Kinaxis Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 12 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Kinaxis Incorporated Fiscal 2023 Third Quarter Results Conference Call. Currently, all participants are in a listen mode only. Following the presentation, we will conduct a question and answer session. Instructions will be provided at the time for you to queue up your questions. I'd like to remind everyone that this call is being recorded today, Thursday, November 2, 2023.

Operator

I would now turn the call over to Rick Wadsworth, Vice President of Investor Relations at Kinaxis Incorporated. Please go ahead, Mr. Wadsworth.

Speaker 1

Thanks, operator. Good morning and welcome to the Kinaxis earnings call. Today, we will be discussing our Q3 results, which we issued after close of markets yesterday. With me on the call are John Sicard, our President and CEO and Blaine Fitzgerald, our CFO. Before we get I want to emphasize that some of the information discussed on this call is based on information as of today, November 2, 2023, and contains forward looking statements, including with respect to our recently announced share buyback that involve risks and uncertainties.

Speaker 1

Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward looking statements And non IFRS financial measures, including adjusted EBITDA, the reconciliation between adjusted EBITDA and the corresponding IFRS results is available in our earnings Participants are advised that the webcast is live and is also being recorded for playback purposes. An archive of the webcast will be made available on the IR section of our Web Neither this call nor the webcast archive may be rerecorded or otherwise reproduced or distributed without prior written permission from Kinaxis. To begin our call, John will discuss the highlights of the quarter as well as recent business developments, followed by Blaine, who will review our financial results and outlook. Finally, John will make some closing statements before opening the line for questions.

Speaker 1

We have a presentation to accompany today's call, which can be downloaded I'll now turn the call over to John.

Speaker 2

Thank you, Rick. Good morning, everyone, and thank you for joining us today. I'll be starting with Slide 4. I'd like to highlight some key points for this call, all of which Blaine and I will explore in more detail. 1st, Q3 financial results were strong with SaaS revenue growth of 26%, total revenue growth of 21%, and a healthy adjusted EBITDA of 21%.

Speaker 2

I'm very pleased with the team's execution despite various challenging macro conditions around the world. 2nd, we are providing updated annual guidance that notwithstanding an unavoidable shift in revenue classification between SaaS and subscription term license would be in line with our original estimates at the start of this calendar year and continues to deliver rule of 40 plus performance for 2023 with an increase in profitability. 3rd, the last quarter of every year is typically our strongest for building ARR, and we expect it to be as usual this year. We are actively working on some major expansions and some exciting net new additions we hope to be able to share with you very soon. 4th, management and the Board is pleased to have announced a buyback of up to 5% of our shares starting this Monday, At current valuations, this investment is an easy decision, a good use of capital and in the best interest of the company.

Speaker 2

5th, and most exciting for me, We continue to see compelling evidence that supply chain management market remains very robust. Our pipeline remains very healthy And our ability to serve it is stronger than ever. Let me expand my comments on this last point and I'll ask Blaine to go deeper on the rest Very shortly. Turning to Slide 5. With respect to market activity, our pipeline is larger now than it was At this time last year and remains very near record levels.

Speaker 2

Our business development team, which builds pipeline in its earliest stages, Booked a record number of meetings for our account executives in Q3 with an over 40% year over year increase. This is an encouraging sign and evidence of accelerated interest in supply chain transformation. We have invested heavily in expanding our sales team, now over 30% larger than it was at the start of 2022, and ready to execute on these new opportunities as they mature. I should also note that we are not Slowing down our investments in sales and marketing, but rather will continue to expand in both areas through Q4 and through 2024 to ensure coverage of an expanding market. Our win rate against key competition so far this year continues to be strong, And we're pleased to be able to name a sample of our recent customer wins, including: in the automotive sector, we added innovator Volvo Cars In our industrial vertical, we welcome Ecolab, a global sustainability leader offering water, hygiene and Infection Prevention Solutions and Services That Protect People and the Resources Vital for Life.

Speaker 2

In Life Sciences and Pharmaceuticals, we welcomed several new customers. Cooper Health, a European leader in self care, including non prescription medicines, food supplements and medical devices. Fertin Pharma, a Phillips Morris Company, which develops and manufactures innovative systems for delivering oral pharmaceuticals and finally, FIS In Italy, one of Europe's leading private manufacturers of active ingredients for the pharmaceutical industry. I'm also pleased to share that the vast majority of new deployments occurring within our public cloud are occurring within our public cloud partners, Microsoft and Google. As I've mentioned in the past, this is an important strategy that will help us scale as we accelerate into the future And ultimately will become our standard method of delivery.

Speaker 2

In recent periods, we talked about several long term strategies to expand our addressable market, notably with more focus on targeting small to medium sized businesses. I'm pleased with our progress to date. For example, just over half of the new customers added this quarter year to date Have been mid market or smaller companies and the year to date total is higher than in the same period in 2022. In the Q3, our value added resellers or VARs who sell to smaller companies contributed a record number of wins And we are anticipating a strong 4th quarter as well. Serving this much broader market increases both our growth opportunities and Now moving to Slide 6.

