Tecsys Inc (TCS) Q4 2022 Earnings Call Transcript

Tecsys Inc (TSE: TCS) Q4 2022 earnings call dated Jun. 30, 2022

Corporate Participants:

Peter Brereton — President and Chief Executive Officer

Mark J. Bentler — Chief Financial Officer

Analysts:

Andy Nguyen — Raymond James — Analyst

Nick Agostino — Laurentian Bank Securities — Analyst

Maxim Barron — Cormark Securities — Analyst

John Shao — National Bank Financial — Analyst

Deepak Kaushal — BMO Capital Markets — Analyst

Steven Li — Raymond James — Analyst

Presentation:

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 close yesterday. All dollar amounts are expressed in Canadian currency and are prepared in accordance with International Financial Reporting Standards. Some of the statements in this conference call, including the question-and-answer period may include forward-looking statements that are based on management’s beliefs and assumptions. Actual results may differ materially from such statements. [Operator Instructions]

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

Peter Brereton — President and Chief Executive Officer

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, fiscal year 2022 was a transformational year underscored by strong organic growth, amid the ongoing global crisis from the Nth wave of COVID to labor shortages and to where supply chains have been in the eye of the storm. I believe strongly that what we do empowers our customers set new benchmarks for success by driving excellence through their supply chains. This is not a new belief. For decades, Tecsys has been advocating that the supply chain is a strategic lever for competitive differentiation, that 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 SaaS 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 is 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 in that 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 ’22 versus 82% last year. In the fourth quarter of fiscal ’22, 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 offering 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 in fiscal ’22 having been partner-influenced, 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 roll-outs expand across the customer base. Some notable wins announced this year include Australian retail chain, Politix, distributor, American Woodmark, and McLeod Health in the South Carolina. We’ve 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 ’22, 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 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 newly signed IDNs are out first touch points, 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 CAD3.8 billion on medical and surgical supplies annually and over CAD1 billion in pharmacy supplies. And we have proven solutions that control and optimize that spend.

When we welcome a new IDN into the Tecsys pool, we start to collaborate with that IDN’s 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 ’22 will continue to show their value as long as we continue to deliver ours as we have with longtime 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 healthcare customers alone now provide care at roughly 100,000 beds and record over CAD170 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 SaaS 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, spanning 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 staff 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 this development and see it as the beginning of a 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 J. Bentler — Chief Financial Officer

Thank you, Peter. Starting with our fourth quarter results, total revenue was CAD34.3 million, 6% higher than CAD32.4 million reported in Q4 of ’21. 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 fiscal ’22, 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 ’22 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 CAD5.5 million in Q4 of ’21 to CAD7.7 million in Q4 of ’22. 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 CAD8 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 CAD94 million at the end of Q4 fiscal ’22. That was up 43% from 60. — CAD65.7 million at the same time last year. On a constant currency basis, that growth was 39%. Professional service revenue for the fourth quarter was CAD12.9 million, that’s up 6% from CAD12.2 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 hospital 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 are 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 are especially seeing this within our healthcare vertical, which is a growing part of our business. We are also seeing 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 CAD0.6 million, that was down 46% compared to CAD1.0 million in the same period of fiscal ’21. While this number may continue to be lumpy from quarter-to-quarter, we expect the general trend of declining license revenue to continue over time, and this is in line with our shift to SaaS. Hardware revenue in Q4 fiscal 2022 was CAD5.1 million, a decrease of CAD0.2 million compared to the same period last year and a decline of CAD1.3 million sequentially compared to CAD6.4 million in Q3. By way of reminder, we sell primarily third-party hardware to our customers for warehouse operations and in-hospital point-of-use 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 CAD4.5 million in Q4 of 2022 compared to CAD3.5 million in Q4 ’21, 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 CAD14.8 million, that’s up 70% compared to CAD8.7 million in the same quarter last year. This is up sequentially from CAD9.3 million in Q3 of this year.

