Tecsys Inc. (OTCPK:TCYSF) Q4 2022 Earnings Conference Call June 30, 2022 8:30 AM ET
Company Participants
Peter Brereton – President and Chief Executive Officer
Mark Bentler – Chief Financial Officer
Conference Call Participants
Andy Nuin – Raymond James
Nick Agostino – Laurentian Bank Securities
Maxim Baron – Cormark Securities
John Shao – National Bank Financial
Deepak Kaushal – BMO Capital Markets
Steven Li – Raymond James
Operator
Good morning, everyone. Welcome to Tecsys Fourth Quarter and Fiscal Year 2022 Results Conference Call. Please note that the complete annual and fourth quarter report, including MD&A and financial statements were filed on SEDAR after market closed yesterday. All dollar amounts are expressed in Canadian currency and are prepared in accordance with International Financial Reporting Standards.
Some of the statements in this conference call, including the question-and-answer period, may include forward-looking statements that are based on management’s beliefs and assumptions. Actual results may differ materially from such statements. I would like to remind everyone that this call is being recorded on Thursday, June 30, 2022, at 8:30 AM Eastern Time.
I would now like to turn the conference over to Mr. Peter Brereton, Chief Executive Officer at Tecsys. Please go ahead, sir.
Peter Brereton
Thank you. 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, this year 2022 was a transformation on year underscored by strong organic growth. Amid the on-going global prices from the [Indiscernible] labor shortages and towards life change has been in the eye of the storm. I believe strongly that what we do empowers our customers set new benchmarks versus debts by driving excellence through their supply chains. This is not a new belief. For decades, Tecsys has been advocating that their supply chain is a strategically for a competitive differentiation, but never in the history of this company has the world been so ready to invest in supply chain.
I’d like to take a moment to summarize the key events in fiscal 22 and the 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.
First, I’d like to highlight that our Q4 SaaS bookings were the highest quarterly tax bookings in our history, and this naturally adds to the continued positive impact of our growing SaaS customer base. We’ve also seen continued momentum in existing customers migrating to our SaaS offering. Indeed, the pace at which our SaaS business has expanded as a healthy blend of new accounts, expansion of existing SaaS customers, and some of these accounts choosing to renew their engagement with Tecsys and convert to SaaS.
Our SaaS approach has strengthened the quality of our revenue streams, and it is making it easier for both new and existing clients to buy our software solutions. We have a strong pipeline and our SaaS revenue growth is fantastic, solidifying our thesis for value creation. Full year SaaS revenue was up 47% on a constant currency basis. It is a milestone year for Tecsys and then all but one new major account and every major account upgrade has been a SaaS deal.
Overall, 91% of software bookings were SaaS in fiscal 2022 versus 82% last year. In the fourth quarter of fiscal 2022, SaaS revenue represented 49% of total cloud maintenance and subscription revenue up from 40% at the same time last year. We see this as a strong endorsement of our SaaS offerings and more holistically of our sustained value to our customers. I also want to take the opportunity to highlight our strengthening partner ecosystem, we committed to investing in developing a world class strategic alliance program. And we’ve seen excellent momentum on this front in the form of co-marketing, accreditation tools and training and supporting resources. All of this is translating into positive new SaaS account acquisitions and expansions with 50% of new logos and fiscal 2022 having been partner influence, a significant jump from 22% just two years ago.
Our customer base continues to expand across verticals. Throughout the year, we have secured several meaningful add on bookings, as platform rollouts grow and expand across the customer base. Some notable wins announced this year include Australian retail chain politics, distributor, American Woodmark, and McLeod Health Services, South Carolina. We have also added household brands in the healthcare space, automotive industry, apparel and footwear industry and we continue to expand our relationship with one of the world’s largest cosmetic retailers.
The accelerated market opportunity has been most prominent in the healthcare sector, where we have seen significant new opportunities for us to win new business with both new and existing customers. Tecsys proved to be the best supply chain solution available to that market and our SaaS approach has made it easier than ever for healthcare systems to buy and deploy efficiently and effectively. We are pleased that we have capitalized on this market opportunity in fiscal year 2022, with SaaS conversions and new logos, including eight new health systems, or IDNs, including the two that joined us in the fourth quarter.
I’d like to take just a minute to talk about what adding eight new IDNs really means. Because of how well developed our end-to-end offering is in the healthcare market, there is greatest value to our customers to invest in our broader suite of solutions. As a result, our healthcare customers tend to represent a substantial lifetime value, whatever that first engagement looks like from the warehouse to the OR [ph] suite. What sets us apart from the competition is that we can uniquely deliver value exactly where an IDN is struggling the most. And then expand on that value progressively through our relationship with that customer. So these eight new newly signed IDNs are our first touch point, but they represent so much more. Between them, there are about 50 hospitals, more than 400 OR suites and over 12,000 hospital beds. Collectively they spend over $3.8 billion on medical and surgical supplies annually and over a billion dollars in pharmacy supplies. And we have proven solutions that control and optimize that spend.
When we welcome a new IDN into the Tecsys fold, we start to collaborate with that IDNs leadership to deliver the full value of our end-to-end supply chain platform selling into other areas of their logistics operation over time. Those eight IDNs that signed on with Tecsys in fiscal 2022 will continue to show their value as long as we continue to deliver ours, as we have with long time partners like Mercy Health, Parkview health, Orlando health and others.
