. We're very pleased with the strong performance in our fourth quarter ended April 30, 2023. Total revenue was a record 41.2 million, that's 20% higher than 34.3 million reported the same period last year. Total revenue excluding hardware increased 17%, compared to the same period last year or 14% on a constant currency basis. As many of you know, a significant portion of our revenue, about 72% this quarter in fact, is denominated in U.S. dollars. And as a result, movements in currency exchange rates have an impact on our reported revenue and growth.

We continue to experience strong and steady revenue streams underpinned by a 44% increase in SaaS revenue, up from 7.7 million in Q4 of 2022 to 11.1 million in Q4 of 2023. On a constant currency basis, SaaS revenue was up approximately 40%, compared to the same quarter last year.

As Peter mentioned, SaaS remaining performance obligation or RPO was 137.7 million at the end of Q4 fiscal 2023 and that's up 47% from 94 million at the same time last year. On a constant currency basis, that growth was 41%. Maintenance and support revenue for the three months ended April 30, 2023 was 8 million, flat compared to the same quarter last year or down 3% 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 over time. Professional services revenue for the fourth quarter was $14.6 million. That was up 13% from 12.9 million reported for the same quarter last year or up 10% on a constant currency basis.

As we noted 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 customer development work as customers opt for a more out of the box approach to platform implementations.

We're also continuing to experience the increased collaboration of our partner ecosystem in helping to implement our suite of solutions. While we expect that over time these factors will continue to moderate our professional services revenue growth, we had another solid quarter of professional services bookings, which I'll speak to in a moment.

As we disclosed in our published MD&A, we expect total services revenue. So that's combined SaaS, maintenance and support, as well as professional services ranging between 33.5 million and 34.5 million per quarter in the short-term. Hardware revenue in Q4 of fiscal 2023 was $6.9 million. That was up 35%, compared to the same period last year.

As a reminder, we sell primarily third party hardware to our customers for warehouse operations and in hospital point of use storage and tracking. While hardware revenue can tend to be uneven, it is a key component of our market offering and thereby supports our recurring revenue business. That said, like last quarter, our hardware backlog remains strong, driven primarily by hospital network point of use orders.

Turning now to bookings. SaaS bookings are reported on an annual recurring revenue basis, SaaS bookings were $3.9 million in Q4, down 13%, compared to 4.5 million in the fourth quarter 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.

As Peter mentioned, our SaaS bookings are up 38% for the full-year fiscal 2023, compared to last year. Professional services bookings were $16.7 million in the quarter, that was up 13%, compared to 14.8 million in the same quarter last year and up 8% for full fiscal 2023, compared to last year.

Professional services bookings are in part linked to SaaS subscription bookings and are subject to quarterly timing. Professional services backlog was a record 41.3 million at April 30, 2023. That was up 24% from the same time last year. For the fourth quarter, total gross profit was $18.4 million, that was up 21%, compared to $15.1 million in Q4 of last year, led by higher gross profit contribution from SaaS maintenance, support, and professional services.

As a percentage of revenue, gross margin in Q4 was 45%, compared to 44% for the same period last year. Combined fast maintenance, support, and professional services gross profit margin in the quarter was 47%, compared to 46% same period last year. We expect to see continued service margin improvement in the coming quarters as the business continues to scale and as we focus development and operational energy on optimizing platform efficiency.

Some of you may recall that last quarter, 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 project assumption.

Our SaaS margin in fiscal 2023 ended up slightly higher than our projection model, which is an encouraging sign as we look into the future. As I said last quarter, we see this as a multi-year journey with incremental benefits building over time. Switching now to our expenses for the quarter, operating expenses increased to $17.0 million. That was higher by 3.2 million or 23%, compared to 13.8 million in Q4 fiscal 2022.

Sequentially, compared to Q3 fiscal 2023, Q4 operating expenses were up $1.0 million. Operating expenses are up sequentially, as well as compared to the same quarter last year, primarily because of higher sales and marketing costs and higher research and development costs. Sales and marketing costs were up sequentially by $0.4 million in Q4 fiscal 2023, compared to Q3 on higher marketing program spend. We expect sales and marketing costs to be relatively flat in Q1 fiscal 2024, compared to Q4 fiscal 2023.

