Sylogist TSE: SYZ reported a 6% decline in third-quarter revenue as weaker project services results offset growth in its cloud subscriptions, while management outlined a plan to restore services profitability through 2027.
Revenue fell to CAD 14.9 million from CAD 15.9 million a year earlier, and the company posted a net loss of CAD 1.8 million, compared with a CAD 0.9 million loss in the prior-year quarter. Project services revenue declined to CAD 3 million from CAD 4.2 million, with the segment producing a negative 1% gross margin.
“A negative margin means we are carrying delivery costs that our services revenue is not covering,” CEO Joel Leetzow said on the earnings call. He said much of the quarter’s delivery expense involved non-billable work and channel-related support.
Cloud Growth and Retention
Annual recurring revenue rose 0.4% year over year to CAD 46 million. Within that total, software-as-a-service annual recurring revenue increased 4% to CAD 35 million, driven primarily by the Victim Services Suite and the cloud-based SylogistGov ERP platform.
Leetzow said annual recurring revenue from the Victim Services Suite doubled. Chief Operating Officer David Miller said most of that increase came from the renewal of a Texas contract, which renewed in the quarter at a higher value than when it was originally signed two years earlier.
SaaS revenue grew 2.4% overall, including increases of 17% in the solutions segment, 14% in government and 4% in mission. Education SaaS revenue declined 4%. Recurring revenue accounted for 75% of total revenue, up from 72% a year earlier.
Retention weakened: SaaS net revenue retention fell to 100% from 106% a year earlier. Miller attributed the decline primarily to churn and downselling in the education and solutions segments. Maintenance and support revenue fell 12%, largely because of customer churn in government and mission.
Leetzow said the company is contacting customers affected by earlier end-of-life product announcements to make sure they know they can remain longer. Some have chosen to stay, while others have continued to leave, he said.
Services Reset and Partner Changes
Sylogist is standardizing the scope and pricing of new services engagements, limiting customization and changing how it works with channel partners. Under cooperative deployments, the company will lead product, architecture and data conversion, while partners handle areas suited to their strengths.
Leetzow said Sylogist is moving to co-billable work with partners rather than providing support while partners collect the fees. Key partners have committed to certify their staff by February 27, he said.
The CEO expects some backlog work to continue into the first quarter, followed by a gradual taper through 2027. He said he expects margins to improve as the changes take effect and the services organization to be fully reset by the end of 2027.
Miller cautioned that remaining non-billable and channel-support work could continue to weigh on margins in the fourth quarter. The company’s overall gross margin fell to 55% in the third quarter from 60% a year earlier.
Profitability and Cash
Adjusted EBITDA declined to CAD 1.6 million, or 10.7% of revenue, from CAD 3.1 million, or 19.3%, a year earlier. Excluding the impact of research and development capitalization in the prior-year quarter, adjusted EBITDA for that period was CAD 2.4 million, with a 15% margin.
Sales and marketing expense fell to CAD 1.2 million from CAD 1.8 million, primarily because of lower headcount costs and marketing spending. General and administrative expenses were flat at CAD 2.8 million, as was gross research and development expense at CAD 2.6 million.
Cash from operations was CAD 7.3 million during the quarter, and cash and cash equivalents ended the period at CAD 9.3 million. Miller said billings late in the second quarter and early in the third typically build cash during the third quarter, with the balance likely to decline through the fourth and first quarters.
After quarter-end, Sylogist amended its credit facility to extend its maturity to September 30, 2028, from September 30, 2027. Miller, who joined the call as chief operating officer, is set to become chief financial officer effective November 13.
Sales Outlook
Leetzow said third-quarter annual recurring revenue bookings were the strongest in five quarters, with partner-sourced bookings accounting for more than half of the total. He said the company is building its 2027 sales plans by segment and aims to make growth more predictable.
In education, Leetzow said addressing churn is the priority, although the company has had limited success expanding in Oklahoma. He said product work completed for North Carolina means Sylogist can now sell its education offering across all 50 U.S. states, and the company is resetting its 2027 sales plans.
About Sylogist (TSE:SYZ)
Sylogist provides mission-critical SaaS solutions to over 2,000 public sector customers across the government, nonprofit, and education market segments. The Company's stock is traded on the Toronto Stock Exchange under the symbol SYZ. Information about Sylogist, inclusive of full financial statements together with Management's Discussion and Analysis, can be found at sedarplus.ca or at sylogist.com.
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