Kinaxis Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 10, 2023

There are 13 speakers on the call.

Operator

Good morning, ladies and gentlemen. Welcome to the Kinaxis Incorporated Fiscal 2023 Second Quarter Results Conference Call. Currently, all participants are in a listen only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions.

Operator

I'd like to remind everyone that this call is being recorded today, Thursday, August 10, 2023. I will now turn the call over to Rick Wadsworth, Vice President of Investor Relations at Kinaxis Inc. Please go ahead, Mr. Wadsworth.

Speaker 1

Thanks, operator. Good morning, and welcome to the Kinaxis earnings call. Today, we will be discussing our 2nd quarter results, which we issued after close of markets yesterday. With me on the call are John Sicard, our President and Chief Executive Officer and Blaine Fitzgerald, our Chief Financial Officer. Before we get started, I want to emphasize that some of the information discussed on this call is based on information as of today, August 10, 2023, and contains forward looking statements 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 disclosure in the earnings press release as well as in our SEDAR filings. During this call, we will discuss IFRS results and non IFRS financial measures, including adjusted EBITDA. A reconciliation between adjusted EBITDA and the corresponding IFRS result is available in our earnings press release and in our MD and A, both of which can be may be rerecorded or otherwise reproduced or distributed without prior written permission from Kinaxis. To begin our call, John will discuss the highlights of our quarter as well as Recent business developments followed by Blaine, who will review our financial results and outlook.

Speaker 1

Finally, John will make some closing statements before opening the line for questions. We have a presentation to accompany today's call, which can be downloaded from the IR homepage of our website. We will let you know when to change slides. I'll now turn the call over to John.

Speaker 2

Thank you, Rick. Good morning and thank you all for joining us today. I'm excited to share our Q2 results and developments with you today. I'll begin with Slide 4. In the Q2, we achieved SaaS revenue growth of 25%, Total revenue growth of 31% and our adjusted EBITDA margin was 14%.

Speaker 2

These results keep us on track towards our targets for the year. Moving to Slide 5. We won a record number of new customers in Q2, surpassing the benchmark from last year, which demonstrates our ongoing momentum in the market. Our win rate against the competition continues to increase and it was our best Q2 ever in terms of incremental subscription Business One. In June, we had a record turnout at Connections, our annual customer conference, where in person attendance grew by over 50%.

Speaker 2

We also held more initial meetings with our prospective accounts in Q2 than any in any quarter of our history, further suggesting that the market is heating up. While we need to remain appropriately cautious about the global economy, We continue to see a persistent urgency around the need to transform supply chain governance and the demand environment for supply chain management solutions These companies represent some of the largest and most exciting brands in their sectors. In our Industrial segment, We're thrilled to add ExxonMobil, one of the largest publicly traded energy and petrochemical companies, As well as oil and gas giant Shell International. In the same segment, we welcomed Westlake, A New York Stock Exchange listed company with roughly $16,000,000,000 in revenues last year. In Consumer Goods, We added major fitness lifestyle company Peloton as well as Brown Forman distillers and marketers of premium spirits like Jack Daniel's, Finlandia Vodka and Woodford Reserve.

Speaker 2

We also won water filtration leader Brita as well as Premier Foods, 1 of U. K. Largest food manufacturers with brands like OXO and Bird's Custard. Unsurprisingly, given this success, consumer goods remains one of our fastest growing segments. In high-tech, we welcomed Kyocera Communications Systems, a Japanese information systems company that is pioneering the communications of the future.

Speaker 2

This is just a small sample of our wins in Q2, Names that clearly demonstrate how global innovation leaders are starting to embrace meaningful supply chain transformation. In total, roughly half of the companies we won in Q2 are enterprise class, and there are many more prospects of Now moving to Slide 7. Siloed approaches to supply chain management are giving way to fully concurrent supply chain From planning through execution, Kinaxis remains alone in its ability to deliver on that vision And we recently announced several major innovations that set us apart in this space. 1st, Enterprise Scheduling. Enterprise scheduling is the 1st and only scheduling tool that allows companies to orchestrate production across Sites and creates a comprehensive, feasible and efficient manufacturing schedule regardless of plant layout.