In Q2 of fiscal 2024, we expect sales and marketing costs to increase with added investment, including costs related to our user conference, which is in September this year. I'll draw your attention once again to another new slide we added to our investor presentation last quarter that provides some inside and 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 Q3 of this year, research and development costs were up $0.8 million in Q4. As we noted last quarter, Q3 costs were positively impacted by $0.4 million true up of R&D tax credits and e-business credits. Run rate costs for research and development increased with added headcount, as well as bonus and benefit costs.

We expect continued increases in R&D cost during fiscal 2024 as we continue to invest in our SaaS platform and product offering. Net profit for the quarter was $446,000 or $0.03 per fully diluted share, compared to $2.6 million or $0.17 per fully diluted share for the same period last year. Recall that in Q4 of last year, net profit and earnings per share benefited from the recognition of $1.9 million of net deferred tax assets.

The recognition of approximately $0.6 million gain on remeasurement of lease liability, as well as a recognition of approximately $0.6 million in tax credits generated in prior periods. Adjusted EBITDA was $2.4 million in Q4 of fiscal 2023, compared to $1.7 million in Q4 last year. Net profit and adjusted EBITDA were both positively impacted by favorable foreign exchange of approximately $0.6 million, compared to the same period last year.

Turning now to our results for full fiscal year 2023. Our total revenue was $152.4 million. That was up 11%, compared to $137.2 million in fiscal 2022 and up 9% on a constant currency basis. SaaS revenue for fiscal 2023 was 37.5 million. That was up 39% from 26.9 million in the same period last year and that was up 35% on a constant currency basis.

Our net profit for fiscal 2023 was 2.1 million, compared to 4.5 million in the same period last year. As I just mentioned, last year's net profit benefited from the recognition of the $1.9 million net deferred asset recognition, approximately $0.6 million gain on remeasurement of lease liability, and approximately $0.6 million tax credits generated in prior periods.

Foreign exchange movements had a positive impact of approximately $1.8 million on profit and adjusted EBITDA in the current year, compared to last year. Adjusted EBITDA for fiscal 2023 was $9.5 million, compared to $10.1 million last year. We ended Q4 fiscal 2023 with a solid balance sheet position. We fully repaid our long-term loan in December 2022, which was early. And as a result, we are debt free.

On April 30, 2023, we had cash and cash equivalents and short-term investments of $37.1 million. That was down $6.1 million, compared to $43.2 million at the end of fiscal 2022. Had we not repaid the loan early, cash and cash equivalents, and short-term investments would have risen by $1.1 million during the year.

While operating activities provided cash, the overall decrease in cash and short-term investments was driven by the full repayment of the long-term debt, as well as the payment of dividends.

Finally, with respect to financial guidance, as Peter mentioned, with our growing SaaS revenue driving up recurring revenue, we have greater visibility into future revenue. As some of you probably noticed in our earnings release, we were providing financial guidance for total revenue growth in fiscal 2024 in a range of between 10% and 5%. And total SaaS revenue growth for fiscal 2024 in a range between 35% and 37%.

In terms of profitability, we're providing financial guidance for adjusted EBITDA margin in fiscal 2024, up 6% and in fiscal 2025, adjusted EBITDA margin in a range between 8% and 9%.

I'll now turn the call back to Peter to provide some outlook comments.

Peter Brereton

Thanks, Mark. Tecsys’ performance in fiscal 2023 was strong. We have a strong balance sheet and we continue to have a great backlog and 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 Newtek.

Our increasing market share and healthcare supported by a growing partner network and increasing 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.

Our converging distribution business continues to represent a massive market opportunity, and we're still only scratching the surface. We continue to hone our sweet spot and carve out our share of that pie with the rising market indicators driven by fundamental changes to the supply chain industry. Changes spurred by aging legacy systems, digital adoption, and a realization that heightens consumer expectations are definitely here to stay.

We are pleased that our fiscal 2023 result continues to demonstrate our dominance in key markets and emerging opportunity in growth markets. The wave of change and systems modernization and supply chain management is underway, and businesses are actively investing in the tools that they need to adapt to consumer expectations.

