Tecsys Inc. (OTCPK:TCYSF) Q2 2023 Earnings Conference Call December 1, 2022 8:30 AM ET
Company Participants
Peter Brereton – CEO
Mark Bentler – CFO
Conference Call Participants
Amr Ezzat – Echelon Partners
Andy Nguyen – Raymond James
Gavin Fairweather – Cormark
Nick Agostino – Laurentian Bank
Rini Sharma – BMO Capital Markets
Suthan Sukumar – Stifel
John Shao – National Bank of Canada
Steven Li – Raymond James
Operator
Good morning, everyone, welcome to Tecsys Second Quarter Fiscal 2023 Results Conference Call. Please note that the complete second quarter report including MD&A and financial statements were filed on SEDAR after-market 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 the 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, December 1, 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 to everyone. Joining me today is Mark Bentler, our Chief Financial Officer. We appreciate you joining us for today’s call.
Our company began fiscal 2023 with strong growth underscored by solid SaaS bookings and that momentum continues into Q2. Bookings included based accounts, as well as new accounts in the U.S. Canada, and Australia. Our SaaS offering is proven to be a system of choice for organizations grappling with innovative technology and supply chain complexity.
Since our last results call, we announced implementations at the distributor A.M.G. Medical, and the University of Miami Health System, each of which pointed to Texas software as the digital enabler of their supply chain strategy. With nearly 20 projects renewals landing in the quarter, we are seeing traction for the Texas value proposition across all industries in which we do business, within a market that is highly engaged.
As much as I’d like to say that the pandemic is behind us, the effects of it are not. Labor and supply issues continue to affect many companies. That said, our ability to get in there and install the system that puts them on a path for success is what we do really well. And this gives us confidence that the momentum we are seeing will only continue to gain speed.
Now before turning to the second quarter results, I wanted to take a moment to speak about a transition that is underway in our HR leadership. Patricia Barry who has led our HR team for more than 20 years will be retiring over the next few months. And she is much to be proud. She has been a key part of our success and we’d like to express our appreciation and wish her all the best.
I’d also like to welcome Nancy Cloutier to the position of Chief Human Resources Officer. I’ve spoken before about the important role our talented people play in the development and delivery of our software. Nancy brings her HR experience from much larger organizations to us and is now leading the effort to prepare our HR team and the company as a whole for the growth ahead. As our team expands and our business continues to grow, we are excited to have Nancy onboard.
Getting back to Q2 results, I’d like to take a moment to summarize the key events of the second-quarter of fiscal 2023 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.
There are a couple of key indicators I’d like to highlight, which are contributing to our continued track record of stable-growth as a SaaS organization. First, our revenue model continues to move in a positive direction. Our SaaS revenue model provides greater revenue visibility, makes it easier for new and existing companies to buy our software solutions.
Notwithstanding our total record revenue up 11% in the quarter compared to the same-period last year, the real headline is that our SaaS revenue is up 34% year-over-year, which results in the achievement of an important milestone in this quarter. And the SaaS revenue now represents over half, 52% to be specific, of total recurring revenue. That means that in the last four years, we have built the SaaS business that is driving more recurring revenue than our legacy on-prem business built to over the previous 35 years. We are extremely proud of this achievement.
Second, our SaaS ARR bookings are up 30% in the first half of this fiscal year compared to the same period last year. Bookings included based account expansions, as well as new SaaS accounts. As mentioned in Q2, we added two new major healthcare IDNs in the U.S., as well as new complex distribution and converging commerce accounts outside of the U.S.
These bookings also reflect continued partner involvement in our pipeline and in our closing activity. It is extremely difficult to manage today’s supply-chain complexity without a properly integrated digital supply-chain platform. We’re finding that this company is trying to patch together an agile supply-chain by adding onto old-style monolithic systems. At some point, they conclude that the core software they’re using was never designed to do what they now needed to do. Tecsys is proving to be among the best cloud-based solutions available in the markets we serve. And we have the people, the products, and the plan to provide what the market demands.
Mark will now provide further details on our second-quarter and first half financial results.
Mark Bentler
Thank you, Peter.
Starting with our second quarter, we’re pleased with the strong performance in our quarter ended October 31, 2022. Total revenue was CAD38.1 million, that’s 11% higher than CAD34.3 million reported for the same period last year. Total revenue excluding hardware increased 9% compared to the same period last year or 6% on a constant currency basis.
As many of you know, a significant portion of our revenue, about 70% this quarter is denominated in U.S. dollars. 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 34% increase in SaaS revenue, up from CAD6.6 million in Q2 2022 to CAD8 million in Q2 of this year.
On a constant currency basis, SaaS revenue was up 30% compared to the same quarter last year. SaaS remaining performance obligations, also known as RPO or SaaS backlog, was CAD109.5 million at the end of Q2 fiscal 2023. That’s up 51% from CAD72.7 million at the same time last year.
On a constant currency basis, that growth was 43%. Maintenance and support revenue for the three months ended October 31, 2022 was CAD8.1 million, down 1% compared to the same quarter last year, around 3% on a constant currency basis. The general decline in core 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 offerings, maintenance and support revenue will continue to decline over time.
Professional services revenue for the second quarter was CAD13.5 million. That was up 4% from CAD13.1 million reported for the same quarter last year, but flat on a constant-currency basis. As we’ve noted in the last few quarters, we’re starting to see the impact that our transition to SaaS will ultimately have on our professional services revenue line. That is, we are seeing a continued reduction in custom development work as customers opt for more out-of-the box approach to platform implementations. We’re also continuing to experience the increased collaboration of our partner ecosystem and helping to implement our systems. We expect that over time, these factors will continue to moderate our professional services revenue growth in the future.