Looking at this from an overall perspective, with our new bookings this fiscal year, our total health care customers alone now provide care at roughly 100,000 beds, and record over $170 billion in total revenue. To put that in perspective, that’s twice the revenue of FedEx, and more than half of the total healthcare spend across all of Canada. With every dollar that moves through these health systems, there is a business case for optimization and supply chain sits at the very center of that discussion.
Retail has been undergoing a bit of a renaissance where digital shopping and in person shopping has converged into this new blended commerce model, where consumers expect to be able to shop anywhere and get their purchases, how they choose. Traditional retailers are ill equipped with legacy technologies to effectively orchestrate that blended commerce model. And this is driving investment in new software that is capable of handling this level of complexity.
The complex distribution market remains a consistent source of base account revenue with positive momentum towards as conversions. In addition to a national U.S. government organization, new bookings have underscored our competitive stance with third party logistics providers, the automotive industry, electrical distributors as well as traditional distribution organizations. All three sectors are contributing to our performance this year spending expansions and renewals by existing customers and new account growth.
The Pro Services slowdown that we witnessed in the third quarter has continued in the fourth quarter, and we expect it to continue into the first quarter. Many projects were impacted by Omicron as executive staff and supply chain staffs were hit in large numbers. That is over, but it takes a while for these projects to ramp back up. We are also seeing more of our project work being carried out by our partners. This is what is enabling our SaaS revenue to grow at over 40% while our PS revenue grows at a much slower rate. We are pleased with his development and see it as the beginning of the shift that will lead to a higher margin mix for our business.
Mark will now provide further details on our financial results for the fourth quarter and the fiscal year.
Mark Bentler
Thank you, Peter. Starting with our fourth quarter results, total revenue was $34.3 million 6% higher than $32.4 million reported in Q4 of 2021. As many of you know, a significant portion of our revenue about 65% is denominated in U.S. dollars. As a result, movement currency exchange rates has an impact on a reported revenue and growth. During Q4 of fiscal 2022 currency exchange movements negatively impacted our reported revenue, as the value of the U.S. dollar was weaker compared to the same quarter last year.
On a constant currency basis using fiscal 2022 currency rates, our fourth quarter revenue grew by about 8% compared to the same quarter last year. We continue to experience strong and diverse revenue streams underpinned by a 40% increase in SaaS revenue, up from $5.5 million in Q4 of 2021 to $7.7 million in Q4 of 2022. On a constant currency basis, SaaS revenue was up 43% compared to the same quarter last year.
Maintenance and support revenue for three months ended April 30, 2022 was $8 million. That’s down 4% compared to the same quarter last year. There was a one percentage point impact here due to currency movements. But the general decline in the quarter compared to the same period last year is consistent with our shift to SaaS. We expect as current customers migrate to our SaaS offering, maintenance and support revenue will continue to decline over time.
SaaS remaining performance obligation, also known as RPO or SaaS backlog was $94 million at the end of Q4 fiscal 2022. That was up 43% from $65.7 million at the same time last year. On a constant currency basis that growth was 39%.
Professional service revenue for the fourth quarter was $12.9 million, that’s up 6% from $12.2 million reported for the same quarter last year. Again, currency movements created headwind on revenue growth here which would have been 8% on a constant currency basis. Professional Services revenue was basically flat sequentially from Q3 of this year. In spite of robust backlog and growth in our delivery capacity, we experienced client side project slowdowns resulting from lingering effects of Omicron especially as hospitals networks have continued to deal with labor shortages with clinical staff.
Additionally, we believe we are starting to see the impact of our transition to SaaS, which will ultimately, we’re starting to see the impact that our transition to SaaS will ultimately have on our professional services revenue line. That is we’re seeing a continued reduction in custom development work as customers opt for a more out of the box approach to platform implementations. We’re especially seeing this within our healthcare vertical, which is a growing part of our business. We’re also saying and have been talking about this for some time growth in our partner ecosystem. This includes partners that are involved in helping to implement our systems. We expect that over time, this will ultimately moderate our professional services revenue growth in the future.
License revenue in the quarter was $0.6 million that was down 46% compared to $1.0 million in the same period of fiscal 2021. While this number may continue to be lumpy from quarter-to-quarter, we expect the general trend of declining licensed revenue to continue overtime. And this is in line with our shift to SaaS.
Hardware revenue in Q4 of fiscal 2022 was $5.1 million, a decrease of $0.2 million compared to the same period last year, and a decline of $1.3 million sequentially compared to $6.4 million in Q3. By way of reminder, we are still primarily third party hardware to our customers for warehouse operations and in hospital point of view storage and tracking. This part of our business tends to be lumpy and revenue recognition here is tied to delivery.
Delivery timing, in recent past has been impacted by global supply chain issues. And we expect this to continue in the near term. That said, our hardware backlog remains strong driven primarily by hospital network point of use orders. SaaS bookings are reported on an annual recurring revenue basis and increased by 29% to a record $4.5 million in Q4 of 2022 compared to $3.5 million in Q4 of 2021, which was frankly a pretty solid comp. SaaS bookings were highlighted by the addition of two new hospital networks, a new complex distribution customer and significant base business, in particular with strong add on business and a migration from our healthcare base.
Professional Services bookings were $14.8 million, that’s up 70% compared to $8.7 million in the same quarter last year. This is up sequentially from $9.3 million in Q3 of this year. And this highlights again the lumpiness and impact of timing on reported quarterly bookings. As I indicated last quarter, we still like bookings as a metric because over time, we believe it provides a good leading indicator of business performance and growth prospects.