And this highlights again the lumpiness and impact of timing on reported quarterly bookings. As I indicated last year — 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 CAD15.1 million, that was down 4% compared to CAD15.7 million in Q4 of ’21. 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 ’21. 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 roll-outs as noted previously. Professional services backlog remained solid at CAD33.4 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 CAD13.8 million, that’s higher by CAD0.7 million or 6%, compared to CAD13.1 million in Q4 of fiscal ’21. 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 CAD0.6 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 CAD2.6 million or CAD0.17 per fully diluted share compared to CAD2.0 million or CAD0.14 per share for the same period in fiscal ’21. Net profit was positively impacted in the three months ended April 30, ’22, as a result of the recognition of approximately CAD1.9 million net deferred tax assets and the recognition of CAD0.6 million gain on a remeasurement of a lease liability. The latter resulted from our decision not to renew an expiring office facility lease. Adjusted EBITDA was CAD1.7 million in Q4 ’22 compared to CAD3.9 million in Q4 of ’21. Net profit and adjusted EBITDA were both negatively impacted by an unfavorable foreign exchange impact of approximately CAD0.7 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 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 CAD137.2 million, up 11% compared to CAD123.1 million in the same period last year, and that’s up 16% on a constant currency basis. SaaS revenue for fiscal ’22 was CAD26.9 million, up 41% from CAD19.2 million in fiscal year ’21 and up 47% on a constant currency basis. Our SaaS bookings for the year are up 25% to CAD11.9 million compared to CAD9.5 million in fiscal ’21. 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 ’22 was CAD4.5 million compared to CAD7.2 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 CAD5.2 million on profit and adjusted EBITDA compared to the same period last year. Adjusted EBITDA was CAD10.1 million in fiscal year ’22 compared to CAD16.2 million for the same period last year.

Finally, we ended fiscal ’22 with a strong balance sheet position. On April 30, 2022, we had cash and cash equivalents and short-term investments of CAD43.2 million compared to CAD45.9 million at the same time last year. And we had debt of CAD8.4 million compared to CAD9.6 million at the same time last year. Cash provided by operations was CAD4.9 million in fiscal ’22. And our DSOs or days sales outstanding and accounts receivable was 49 days at the end of ’22 compared to 47 days at the same time last year.

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

Peter Brereton — President and Chief Executive Officer

Thank you, Mark. Sorry about that. I had my mute button turned on. Tecsys enters fiscal ’23 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-use solutions and the failing grade of 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 the 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 ’23, 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 we will continue to invest.

In summary, I want to highlight the key themes for fiscal ’23. First, we will continue to maintain a laser-focus on expanding our SaaS revenue model. Second, we will continue to deepen our partner — 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 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 life, 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.

Questions and Answers:

Operator

Thank you very much. [Operator Instructions] And we will get to our first question on the line from Andy Nguyen from Raymond James. Go ahead.

Andy Nguyen — Raymond James — Analyst

Thank you very much. My first question is on the addition of new IDNs. Given the investment you guys made it to the sales team, what’s holding the addition of new IDNs from accelerating at a faster pace?

Peter Brereton — President and Chief Executive Officer

I mean a lot of it is really just the speed with which IDNs move. I mean, we have a — our pipeline in the healthcare space is up 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 — the hospital networks generally move slowly. I can tell you there’s one account, for instance, that gave us a congratulations, the selective [Phonetic] 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 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 is a certain factor in this market too that, as we often discuss with our Board, there’s this question of how fast do you expand the sales organization in this market.

You can’t push the market to go faster than the market is inherently willing to go. We want to continue sort of our evangelism in the market, promoting what we can do with supply chains and promoting the games. But until Boards 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 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 Nguyen — Raymond James — Analyst

Thank you. And I just have a quick follow-up on the SaaS bookings. So what percentage of healthcare continues to be SaaS booking of 4.5% [Phonetic] in the last quarter?

Mark J. Bentler — Chief Financial Officer

Yeah, it was — it was significant. It was — for the year, it was approaching 70% healthcare. 68%, I think is the number.

Andy Nguyen — Raymond James — Analyst

68%, okay. Yeah, thank you. Thank you, Peter and Mark. I’ll pass the line.

Mark J. Bentler — Chief Financial Officer

And in the Q4, it would have been a significant number as well.

Andy Nguyen — Raymond James — Analyst

Thank you.

Operator

Thank you very much. We’ll get to our next question on the line, it’s from Nick Agostino with Laurentian Bank Securities. Go ahead.