License revenue for the quarter was CAD1.1 million compared to CAD1.0 million in the same-period in fiscal 2022. As we’ve stated before, with most of our software bookings now SaaS, we expect license revenue to decline in general over time. Hardware revenue in Q2 of fiscal 2023 was CAD6.6 million, that was up 22% from CAD5.4 million in the same period last year and an increase of CAD2.8 million sequentially compared to CAD3.8 million in Q1.
By way of reminder, we sell primarily third-party hardware to our customers for warehouse operations and in-hospital point of views, storage and tracking. This part of our business tends to be lumpy and revenue recognition here is tied to delivery timing. That said, like last quarter, our hardware backlog remains strong, driven primarily by hospital network point-of-view sorters.
Turning now to bookings, SaaS bookings are reported on an annual recurring revenue basis and can be somewhat lumpy due to the timing of quarterly deal closings. SaaS bookings were down 31% in the quarter to CAD2.8 million compared to CAD4.0 million in Q2 of last year. I’d point out that it’s helpful to look at a longer-term period to get a real understanding of what’s happening with momentum on SaaS bookings. We’ve been seeing some sustained momentum with SaaS bookings, up 30% year-to-date compared to the first half of last fiscal year and 40% in the last 12 months through Q2 fiscal 2023 compared to the prior 12 month period.
Professional services bookings were CAD15.0 million in the quarter, down 16% compared to CAD17.9 million in the same quarter last year, but up 55% sequentially compared to Q1. This highlights the lumpiness and impact of timing on reported quarterly bookings, a reminder that we do see our transition to SaaS and strengthening partner ecosystem tempering professional services growth in the long-term. That said, professional services backlog remains solid at CAD31.9 million at October 31, 2022.
For the second quarter, gross profit was CAD16.7 million, that was up 7% compared to CAD15.5 million in Q2 of last year. That was led by higher gross profit contribution from SaaS, maintenance and support, as well as license and hardware.
As a percentage of revenue growth — as a percentage of revenue, gross margin was 44% compared to 45% the same-period last year. Combined SaaS, maintenance, support and professional services gross profit margin for the three months ended October 31, 2022 was 46% compared to 49% in the same period in fiscal 2022, but flat sequentially compared to Q1 fiscal 2023.
We generally expect services margins to flatten out in the coming quarters of fiscal 2023 and we expect to see services margin improvement into fiscal 2024 and beyond. We believe this will result, as the business continues to scale and as we focus development and operational energy on optimizing platform efficiency. We see this as a multiyear journey with incremental benefits building over time.
Switching now to our expenses for the quarter, operating expenses increased to CAD15.6 million. That was higher by CAD1.7 million or 13% compared to CAD13.9 million in Q2 fiscal 2022. Operating expenses are up compared to the same quarter last year, primarily because of higher research and development costs, as well as higher sales and marketing costs.
Compared to Q1, research and development costs were up 3% on a sequential basis. We expect research and development cost to be relatively flat sequentially in Q3 compared to Q2. Sales and marketing costs were up sequentially in Q2 on higher marketing program spend, seasonal sales and marketing events and travel. We expect an increase in sales and marketing costs sequentially in Q3 that will be slightly more modest than the increase we saw in Q2.
Net profit for the quarter was CAD715,000 or CAD0.05 earnings per fully diluted share compared to CAD708,000 or CAD0.05 per share for the same period in fiscal 2022. Net profit in the current period benefited from a lower effective tax-rate. Adjusted EBITDA was CAD2.8 million in Q2 fiscal 2023, compared to CAD3.2 million in Q2 of last year. Net profit and adjusted EBITDA were both positively impacted by favorable foreign-exchange of approximately CAD0.8 million compared to the same-period last year.
Turning now just briefly to our results for the first-half of fiscal 2003, total revenue was CAD73.3 million. That was up 7%. Compared to CAD67.5 million in the first half of last fiscal year. And that’s up 5% on a constant currency basis. SaaS revenue for the first-half was CAD16.8 million, that was up 37% from CAD12.2 million in the same period last year and up 34% on a constant currency basis.
Our SaaS bookings are up 30% as I previously mentioned to CAD6.7 million, compared to CAD5.1 million in the first-half of last year. Our net profit for the first-half was CAD755,000, CAD752,000 in the same period last year. Foreign-exchange movements had a positive impact of approximately CAD1 million on profit and adjusted EBITDA compared to the same period last year.
Adjusted EBITDA was CAD4.3 million in the first-half of fiscal 2023 compared to CAD5.7 million last year. We ended fiscal 2023 [Phonetic], with a strong balance sheet position. On October 31, 2022, we had cash and cash equivalents and short-term investments of CAD41.8 million. That was down CAD1.5 million compared to CAD43.2 million at the end of fiscal 2022, but up sequentially from CAD37.5 million at the end of Q1. Finally, we had a debt of CAD7.8 million at quarter-end compared to CAD8.4 million at the end of fiscal 2022.
I’ll now turn the call back to Peter to provide some outlook comments.
Peter Brereton
Thanks, Mark.
Tecsys stable performance continued through the second-quarter of fiscal 2023, with a strong balance sheet and a robust backlog and strong sales pipeline. We are seeing widespread buyer intent across target markets, solid opportunity cycles in our highly capable sales team with the tools and talent they need to capitalize in a market ready to invest in new technology.
Our increasing market share in healthcare, supported by an increasingly robust partner network and growing acceptance of the clinically integrated supply chain and consolidated service center model, together with our expanded health-care sector offering, gives us confidence that the health-care sector will continue to serve as an important revenue stream for us.