Speaker 2

We launched several new and exciting applications earlier this year, all of which attract new subscription revenue. Our supply chain execution application is targeting a market that A recent industry report sized at over $12,000,000,000 in 2023, and that's expected to grow roughly 20% through 2,030. Our new enterprise scheduling application is highly differentiated as the 1st and only tool in the market to allow companies to create and manage a globally integrated production scheduling strategy. Our sustainable supply chain solution allows companies to embed emission factors in Supply Chain Decisions, just as requirements around corporate disclosures of GHG emissions are being mandated globally. And finally, Demand dot ai leverages cutting edge AI to provide highly accurate demand forecasts based on insights that human observation alone wouldn't be able to uncover.

Speaker 2

This offering has been instrumental As our entry point to the quick service restaurant segment of retail, where we are serving 1 of the world's most recognized brands and will be key in penetrating the broader retail vertical for years to come. I'll now turn the call over to Blaine cover more details on our financial results.

Speaker 3

Thank you, John, and good morning. As a reminder, unless noted otherwise, figures reported on today's call are in U. S. Dollars under IFRS. Starting on Slide 7, total revenue in the 3rd quarter was up 21 percent to $108,100,000 and our key SaaS revenue result grew 26 percent to $67,900,000 Subscription term license revenue was $2,500,000 versus $5,800,000 in Q3 2022.

Speaker 3

This item largely follows the normal cadence of renewals among our small group of on premise customers or those that have the option to move their deployments on premise. Our professional services activity resulted in $32,900,000 in revenue or 28% growth over Q3 2022. Generally, this revenue item varies from quarter to quarter based on the number, size and timing of customer projects underway as well as the proportion of work assumed by partners. Maintenance and support revenue for the quarter was $4,800,000 up 18%. 3rd quarter gross profit increased by 19 percent to $65,300,000 Gross margin in the quarter was 60% compared to 62% Our software gross margin was 74% compared to 80% in the comparative period, With the biggest factor in this change being our transition to public cloud hosting arrangements.

Speaker 3

We continue to be ahead of plan in this transition, which is positive for our business and expect related costs to normalize by the beginning of 2025. Professional Services gross margin was extremely strong at 29% compared to 17% in Q3 2022, mainly due to significantly lower use of third party contractors in delivering projects. We still foresee a total annual gross margin in the 60% to 62% range. As a result of the growth in our revenue and gross profit, adjusted EBITDA was up 54% to $22,800,000 with a margin of 21% compared to 17% in the Q3 last year. Our profit in the quarter increased by over 3 50% to $7,400,000 or $0.25 per diluted share compared to $1,600,000 in Q3 2022.

Speaker 3

Cash flow used in operating activities was $1,500,000 compared to $3,600,000 in the prior year period. For the year to date, Cash flow generated from operating activities was $51,400,000 versus $26,800,000 in the comparable period. At September 30, 2023, cash, cash equivalents and short term investments grew to $290,000,000 from $225,800,000 at the end of 2022. As always, we remain focused on being a strong cash generative business. On to Slide 8.

Speaker 3

As John mentioned and as our Q3 results demonstrate, we've been sharpening our focus on profitability and I want to provide an example. As you know, we continue to make investments in our sales organization to capture the large and growing opportunity ahead. But we have simultaneously been gaining leverage in our R and D and G and A lines. Slide 8 shows We are steadily spending less on these operating expense items as a percent of total revenue or normalized revenue, which averages out our lumpy subscription term license revenue over We are very pleased with progress and fully anticipate more ahead. Overall, IFRS Results in Q3 were very solid.

Speaker 3

Moving to Slide 9. Our annual recurring revenue or ARR grew 18% over the Q3 of 2022 to $304,000,000 reflecting a couple of factors. 1st, Economic uncertainty has obviously been a challenge for the software industry all year. Although our ARR growth rate is strong compared to many, It has grown slower than our ambitious expectations. After ARR growth peaked in Q3 last year, we started to see macro impacts.

Speaker 3

So the comparative figure is a challenging one this quarter. As usual, we expect the 4th quarter will be our strongest for winning new business and growing ARR. Secondly, Q3 of the Q1 that we don't benefit from the inorganic ARR growth related to our acquisition of NPO. If you look at ARR excluding NPO, as depicted on Slide 9, it only declined by 1 percentage point this quarter. As we only recently launched the integrated supply chain execution product, we fully expect that aspect of ARR to grow over the next year.

Speaker 3

Finally, to echo John's comments, given strong underlying demand, a larger sales team just coming into higher efficiency, A strong competitive win rate and multiple early stage growth strategies that are showing progress, I'm fully confident in AR acceleration as these strategies mature or RPO was $591,000,000 up 8% from Q3 2022. Of that total, was at a relatively low point in the normal renewal cycle as well. In other words, there simply hasn't been as much business scheduled for renewal this year. Further details on our RPO can be found in the revenue note to our financials. Turning to Slide 11.

Speaker 3

We are updating our 2023 guidance while still focusing on Rule of 40 performance. We anticipate stronger profitability and subscription term license revenue And slightly tempered SaaS growth that still demonstrates acceleration over last year's IFRS results, an impressive accomplishment. We are very pleased to affirm our total revenue outlook, which remains unchanged at $425,000,000 to $435,000,000 With respect to some of the components of total revenue, it can be difficult to accurately forecast which direction new customers will go when choosing to host our solution. We generally assume that new customers will be hosted in our environment and are therefore recognized as SaaS revenue. However, in 2023, certain customers decided to host or have the option to host our solution on premise, which is recognized as subscription term license revenue.