Nick Agostino — Laurentian Bank Securities — Analyst

Yes, good morning. Sorry. Just jumping on that IDN question from the previous analyst. Peter, what’s your comfort? 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 new add-ons. That would suggest obviously a sizable increase, let’s call it, for fiscal 2023. Just given your comments on the momentum, the bookings in the — on the hospital side and the fact that they’re, I guess, coming back post-COVID or at least hopefully post-COVID, are you comfortable with that type of target over the next year and a half?

Peter Brereton — President and Chief Executive Officer

Yeah, I would say we are. I mean, that’s — obviously, that’s quite a number. We’d be over year and a half, you’d be looking at sort of moving from 2.25% [Phonetic] to 3.25% [Phonetic] to get 20 accounts done in 18 months. And certainly, at this point, I mean, anything sort of things can change, times can change, etc., but certainly based on what we’re seeing in our pipeline, that looks very doable.

We have — 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 benefit beginning to kick in. And as I mentioned earlier, we’ve never seen a pipeline like this one. There’s — measuring a pipeline precisely is sometimes tough just because when a pipeline is poor, people’s natural optimism tends to make them score accounts perhaps a little higher than they should.

And when an account — and when a pipeline is really full and really active, they tend to be almost more cautious about calling it. 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 J. Bentler — Chief Financial Officer

And I would add on to that, Nick, that while new IDN networks is definitely the game plan and the folks, etc., 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 healthcare 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 existing customers in healthcare and a migration of an existing customer from on-prem to SaaS. So there’s a lot of movement happening in there that, that isn’t just a new IDN network.

Nick Agostino — Laurentian Bank Securities — Analyst

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 these deliverables. In prior quarters, you had alluded to supply chains having a minimal impact. Just wondering if the supply chains are starting to have obviously an impact on your business and maybe give us some an idea as to maybe the revenue impact that you probably would estimate for this current quarter?

Peter Brereton — President and Chief Executive Officer

Yeah. Mark would probably give you a better number there. Yeah.

Mark J. Bentler — Chief Financial Officer

Yeah. So I mean, think, Nick, the supply chains are — the issues are real there and some of it’s around the third-party hardware 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 then 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 up. The lead times are still long. So that is kind of extending out the revenue picture there. It’s been a bit lumpy in the last couple of quarters. If you look at the last few quarters, it’s been — hardware revenue has been over CAD6 million. This last quarter, it was closer to CAD5 million. And I think in the next quarter, if we look ahead, it’s a little bit 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 CAD4 million next quarter is kind of what we have in line of sight. I don’t think it will be lower than that, but it’s in that sort of zip code.

Nick Agostino — Laurentian Bank Securities — Analyst

And would that be, I guess, a bottom type run rate until things improve, any visibility there?

Mark J. Bentler — Chief Financial Officer

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 start to understand the lead times, they move — they tend to move around a little bit, but I think so.

Nick Agostino — Laurentian Bank Securities — Analyst

Okay. And then just one other question and maybe just a quick follow-up. Just staffing, obviously, you guys have to keep adding to your healthcare sales force and stuff like that, just given all the market, the market [Technical Issues]. 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 — you were staffing at a slower rate, is that improving in any way?

Peter Brereton — President and Chief Executive Officer

Yeah, Nick, in fact, like in Q4, we basically caught up, like it was amazing. I mean, we ran the first — 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. It’s the expense both on the service side as far as sort of the cost of goods sold, as well as on the R&D and other areas that are part of opex, it sort of caught right up to where we felt we needed to be.

And that’s why we sort of included some indicators in the press release 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 expense run rate shown in Q4. That will more show in Q1, but we’re really feeling that by and large, we have the heads we need for the year in front of us. It — 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 — Laurentian Bank Securities — Analyst

Okay, no, that’s good color. Everything all ties in. And just one last quick question. I’m not sure if you called out earlier, but what was the partner contribution, whether it’s on wins or whatever the case is, if you call that out?

Mark J. Bentler — Chief Financial Officer

Yeah, we did, we did, Nick. It was 50% of the new SaaS wins in the year were partner-influenced. 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 — Laurentian Bank Securities — Analyst

Okay, okay, great. Thank you. I’ll pass the line.

Operator

Thank you very much. We’ll get to our next question on the line, it is from Maxim Barron with Cormark Securities. Go ahead.