Turning to converging distribution, we continue to hold our sweet-spot there and carve-out our share of a massive market opportunity driven by fundamental changes to the supply-chain industry. Changes spurred by aging existing systems, digital adoption and a realization that heightened consumer expectations are here to stay.
We are pleased that this first-half of fiscal 2023 continued recent trends. It isn’t hard to see that accelerated changes on the horizon when it comes to supply chain management and companies are starting to invest in that change. We believe that the remainder of fiscal 2023 is tracking well against our internal KPIs and we are well-positioned to expand our footprint in this growing market.
In summary, I’d like to remind analysts and our investors of our 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 and strengthen our partnership ecosystem. This is key for us to scale rapidly into North American and international markets. Third, we will continue to expand and refine our distribution and omnichannel business platforms to service evolving needs in both of our healthcare supply chain and converging distribution market segments.
Across all markets, we will place emphasis on customer success. We have launched by the philosophy of customers for life and a big part of that formula is to deliver value fast, stay connected, and expand on the value delivered. With that, we will open the calls back up for questions. Thank you.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] And our first question is from Amr Ezzat with Echelon Partners. Please proceed.
Amr Ezzat
Peter and Mark, thanks for taking my questions. My first one is on the economic environment like. It’s ever weaker, and I’m just wondering how conversations with clients are evolving. It seems like your product is still getting good traction. That’s wonder, like you are still seeing some reluctance from net new accounts to engage in conversations at all or?
Peter Brereton
Overall, it seems to be multi-server, multi-speed situation. I mean, we’re in a lot of different markets and the healthcare market, for instance, the aftermarket is completely unaffected. I mean that work right now is just go, go, go. It’s frankly at it’s higher than we have ever seen it. The retail side, I would say, is actually doing surprisingly well. There’s a lot of talk of recession and consumer spending habits changing and all that kind of thing. We’re not seeing that in the retail markets we serve. We just came through Black Friday, Cyber Monday.
So, through our management solution platform, we saw some pretty good order flows running through that platform. And certainly, we are seeing continued investment from that — from that market. So that — I mean, we’re keeping an eye on that. So, that –that could yet slow down, but certainly at this point, the actual transaction flows and interest, and we added a couple of accounts in the quarter in that market.
It seems to be clicking along quite well. The general distribution, I would say, is the one that is more hit [indiscernible]. There are accounts. I mean there are sub-segments in general distribution that are clearly slowing down a little bit and are being more cautious. There is other segments that are not.
So that’s where we look at our overall, across-the-board, we look at the mix of healthcare and general distribution retail. We are seeing, overall, total pipeline is very strong. No question, the healthcare is the strongest. I would say, retail is probably next.
Complex distribution is probably last. And yet, EBIT there — even there, likewise, still reasonable. So, we continue to sort of watch what’s going on there. But so far, not seeing, not seeing any impact on slowing down in the pipeline.
Amr Ezzat
Great, and thank you Mark. I appreciate all the color on cost and margins in your prepared remarks. So if I were to sort of sum up the margins in around the same levels in fiscal 2023, with an improvement in fiscal 2024, so I wonder whether fiscal 2024 is a year that looks like fiscal 2021 where you guys were double-digit EBITDA margins? Is that fair or is that like too aggressive?
Mark Bentler
So I think that’s, I mean, that’s sort of a different question. When I was talking about margin, I was really talking about services gross margins. Yes, and that’s and that we have to be a little bit careful about extrapolation because our stated intent and our philosophy has always been that if we see real market opportunity for growth and taking market share, we’re going to invest into that.
So, we will continue to monitor that, but at least, if we see markets and potential and pipelines like they look right now, I think our propensity in the intermediate-term will be to invest into that in sales and marketing and R&D and let the EBITDA margin expansion happen a little bit later as long as there is real opportunities to invest in growth.
Amr Ezzat
Fantastic. So it’s too early to call a proper inflection point on EBITDA margins.
Mark Bentler
Yes, I would say, keep an eye on gross margins.
Amr Ezzat
Fantastic, fantastic. Then maybe one last one for me. Can you update us on the capital allocation strategy and M&A in light of your strong balance.
Peter Brereton
Hi, Amr, we continue to look at there. But nothing really has changed. I mean we’re clearly pretty conservative buyers. The opportunities we’ve looked at still have ended up sort of priced above a level that we think is reasonable to go and spend investors’ money on. And so we continue to look. We’re looking in Western Europe. We’re looking in the U.S. market. We’re looking for the right fit, and good opportunity. But so far, we’re not — we’re still seeing pricing pretty high, resourcing private equity companies with a lot of dry powder, willing to pay more than we’re willing to pay.
And so our — at the same time, the organic growth we have in front of us, we think, is tremendous and so feel we do not want to do that unless we find really right fit. We’ll will stay focused on organic growth.
Amr Ezzat
Great, thanks for the color. I’ll pass the line.
Peter Brereton
Thanks.
Amr Ezzat
Thanks for the questions, Amr.
Operator
Our next question comes from Andy Nguyen with Raymond James. Please proceed.
Andy Nguyen
Hi, Peter and Mark. This is Andy for Steven Lee. When you mentioned the deal pipeline in the complex distribution vertical, it kind of reasonable. Can you give us some more color on your outlook in that specific segment, should we expect any changes for the rest of the year or in next fiscal year in that sense.
Peter Brereton
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No, no real changes. I mean, we have always continued to run well — not always, but I guess, we’re probably 15 years now. We’ve run with sort of two primary verticals, the general distribution vertical and Hudson vertical and they have taken turns to some extent being hot. You may remember a few years ago we had talked with [indiscernible] The Affordable Care Act in the U.S. and suddenly the U.S. hospital market went quite flat for a couple of years. Meanwhile, the general distribution side was actually quite robust.