For the fourth quarter, total gross profit was $15.1 million that was down 4% compared to $15.7 million in Q4 of 2021. Our license and hardware gross profit contribution was the main driver of this decline. As a percentage of revenue, gross margin was 44% compared to 49% in the same quarter last year.
Let me unpack that gross margin decline a bit. Foreign exchange accounted for about one percentage point of the decline in the quarter compared to the same period last year. Combined SaaS, maintenance, support and professional services gross profit for the three months ended April 30, 2022 was 46% compared to 52% in the same period in fiscal 2021. The non-foreign exchange related portion of this decline was primarily from lower professional services margins, as existing delivery capacity was underutilized during the quarter. This resulted mainly from the timing of project rollouts as noted previously.
Professional services backlog remained solid at $33.4 million at April 30, 2022. Excluding the impact of foreign exchange, SaaS, maintenance and support gross profit margin was down slightly from the prior quarter as the company continued to add investment to scale the business.
License and hardware gross profit margin decreased to 32% from 36% in the prior year quarter. This decline was primarily the result of a revenue mix driven by lower license revenue, which is of course in line with our shift to SaaS.
Switching now to our expenses for the fourth quarter, operating expenses increased to $13.8 million, that’s higher by $0.7 million or 6% compared to $13.1 in Q4 of fiscal 2021. Operating expenses increased compared to the same quarter last year, primarily as a result of our expanded investment in sales and marketing.
Importantly, research and development expense in this particular quarter benefited from a $0.6 million federal non-refundable scientific research and experimental development tax credits generated in prior periods.
Moving on to net profit, net profit for the quarter was $2.6 million or $0.17 per fully diluted share, compared to $2.0 million or $0.14 per share for the same period in fiscal 2021. Net profit was positively impacted in the three months ended April 30, 2022 as a result of the recognition of approximately $1.9 million net deferred tax assets, and the recognition of $0.6 million gain on a re-measurement of a lease liability. The latter resulted from our decision not to renew an expiring office facility lease.
Adjusted EBIDTA was $1.7 million in Q4 of 2022, compared to $3.9 million in Q4 of 2021. Net Profit and adjusted EBITDA were both negatively impacted by an unfavorable foreign exchange impact of approximately $0.7 million in the quarter.
From an investment standpoint, we believe our existing professional services capacity is adequate for the near term. We believe that our investment in sales and marketing put us in a solid position to grow as productivity continues to improve and expect to only moderate increases to sales and marketing expenses in the near term. Our investment in research and development during the fourth quarter will impact Q1 of fiscal 2023, but we expect investment to moderate beyond that point.
Turning now briefly to our results for the full year fiscal year 2022. Our total revenue was $137.2 million up 11% compared to $123.1 million in the same period last year. That’s up 16% on a constant currency basis. SaaS revenue for fiscal 2022 was $26.9 million, up 41% from $19.2 million in fiscal year 2021 and up 47% on a constant currency basis.
Our SaaS bookings for the year are up 25% to $11.9 million compared to $9.5 million in fiscal 2021. I just want to point out and we take a lot of pride in the fact that this is another year of very strong SaaS revenue growth and record SaaS bookings. Our net profit for fiscal 2022 was $4.5 million, compared to $7.2 million in the same period last year. I noted above the positive impacts on the current year net profit from some tax accounting and lease obligation accounting, foreign exchange movements had a negative impact of approximately $5.2 million on profit and adjusted EBITDA compared to the same period last year.
Adjusted EBITDA it was $10.1 million in fiscal year 2022, compared to $16.2 million for the same period last year. Finally, we ended fiscal 2022 with a strong balance sheet position. On April 30, 2022 we had cash and cash equivalents and short term investments of $43.2 million compared to $45.9 million at the same time last year, and we had debt of $8.4 million compared to $9.6 million at the same time last year. Cash provided by operations was $4.9 million in fiscal 2022 and our DSOs or days sales outstanding and accounts receivable was 49 at the end of 2022 compared to 47 at the same time last year.
I’ll now turn the call back to Peter to provide some outlook comments.
Peter Brereton
Thank you Mark. Sorry about that, I had my mute button turned on. Tecsys enters fiscal 2023 with a strong balance sheet and robust backlog and sales pipeline. On the healthcare front our own pipeline is providing us with all of the data we need. Between the growing acceptance of our point of view solutions and the feeling great have many existing hospital supply chains demonstrated during the pandemic our market space is definitely showing indicators that they are ready to invest.
Turning to converging distribution and to understand this scale of the market you have to consider the massive transformation currently underway. The digital adoption is here to stay and consumers now expect that supply chains are modern and connected. And so in fiscal 2023, we plan to leverage the market opportunities that are emerging as a result of this accelerated digital transformation. We see a growing pressure in the market for strong cybersecurity, and we feel well positioned to answer the call. For heightened sensitivities and demands in this area, this is an area where will we will continue to invest.
In summary, I want to highlight the key themes for fiscal 2023. First, we will continue to maintain a laser focus on expanding our SaaS revenue model. Second, we will continue to deepen our partnership ecosystem. This is key for us to scale rapidly into North America and international markets. Third, we will continue to expand and refine our distribution and omni-channel business platforms to service the evolving needs in both of our healthcare supply chain and converging distribution market segments. Across our markets, we will place emphasis on customer success. We have long stood by the philosophy of customers for like, and a big part of that formula is to deliver value fast, stay connected, and iterate on the value delivered.
With that we will open the call up for questions. Thank you.
Question-and-Answer Session
Operator
Thank you very much. [Operator Instructions] Our first question comes from the line of Andy Nuin from Raymond James. Go ahead.