As we look ahead to fiscal 2024, we're confident in our ability to seize market opportunity, and expand our presence in this rapidly growing market. Fiscal 2024 is also the year that we celebrate our 40th year in business. It's an exciting milestone in our journey as a supply team leader and reminds us of our legacy of innovation and market leadership as we embark on another successful year.

And so in summary, I want to share with analysts and investors our key themes as we look to a successful fiscal 2024 and beyond. First, a sustained commitment to expanding our SaaS revenue model, which will drive changes in the way we deploy solutions and delight customers.

Second, a continued strategic partnership approach characterized by deeper and stronger alliances. This helps us tap into new opportunities and fuels our scalability around the world. Third, a continuous evolution of our distribution and omnichannel business platform that takes advantage of innovative technologies and the power of data. And fourth, an emphasis on advancing and deepening our healthcare vertical covering both med-surge and pharma.

We continue to solidify our position as the go-to-provider for healthcare supply chain solutions. As a final point, I'd like to stress across our markets. We will place emphasis on customer success. We have long stood by the philosophy of customers for life. A big part of that formula is to deliver value quickly, stay connected, and then expand on the value delivered.

With that, we will open up the call for questions. Thanks.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Gavin Fairweather with Cormark Securities. Please proceed.

Gavin Fairweather

Hey, good morning. Wanted to start it on the guidance and appreciate you guys putting that out there this quarter. Maybe you can just discuss some of your underlying assumptions as you were modeling out the business over the next year?

Mark Bentler

Yes, sure Gavin. Thanks for the question. As you know, this is the first time we've provided that type of guidance. And as we said in our prepared remarks, the driver was the growth of SaaS in our business. So, we looked at our backlog of SaaS RPO and our annual recurring revenue on SaaS and the coverage that provides into the future. And then added into that, of course, our expectations on bookings during the year.

The tricky thing there is, as we've mentioned previously, it's sometimes those bookings are kind of hard to call in a quarter. So obviously, we had to make some assumptions about how those bookings would happen And of course, we included an assumption on attrition and an impact of in your attrition on that model as well.

In terms of the overall revenue assumption, overall revenue growth assumption, I think the interesting thing in there that we talked through was the range is fairly large between 10% and 15%. And the reason it is so large for us is, hardware revenue for us is notoriously, sort of hard to call. You know, we've got a big backlog of hardware deals and so we, sort of wanted to take that into consideration when we provided that range, which is why it's pretty wide.

And then finally on the EBITDA margin side, we wanted to signal that we're continuing to invest in sales and marketing and an R&D this year, but we do expect that continued margin contribution heading into next fiscal is going to be where we're going to see an opportunity to create some operating leverage.

Gavin Fairweather

Okay. That's very helpful. And then maybe just zeroing in on the SaaS revenue growth of 35% to 37%. It seems to imply that SaaS bookings in your model would be kind of roughly flat with fiscal 2023, I mean, you touched on the difficulty of forecasting that line. So, are you trying to be a bit conservative on that and am I kind of reading that right?

Mark Bentler

Yes, I mean, I think we wanted – we definitely didn't want to put out a range there that that we weren't comfortable with. I think I'll put it that way. And the other thing is, as I mentioned, it's the timing of SaaS, the timing of SaaS revenue in the year is quite dependent on hitting numbers early in the year. And it's like I said for us, it's kind of hard to call the timing of some of these deals can slip and move around by a couple of months and that can have some sort of – some impacts on the in-year impact of revenue from those bookings. So, we wanted to make sure that we were providing some guidance that took that into consideration.

Gavin Fairweather

Got it. Appreciate it. And maybe just on the bookings this quarter, Peter, can you just discuss kind of the mix between healthcare and distribution? I don't think I caught it if there are any audience in there that were new this quarter? Maybe can you just discuss, kind of the sales performance that you saw in the quarter?

Peter Brereton

Yes, I mean, it continues to be similar what it was last quarter in a sense if that it's healthcare that's absolutely on fire. I mean, that's where we're seeing, sort of new account wins, expansions, migrations. We're seeing – it looks like pharmacies finally really heating up. I suspect we'll be doing several pharmacy deals in the next couple of quarters.

Mark, I'm trying to remember now. Q4, we did what, we ended up with 9 for the year.

Mark Bentler

Three in Q4.