Maxim Barron — Cormark Securities — Analyst

Hi, there, thanks for taking my question. So I first want 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 — President and Chief Executive Officer

Yeah, that’s a tough one. I mean the beauty to healthcare, of course, is that 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 CAD600 million, but we’re never going to get 100% of the TAM.

So we can get to CAD300 million. So 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 the 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 J. Bentler — Chief Financial Officer

Yeah. I think it was even sub 36%, just under 36% to now 40%. Yeah.

Peter Brereton — President and Chief Executive Officer

Okay. Yeah. So I don’t — I would not be at all surprised if within 12 months or so, it gets close — very close to the 50% mark. So it’s got some real legs under it. The other market, the 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, be it cost to containers, goods stuck offshore, goods not coming out of China.

I mean, they’re having trouble sourcing the product, moving the product and handling the product. So that — while ultimately that drives changeover to new system, in the middle of a crisis, it’s very distracting. So that’s what we’re seeing in those different markets. But coming back to healthcare, I would certainly expect that it will dominate our growth for the next — at least the next year and probably beyond.

Maxim Barron — Cormark Securities — Analyst

Got it. Okay, that’s helpful. And I guess just a follow-up on the complex distribution side. Have you seen customers respond to the new warehouse management system that you guys recently launched?

Peter Brereton — President and Chief Executive Officer

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 that’s quite different. I mean it’s a — that’s a system that is aimed at micro-fulfillment, the sort of small warehouse that with the objective being that you can deploy it in less than 60 days. It deploys at very low cost. It’s incredibly intuitive. So it does not require that much training or — and the setup as well 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 in discussions with a number of different players around potentially being the first account.

We’ve got over in Denmark, of course, they’ve already got it deployed in a number of sites, but on the North American side, they’re saying, no one wants to be first. So 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 it and begin to drive opportunities to it. But from an investor standpoint, I would say it’s a couple of years out before it gets interesting.

Maxim Barron — Cormark Securities — Analyst

Okay, great. Yeah. That’s helpful. And I also just want 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 start moving properly through the pipe?

Peter Brereton — President and Chief Executive Officer

You want to take that one, Mark?

Mark J. Bentler — Chief Financial Officer

Yeah, sure. So I mean, I think we had, if you look at our PS revenue line in the last few quarters, you’ll see it kind of floating around with kind of at the — almost at the CAD13 million a quarter level. It was over CAD13 million in Q2. It was CAD12.9 million in Q3. It was CAD12.9 million again in Q4. And when we were at the sort of CAD13 million level, we were building capacity there. And in Q4, we were underutilized. So that kind of gives you a baseline that we’ve got excess capacity beyond CAD13 million. Now can that capacity drive CAD14 million of revenue in a quarter? Yeah, it can. Can it drive CAD15 million? Yeah, that’s probably getting pretty stretchy and unsustainable, but that’s kind of how we’re — that’s kind of how I’d scale those numbers.

Maxim Barron — Cormark Securities — Analyst

Great. Yeah. That’s helpful color. That’s all I had. I’ll pass the line.

Operator

Okay. Thank you very much. We’ll get to our next question on the line from John Shao with National Bank Financial. Go ahead.

John Shao — National Bank Financial — Analyst

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 SaaS transition, as well as your partners. But at the same time, it also sounds like there’s the order [Phonetic] to utilize the capacity within your service delivery team. So how should I think about this order utilization issue in the future and how much would it be a drag to your gross margin?

Mark J. Bentler — Chief Financial Officer

Yeah, I think it’s a good question. And I think — and Peter sort of hinted at that in his comments earlier a bit when he talked about what the slowdown in 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 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 — 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. It’s a question of when we get there. And if we look it — 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 level start to climb back up.

John Shao — National Bank Financial — Analyst

Okay. I — 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 the growth for the next year, should I expect wallet share expansion to be a meaningful driver of growth?

Mark J. Bentler — Chief Financial Officer

Yeah. 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 base. And if you look at kind of what our year looked like, it sort of looked like that as well. I think the numbers were in the 40% [Phonetic] — in the mid — in the high-40s for new and the balance was base in terms of bookings.