Andy Nuin
Thanks, Peter and Mark. My first question is on the addition of new ideas, given the investment, you guys made it to the sales team, what’s holding the addition of new ideas from accelerating at a faster pace?
Peter Brereton
I mean, a lot of it is really just the speed with which IDNs move. I mean, we have, our pipeline and the healthcare space is, is off by a very significant margin to where it has been at any time in the past. We’re very excited by what we see in that pipeline. But hospitals and hospital networks generally move slowly. I can tell you there’s one account, for instance, that gave us a congratulations, you’re the selected vendor letter back in, I think it was November. And we’re still working through contracts. So there’s a there’s just a general, it’s a very cautious conservative sector. And so there’s a, quite a significant time lag between the growing opportunity in that market, our growth of our sales team to grab hold that opportunity. And the time that they actually come through to contract. But so, I mean, I think that’s the primary reason.
I mean, there’s a, there is a certain factor in this market to that as we often discuss with our board, there’s this question of how fast you expand the sales organization in this market, you can’t, you can’t push the market to go faster than the market is, is inherently willing to go. We want to continue sort of our evangelism in the market, promoting the what we can do with supply chains and promoting the games. But until boards are, are ready to actually move and commit money to it, and so on. You can’t move that faster than a certain pace. But, given the, the events in the market over the last couple of years, we’re certainly seeing that resistance fading away. And we think the bottleneck is really more now on the contracting side.
Andy Nuin
Thank you. And I just have a quick follow up on these SaaS booking. So what percentage of healthcare contributes to the SaaS booking of 4.5 in the last quarter?
Mark Bentler
Yes, it was it was, it was significant it was for the year. It was approaching 70% healthcare, 68% I think is the number.
Andy Nuin
68, okay, yes. Thank you. Thank you, Peter and Mark. I’ll pass it on.
Mark Bentler
And in Q4, it would have been it would have been, it would have been significant, a significant number as well.
Andy Nuin
Thank you.
Operator
Thank you very much. We’ll go to our next question on the line. So Nick Agostino with Laurentian Bank Securities. Go right ahead.
Nick Agostino
Yes, sir. Good morning. Sorry. Just jumping on that IDN question from the previous analyst. Peter, what’s your call I think in the past you said that you think you can get up to 20 IDNs over the next year and a half in terms of, of new add ons, that would suggest, obviously a sizable increase, let’s call it for, for fiscal 2023. Just given your comments, on the momentum, the bookings in the on the hospital side, and the fact that there is coming back, post-COVID or at least hopefully post-COVID? Are you comfortable with that type of target for the next year and a half?
Peter Brereton
Yes, I would say we are I mean, that’s obviously that’s quite a number we’d be over a year and a half, you’d be looking at sort of moving from two a quarter to three and a bit a quarter to get 20 accounts done in 18 months. And certainly at this point, I mean, anything, sort of things can change times can change, etcetera. But certainly based on what we’re seeing in our pipeline, that looks very doable. We have the, the expansion we’ve done with our sales organization is working. Some of these new accounts that are coming in now are being brought in by some of the new account executives that we’ve added over the last couple of years. So it’s not sort of the same, the original team doing all the delivery of contracts. So we’re seeing that, that benefit beginning to kick in. And, as I mentioned earlier, we’ve never seen a pipeline like this one. There’s measuring of pipelines precisely is sometimes tough, just because when a pipeline is poor, people’s natural optimism tends to make them score accounts by perhaps a little higher than they should. And when an account or when a pipeline is really full, and really active they tend to be almost more cautious about qualia [ph]. So it’s sometimes hard to be overly precise about it. But I would say both qualitatively and quantitatively, this is the most exciting pipeline we’ve ever seen in healthcare, we’re pretty happy with where it’s at.
Mark Bentler
And I would add on to that, Nick that while new, new, new, new IDN networks is definitely the game plan, and the folks etcetera. We did experience some very nice, interesting expansion of our healthcare base, in particular, in this last quarter, but even over the course over the course of the year of the health care bookings that we did this year, 68 of the bookings we did this year in SaaS, 68% were healthcare. And roughly half of that was expansion of, of existing customers in healthcare, and a migration of an existing customer from on-prem to SaaS. So there’s a lot of there’s a lot of movement happening in there that that isn’t just a new IDN network.
Nick Agostino
Okay, appreciate that color. Just going back to the hardware, sales and stuff like that. I think Peter you alluded to supply chains having somewhat of an impact on the deliverables. I think in prior quarters, you had alluded to supply chains, having a minimal impact, just wondering if, if the supply chains are starting to have obviously an impact on your business, and maybe give us some an idea as to the revenue impact that you probably would estimate for this current quarter?
Peter Brereton
Yes Mark will probably give you a better number there. Yes.
Mark Bentler
Yes. So I think, Nick, the supply chains are the, the issues are real there. And some of it’s around the third party hardware that we that we order from suppliers, and then we’re sort of bound by the delivery timelines of those suppliers. And then we also have the proprietary technology that we sort of get some parts and have fabricated and delivered to, for in hospital, point of use measuring and tracking. And the parts on some of that stuff are taking longer to get the hold of the lead times are still long. So, so that is kind of extending out, extending out the revenue picture there. It’s been a bit lumpy and last, in the last couple of quarters, like if you look at the last few quarters, it’s been hardware revenue has been over 6 million; this last quarter was closer to 5 million. And I think in the next in the next quarter if we look ahead and it’s a little bit hard to hard to hit because you’re subject to not only supply chain side delivery stuff, but also just the timing of when we’re actually going to ship to customers. But I think some number that’s sort of closer maybe closer to 4 million next quarter is kind of what we have in line of sight. I don’t think it’ll be lower than that. But it’s in that sort of zip code.