Right now, it’s clearly on hospital side. I mean, as they went through the pandemic and came out the other side and sort of many of them realize how weak their supply-chain solutions were that they we’re existing with. And so, it’s become a even harder market than it was before.
So, that’s clearly where a lot of the excitement is right now. But at the same time, the general distribution market still represents a 55% of our revenue. It’s an enormous market. There’s 12,000 companies in that market. I think it was Gartner Group that just came out with a statement that said they believe close to 50% of the companies in that space will be shopping for new solutions within the next few years.
These are systems that all went in time for Y2K and they’re getting pretty old. So, that market continues to be quite interesting. So, we’ll prioritize investments in healthcare right now because that’s the hardest market for sure. At the same time, we will continue to do a great job of serving the other market as they come through this — the current distractions. I mean, it’s largely filled distractions around labor availability and transportation availability, as well as of course the shutdowns in China impact that market a fair bit.
So, we’ve got to get through those. That’s probably going to take another couple of quarters before that market really completely worms back up again. But even so, it’s still good enough frankly. It’s still a pretty decent market. So, no real changes in our side. We will continue to pursue the both and currently expect that market to come back up to a more normal operating temperature within a couple of quarters.
Andy Nguyen
Got you thank you. And maybe this a question for Mark. You have really decent quarter in terms of cash flow from generation. Should we expect a similar level for the remainder of the year, comparing to like fiscal 2022?
Mark Bentler
Yes. I mean I think we had a kind of a light Q1 on cash flow, which is kind of seasonal for us and kind of is our historical trend. That’s kind of the low-point, tends to come back a little bit in Q2. Our bigger cash generating quarter tends to be our Q4. So, I think, I expect the back half of the year to be generating more cash-flow than the first-half of the year.
Andy Nguyen
Perfect, thank you, I will jump back into the queue.
Mark Bentler
Yes. Thanks for the questions.
Operator
Our next question comes from Gavin Fairweather with Cormark. Please proceed.
Gavin Fairweather
Hi, good morning. I wanted to talk about healthcare. Obviously, your comments were quite bullish on what’s going on in the pipeline. Obviously, you added two new networks this quarter by my count. You should be maybe a tick over 60, obviously to hit the 100 target, we will need to see an acceleration in the number of quarterly additions to hit that. So, maybe just discuss kind of how many logos are in the pipe? How the sales cycles are going and any other KPIs and color there? What’s your kind of backing up your bullish comments?
Peter Brereton
Yes, I mean, we’re currently — in the pipeline. We’ve got actually a couple of weeks ago, I looked at that. I think we’ve got in the low 20s, 23 and 24 accounts in the pipeline in retail. But outline the change just the velocity in the pipeline in there. They are moving through quickly. If you talk to our sales teams, right now, their main complaint is the speed of the legal process by the time the contractors go through legal review it.
On the one-side, on the client side, on our side, it takes some time. And, yes, so I’d say, it’s pretty strong. If we look at our total pipeline, more than two thirds of our pipeline right now is actually new account, healthcare opportunity. So it’s very, very strong.
In terms of reaching a 100, we’re quite confident we’re going to hit it. I mean, we’ve come through a couple of really weird years that were sort of hurry up and wait and sort of what’s the pipeline, but too distracted to do anything and so on. That seems to prevent it, I mean, at this point, it really is rolling. So, we sort of look at it. Besides buying in the first half. can we buy next year. it would be at a run rate of sort of 12 to 15 in the year. We think so. So, we’re looking over the next couple of years and feeling like we’re pretty well right on track with that 100 mark on schedule.
So we’re feeling good about that. I think the question we’re starting to think about is, sort of, okay, what comes after that 100. There is obviously 300 in total. How many in total can we get? Can we end up with 150. Sort of 150 is the minimum long term goal. At the same time, the market acceptance is growing so rapidly, it’s quite possible we could push that to more like 200.
There is also in effect almost the verticals within the hospital space, we’re still just in the early stages of growing the pharmacy piece. This last quarter, we had a pharmacist, a U.S. based pharmacist join our sales team. So, she’s now an active part of our sales team, helping to sort of explain our solutions to the market, and so on and that we think that’s going to have a very positive impact.
So, there’s just lots of growth within the accounts, we already have plus we still see pretty good runway for new accounts.
Gavin Fairweather
Awesome. That’s great color. And maybe for Mark, your comments on services gross margins were interesting, have been trending in kind of the mid-40s. It sounds like they’re going to stay there in the back half, but curious maybe for a longer-term target on that front. I mean, the SaaS revenue is scaling and you’re doing some work to kind of optimize the platform on the backend and you’re pushing more services work at the partners. So, how do you think about kind of the longer-term potential for that gross margin line on services.
Mark Bentler
Well I mean. I think when we look at the cloud componentry in there we’re sort of in — sort of high 50s right now. It’s a sub-optimized, and if we look down the road and sort of see a dot on the wall and aim for it, it’s 10% plus expansion on that line. The question for us is how quickly can we — can we move the needle there and how much scale does the business need to have in order to get there. We’re doing quite a bit of work on — you know on figuring out and running initiatives that are currently underway that we expect will have a positive impact on margins over time. Those are focused on reducing public cloud infrastructure costs, making the platform more efficient to operate and support.