In Q4, it was a little — even a little bit more skewed towards base. We had a pretty significant migration in the hospital network business. And I think the two vectors are both very important. I mean, there was a kind of a balance in Q4. And if you — when you get a chance to see the deck that we put up, you’ll notice, and Peter mentioned, our healthcare business actually expanded. We actually — the penetration level in our base actually jumped up a little bit markedly in the quarter.

I think we are at 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 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 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 base is almost 60%, whatever, almost 70% — actually, slightly over 70% of the footprint is still white space in our base.

John Shao — National Bank Financial — Analyst

Okay, that’s great color. And my last question is related to the inflationary environment. So for your existing contract with your customers, is there a price adjustment factor, so you can bake in some of the increase at renewal?

Mark J. Bentler — Chief Financial Officer

Yeah. Typically, we — when we contract, we do have the ability to increase. We do have the increase — the ability to increase pricing. In our — on our legacy maintenance business, that is sort of an annual — 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 inflation. In the SaaS world, we tend to have longer-term contracts, three-year to five-year contracts. Those we tend to lock in for those three-year to five-year periods. But then when they renew, they’re certainly subject to — they’re certainly subject to price increases.

John Shao — National Bank Financial — Analyst

Thanks, Mark. I’ll pass the line.

Peter Brereton — President and Chief Executive Officer

Thanks.

Operator

Thank you very much. We’ll get to our next question on the line, it’s from Deepak Kaushal with BMO Capital Markets. Go ahead.

Deepak Kaushal — BMO Capital Markets — Analyst

Hi, good morning, guys. Thanks for taking my question. I’ll try and keep it brief. At year-end, and you sometimes give us the breakdown of total revenue between healthcare 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 a revenue basis?

Mark J. Bentler — Chief Financial Officer

Yeah. So we do split in the deck, Deepak — and welcome to the call. We do split on the deck that split of ARR between complex and healthcare, and that kind of moves around over time. But because of the legacy basis, as you know, kind of skewed towards complex distribution, the sort of growth in healthcare 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 CAD4.5 million ARR was in fact a healthcare, a big chunk of it.

So that ARR number, the 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 base business migrations and add-ons, it’s skewed towards healthcare. If we look at overall growth rates in the year, Deepak, I mean, healthcare was growing and this is scale at the level of bookings. Healthcare was growing at 45% against complex distribution — sorry, against total, which was growing at about, let’s say, it was about 27%, 27%, 29%. So healthcare is definitely leading the growth.

Deepak Kaushal — BMO Capital Markets — Analyst

Got it. Okay, that’s helpful. And then — yeah, I know it’s been a while since I’ve been on the conference call, but certainly not since we last spoke. And since we did last week, the macro environment has changed quite a bit. And all through COVID, the priority of supply chain spending for hospitals increased. Does the recession change that or how are hospitals thinking about inflation or potential recession impacts to spending? Does it change the priority of where supply chain investments stand or does it change just the amount they’re willing to spend? And what are they kind of signaling to you guys?

Peter Brereton — President and Chief Executive Officer

I mean, so far, Deepak, what we’re seeing — and I mean this is — when I say so far, I mean I’m talking — I’m giving you just a very real-time feedback as opposed to, I mean, most of what we discussed on these calls is as of last quarter April 30, whatever, where 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 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 that conference hadn’t been held for a couple of years 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 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 industry is on the move. And at this point, we are in — I mean that’s 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 networks. So it’s pretty exciting in healthcare right now. The macro environment is doing nothing to slow it down at this point.

Deepak Kaushal — BMO Capital Markets — Analyst

Okay. That’s helpful, 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 in the gross margin. But when I look at the EBITDA side, your level in fiscal ’22 was about half of what it was in ’21. What portion of that is in your control? You mentioned investment. Are you expecting to recover that portion fully in fiscal ’23 or expect to gain on that, gain more leverage on that in that opex portion spend in ’23? What — how are you kind of thinking of it? And do you guys target a specific — 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 — President and Chief Executive Officer

Yeah. I mean, there’s obviously a lot of factors involved to what you’re describing. I mean, in some ways, fiscal ’22, sorry, fiscal ’21, this is 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 CAD1.40 [Phonetic]. So that just gave us a great extra padding on the margin side. This past year that just ended, in some ways, the extreme change was more typical. It sort of averaged — what is the average, Mark? 125-ish [Phonetic]?