Nick Agostino
And would that be, I guess, a bottom type run rate until things improve, any visibility there?
Mark Bentler
I mean, I think so. Again, it’s kind of hard to call, I think so. But if you look at our backlog, and we’re making orders for this stuff, and we kind of kind of start to understand the lead times they move, they tend to move around a little bit, but I think I think so.
Nick Agostino
Yes. And then just one other question. And maybe just a quick follow up, is just staffing, obviously, you guys have to keep adding to your health care, Salesforce and stuff like that. And just given all the market, the market, it’ll work ethically. Are you able to staff specifically on the sales side, also on the R&D side at the rate that you guys are wanting to see? Because I think in the past that was — your staffing at a slower rate? Is that improving in any way?
Peter Brereton
Yes, Nick in fact, like, in Q4, we basically caught up, like it was amazing. And then we ran the first. And we ran from May to December, sort of low on heads in a variety of areas. I mean, we needed professional services, people, we needed R&D people, we were, I mean, right across the board, it was hard to hire staff. That win shifted massively in mid-January and in sort of late January, February, March, April, we pretty much caught up. And it’s one of the things you see reflected in the expenses for Q4 that we just released is the expense both on the service side as part of sort of the cost of goods sold, as well as on the R&D and others that are part of OpEx. It sort of caught right up to where we, we felt we needed to be. And that’s why we sort of included some indicators in the press release that, that we think we’re kind of at a, I mean, because some of those people joined during Q4, you don’t have the full expansion rate shown in Q4. That more show in Q1, but we’re really feeling that by and large, we have the edge we need for the year in front of us. We may end up adding some more heads towards the end of the year, we’re still going to continue to grow the marketing side of the sales and marketing side of the house, because we think the opportunity right now is really, really strong. So we want to continue to grow the sales and marketing side, but you’re really going to see a moderating in the growth of the OpEx and Pro Services expenses this year compared to last.
Nick Agostino
Okay, that’s good color, everything all ties in. And just one last quick question. I’m not sure if you’d call it out earlier but what was the partner contribution, whether it’s on wins or whatever the case is, if you call that out?
Mark Bentler
Yes, we did. We didn’t make it was 50% of the new SaaS wins in the air were partner influence. And I think you’ll see we put up the investor deck last night or this morning too. And the partner influence in the pipeline is about 25%.
Nick Agostino
Okay, okay. Great. Thank you. I’ll pass along.
Operator
Thank you very much. Okay. Our next question on the line is from Maxim Baron with Cormark Securities. Go right ahead.
Maxim Barron
Hi, there. Thanks for taking my question. So I first wanted to start off on the strong performance you’ve been having on the healthcare side and the progression of the ARR from healthcare. So I was wondering if you can give any color on how you see that progressing. And where you see that plateauing as a percent of total ARR?
Peter Brereton
That’s a tough one. I mean, the beauty to health care, of course, is because it’s such a defined market, right. So we know, we’re targeting about 300 networks. We’re now around 50. We think we can grow that to 100 within the next, few years. And beyond that, we don’t see any reason why we couldn’t get to 150. But as you look at that, that implies kind of at 100% penetration rate, you’d have a maximum sort of market size. I mean, the TAM is 600 million, but we’re never going to get 100% of the time. So, it being just 300 million so there’s, there is some ceiling on that. At the same time, there’s no question. It is on fire right now. And it is growing very quickly. It’s driving the growth. It’s dominating our pipeline and looks like it will continue to be a larger and larger piece of business. I think just in the last year, it’s grown from what Mark 36% of SaaS to 40% of SaaS. Am I getting that right?
Mark Bentler
Yes, I think it was even sub 36, just under 36 but now 40%, yes.
Peter Brereton
Yes. So I don’t, I would not be at all surprised if within 12 months or so it gets closer and closer to the 50% mark. So, so it’s got, it’s got some real legs under it. The other markets that much larger, general distribution, complex distribution market, in effect has no ceiling on it. But is moving more slowly, at this point in time, a lot of interest, a lot of tire kicking, a lot of top of funnel activity. But a lot of those players are still very distracted by current supply chain challenges. The cost to containers, good stuff, offshore goods are coming out of China. I mean, they’re having trouble sourcing the product, moving the product and handling the product. So, so that, while ultimately that drives changeover to new system in the middle of a crisis, it is very distracting. So that’s what we’re seeing in those in those different markets. But coming back to healthcare, I would certainly expect that it will, it will dominate our growth for the next, at least the next year, and probably beyond.
Maxim Barron
Got you. Okay, that’s helpful. And I guess just a follow up in the complex distribution side, have you seen customers respond to the new warehouse management system that you guys recently launched?
Peter Brereton
By that I’m sure you’re referring to Omni, we’re seeing a lot of interest in that. It’s always the challenge when you launch something brand new, and it’s quite different. I mean, it’s a, that’s a system that is aimed at, micro fulfilment, this sort of small, small warehouse that with the objective being that you can deploy it in less than 60 days, deploys a very low cost, it’s incredibly intuitive. So it does not require that much training or the setup as well, as is much simpler. So it’s aimed at a very particular market. The challenge is always is no one wants to go first. So we’re, we’re in discussions with a number of different players around, potentially being the first account. We’ve got over in, in Denmark, of course, they’ve already got it deployed in a number of sites, but on the North American side, they’re say no one wants to be first. So we’ll, we’ll see how that goes.