Speaker 2

Our new supply chain execution application, a result of our NPO acquisition, includes Transportation Management, Order Management and Returns Management. It empowers businesses to drive supply chain orchestration from planned through delivery across all time horizons. Our sustainable supply chain offering allows companies to ensure environmental are a key part of supply chain decisions by embedding carbon emission factors, including Scope 3 emissions into rapid response scenarios. If you read our ESG report, you'll know that commitment To a sustainable socially responsible future is one of our core strategic pillars. And finally, Demand dotai We'll allow companies to better understand how both internal and external factors are influencing demand for their products And to take advantage of these changes quickly, Javi, a giant in the strategic outsourcing for quick service restaurants And other industries took the stage at Connections to highlight its early adoption of this new capability.

Speaker 2

On Slide 8, not only are our customers recognizing these innovations, but in May, for the 9th consecutive time, Kinaxis was placed in the leaders category of Gartner's Magic Quadrant for Supply Chain Planning Solutions and became the first Company ever to be simultaneously positioned furthest on both completeness of vision and ability to execute. Hopefully, you've seen this report by now, but the amount of white space between Kinaxis and the next Competitor in that quadrant speaks for itself and is a great testament to what our customers see in us. Simply stated, we are the innovative and trusted leader that delivers on our promises. With that, I'll turn the call over to Blaine to review results of the quarter.

Speaker 3

Thank you, John, and good morning. As a reminder, unless noted otherwise, all figures reported on today's call are in U. S. Dollars under IFRS. Starting on Slide 9.

Speaker 3

Total revenue in the 2nd quarter was up 31 percent to $105,800,000 Our SaaS revenue grew 25 percent to $64,100,000 Ongoing momentum in our markets continues to drive this very healthy growth. Subscription term license revenue was $7,100,000 versus $400,000 in Q2 of 2022. As you may remember, this item largely follows the normal cadence of renewals among our small group of existing on premise customers or those that have the option to move their deployments on premise. However, it's important to note that in Q2, 1 of our new customers that joined us will be accounted for as subscription term license revenue. Given our typical experience, we had initially forecast this And all other new wins to come in as SaaS revenue.

Speaker 3

Our professional services activity resulted in $30,000,000 in revenue or 18% growth over the Q2 of 2022. New bookings for Professional Services were also very strong, which will help support our total revenue outlook for the year. 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 $4,600,000 up 17%. 2nd quarter gross profit increased by 28% to $63,700,000 Due to the significant revenue growth I just discussed, gross margin in the quarter was 60% compared to 62% in Q2 of 2022.

Speaker 3

Software gross margin decreased to 76%, largely due to initial investments in our new public cloud arrangements. We are ahead of plan with respect to the number of customers hosted on public cloud, which is positive, but it does mean that costs are also a little higher than expected. As we move closer to a fully public cloud model, we expect software margins to return closer to 80%. This will also be helped by a higher proportion of expand business in future years. I would like to highlight that in Q2, over 70% of new subscription business, 1 was in the land phase of our business.

Speaker 3

Professional Services gross margin was healthy at 21%, though slightly lower than in Q2 of 2022 due largely to investments made in additional headcounts for new customer engagements and existing customer expansions. We still foresee a total annual gross margin in the 60% to 62% range. Adjusted EBITDA was up 47% to $15,200,000 with a margin of 14%, up 1 percentage point from the Q2 last year. Our loss in the quarter was $2,500,000 or $0.09 per diluted share, a $0.01 improvement from last year. Cash from operating activities was very strong at $13,900,000 compared with $8,400,000 in the prior year period.