Speaker 3

Year to date, this has resulted in just over $3,000,000 in lower SaaS revenue or between 1 percentage points and 2 percentage points of growth, while simultaneously increasing our subscription term license revenue. As a result, we are increasing our subscription term license revenue outlook for the year to $18,000,000 to $20,000,000 and updating our SaaS revenue to grow between 24% 25% over our 2022 levels. Absent this shift in the various accounting revenue components, there would have been no change to SaaS guidance. Finally, we are increasing our adjusted EBITDA margin guidance to 16% to 18% for the year, reflecting operating leverage that's led to increased profitability. We have managed to bring costs in lower than initially planned across several functional areas, while also absorbing the additional public cloud expense compared to the amortization of our private data centers in previous years.

Speaker 3

In the current environment, we will remain even more diligent around profitability and our balance Turning to Slide 12. As we announced last night, we have instituted a normal course issuer bid for up to 5% of our stock. We can start buying Monday. We are an acknowledged leader in an exciting market and few companies offer a growth and profitability profile. At current valuations, this investment is an easy decision, a good use of capital and in the best interest of the company.

Speaker 3

The NCIB provides the opportunity to more than cover issuances made to date under the expanded stock based compensation plan we rolled out in 2022. And given our strong cash generation over time and a robust current cash balance, we will also have more than enough capital to simultaneously pursue growth strategies. With that, I'll turn the call back to John.

Speaker 2

Thank you, Blaine. Over the last few years, The world has witnessed and survived several global business disruptions. And today, we continue to see challenges affecting supply chains Across every vertical in every geography, it has become obvious to most that legacy techniques are no longer fit for use in supporting the demands of a modern supply chain practice. CEOs and Boards can't unsee What they've been exposed to and there continues to be a push towards new and better ways to absorb continuous volatility. I continue to have more discussions than ever with practitioners of leading companies looking for our help.

Speaker 2

And I continue to believe that power and supply chain excellence will require the fusion between machine learning and AI with concurrent planning and execution. That is the value Kinaxis can and will deliver To all who need it. On behalf of the Kinaxis team, thank you for your support. I'll turn the line over to the operator now for Q and A.

Operator

We got our first question from Doug Taylor from Canaccord Genuity. Your line is now open.

Speaker 4

Yes. Thank you and good morning everyone. First question is for Blaine. Last quarter On the conference call, you spoke to a couple of large expansion opportunities that you expected would hit Q3 or Q4. It sounds like from the prepared remarks that a few of those are still on the come here in Q4.

Speaker 4

Maybe you could speak to your against those opportunities and if you didn't observe any slippage from Q3 into future periods?

Speaker 3

Yes. Good catch there, Doug. We obviously did have some slippage into Q4. Probably our most significant expansion is right now it was supposed to be Q3. It's looking like it will be November at this stage.

Speaker 3

We are still working through that deal. But yes, there's some extremely big expansions That are slated for Q4 at this point that we're supposed to be in Q3.

Speaker 4

All right. That's helpful. Professional Services Margins obviously stand out here. It's particularly strong in the quarter. You've said in your prepared remarks, you expect that To mute revert to the mean here.

Speaker 4

I guess my question here on this is, the degree to which you expect the shifting mix So 3rd party versus in house delivery can be a positive benefit in years ahead as you continue to optimize that?

Speaker 3

Yes. That 29% gross margin for professional services, number 1, it's a record. And When it first came in, I obviously told my team, can you double and triple check that number because we've never seen a margin on high. But it reaffirms the power that we have with our pricing right now for professional services. And we are trying to push as much to our partners.

Speaker 3

Our professional services team is doing extremely well on their side at winning these deals and doing quite well at Making our customers very, very happy with the deployments that they're receiving. But again, what you're seeing right now with those margins It is in large part due to the power that we have with our pricing around professional services based on how successful we've been over the last little while.

Speaker 2

I might just add, just from a commentary perspective, I recently had 2 conversations, one with the CEO of One of our largest partners and another who basically leads the practice of an extremely large SI And both have told me that they're at record level revenue for Kinaxis related work year to date. So it's I think a reflection a lot of it's a reflection of a lot of project starts that have occurred over the last four quarters.

Speaker 4

One last question from me for you, John. I wanted to ask a question on competition. I think We've all seen some of the noise related to E2 Open. I recognize that's pretty recent E2 Open is not directly competitive with your entire portfolio. But I thought it might be a good time to revisit the competitive environment.

Speaker 4

You've quoted very strong win rates. Just to ask you, John, how you see the competition Evolving as you expand your own product portfolio across the supply chain management surface area.

Speaker 2

Yes. So SAP continues to be omnipresent. Let's just say they're almost always the incumbent. I would say between 60% 70 Of our enterprise accounts are very large SAP shops. And so we tend to hit that wall first.