Certainly, from an investor standpoint, though, I would not anticipate that product having much effect on our overall revenue numbers for another couple of years. I mean we’ve got to make some noise in the market on the marketing side to stir up interest in begin to drive opportunities to it. But from an investor standpoint, I would say, that’s a couple years out before it gets interesting.
Maxim Barron
Okay, great. Yes, that’s helpful. And I also just wanted to ask on the services side and the capacity. So I understand you’re pretty happy with where the capacity is at now. But I just want to know how much spare capacity there was in the quarter and how you see that revenue line kind of plateauing, as services aren’t moving properly through the pipe.
Peter Brereton
You want to take that one Mark?
Mark Bentler
Yes, sure. So I mean, I think I think, we had, if you look at our PS revenue line, in the last, last few quarters, you’ll see it kind of up flirting around with it kind of at the almost at the $13 million, a quarter level. It was over 13 and in Q2, it was 12.9 and Q3 it was 12.9 again, and Q4 and when we’re at the sort of 13 million level, we were building capacity there. And in Q4, we were we were under underutilized. So that kind of gives you a baseline that we’ve got excess capacity beyond 13 million. Now, can that capacity drive $14 million of revenue in a quarter? Yes, it can. Can it drive 15, yes its probably getting, it’s probably getting pretty, pretty stretchy and unsustainable. But that’s kind of how we’re, that’s kind of how it scale those numbers.
Maxim Barron
Great, yes, that’s helpful color. That’s all I had. I’ll pass the line.
Operator
Thank you very much. And to our next question on the line from John Shao with National Bank Financial. Go right ahead.
John Shao
Thanks, and good morning, guys. It sounds like the PS revenue will have a lower contribution to the total revenue in the future given the staff transition, as well as in partners. But at the same time, it also sounds like there’s the honor, utilize a capacity with [Indiscernible] service delivery team, so how should I think about this honor utilization issue in the future and how much would it be a drag to your gross margin?
Mark Bentler
Yes, I think it’s good. It’s good question. And I think in and Peter sort of hinted at that and in his comments earlier a bit when he, when he talked about what the slowdown and in the sort of our pipeline burn sorry, our backlog burn on professional services in Q4. And that, we sort of see that lingering into Q1. And I think if we think forward into Q1, I think it’s it is going to have an impact on margins there. And then the question from there becomes, well, how quickly does the, the speed of the burn of the backlog pick up. We certainly expect that, what we’re what we went through in sort of in Q3, and Q4 and sort of into Q1 here, the slowdown, we expect it to turn around, starting to see the initial signs of that. But Q1 is going to be is going to be there’s going to be continued drag there on margins, because we’re not going to adjust capacity in the short term. We’ve got backlog, there’s no reason to adjust capacity downward, we’re going to need it as a question of when we get there. And, our if, if we look at, if we look down the road into Q2 and Q3, we definitely expect to kind of be getting to those levels where the capacity gets, the utilization levels start to climb back up.
John Shao
Okay. The other question I have is, I understand the staff bookings are strong this quarter. So how much of this is actually driven by the new logos versus the wallet share expansion? And when I think about growth for the next year, should I expect wallet shared expansion to be a meaningful driver of growth?
Mark Bentler
Yes. I mean, I think in the quarter — in the last quarter, the question was just about the quarter, right. I mean, in the last quarter, more than half of the more than half of the bookings were based. And if you look at kind of what our year looked like, it sort of sort of looked like that, as well. I think the numbers were for, in the, in the 40, in the in the mid in the high 40s for new, and the balance was, was based in terms of, in terms of bookings and Q4 was a little even a little bit more skewed towards, towards base. We had a, we had a pretty significant migration and hospital network business. And, and I think that the two vectors are both are both very important. I mean, there was a kind of a balance in Q4, and you’ll, if you, when you get a chance to see the deck that we put up, you’ll, you’ll notice, and Peter mentioned, our health care business actually expanded. We actually, the penetration level in our base actually jumped up a little bit markedly in the quarter and grew like 27% penetration in our base now, versus I think the number we reported last quarter was something like 22%. And that’s coming from that, that that non new IDNs, it’s coming from base business add-ons and expansion.
So, there’s still a lot of headroom. We’ve only had two hospital networks migrate so far, and in the course of our SaaS, lifetime, the last sort of three plus years. So there’s more there to migrate. And clearly the footprint is in our existing bases, almost 60%, whatever, almost 70% of actually slightly over 70% of the footprint is still whitespace in our base.
John Shao
Okay, that, that’s great color and my last question is related to the inflationary environment. So for your existing contracts with your customers, is there a price adjustment factor so you can bake in some of the increase renewal?
Mark Bentler
Yes typically we when we contract we do have we do have the ability to increase, we do have the increased ability to increase pricing in our legacy maintenance business. That that is sort of an annual a usually an annual adjustment, those price those contracts renew annually, and that’s where they’re subject to price change. A lot of the standard contracts that we have on that legacy business allow for, CPI or CPI plus price increases so they’re kind of linked to linked to inflation. In the SaaS world, we tend to, we tend to have longer term contracts three to five year contracts, those we tend to lock in for those three to five year periods. But then when they renew they’re, they’re certainly subject to, they’re certainly subject to price increases.
John Shao
Okay, thanks Mark. I’ll hop the line.