Speaker 3

The increase largely reflects normal periodic fluctuations in balances of operating assets and liabilities as well as higher interest received on balances in Q2 2023. At June 30, 2023, cash, Cash equivalents and short term investments totaled $293,400,000 up from $225,800,000 at the end of 2022. On Slide 10, our annual recurring revenue or ARR grew 22% Over the Q2 of 2022 to $293,000,000 representing a healthy balance in growth rate given the economic backdrop. There is plenty of opportunity for even faster growth, but the final stages of procurement are still taking longer in some cases, a well documented phenomenon In enterprise class SaaS by now. It's especially applicable when targeting new customer opportunities and over 70% of our ARR growth in the quarter was from New customers.

Speaker 3

In short, we have continued to grow well in this unusual environment, which highlights the ongoing urgency around supply chain transformation. Slide 11. At quarter end, our remaining performance obligation or RPO was $587,000,000 up 19% from Q2 2022. Of that total, $542,000,000 relates to SaaS business, up 18% year over year. Of the SaaS amount, roughly $127,000,000 converts to revenue in the remainder of 2023.

Speaker 3

I'll remind you that growth in RPO varies both with incremental business won and renewals of existing subscription amounts. So it's best to focus on trends over the longer term. Further details on our RPO can be found in the revenue note to our financials. Turning to Slide 12. We remain excited about 2023 and are pleased to be able to reiterate our outlook for the year.

Speaker 3

A way of reminder, we expect total revenue of $425,000,000 to $435,000,000 25% to 27% SaaS revenue growth $16,000,000 to $18,000,000 in subscription term license revenue and an adjusted EBITDA margin of 14% to 16%. Now I mentioned that we won a new customer in the quarter that will be accounted for a subscription term licenses. You will recall the same thing happened in Q1 and we increased subscription term license and total revenue guidance at the time. In both cases, we had anticipated the business coming in as SaaS revenue and the combined impact to SaaS growth is roughly 1%. As a result, it will be more difficult to hit the top end of our SaaS revenue growth guidance, while our confidence in the elevated subscription term license outlook has grown.

Speaker 3

Overall, we remain fully focused on finishing the year within all our target regions. We remain pleased With our balanced approach to SaaS revenue growth and profitability as we work towards another year of Rule of 40 performance. And with that, I

Speaker 2

will turn the call back to John. Thanks Blaine. As you know, we're working towards 30% plus SaaS revenue growth and 25% plus Adjusted EBITDA margin in the midterm. Internally, we are hyper focused on our path to crossing $1,000,000,000 in revenue. To help achieve these goals, we recently made some exciting changes to our leadership team.

Speaker 2

First, we appointed a new Chief Product Officer. Andrew Bell will lead the product roadmap and oversee its execution, including our continued excellence in AI and machine learning. Andrew has been with Kinaxis for more than a decade, most recently leading the product management group. We've also created a new Chief Operations Officer role and appointed former Chief HR Officer, Megan Patterson. Megan will have responsibility for our cloud services operations, corporate IT, corporate strategy, HR and global real estate.

Speaker 2

We named Amber Pate as Chief Human Resource Officer. For almost 3 years, Amber has worked closely with Megan as Vice President in the HR team and has previously led the entire HR resource function for other companies. Finally, we recently announced Margaret Franco as our Chief Marketing Officer. Based in London, Margaret has extensive experience Shaping Global Tech Brands and Helping Companies Scale Well Beyond $1,000,000,000 And she's previously Held positions as CMO at Finastra, held senior marketing global roles at Dell during a 13 year tenure and was named to the list of top 25 women in financial technology. Our continued strong financial performance alongside a growing list World class enterprise customers, innovative new product capabilities and an exceptional leadership team Positions us well for our next stage of growth.

Speaker 2

It is a privilege to lead a company that powers the world's supply chains while preserving the planet's resource and all to ultimately enrich the human experience. I want to thank our amazing team around the world, Our customers and partners and our shareholders for your continued support and commitment to Kinaxis. With that, I'll turn the line over to the operator for Q and A.

Operator

Our first question comes from the line of Daniel Chan from TD Cowen. Daniel, your line is open.