Speaker 2

And then subsequent, we might see Blue Yonder and perhaps 'nine, E2 Open almost never. I can't even remember Actually, the last time I simply can't remember the last time we were in the ring with them. And I think I would point back to the Gartner MQ as being a great representation of our strengths And weaknesses, quite honestly, I think they're extremely balanced in their approach. And I think they represent A good description of how each of the competitors play out. And indeed, we've been monitoring and I've been very, very happy with our win rates with our key competitors in all those cases.

Speaker 2

And the vast majority, we tend to win. We don't win them all. We're not batting 1,000, but we are well above average, let's just say. I'm pretty happy with the results.

Speaker 4

That's great color. I'll pass the line. Thank you.

Operator

Our next question comes from David Weisz from Scotiabank. Your line is now open.

Speaker 5

Hi. This is David Weisel on for Kevin Krishnaratne from Scotiabank. So thanks for taking my questions. Can you talk about demand and interest for your supply chain execution and scheduling solutions? How do we think about the potential near term revenue opportunity?

Speaker 5

What are customers saying and how are you positioned competitively?

Speaker 2

Yes. So two comments I'll make on that. First, the enterprise scheduler, I believe it to be the first of its kind. Scheduling factories has always been Reserved for boutique software companies, there's very few companies that have made a living strictly on scheduling And achieved the type of size of a Kinaxis or greater. And we've taken the approach that well, Frankly, we believe that we could build an enterprise scheduler where one ring rules them all.

Speaker 2

And more than that, we believe that we can schedule multiple factories Simultaneously. And so we have run several proof of concepts with actual customers. We've gotten lots of Amazing feedback from some of our larger enterprise customers. There's a tremendous amount of interest in that. We just Launched it, we think it will be we believe it will be a winner product because scheduling I consider scheduling to be the boundary between planning and execution, which is why I started talking about scheduling first.

Speaker 2

And so once you solve for scheduling connected to our current platform, it leads to supply chain execution, which was the thesis around MPO. And then during COVID, when you couldn't find a container to save your life, and even if you could, it was probably 10x the cost it was before, Transportation risk became omnipresent for a lot of our customers. And so they are the ones who really came to us and said you really have to find a way To fuse in supply chain execution with the planning side. So if something happens where materials at risk, while it's in motion, We need to know the moment that happens. We can't wait until it's too late to respond to that.

Speaker 2

And that's what That's really the thesis behind our acquisition with NPO. Now we've been hard at work integrating those technologies. I think we're going to see some acceleration And pickup of that splice in execution as we enter 2024.

Speaker 5

Okay, great. Thanks. Last one for me. Is there are there any particular verticals that stand out in terms of gaining better traction or sales with some of your newer products Outside of RapidResponse, such as MPO and the scheduling that you just discussed?

Speaker 2

I think every vertical has its own interesting Volatility formula. In the automotive sector, for example, First, a lot of automotive companies are starting to realize they're in the mobility business. They're not in the car manufacturing, they're into mobility And they're becoming computers with some mechanics around it. And so they're having to deal with chip shortages Across the board. And so it becomes a supply kind of a disruption that affects them.

Speaker 2

And that's where supply.ai has been extremely valuable to customers. In some cases, it's a demand profile volatility drives the need for concurrency. And when I say demand profile, there's 2 main Occurrences that we're seeing. There are some manufacturers that are telling us we're going to sell 100% of what we manufacture. We're going to manufacture 100 percent of what we can.

Speaker 2

There's more demand for our products than we have supply, and we have to make decisions about allocation. And that process is a continuous volatility challenge for many. And that's where we'll see A lot of Demand dot ai type of usage. On the scheduling side, I think it's if you still manufacture, If you're a company that manufactures your own goods, then our scheduling solution, our Enterprise Scheduler is going to fit. There will be a fit for use.

Speaker 2

Now we do have some companies out there, especially some that are in the high-tech electronics space That are big brands, but they don't manufacture a thing. Everything is done through contract manufacturing. In those cases, Things like enterprise scheduling will not be a fit for use for them. They simply don't manufacture anything. And so now Mentioning the contract manufacturers like Flextronics and or Flex, I guess, they're called now.

Speaker 2

They've been a customer for So long that I've always known them as Flextronics. But anyway, companies like that, talking to their CIO, Gus Shaheen, There's a lot of interest in enterprise scheduling because they have over 100 factories To schedule simultaneously, so there's going to be a lot of interest from the contract manufacturing space.

Speaker 6

Thank you.

Operator

Our next question comes from Thanos from BMO Capital Markets. Your line is now open.

Speaker 6

Hi, good morning. John, can you expand on the macro? So if we look at conditions now versus say 3 months ago, Is it status quo or have things gotten incrementally worse? Are customers showing any signs of Increasing caution versus earlier in the year?

Speaker 2

Yes. I think It might be a little worse than it was last quarter in terms of signing authorities that we're seeing where delays Are now getting pushed to board meetings and board meetings are happening, as you know, once a quarter. And in some cases, those have protracted. And so that's one of the things that we're seeing mostly on the enterprise side, less so on the mid market small to mid market side. The other thing that is, I'd say, status quo is that accounts are starting smaller, which is fine with us.

Speaker 2

I get it. We still have companies coming to us saying, can you please get me live in 3 months or less than 6 months? And the value of the solution will help pave the way for expansion. And So that's been, I'd say, status

Speaker 3

quo.