And the other dynamic in there of course is larger average deal sizes here, typically will tend to support higher margins there. The bigger our deals are, the higher the margin, higher additive margin is .And then how — that has a positive effect on moving up the averages. So like I said, we’re doing — we’re doing a lot of a lot of work in this area and we think there’s a lot of potential on kind of the 10 points out there, It’s a question of, for us, it’s a question of when and where is the top.
Gavin Fairweather
That’s helpful and then maybe just on professional services. I know you made some additions to the team there. And it sounds like the load that’s being absorbed by your partners continues to increase. How should we be thinking about this revenue line going forward? Are the partners kind of take on more of their work than perhaps you were thinking and should we be looking for pretty modest growth in the services line? Maybe just help us out with some updated thoughts on that?
Mark Bentler
Yes, it’s interesting. I mean our — that line is moving. It’s moving pretty — the growth line there seems to be changing pretty dramatically. Just in terms of the — we measured the attach rate so the bookings that are coming in on professional services, as deals happen. So when a new SaaS deal happens, how much — how much services is attached to it and that evolves over time because those initial implementations, you tend to — you tend to do a deal. There are some services to do the core implementation and then there is some added work that comes off. So, it’s not completely scientific, but we have seen those attach rates sort of declining and we pointed a couple of different things for that.
One is, as you said, the partner ecosystem development and how the partners are taking some of the surrounding professional services, not necessarily very specific product configuration, core implementation stuff, but some of the some of the surround stuff, oftentimes, the sort of stuff that we think about is more kind of client side services that sometimes clients engage us to help them with. We have partners right now that are doing that are doing work in that area. So, that’s tamping down that attach rate.
The other thing is, you know and I mentioned it in my remarks this notion that as we shift more and more to SaaS, just that shift itself, the market is starting to say, hey, wait a second, if we want to really take advantage of SaaS and upgradability in the future, we want to make sure we stay as clean as we can on the stack and really get rid of custom modes and modification work that would otherwise be services revenue for us and stick with the core platform.
And we’re kind of encouraging more so now in the SaaS world than previously for our new prospects and customers to stay on that clean path because there is more value in the end for them to be in a clean upgrade path. And that’s happening even more dramatically as healthcare becomes a bigger part of our bookings, which we’ve seen in the last in the last number of quarters. Healthcare becomes a bigger part of our bookings. And those deals tend to be very sort of modification light.
We’re oftentimes we’re going into an opportunity where we’re not necessarily replacing a system we’re putting in a system. So oftentimes, the networks are very keen to say, hey, what’s the best practice here. Texas has this end-to-end solution. We say, well, this is it. Put this in just like this, and you’ll benefit and here’s the ROI and you don’t need to do a lot of – I had this old system that was doing this and I’d like it to go do this.
Those kind of conversations aren’t happening nearly as much in the healthcare side. So that’s tamping down the amount of services or custom work that happens around implementation. So we think that’s probably going to moderate growth on professional services, frankly, Gavin, I’m not sure where that’s going to land. I mean I think it’s – I think it’s in my head, it’s clearly single-digit growth, is it mid-singles? I think time will sort of tell.
Gavin Fairweather
Okay, that’s helpful. And then just maybe a quick one, I saw in the MD&A or on the SaaS revenue. You said that there is a bit of a drag from cancellations in the quarter. Did you see maybe a little bit of churn in somewhere in the business there?
Mark Bentler
I mean we do see some churn that’s a – that’s not a new comment. It’s kind of meant to be kind of an all-encompassing here’s the stuff that makes that number move around. And if you’re trying to loop the bookings through to the – to what was reported as last quarter’s revenue and plus bookings and what’s showing up as revenue this quarter. The dynamics there are attrition and cancellation is one of the dynamics and the other dynamics is timing.
Sometimes we sign a deal and it doesn’t necessarily start right away. It might start two months later or even three months later, quite oftentimes, it does start very quickly, but there can be a bit of a time delay there. But we have over the course of time. We’ve had some cancellations happen.
Gavin Fairweather
Appreciate all the color, thanks so much.
Operator
Our next question comes from Nick Agostino with Laurentian Bank. Please proceed with your question.
Nick Agostino
Yes, thank you and good morning everybody. I guess, Peter and Mark, just trying to understand the hardware revenue. I think it was a record number that you guys printed this quarter. And if I recall correctly, last quarter, you were somewhere around $4 million and you suggested that maybe you’d be down at that level in the near term or in the short-term just because of supply chain constraints?
So just trying to understand how – like how you are able to source a stronger number. Is there anything you guys did differently? And is that something that can carry forward or should we expect, maybe a drop back down to that low $4 million or?
Mark Bentler
Yes, it’s a great question, Nick. And that was a big quarter and a little bit, I mean, didn’t quite see that much coming. But we did see some – remember, like these deals can be pretty lumpy. So you can have a $0.5 million shipment come through here or more, and it kind of falls into one quarter versus another quarter. So there is just that delivery timing, and that’s why we always mentioned that in the prepared remarks and the MD&A because it’s very real.
In terms of what’s going on in our book there, we still have very significant backlog. So it does come down to a question of how quickly can, we deliver this. We – expectations around the proptech side here, where we’re still having some – it seems like it’s loosening up now, but we’re still kind of burdened a little bit by our own supply chain issues with chips to build out those smart panels.
But we see that kind of loosening up whether that’s going to impact this year or in the sort of Q1 of next year, that backlog is going to start releasing here eventually. But what does that mean for the next couple of quarters. I don’t – I think we’re at a high watermark right here, but I also don’t think we’ll probably be back down below four in the next couple of quarters. It looks like because of the backlog we have and the delivery schedules we have right now, it’s going to be somewhere between those numbers.