Mark Bentler

Three in Q4, right? So, it was a pretty strong quarter, but it was definitely, I mean, pretty strong quarter in healthcare and the overall mix was definitely dominated by the healthcare site. Average deal value in healthcare also moved up a little bit more. So, it was, I mean, in terms of Q4, it was a – healthcare was the story, I would say. And as we look at Q1 and Q2, I think it's going to be pretty much the same.

The general distribution and converging distribution side, continues to get more active. We continue to see we're just looking at the pipeline the other day, the lead count is way up from this time last year and so on. So, it's getting more active. but I still think it's going to be the fall before that really starts to turn into regular deal flow. So, at this point, it's – healthcare dominates the story.

Peter Brereton

And you'll note Gavin, the mix for the year, which looking at these things on a quarter is sometimes a little bit tricky and can be a little misleading for the year. We had about 70, I think it was 73% of our bookings were healthcare?

Gavin Fairweather

That's helpful. And then maybe just on services, the backlog has grown pretty substantially, despite increased partner activity. Curious if you can, kind of deliver on that with the existing team or if this will be an area where you're doing some hiring?

Mark Bentler

Yes, we actually expect a little bit of hiring, but it's going to be pretty moderate. We think the team is going to – has capacity to deliver this. You've been following this story. We started building that team up over the course of – at the end of not 2023, but of fiscal 2022 came into 2023 with a pretty big, pretty good sized team. And we've kind of grown the revenue into that team in a lot of ways. So, there’ll be some hiring going on there, but it's not going to be – we don't expect it to be material.

Gavin Fairweather

Okay, I'll reach you. Thank you.

Operator

Our next question comes from John Shao with National Bank. Please proceed.

John Shao

Good morning. Thanks for taking my question. So Peter, your [Technical Difficulty] is actually getting bigger. So, how should I think about the margin profiles between small and large deals?

Peter Brereton

You mean in terms of SaaS margin?

John Shao

Yes.

Peter Brereton

Yes. I mean, we're seeing the larger deals are coming in with SaaS margins up in the, sort of mid to high 70s, smaller deals come in with SaaS margins closer to around 50. What's interesting to us and it's something we continue to look at as our SaaS customer base grows, is the most accounts that start small. Three years later, they're not small.

So, we're trying to look at that in terms of, sort of where we place the emphasis in the market, continue to, sort of invest in landing some of these smaller opportunities, then become growth opportunities, you know, within our customer base, and you know, could also end up over time moving up to being higher margin accounts.

So, we're looking at and that's – but those are the reasons why we were able to put that, sort of slide in the deck starting in Q3 showing evolving SaaS margins over the next few years is we're just seeing the new deals coming in and the growing deals in the growing relationships in our customer base are all driving those margins higher.

At the same time, we continue to take advantage of SaaS technology that decreases our public cloud infrastructure cost. So, you end up being able to reduce your cost per account even as the average deal value expands. So, the combination ends up creating a fairly powerful, sort of updraft on the SaaS margins over time.

John Shao

Okay, thanks. That's good to know. I understand the investment in sales and marketing and R&D will be the main focus in the coming years. So, my question is, how much of the investment goes to healthcare vertical relative to the complex distribution, kind of assume majority of them is for healthcare?

Peter Brereton

Yeah. You have to, sort of split that out a little bit. First of all, in sales and marketing, the investment in sales certainly is heavily weighted towards healthcare at this point. I mean, that's the – and I think new investment you're going to see over the next couple of years would be, my guess would be at this point, you're going to be looking at, sort of 80% of the investment going into healthcare.

That could change if the general distribution market continues to heat up and gets more active, we could twist that. But if you look at the way things are aligned right now, I would say that's where it's going to go. Marketing is a bit different just in the, you know, healthcare is such a contained market. You know, it's – we know the networks.

We're going after the, you know any network in the U.S. with more than a 1 billion in net patient revenue. So, we know their names. We know where they live. We know their executives. So, it is less of a marketing led effort than a sales led effort. So, the heavy investment tends to be more on the sales side and accounts executive side than on the marketing side.