Speaker 6

Great. And then if we look at The ARR growth rates you've had over the last couple of quarters, just very superficially, it seems like it may be a challenge to sustain a mid-twenty SaaS growth rate next year. Although you obviously suggest that you're looking at strong bookings in Q4, and as you just alluded to, maybe some of the customers you're signing Maybe it's too early to talk about it, but just at this point, are there any broad goalposts Would you be willing to share regarding say a minimum level of SaaS growth you'd look to achieve next year?

Speaker 3

Yes. Thanks, Dennis. I'll take this one. Yes, obviously, it's too early on to talk about what we're going to do for 2024. I think that we are still going to have strong status growth.

Speaker 3

We are still going to be growing at an elite level compared to many of our Peers, we have a ton of things that we're excited about. We are growing our sales team there. We have a significant amount Of the sales team cohort that's getting to what we would say are more efficient level based on the maturity they've had within the organization. We haven't been an organization that is focused on expand until this year. And so some of our peers that have reported recently Are the exact opposite.

Speaker 3

We're there focused more on the expansion side than the new name account side. So we're very fortunate to be Growing that team and to see how strong we can be on the expansion side of our business. VARs, as John mentioned in the call, we hit new records. I was kind of looking at our VAR numbers and I'm starting to look back just only like 3 or 4 years and realize our VAR business is now basically what we used to have as an organic business Direct organic business not too long ago. And so that's getting pretty exciting.

Speaker 3

SMB is still something that we're penetrating more and more. We just came out with a wider margin of new SKUs that we can monetize on in the nearest future. I think oil and gas, QSR, 2 very exciting verticals that we're starting to expand. So if nothing, we haven't given our Numbers for 2024 yet and we will wait another quarter to do that as we go through our investment planning. But we're extremely excited with where we are right now.

Speaker 3

We think we've been doing A lot of the heavy lifting over the past couple of years and we're just getting ready to reap some of those rewards. And It's a situation where it's hard to sometimes apologize for getting 26% SaaS revenue growth and 21%, I guess EBITDA margins, those are a rule of 47, which I don't think there's that many companies out there that can brag about that. So we're trying to do this with Jeff Ransom with being humble as part of this, but at the same time, we have to kind of stick our chest out and realize we've done an amazing job up to this point.

Speaker 2

Yes. I would add Thanos, some people might wonder whether supply chain excellence and supply chain transformation is temporary. I mean, we see no signs of that. I mean, we and you've known us quite some time. You know exactly who we were 3 years ago.

Speaker 2

We've doubled more than doubled the number of customers in 3 years, More than doubled in 3 years. And it's think of it as taking us 25 years to get to a point and 3 years to double it. We've been a rule of 40, I want to say, for at least 8 years in a row, which is a sign of great resilience and growth. And as Blaine said, we know the conversations we're having. We know the deals we're working on.

Speaker 2

There's some pretty exciting stuff in the pipeline there. And as Blaine said, it's very difficult to predict what's happening in the micro And macro level economy around the world. And so we're monitoring all of that. But notwithstanding, We operate the business with great responsibility, I'd say, and great insight. So if there's opportunity, we're certainly not going to waste

Speaker 7

That's excellent color. I'll leave it there. Thanks.

Operator

Our next question comes from Suthan Sukumar from Stifel. Your line is now open.

Speaker 8

Good morning, gents. First question for me is, maybe on the product engagement side with respect to some of your Newer product offerings like Time.ai and so forth. How many products have been influencing win rates and deal sizes for you guys? Wondering if it's been a catalyst for new business or are they more value on the expansion side?

Speaker 2

Well, the answer is really both. When we meet a brand new prospect, the first thing I say might sound odd coming from not only a software But coming from a CEO of a software company, the first thing out of my mouth is software doesn't matter. You have to bond on technique first. And I drive the conversation above software on purpose. Obviously, I've there's a method perhaps to the madness.

Speaker 2

And so people are coming to us, not because of one particular module that we happen to offer. It's not like my algorithm is better than your algorithm. That's Sir, I will say that the techniques that Kinaxis offers around concurrency Are vastly superior than anything else in the market. I fundamentally believe that in my heart and in my head. And so we start there.

Speaker 2

Now as it relates to things like Enterprise scheduling? Well, that's an expansion of concurrency. What makes that most valuable is the fact that it's inextricably connected To everything else. And certainly that benefits expansion for sure because customers that already use us, As I mentioned around Enterprise Scheduling and the contract manufacturing space, there's tremendous interest there. One of our confectionery customers very, very interested because they have many factories that can manufacture the same goodies in the same way.

Speaker 2

And so being able to schedule across factories is unique. Those things just don't exist. Otherwise and again built on top of a concurrent engine, that's what gets the industry excited. That's what I think will power The Future Supply Chain. And that will power Future Supply Chain Excellence.

Speaker 2

So, now you mentioned Demand IDI, and I do want to touch on that one Because that in the space of retail has been really, really potent, where we are disrupting. We are disrupting systems and replacing systems that have been in place for 30 years, and we are stepping in with a system of solution and environment That runs not only faster, but is more superior as it relates to forecast accuracy. And so that Around machine learning and AI, we have a very, very strong bench, exceptionally gifted engineers. I want to say we have 50 ish patents in play at the moment, The vast majority of which are associated with machine learning and AI. So we're this what I talked about, this fusion Of MLAI on top of a concurrent engine, I think is where excellence is going to live in the future.