Nick Agostino
Okay. Just a follow-up, I recognize the strong demand side that you guys called it out on the hospital side. But did you guys change anything or any change from your suppliers when it comes to the shipments. Were you able to access shipments at a faster pace?
Mark Bentler
Yes, you kind of cut off at the, you kind of cut off at the end there, but I think you’re sort of – you still asking about were there components in there that are — where there’s less constraint – in the supply chain than others?
Nick Agostino
Yes.
Mark Bentler
And that’s certain. Some of the stuff we deliver is – where we really have the – I would say, we really have more of the supply chain constraints around the proptech stuff. The core storage stuff that we sell into the hospital point of view is, there’s not – we’re able to get that stuff. And in fact, that’s some of the stuff that was driving the prop there in the Q2.
Nick Agostino
Okay, that’s helpful. I guess my other question is, and I’m not sure if you discussed in the prepared remarks, but I think you recently announced a new – I think it was a rapid implementation for the order management system market, I guess, a solution that can be installed faster – it’s a little bit of easier to get guys up and running quicker and then hopefully, they do bigger deployments if I understood that presses correctly. And I’m just wondering, have you rolled that out yet, what the time line is there? And if you have pulled out what’s been the market with option?
Peter Brereton
Yes and Nick, that we have rolled it out. We actually have – we signed two accounts with it in the second quarter. And at this point, both of those accounts that we signed in the second quarter are already live. So it’s – been successful and is proving itself in the field. So we’re pretty happy with that. I mean that’s very much in the sort of the retail market where the implementation seasons in retail tend to be very short.
Nobody wants to invest with the system around Black Friday, Cyber Monday or Christmas. They then got sort of a few months in the spring. A lot of them don’t want to do anything close to Valentine’s Day or Mother’s Day, so they have sort of a couple whole things in there. The summer time is fairly popular and – for implementation in early fall. But you’ve got sort of these big events that are sort of total blackout periods in terms of implementation.
So that was something that you can sort of sign a contract and be live back quickly, we think, it is pretty important for that market. So we’re pretty happy that we were able to sign two accounts and bring them live since we rolled that out.
Nick Agostino
Okay. And maybe just as a follow-up, what’s the relative, I guess, revenue versus this solution versus if somebody went with a full-on order management system deployment?
Peter Brereton
Like the SaaS revenue is the same, it’s really just a highly prioritized and pre-templated approach to implement it. So, that you don’t sort of get hung up in trying to do 1,000 things all at once which, is often the temptation when you’re rolling out a new platform. While we’re putting in a new platform, let’s add four new payment methods and let’s add endless aisle in the store and less et cetera.
And this sort of focuses the implementation around sort of, no, let’s just implement top not – order orchestration and we’ll cycle back for the rest later. It uses pre-templated interfaces that uses relate the eyes, and uses a sort of a preset workflow that just takes a lot of the guesswork in process development and white boarding and constructer pilots and so on sort of take that all down to a minimum or right out of the process entirely and just brings you live. So you’re immediately getting value. Your consumer experience is already elevated and then you can cycle back to accelerated it doesn’t change the SaaS footprint at all.
Nick Agostino
Okay, that’s very helpful. And my last question for top line. Just wondering, are you seeing increases contracts renew — are you guys pushing through any pricing increases? And if so, what percentage of your contracts — have you done that and with and what’s been the market reaction to that?
Peter Brereton
I mean we’re doing regular price increases with our old on-prem maintenance revenue stream. But the SaaS side, we’re just coming up to start seeing renewals, right and most of these contracts signed on a five-year contract basis. We really only entered the SaaS market four years ago. So we’re just now starting to see sort of coming up on the horizon like as we get into fiscal ’24, you’ll start seeing some renewals, which will, of course, start to impact RPO and so on because you’ll have not only new accounts coming into that, but also renewals pushing out.
But we’re just looking right now on what kind of price increases will be – right for the market over the next year or so. We do, of course, continue to roll out additional modules as well. So I mean some of the increases come not through just direct like-for-like price increases, but through add value you can provide.
Nick Agostino
Okay appreciate that color. That was excellent, I’ll pass the line.
Operator
Our next question comes from Rini Sharma with BMO Capital Markets. Please proceed.
Rini Sharma
Hello, good morning thank you for taking my question. So I guess with specific to the SaaS revenue. I’m wondering how much of the growth was being driven by new customer wins versus expansion with existing customers? And then if you could also talk about maybe like the different strategies that you’re using to drive growth amongst new and existing customers?
Mark Bentler
Yes, so the – yes, can you hear me?
Rini Sharma
Yes, I can.
Mark Bentler
Yes, okay great. Yes, so the spread between new and existing in the quarter was maybe it was pretty close to 50. It was pretty close to 50-50. And the other part of your question, I think, was — can you repeat the other part of your question?
Rini Sharma
Yes, we’re just wondering what are, the difference – like what are the differences in terms of the strategy that you’re using to kind of drive greater penetration amongst existing customers versus getting new accounts?
Mark Bentler
Yes, I mean I think – I mean okay I’ll take that, Peter. It’s kind of more for us. It’s kind of more of that approach is more of a story of which market in a way. If you look at healthcare, where it’s a very defined space, our go-to-market strategy there is we’ve got these 300 identified hospital networks, and we’re very proactive about spreading our sales force out with – in territories and going after named accounts or going after expansions in existing accounts.
So it’s kind of a finite – it’s more finite in terms of number of hospital networks. It’s a more finite population. So we approach it very directly. In terms of the complex distribution market, our go-to-market strategy is much broader. So we’re doing a lot more sort of typical digital marketing lead generation to drive new opportunities.