Operator
Thank you very much. Okay to our next question on the line is from Deepak Kaushal with BMO Capital Markets. Go ahead.
Deepak Kaushal
Oh, hi, good morning, guys. Thanks for taking my question. I’ll try and keep it brief. You know, it’s year end, and you sometimes give us the breakdown of total revenue between health care and complex distribution. I was wondering if you had some metrics, because what I’m trying to get at is, what’s the natural growth rate that you’re seeing across these two different divisions overall on — basis?
Mark Bentler
Yes, so we do split in the in the deck, Deepak and welcome on the call. We do split on the deck that split of ARR, between complex and, and healthcare. And, that kind of moves around over time, but because the legacy basis, as you know, kind of skewed towards complex distribution, the sort of growth in health care has been a little bit muted in terms of how that overall percentage of ARR increases towards healthcare. We actually saw quite a pop in the last in this last quarter, because a big chunk of that 4.5 million ARR was, in fact, healthcare, a big chunk of it. So that, that ARR number, that percentage of our business of our ARR business, that’s healthcare moved from 36%, like Peter mentioned last quarter, to like 40%. So healthcare is like now 40% of our total ARR. So the new business is definitely and including based business migrations and add-ons is skewed towards healthcare.
If we look at overall growth rates in the year, Deepak I mean, healthcare was growing, and this is scale that the level of bookings. Healthcare was growing at 45% against complex distribution, or sorry, against total, which was growing at about, let’s see was about 27%, 27%, 29%. So healthcare is definitely leading the growth.
Deepak Kaushal
Got it. Okay. That’s helpful. And then and then yes, I know, it’s been a while since I’ve been on a conference call, but certainly not since we last spoke. And since we did last week, the macro environment has changed quite a bit. And also COVID, the priority of supply chain spending for hospitals increased. Has the recession changed that or how are hospitals thinking about inflation and potential recession impacts to spending? Does it change the priority of our supply chain investment stand? Or does it change the just the amount they’re willing to spend? And what are they, what are they kind of signaling to you guys?
Peter Brereton
I mean, so far, Deepak what we’re seeing, and I mean, this is what I say so far, and I’m talking I’m doing really real time feedback as opposed to me, most of what we discussed on these calls is, as of last quarter, April 30, whatever, whereas, this relates to sort of what is happening in the field right now. And what is happening in the field right now, is there’s an urgency in healthcare to get new supply chain systems selected and implemented, like we’ve never seen before. I think the macro environment is causing a lot of distraction in the, in the general distribution market. But in the, in healthcare itself, it seems to be just go go go. And, I’ve mentioned a few people, I was at a conference at the end of April, where I, it was a healthcare conference with a lot of IDNs there. And the exact conference had been held for a couple of years, these due to COVID. But it was fascinating for me, I talked to quite a number of IDNs while I was there at the conference, and every single network I spoke to was either a current Tecsys customer. a current Tecsys prospect, or I had us in their plans for the next couple of years. So it was just pretty exciting. I left that conference going wow, okay, this, this industry is on the move. And at this point, we are in and as a small sample set, I probably spoke to 25 or 30 IDNs at the conference, but we were literally in the plans or already in the business of every single one of the network. So, so it’s pretty exciting in healthcare right now and the macro environment is doing nothing to slow it down at this point.
Deepak Kaushal
Okay, that’s helpful both Peter and Mark. Thank you. I just have another question to follow up on margins. Obviously on the gross margin side, mix shift, and evolution changes the gross margin. But when I look at the EBITDA side, your [Indiscernible] fiscal 2022 was about half of what it was 2021. The portion of that’s in your control you mentioned investment. Are you expecting to recover that portion fully in fiscal 2023? Or are expected to gain on that, gain more leverage on that? And in that OpEx portion spend in 23? What how are you kind of thinking of it and you guys target a specific when you when you budget for the year are you targeting a specific spend level or margin level? How should we think about your process around margins?
Peter Brereton
Yes, I mean, there’s obviously a lot of factors involved in what you’re describing. I mean, in some ways, fiscal 2022. Sorry, fiscal 2021. That’s a comparable, was a bit of a windfall year, because of the fact that U.S. currency was and the Canadian Buck was trading at, including our hedge effect, it was almost, it was around a buck 40. So that just gave us a, a great, extra padding on the on the margin side.
This past year that just ended, in some ways the exterior interior was more typical, it’s sort of averaged what, what did we average Mark? 125ish?
Mark Bentler
Yes.
Peter Brereton
I think around there, so. So that was a much more typical year. And so as we look ahead into the future, we’re seeing, we expect that number to, the EBITDA margin to slowly climb back during the year. But we’re continuing to say that we want to have our overall philosophy has not changed, and that is that we want, we want to lead with organic growth, we want to invest for organic growth, we want to continue to pump money into sales and marketing and scale the business as needed. And yes, we want to maintain reasonable EBITDA so that we’re not consuming investor cash in the process of growing a business, we’re, we’re sort of funding our own growth as we go.
We, it’s hard to depend on the markets, the markets are up, sometimes down, sometimes we don’t want to be in a position where we’ve got to dilute at a, at a bad time. So, that continues to be the strategy. Some years we come in above that rough guideline, as in fiscal 2021. Some years we come in below that, but that continues to be the philosophy we run with it. If we look at what we see in the headlights right now, it calls for continued investment in growth in marketing, I mean, in sales marketing, but it is that on the operating side, specifically cloud operations, and to some extent, R&D, we feel like we’re approaching a point where we could moderate that growth. I mean, R&D growth, we will definitely be very moderated this year, we feel like we did a lot of catch up in Q4. So we expect R&D spending to be relatively flat this year. And, cloud Ops is a start. Yes, based on exiting run rate, yes.