Speaker 8

Great. Thank you for that color. Same question for me is really on the land and expand Toni, it's good to hear that you guys are doubling down on your expansion efforts. Is there anything that you would flag With respect to the nature of the expansion activity that you're seeing now that may be different than you've seen in prior years, just wondering if there's Something related to the pace or the size of these opportunities. And ultimately, how does that And does that and ultimately does that sort of drive any change to what you see in terms of the medium term outlook that you guys have talked about previously?

Speaker 2

Yes. So I'll start and then maybe ask Blaine to add further color. But one of the things that we did Barry recently has built a dedicated team to focus strictly on the installed base with a leader and that happened In earlier in 2023, so we are taking a very, let's just say, focused approach at addressing the base and Addressing expansion, I'd say at the moment, roughly 50%, I want to say. And again, I'm looking at Blaine to keep me honest here, roughly 50% of our ARR, at least this quarter, was in the expansion versus net new. It's close enough anyway, let's just say.

Speaker 2

And so we continue to stay very close with the base. And again, as I mentioned just earlier, We doubled the size of our customer base inside of a 3 year period. And so that is giving us a great sort of internal market to go after with net new products. Blayne, do you want to add anything to that commentary?

Speaker 3

Well, maybe just to Jumping to the last part of your comment, you talked about mid term guidance and we expect that we would be asking questions around that. We obviously talked about 30% Year over year SaaS growth and 25% adjusted EBITDA, we are not changing from that. We've Still, it's Zenith as the midterm. We're barely in, not even at 1 year from when we first announced that Mid term guidance. So we still think it's going to be there.

Speaker 3

I would say, the only thing that's probably shifted is that the SaaS revenue growth, We had foreseen it to be in the short term and I wish I could have been sitting here today and saying we've already knocked it out of the park. But we do still see it in that midterm product at this stage.

Speaker 8

Great. Thank you.

Operator

Our next question comes from Mark Schappel from Loop Capital Markets. Your line is now open.

Speaker 3

Hi, thank you for taking my question. John, in the prepared remarks, it was noted that Q4 is That you're going to bring in the ARR this year in Q4?

Speaker 2

Well, there's a couple of things. One, we know what we're negotiating. And so when we have pens in hand and lawyers assigned, Doesn't mean anything is guaranteed, I assure you, because of the macro conditions and often getting signatures and getting ink to dry, getting Board members, In some cases, design, are things that we're continuously monitoring and questioning and doing all of those things to make sure that we're not just guessing on what's going to happen. We certainly know what's in play. And we know exactly what expansions we're working on, as Blaine mentioned.

Speaker 2

There's a rather large expansion that slipped out of the quarter, which now looks like it will be in November timeframe. And so, we're feeling pretty confident that all of that is in good standing. And 3rd, we know what the pipeline is ahead of us. And that's what's giving us that level of confidence. Now obviously, the thing we can't predict It's exactly what is happening to these macro conditions on a moment's notice.

Speaker 2

And so we'll be able to comment At the next call, when we know exactly what history ultimately looks like. But that's what's really driving our confidence. We know what's We know what we're working. We have pens in hand. We have some rather exciting accounts that we're working.

Speaker 2

And yes, that's what's fueling our confidence.

Speaker 9

Great. Thank you.

Operator

Our next question comes from Erinn Kyle from CIBC. Your line is now open.

Speaker 10

Hi, good morning. It's Erin Kyle on for Stephanie Price here. Maybe if I could ask one question on the professional services growth. In the prior few quarters, we saw professional services growth fall below subscription growth. And then this quarter, we saw it tick back up again at 28%.

Speaker 10

So could you talk a bit about what drove the higher growth this quarter and maybe just how we should think about conventional services growth looking into 2024?

Speaker 3

Good question. And I will just say that I have to repeat it to the team that the team is doing extremely well at executing Their bookings number, which we don't disclose, hit an all time high This past quarter, the year over year growth on that side is phenomenal. We're using third party contractors less and less. But saying all that, we do want to be partner first. We do want to push as much of our professional services work in their direction.

Speaker 3

And we are having executive discussions on trying to figure out how to achieve that going forward Even more than we are right now. Training enablement is obviously one of the biggest factors that you have out there, but we want Our partners to be able to step in and have the exact same level of service that our team is doing right now. The issue we have is that our team is so good And it's a testament to the strong retention that we have in place. I can say right now, this year we have Less than a handful of customers that we've lost, which is I don't know how many companies of our size could actually brag with that. But that's a large part because of how strong that So that's a long way of saying that we're growing that revenue base still pretty quick, quicker than we would like.

Speaker 3

But we need to get our partner organization at the level of service to ensure that they have the trust from our customers and our prospects To go with them first before going with us.

Speaker 10

Thank you. That's helpful color there. And then maybe I could just ask one more here on the license revenue in the quarter. And I appreciate you kind of alluded to this in your prepared remarks. But Last quarter, you did speak about a term license customer that you were in the process of determining how that contract revenue should be recognized and when it would come in.