And the base opportunities we have people that are – we have part of the sales team that’s focused on staying in contact with existing customers, keeping up to-date with them on when are they planning to upgrade was an upgrade look like having those discussions about SaaS and when it’s time to upgrade why SaaS is – why SaaS is the right answer. We’ve mentioned before that those conversions to SaaS, we’re kind of at the front end of that in our history right now.
We’ve had some customers that have migrated from on-prem to SaaS, but it’s fairly limited. There’s about a dozen so far that have done that. But as we look in the pipeline, we see – building interest from the existing customer base on converting to SaaS. So we’ve kind of got those identified customer-by-customer.
There are two different approaches. The sort of the migration discussion is a different discussion than new opportunities. And like I said, our go-to-market strategy is slightly different between the complex distribution market and the healthcare market.
Rini Sharma
Okay, thank you yes that’s very helpful. And I guess my second question is just about the environment over with you – so outside of U.S. and Canada. What are you seeing there in terms of growth? And are there any specific investments you’re making to drive international expansion?
Peter Brereton
I mean nothing new or specific at this point in time. I mean we are continuing to see actually pretty decent activity in the Scandinavian region, where we have a presence there in Denmark. I keep – I have been waiting to see if that market is going to slowdown, given that there’s a lot of sort of energy cost concerns and so on in Europe. But so far, that market is doing very well. The third-party logistics market, for instance, is booming over there.
And – a lot of the consumer goods companies are doing really well. So we continue to see good business there. The other place we do a fair bit of business outside of Canada and the U.S. is other than Western Europe is Australia. And it’s been interesting to see that market continuing to do quite well. As I mentioned, we had a couple of order management solution clients there. In the quarter, we saw expansions with another account over there in the quarter.
So that market continues to do well. We have looked for a long time to find the right acquisition in Western Europe to speed up our penetration of the main part of Western Europe, sort of France, Germany, et cetera. We haven’t found one – we’ll need to decide at some point if we just begin to – sort of begin to build something directly ourselves rather than continuing to wait for the right acquisition, but we haven’t made any decisions on that yet.
Rini Sharma
Okay, that’s color. Thank you very much.
Peter Brereton
Rini, thank you.
Mark Bentler
Thanks.
Operator
Our next question comes from Suthan Sukumar with Stifel. Please proceed.
Suthan Sukumar
Good morning, Peter.
Peter Brereton
Good morning.
Mark Bentler
Good morning.
Suthan Sukumar
A quick question, I just wanted to touch on sales cycles. Can you provide a little more color on what you’re seeing in sales cycles across both healthcare and retail? Are you guys still seeing an elongation – or is the urgency starting to see deals get done faster?
Peter Brereton
I mean overall, the sales cycles are actually I mean especially in healthcare. They feel quite compressed at this point. I mentioned earlier on the call, where legal for instance, is continuing a bit of a bottleneck there as yes – we’re seeing sort of the financial side of healthcare networks ready to go ahead, the operations side ready to go ahead, the Chief Financial Officer, Chief Medical Officer, everybody is on board.
But it just takes time to get through procurement and legal. And the fact that, that is a bit of a bottleneck just highlights the fact that sales cycles right now are actually somewhat compressed. You also have the partner effect and that in – many cases, by the time we’re getting involved in some of these opportunities, our partner may have already been there working for months and has already helped them go through the cost justification and sort of written up the analysis to prove that this is worth doing and so on. So by the time we jump in, in a sense we’re halfway through the sales cycle. So that makes the sales cycle feel a lot shorter as well.
Suthan Sukumar
Got you. And on implementation time line, I think and by far as you’ve – you kind of talked a little bit about some of the challenges with project delivery, particularly in the healthcare space. Is there any – are there any changes you’re seeing from that perspective?
Peter Brereton
Sorry, on my end, it broke up a little bit. Can you just repeat that?
Suthan Sukumar
Yes, the question was around implementation time lines. I think in prior quarters, you’ve kind of touched on some of the challenges you’ve seen with kind of project delivery in the healthcare segment. Just curious what you’re seeing now?
Peter Brereton
Yes. I would say no real change there. I mean the market — I mean this is — and this is more of an across-the-board comment, right? Like the market continues to be somewhat starved for good technical people, good implementation people, good project managers, and our customers experience that. I mean they need some of that talent on their side for these projects. We obviously need to sell on our side, our partners need that.
And there is still a labor shortage in the market across all of those sort of implementation professionals. And we don’t see that. I mean, it’s not as crazy as it was last year, but it does continue to be a challenge. I mean every time a large tech company does a layoff, it becomes a news item. But I think those people are getting sort of hired back into the market very, very rapidly.
So there’s not — so there’s still a talent shortage. You also still have this challenge in healthcare that most of them have never really run their own supply chains before. So we end up taking time to build up the — in effect, the board-room chart to have the right people in there to actually run the supply chain. So those challenges all continue.
At the same time, there are far more experienced chief supply chain officers in healthcare than there were a couple of years ago. As the markets has become more aware of the need and we continue to penetrate the market, we’ve seen chief supply chain officers moving from one hospital network to the next and bringing our expertise with them.
So we see sort of glimmers of light there that we think are going to further accelerate the space. But there is definitely still an overall challenge rate. So implementation time lines, I would say, are not really changing at this point.
Unidentified Analyst
Thanks Peter, that’s helpful. Mark, maybe a question for you here. Just on bookings this quarter. How much of that was expansions and migrations versus net new business? And how does that compare to prior periods? And how do you think this trend is going forward?