And cloud Ops, we’ve invested a fair bit in during this past year. We know we’ve still got some more investment to do there. But we think that kind of by the end of this fiscal year, that cloud operations group will be more or less where it needs to be. And at that point, you should start seeing more benefit on the margin side, resulting as a result of growth. So sorry Deepak if I sound evasive. I mean, we don’t give precise margin targets out to the market. But philosophically, it’s, it’s focused on growth, and maintain enough EBITDA margin to fund the business.
Deepak Kaushal
Yes, no, that’s very helpful. I understand that the philosophical answer and the business approach is what I was going after. So that’s helpful. You do have excess cash on your balance sheet. In the past, it’s kind of been earmarked for acquisitions. If macro risk is increasing your do you change that view? Or do you accelerate that view? How should we think of the excess cash?
Peter Brereton
We continue to see it as both a cushion for security in these markets? I mean, we need to, I mean, customers that that select this for a SaaS is a SaaS platform. I mean, in many cases, we are their core system of record. They need to know that we’re rock solid financially here for the long haul. So we continue to see as a bulwark [ph] against sort of some of the craziness going on out there right now. But at the same time, we continue to see some of it as dry powder for acquisitions. I mean, we’ve been watching the, the market, the, private equity markets, which is who we tend to compete with for acquisitions. And I mean, in some ways the pricing still hasn’t adjusted to work, to what the public markets have gone through. It feels like there’s often sort of a six month lag from what the public markets do to what the private markets do. So it seems like pricing is still, fairly high on the private side, but we still expect that to come down now and get more in line with public markets soon. So we continue to watch that and we’ll move if we think there’s some reasonable pricing out there.
Deepak Kaushal
Okay, that’s great. Well, thank you again for taking the questions. I’ll pass it along.
Peter Brereton
Great.
Operator
Thank you very much. We do have another question from the line of Steven Li with Raymond James. Go right ahead.
Steven Li
Thanks. Peter, I’m hoping you can reconcile something for me. So I heard you say it’s, it’s go go go in hospitals. But at the same time, you did mention there’s a lot of inertia? Can you reconcile the two? Thanks.
Peter Brereton
Great question. I’ve been trying to reconcile those two for about five years, I think. There is, there’s a lot of focus from a board level in the hospital space to say we need to implement new supply chain platforms. We need to modernize our approach to supply chain. We need to save, the the millions of dollars that are currently being wasted in supply chain, etcetera. So a lot of that pressure is there, it’s now coming from the boards, it used to be the other way around, if I go back two years, it was the management teams trying to pressure the board to invest more in supply chain. Now it’s the board’s putting pressure on management teams, to hurry up and get new supply chain platforms in place. So that’s that sort of urgency that we see in the market. At the same time, nothing happens. Like, by and large, this industry does not know how to do anything fast. So as much as there’s urgency there, that the contracting process takes a while the security process, they all have, audit teams to audit the security platforms, make sure it passes the test. Then there’s the teams that have to look at interfaces, they only move at a certain speed. So that’s why we ended up seeing this swell in the pipeline swelling activity sales team very busy. And yet the, the actual growth in bookings, as of yet is not that extreme.
I mean, if I look at the numbers, I mean, the, our, our SaaS bookings actually grew, pretty nicely last year over the prior year, and given that a much higher percentage of it was healthier. We actually saw our, our healthcare bookings grow at a pretty substantial clip over the prior year. And we certainly expect that to continue. So we are seeing, I mean, as we mentioned, our SaaS revenue up, 47%, in constant currency, and so on. So we’re seeing the growth is coming through. But certainly the, the, it’s still not at a level that the activity in the pipeline could deliver. And so we’re still seeing that as future gain that we expect to begin to come through soon.
Steven Li
That’s helpful Peter. And this dynamic impacts more PS than SaaS revenues, correct. Like, you can start recognizing SaaS earlier, is that right?
Peter Brereton
Well, yes, that that dynamic still affects the, to some extent that the contract closing which then does affect the SaaS revenue, right. So, this is a lot of this activity, I’m talking about, this, the security reviews, and all those kind of things, those all happen prior to even contract signing. So that does hold up the SaaS revenue. Once the contract is signed, then yes the SaaS revenue kicks in. And at that point, the sort of the ponder speeds, a lot of these networks move at effects the professional services revenue more than the SaaS at that stage.
Steven Li
Okay, that makes sense. And then last one, Mark, I heard you there’s no plan for price increases on SaaS. So this is even for rows coming up for renewal, say this year?
Mark Bentler
No I think, we, we have, we have the opportunity to increase SaaS pricing upon a renewal, but a lot of our contracts that we do on SaaS, Steven, are three to five year contracts, so we don’t have a lot of them, actually, that are coming up for renewal right now. We’ve only been selling this stuff for, a little, sort of three plus years. So we and most of our contracts are five years. So there’s not a ton that are coming up for renewal right now. The ones that are we have the opportunity to, to increase them and we expect, we expect to do that.
Steven Li
Got it. Thanks.
Operator
Thank you very much. And we have no more questions on the line. So thank you very much, everyone. That does conclude the conference call for today. We thank you for your participation. Please disconnect your lines. Have a good day, everyone.
Mark Bentler
Thanks.
Peter Brereton
Thanks everyone. Bye for now.
Be the first to comment