Whereas general distribution and retail is very much a, sort of a you create digital demand in the marketplace, you use digital marketing engines and so on to create demand out there, which then drives into the website and then eventually close through into the sales team. So, there you'll see it's more balanced I would say, in terms of marketing spend between healthcare and general distribution.

On R&D, it's much harder to [divvy] [ph] it up just because it's all the same platform. So, we just – I was in a meeting earlier this week. We're looking at a number of improvements. We're looking at making to further strengthen our competitive advantage on our platform. And at the end of the meeting, we look back through everything we decided to do and realized that everything on the list boosted both healthcare and general distribution.

So, because it's a single platform, the investment there really is predominantly just in the platform. There's a few specific things like we are continuing right now to do a lot of work on 340B. central pharmacy management, that is proving to be the fastest growing part of the pharmacy market for us. And so, you know, that will definitely require some investment, but it's not, you know, that's still a relatively minor component within the overall R&D team.

John Shao

Okay. Thank you, Peter. I guess my last question is, you just mentioned the newly hired account executives, how long does it take for them to fully scale and to potentially breakeven?

Peter Brereton

Yes. I mean, we typically expect them to be landing their first deal within about 12 months. I think in our internal planning, we sometimes even use that, sort of a 9-month to 12-month window as the – where we expect their first deals to be coming in. At the same time, it's really the third year by the we consider them fully up to speed. And some of that is, sort of training, building knowledge, and understanding of our products in the market and so on. But a lot of it is just due to the fact that, you know, sales cycles are still fairly long, you know, especially in health care.

I mean, they're shorter than they used to be, but they're still fairly long. So, the deals that or the relationships that they're building in the first year tend to start paying off in the second year, and by the third year, you know, they've really got some serious run rate going. So, that's the way it tends to work out.

The payback is pretty quick, because you're – if you look at the investment as fully loaded account executive, including salary and the support we provide to them and travel costs and everything. Look at it fully loaded. You're probably looking at [half a million bucks] [ph] per account executive. And yet, if they land a one average size health deal, you know, that – the gross margin on that deal is going to come pretty close to covering that cost. So, you know, the payback is pretty quick. And, I mean, that's one of the reasons why the LTV to CAC, you know, looks as strong as it does.

John Shao

Okay. Thank you. I'll pass the line.

Peter Brereton

Thanks, John.

Mark Bentler

Thanks, John.

Operator

[Operator Instructions] Our next question comes from Suthan Sukumar with Stifel. Please proceed.

Suthan Sukumar

Thank you and good morning gents. Congrats on a strong quarter. I wanted to touch on the broader demand environment today and just trying to get a sense from you guys on what you've been seeing, sort of play out and evolve post the quarter with respect to sales cycles and kind of spending priorities from your customers?

Peter Brereton

We're seeing a pretty strong demand environment. I mean, I understand your question at least I think, I do. I mean, there seems to be so much uncertainty in the news. There's still concerned about what's happening with inflation and interest rates and everything else? We're just not seeing any of that affecting our customers or our sales pipeline. You know, business is rolling along, deals are coming in, etcetera.

I mean, you know, we always have the normal stresses. I mean, right now we're in our first quarter and our first quarter ends in July and a lot of people go on vacation in July. So, say, I think this is roughly our – well, this is actually our 100th public quarter. So, we've been through this cycle quite a few times. And, you know, this is just feeling like a pretty typical July that we're stressing out more over vacations and getting things through legal and so on than we are, any of those, kind of economic issues.

So, it feels like it's a pretty normal busy looking year. So, I keep watching for, sort of signs of these, sort of the overall, sort of economic angst in the market in terms of, you know is it affecting our target markets? Is it affecting our customer base? And so far, not, it looks like a great year coming up.

Suthan Sukumar

And touch on your priorities for growth investments going forward? I know you spoke a little bit about sales and marketing and R&D broadly, but on the sales and marketing side? Is it just kind of sort of adding to, kind of headcount on the direct sales side or is there some element of customer success as well? And on the R&D side, what’s kind of the core focus there? Is it really just expanding on the product roadmap or kind of building out infrastructure? Just would appreciate some color there.

Peter Brereton

Sure. I mean on the sales side, yes, it's both. So, we are expanding the headcount not dramatically, but we're continuing to add in additional account executives and support for those executives. I mean, every time you add a couple of account executives, you need to add another pre-sales solutions person to work with them and support them and so on.