Mark J. Bentler — Chief Financial Officer

Yeah.

Peter Brereton — President and Chief Executive Officer

I think around there. So that was a much of a typical year. And so as we look ahead into the future, we’re saying, 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 yeah, we want to maintain a reasonable EBITDA, so that we’re not consuming investor cash in the process of growing the business. We’re sort of funding our own growth as we go. 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 bad time. So that continues to be the strategy. Some years, we come in above that rough guideline as in fiscal ’21, some years we come in below that.

But that continues to be the philosophy we run with. And if we look at what we see in the headlines right now, it calls for continued investment in growth and marketing, I mean in sales and marketing. But it, 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, yeah, R&D growth, it will definitely be very moderated this year. We feel like we did a lot of catch-up in Q4. So we expect R&D spend to be relatively flat this year. And cloud ops is [Speech Overlap].

Mark J. Bentler — Chief Financial Officer

Based upon exiting run rate.

Peter Brereton — President and Chief Executive Officer

Yeah, based on exiting run rate, yeah. 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, the cloud operations group will be more or less where it needs to be. And at that point, you should start to see 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 focused on growth and maintain enough EBITDA margin to fund the business.

Deepak Kaushal — BMO Capital Markets — Analyst

Yeah, no, that’s very helpful. I understand that and 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, do you change that view or do you accelerate that view? How should we think of the excess cash?

Peter Brereton — President and Chief Executive Officer

I mean, we continue to see it as both a cushion for security in these markets. I mean, we need to — I mean, customers that select us for a SaaS — their SaaS platform, I mean, in many cases, we are their core system of record. They need to know that we’re rock solid financially and here for the long-haul. So we continue to see us a bulwark against sort of some of the craziness going on in there right now. But at the same time, we continue to see — some of it is dry powder for acquisitions. I mean, we’ve been watching the market, the private equity market, which is who we tend to compete with for acquisitions.

And I mean, in some ways, the pricing still hasn’t adjusted 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 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 — BMO Capital Markets — Analyst

Okay, that’s great. Well, thank you again for taking the questions. I’ll pass the line.

Peter Brereton — President and Chief Executive Officer

Okay.

Operator

Thank you very much. We do have another question, it is from the line of Steven Li with Raymond James. Go ahead.

Steven Li — Raymond James — Analyst

Thanks. Hey, Peter, I’m hoping you can reconcile something for me. So I heard you say 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 — President and Chief Executive Officer

Great question. I’ve been trying to reconcile those two for about five years, I think. 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 millions of dollars that are currently being wasted in supply chain, etc. So a lot of that pressure is there. It’s now coming from the Board. It used to be the other way around. If I go back two years, it was the management team starting to pressure the Board to invest more in supply chain. Now it’s the Board is 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, 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 end up seeing this swell in the pipeline, swell in activity, sales team very busy, and yet the actual growth in bookings as of yet is not that extreme. I mean, if I look at the numbers, I mean, our SaaS bookings actually grew pretty nicely last year over the prior year.

And given that a much higher percentage of it was healthcare, we actually saw 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, the SaaS revenue up 47% in constant currency and so on. So we’re seeing the growth that’s coming through. But certainly, the — it’s still not at a level that the activity in the pipeline could deliver. And so we’re still seeing that as a future gain that we expect to begin to come through soon.

Steven Li — Raymond James — Analyst

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 — President and Chief Executive Officer

Well, yeah, that dynamic though affects the, to some extent, the contract closing, which then does affect the SaaS revenue, right? So this is — a lot of this activity I’m talking about, 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, yeah, the SaaS revenue kicks in. And at that point, the sort of the ponderous speed a lot of these networks move at affects the professional services revenue more than this asset at that stage.

Steven Li — Raymond James — Analyst

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 ROSE [Phonetic] coming up for renewals, say, this year?

Mark J. Bentler — Chief Financial Officer

No, I think 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-year 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 over — 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 increase them, and we expect — we expect to do that.

Steven Li — Raymond James — Analyst

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 and ask that you disconnect your lines. Have a good day, everyone.

Mark J. Bentler — Chief Financial Officer

Thanks.

Peter Brereton — President and Chief Executive Officer

Thanks, everyone. Bye for now.