Mark Bentler
Yes, it was pretty close to half and half. I mean I think what we’ve seen more recently and if you take it bigger than a quarter and look at what’s going on there and look at what’s in the pipeline, I think we see — we definitely see a skew towards new business here. I mean I think the pipeline is something like 70% new business in healthcare. So that’s kind of the sort of the broader trend in kind of the forward outlook trend?
Unidentified Analyst
Okay. Great. And what are you guys seeing with respect to churn and expansion renewal activity within your base? Any trends to kind of call out between healthcare and retail?
Mark Bentler
Not really, I would say. I mean, Peter mentioned before, like we have the cycle, a lot of our — we haven’t had a lot of contracts coming to turn. Those are three to five year deals. They tend to be more on the five-year duration than the three-year duration. So we haven’t had a lot of — we’ve only been really kind of been doing this SaaS thing for four years, three to four years. So a lot of the contracts haven’t come to renewal yet. So if we look at fiscal ’24, that’s where we’re going to start seeing some activity happening there on renewals.
Unidentified Analyst
Okay. Good. And just quickly on your outlook for investments, it sounds like you guys are still looking to invest given the expanding market opportunity ahead. We saw some modest growth in OpEx sequentially. And how should we think about the pace of investments ahead? And from a margin perspective, should we be looking at margins being range bound? Or is there still some modest expansion expected.
Mark Bentler
Yes. I mean I think in the very near term, I would think, pretty range bound, and that’s really because when we talk about adjusted EBITDA margin, it’s because our plan is to — as long as we see market opportunity, and we do right now, our plan is to invest into it. So I provided a little bit of guidance on my prepared remarks on where we see sales and marketing and R&D costs going in Q3 versus Q2, and that was we expect the sales and marketing costs to increase slightly more modestly than what we saw in last quarter sequentially. And then on R&D, we actually expect it to be pretty flat quarter-on-quarter.
Unidentified Analyst
Okay, great. Thank you for the color gents. Best of luck.
Mark Bentler
Yes. Thanks for the question.
Operator
Our next question comes from John Shao with National Bank of Canada. Please proceed.
John Shao
Hi, good morning. And thanks for taking my questions. I just wanted to ask about your outlook for Q3. I remember last year, the January quarter was a relatively slow one given the holiday season. So do you still expect a similar pattern? Or is it going to be more organized this year?
Peter Brereton
That’s a good question, John. Thanks for the question. We do — sort of that question comes into the whole discussion around moderating professional services revenue and what’s happening there over time. So as we kind of read the tea leaves for — on this one for next quarter, we do think that does tend to be a quarter where both on our side and on the customer side, across the holidays, you tend to — do you tend to see implementation activity slowing down a little bit. I don’t think that’s going to have a material kind of negative impact quarter-on-quarter for us. At least that’s kind of what we’re seeing right now. We’re seeing something that’s probably a little more flat versus down. And that’s just because we’ve got pretty robust backlog here.
John Shao
Okay. Thanks. And my other question is I just wanted to ask about the rapid implementation as well as the new API stock purpose. So do you think that those newly created APIs, along with this new implementation practice is going to help you grow the partnership channel, given these more easier to roll-out and more automation.
Peter Brereton
Yes, we think it will over time. I mean that rapid implementation was specifically aimed at the retail space, right? So that’s the retail or management solution that fits underneath an e-commerce platform, it can fit underneath for instance, the salesforce power cloud platform or can fit underneath the Adobe e-commerce platform and others.
So it fits under there. So it affects someone goes to a website, places order and the order in effect drops down through the website and lends in our order medicine solution and our OMS then figures out where to source the inventory and processes the invoice and manages loyalty points and manages returns. And if it’s a byline pick up in store, then it handles to pick up the store. And so it does all the logistics after you click the place order button on the website, right?
So it’s that space in that rapid implementation at. That said, the newer approach to interfaces, which are these restful APIs which are sort of spreading through the industry at this point, we are beginning to move those across all of our product lines. And there’s no question that those are more partner-friendly. So we may end up seeing more of that kind of work, continue to move out to partners over time.
John Shao
Okay. Thanks. I’ll pass the line.
Peter Brereton
Thanks.
Operator
Our final question comes from Steven Li with Raymond James. Please proceed with your question.
Steven Li
Hi thanks. Hi Peter, Mark. The 50-50 split and new migration, can I apply that to the dollar growth? So you grew SaaS revenues 6.6% to 8.8%. So right 2.2% growth in SaaS revenues, can I apply that 50-50?
Mark Bentler
That was — I was — when I was talking about 50-50, I was talking about the core bookings — so I’m not sure that I have that number for that revenue growth with — in that quarter, what that split was between the two. I suspect that it’s more tilted towards new business.
Steven Li
Right. And maybe, Mark, so I know that 50-50 was for the quarter. If I take a longer view like LTM, I mean, what would that split be for bookings?
Mark Bentler
Yes. I mean I think it’s — I think I talked about the pipeline there and in general, are kind of looking at what we have in the pipeline and from a perspective standpoint. We’re seeing definitely more weighted to new business. There’s definitely growth in the pipeline, too, that’s coming from migration opportunities that’s going to drive that kind of expansion number, that base number a little bit, but like — we’re seeing like 70% of the healthcare pipeline is new business, for example, and that’s looking like in the intermediate term, that healthcare chunk is going to be more than 3/4 of our bookings. So that’s going to tip things towards new business.
Steven Li
All right. Got it. Thanks.
Operator
And there are no further questions on the phone lines. I’ll turn the call back to you for closing remarks.
Peter Brereton
Great. Well, thank you for joining us today and for sitting through all that detail. And as always, if you have initial questions, please don’t hesitate to reach out to Mark or I. And we look forward to talking to you at the end of Q3. Thanks again.
Operator
That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.
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