Speaker 10

And then this quarter, we did see that the higher expected license revenue came through. And then you did note with your guidance that Excluding that, the SaaS guidance revenue would have been unchanged. So was that related to the term license customer that you alluded to last quarter? And then maybe as Follow on, do you have any more of these contracts in the pipeline that could cause a similar situation?

Speaker 3

Yes. So That way so I'll answer first. The answer is no. It's not related to that one customer. That customer, we are still In negotiations, we believe it will fall into 2024, but there is a chance it could still come in for 2023 in terms of where we have the majority of that revenue hitting.

Speaker 3

So it's a good sign that we have some extra revenue just sitting out there Waiting to be recognized relating to that customer, but no, it doesn't have anything to do with the how we did in Q3 at this stage.

Operator

Our next question comes from Richard Tseff from NBF. Your line is now open.

Speaker 7

Hi. This is Amir calling in for Richard. Congrats again on the quarter. Just wondering if you could talk about how the Habi partnership is tracking?

Speaker 2

We're frankly thrilled with it. I was very recently on stage With Rodney Brown, their Chief Supply Chain Officer at a 0 100 event, anybody who tracks Rodney on LinkedIn would have seen A great photo of him and I on stage, chatting about not only the partnership, but the value that we're delivering this iconic brand. So we're really, really happy with that partnership. We're happy with the work that we're doing with them. We believe that, Well, frankly, I think, Javi, they're trailblazing a new standard for quick service restaurant As it relates to supply chain excellence, not only on the demand side, but the simultaneous replenishment side.

Speaker 2

And that's what has us very excited. It has them excited. Serving one brand is just the first step. They obviously have many, many other brands that they serve and that they're talking to. And so stay tuned for more exciting news as it relates to that partnership.

Speaker 3

And maybe I'll just add in. I was fortunate to talk with Javi last week and we were talking a little bit more about what our go to market our co go to market strategy looks like In the foreseeable future and there's a lot of exciting things. We talk about QSR, but there's more verticals besides QSR that we potentially could move into with them And we're having those discussions as well.

Speaker 7

Okay. Thanks for that. And then just one follow-up. I guess, Blayne, this one is more for you, but you talked about the

Speaker 3

I think we're pretty close to where we expect. I mean, it could go A couple of percentage points a little bit lower, but I don't think we're expecting to go much more. We are spending a lot of time to make sure that we optimize that migration as much as possible. But you're absolutely right. We don't see a rebound for the next at least the next 4 quarters as a result of the Duplicate of cost that we have with public cloud.

Speaker 3

We're doing our best. I mean, one of the hardest things that we're doing is that we're ahead of schedule and we have more customers On public cloud than we expected this time, which then that adds up to more and more duplicative cost that we have at this stage. So we're happy that we're Being so successful right now with those migrations, but we know that it doesn't really help our margin profile at this stage. Okay. Thanks so much

Speaker 7

for that color. I'll pass the line.

Operator

Before we move on to the Our next question comes from Kieran from 8 Capital, your line is now open.

Speaker 3

Good morning, all.

Speaker 7

On to Krishnan here. Now to start, You called out strength with VAR. Can you talk about the maturity of this channel and some of the targets you're setting for them?

Speaker 3

May I start and let John jump in. So it's still very immature. We're excited that we're getting new records with the VARs and that it's growing. We have over 40 VARs that we have in place, but we're also trying to make sure that they are appropriately performing at the levels that we want. And so there will be an assessment of how they do as we go forward.

Speaker 3

We have some that are just already It's interesting just seeing the number of new geographies that we're entering into that we would have never imagined before. But we are seeing that I hate using hockey sticks even though I'm Canadian, but we are starting to see a little bit of a hockey situation with FARS because they are now getting to the level of maturity that they need to execute and they need to win over some new engagement. So Yes, we're extremely excited about where this could go. The pipeline is way bigger than we had a year ago And excited to see where this heads. And I think this could be a very strong piece of our business that has grown very fast in the Recent periods.

Speaker 2

Yes. The only color I will add and I wouldn't want this to be lost on investors. The notion that Kinaxis has produced a solution that not only is what I might call revolutionary as it relates to The technique that it supports the notion of concurrency. But we're serving companies that do under $100,000,000 in revenue and companies to over $150,000,000,000 in revenue. We could serve them all.

Speaker 2

Whether you make tofu, jet engines, automotive, pharmaceuticals, Shampoo, on and on it goes, industrial equipment, Again, with exactly the same software. We're doing that around the world. The notion of VARs for us, as Blaine says, not only Providing an arm, a sales arm in geographies for which we are not in, it is an arm that is going after SMB, the small to medium sized businesses On our behalf. And so that's the other thing that we're quite excited about where we'll the expectation is to see Some acceleration in net new wins. Small companies become medium companies.

Speaker 2

Medium companies become enterprises. So we love this. I think this is what builds resilience in a business.

Speaker 7

Thanks guys. That's helpful color. And this is Mythakan here. Were there reasons outside the conference that influenced OpEx Sequentially, how do you think about the run rate for OpEx?