So, you know, that team just overall continues to grow at a steady pace. The customer success side this year, we’ve a pretty small customer success team at this point, but our plan is to grow that a fair bit this year. We'll probably – by the end of the year, I would think we'll probably be – have doubled our investment in customer success this year. But again, it's not you know, we really have two full time customer success people right now. We'd like to get that up to, sort of a team of 4 to 5 by the end of the year.

On the on the R&D side, the investment is, I mean, it's fairly widespread. I mean, we continue to put probably a third of our overall spend, it goes into the backend of the platform, scalability, security, efficiency and public cloud infrastructure, sort of all the boring stuff that customers don't really see, but which is absolutely necessary to continue to, you know, strengthen our technological position and sort of structure for future growth and margin.

We then have a, you know, roughly another third of it goes into, you know, the core, sort of ongoing supply chain demands that come in from various sectors. There's always new regulatory issues that we need to update to support, there's new – sometimes new taxes that we need to build into the platform in terms of supporting and calculating. We've added support for Europe and European taxation, due to some of the demand we're seeing from there.

So that continues. And then the [last third] [ph], you know, tends to go into, what is really sort of the new and interesting stuff? I mean, you know, I mentioned, you know, what we've been doing with pharmacy? You know, pharmacy looks like it's getting very active at this point. I mean, we've been, sort of trying to crack open the pharmacy market within the healthcare network for the last five years, and it looks like that dam is finally bursting.

So that's, you know, creating some demand for some interesting stuff there around 340B management. If you look at the, you know, what we're doing using, utilizing AI to increase warehouse efficiency without using automation. That's looking pretty interesting. We're also using AI to streamline and standardize [item master files] [ph], which is a huge challenge in the healthcare sector.

So, we've got, you know, we have product that's just in testing right now, but it looks like you can do, sort of 80% to 90% of the work of cleaning up these item master files and helping these healthcare companies deploy much more effectively and efficiently. So, there's – so that's sort of the innovation side, and that tends to be about, you know, typically also about a third of the spend. I mean, I'm rounding all over the place there, but that's typically how it breaks out.

Mark Bentler

I would just add one other comment on the sales and marketing side there Suthan, where we have been, I think you know we've been investing in partner ecosystem development. And we'll continue to – we plan to continue to ramp up that investment. That's around just the base ecosystem development, partner enablement.

We're seeing a lot of good things happening there with our ecosystem growing and having more important impact on our pipeline growth and pipeline development and we expect to continue to invest there.

Suthan Sukumar

Got it. The last question for me is, more around sort of the prospects for inorganic growth, but do you see opportunities to leverage M&A to enhance or accelerate the – some of your strategies on whether it would be, just kind of [regions] [ph], very specific like healthcare order or more on the product or technology side?

Peter Brereton

We're honestly not seeing any great opportunities there right now. I mean, the market that – I mean pricing has come down, pricing has become more reasonable. So, it's not that we don't continue kick tires and look around, but we are continuing to see private equity firms that are willing to pay a lot more than it makes sense for us to pay given our current valuations and add to that the fact that we've got, you know, an organic growth opportunity in front of us that we think is hotter than it's ever been.

So, you know, we're, sort of looking at the overall scalability of this thing and saying, you know, we more or less doubled the company in the last 4 or 5 years. We think we can double it again faster than that. So, there's a strong emphasis internally right now in saying, okay, don't get distracted, just execute, execute, execute, because the organic opportunity is nothing short of fantastic.

Suthan Sukumar

I appreciate the color, gents, and thanks for taking my questions. I'll pass the line.

Peter Brereton

Great. Thank you.

Mark Bentler

Thanks for your time.

Operator

Gentlemen, there are no further questions at this time.

Peter Brereton

Great. Well, thank you everyone. Thanks for joining us and have a great summer. And as always, if you have any questions, don't hesitate to reach out to Mark or I. And we'll look forward to chatting in September. Thanks again. Bye for now.

Operator

That does conclude the conference call for today. We thank you your participation and ask that you please disconnect your line. Have a great day everyone.

For further details see:

Tecsys Inc. (TCYSF) Q4 2023 Earnings Call Transcript