Speaker 3

Yes. So I guess just going on what we have for the quarter, I think very few times in my history that I've seen A company that's growing and being successful have OpEx that's quarter over quarter lower. And you're seeing sales and marketing and you're seeing R and D and G and A a little bit lower. Obviously, I talked about operating leverage. We had our big conference in Q2, Which is obviously not something we repeat every quarter and so that helped us out with our sales and marketing numbers going down.

Speaker 3

But we are being very thoughtful about the investment we have in our teams. We're in a fortunate position that we have been thoughtful and We don't have to worry about changes and that a lot of I think our competitors and our peers and That have gone through, especially in this current environment. So we've been looking at this for a long time. We've been trying to make sure that We are growing at the right rates that we're going to get to the profitability that we want to. This is a long term plan that we've been building forward.

Speaker 3

And I think that we are set up right now for success to get even more operating leverage in the future. I think those numbers where we see that on a normalized revenue We're going to not do it all at once. We're going to continue to take baby steps along the way.

Speaker 7

Appreciate that, Ben. I'll pass the line.

Operator

Our next question comes from Martin Toner from ATB Capital Markets. Your line is now open.

Speaker 9

Thanks so much for the question. Just wanted to I wanted a little more detail on the Improvement in professional services EBITDA margins, or sorry, gross margins, how sustainable are those? And then a second question, can you talk about the STL strength And likelihood that it will continue into next year like relative to the normal cycle.

Speaker 3

Sure. So professional services margins, again, we're I did mention we're very happy with the pricing power. We are Utilizing that pricing at our disposal right now and 29% margins Caught me by surprise. Karloff, people were by surprise. We didn't expect it to come in that high.

Speaker 3

Our utilization rates are right on Track to what we expected. Obviously, the big impact was the use of partners or third party contractors that came down significantly During that period of time, we obviously don't give our any guidance as to PS margins, but we do think that We are starting to learn a little bit more about the margins that we can expect going forward. So No real, I don't want to say we're going to be 29% forever going forward, but I don't see why we can't either.

Speaker 9

Okay, super. How about subscription term license?

Speaker 3

So, subscription license, at the beginning of the year, we said that it would be lower next year. So, we gave a little bit more of an insight into where we saw The next 3 years. Next year is a lower period and we know that that will just based on renewals that is the case. We have one deal that, again, I think I mentioned that we are trying to track to figure out if it's going to be either 2024 or late 2023, but otherwise, we should expect the subscription term license will be a lower year next year And then pop back up to somewhere around the range where we are this year.

Speaker 9

Great. Thank you very much.

Operator

Our next question comes from John Shutter from RBC. Your line is now open.

Speaker 11

Hi. It's John on for Paul Treiber. Just a question on your sales investments that you've been making. And I know you've talked in the past about how the teams are ramping. So Just want to know if there's any updates there on what proportion of your sales teams are fully ramped and what proportion of wins are coming through more recent sales hires

Speaker 3

Yes. It's a great question and something that we've been spending a little bit of time on. We look at cohorts Of our sales team between 0 12 months of experience, 12 to 18 months and then 18 months plus. And there is a significant difference for that 18 month plus versus the other 2 cohorts. Obviously, as you can imagine, the lot more experience they have, The higher productivity they will have, but there is a number of multiples that you get when you have over 18 months.

Speaker 3

And that's generally just We go back to our sales cycle, which is now somewhere sitting around 12 months. It's ensuring they have that sales cycle to run through plus A little bit of a ramping period to ensure they understand what Kinaxis is all about. So it is a we are pretty happy with how They are ramping. As of right now, we've gone through, I'd say, the last 6 quarters where we had a decreasing amount of those 18 month plus Account execs, that's about to switch. I think it's well, this quarter is the first kind of step progression that we have For some increased AEs that are getting over the 18 month area.

Speaker 3

So, a higher proportion is seen right now, but Generally, you can roughly expect somewhere around 2 thirds are supposed to be at 18 month plus and then the 1 third is developing over time.

Speaker 11

Great. Thanks.

Operator

This now concludes the Q and A session. We'd now like to hand back over the call to Rick Wadsworth. Thank you.

Speaker 1

Thanks, operator, and

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Key Takeaways

  • Kinaxis delivered a strong Q3 with SaaS revenue up 26%, total revenue up 21%, and an adjusted EBITDA margin of 21%.
  • The company reaffirmed its 2023 guidance of $425–435 million in total revenue, now expecting 24–25% SaaS growth, $18–20 million in subscription term license revenue, and a 16–18% adjusted EBITDA margin despite a small shift in revenue classification.
  • Pipeline and sales momentum remain robust, with a record number of meetings booked, a sales team that is now over 30% larger than at the start of 2022, and expectations for Q4 to be the strongest quarter for ARR growth.
  • Kinaxis announced a normal course issuer bid to repurchase up to 5% of its shares, viewing the buyback as a “good use of capital” given current valuations and strong cash generation.
  • The company continues to expand its product portfolio with new offerings—supply chain execution, enterprise scheduling, sustainable supply chain, and Demand.ai—positioning it to address a market projected to exceed $12 billion by 2030.
AI Generated. May Contain Errors.
Earnings Conference Call
Kinaxis Q3 2023
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