Speaker 4

Hi, good morning. Good to see the strong SaaS bookings in the quarter. If I look at the ARR added in the quarter relative to the SaaS bookings, it seems that ARR growth isn't quite as strong as what the SaaS bookings would suggest. Was that due to longer contract durations, resulting in larger bookings or is there something else to point out?

Speaker 3

I'll take this one. Great observation, Dan. So one of the things we've been noticing There's a juxtaposition that's happening right now with companies. Number 1, they're realizing that they have these Constraints on budgets. Number 2, they realize they need to have a solution for the supply chain issues that they're going through.

Speaker 3

The demand is through the roof. It's Taylor Swift Heights. And so what we're starting to get is a situation where we need to get them in the door. And so the opening footprint, the AR footprint that we initially get is smaller than we've seen over the past couple of years. And we've seen our pipeline move throughout the quarters, but the biggest thing is getting them in the door.

Speaker 3

And you've seen what our retention rates are. Our retentions are is extremely sticky and we expect that these people will be here for a long time. So I'll give you a couple of examples. Our biggest customer coming on and the biggest contract that we had come on, they have an extremely big ramp. They go from, I'll say, a 1x in the initial contract.

Speaker 3

And by 2025, that contract is a 3x. And that's for our number one Largest customer that we landed. The number 2 is already lined up for a significant expansion that they have early in this year. And so we're getting them in the doors. We're showing them what we can do.

Speaker 3

We know that we're going to stay with us for the long term because of retention rates and we expect to see the expansion. So We were kind of sticking to the script, which is we are in that land phase. We're getting a lot of new name accounts that are coming aboard. We're getting in the door and we're expanding from there. So we're really happy with sticking to the plan right now.

Speaker 4

That's very helpful. Thanks for that. As part of that expansion, I did some of your public cloud investments. Can you just elaborate on what those investments Are and how long do you expect those to continue?

Speaker 3

Sure. So the biggest investment is Well, we have, I'll say, 2 main partners that we're dealing with right now. One of which we are in the process of moving The majority of our customers over to you and we will expect that we'll phase out to The double cost that we're going through right now with private cloud as well as public cloud should be eliminated by the end of 2024. We are Luckily ahead of schedule for the business. For finances, it's not always great to have an extra cost that I'm incurring.

Speaker 3

But there's a high amount of demand to get on board with the public cloud environment. We expect by 2025 that we'll be back To the one cost hitting us.

Speaker 2

Yes. I might just add, our I'm just going to use the word delight To the speed at which we've been able to adopt, not only the Microsoft Azure platform with the Google Cloud Platform as well working both with their teams. They've been hyper focused on us, which is great. It's awesome to get the attention. I think they realize and recognize the same thing that we do that the world of supply chain is going to undergo this massive transformation over the next 5 to 10 years.

Speaker 2

And so they obviously both want to be a major part of that. And as you can appreciate, We started what I'll call public cloud many, many, many years ago. And so translating our Footprint into those public cloud environments, we had some assumptions around what the technology investments would be And any engineering investments and what they would be and thankfully and of course sometimes that has some Impacts on finance, but we're thrilled to see the speed at which we can migrate And start new customers on those public cloud environments.

Speaker 5

Thanks. I'll pass the line.

Operator

Our next call comes from Thanos Moschopoulos of BMO Capital Markets. Your line is open.

Speaker 6

Hi, good morning. Just looking at the ARR growth, obviously, it will have to reaccelerate, I guess, longer term in order for you to get to your 30% SaaS revenue target.

Speaker 7

So how

Speaker 6

do we think about that dynamic? Will that be driven as a function of some of these expansion opportunities kicking in? And then maybe kind of a related question is on the macro, would you say it's consistent to what you've seen in recent quarters or is it directionally getting any softer?

Speaker 3

No, okay. Great question on ARR Thanos. We do see that the expansion part of our business will be I think I mentioned in the last call that we for the first time added in a team that's dedicated to expansion revenue And building up the footprint that our customers have, we obviously have a lot more observation into our pipeline right now, Especially what the upsell opportunities are like and I can say quite confidently the next two quarters there's some Significant upsells that we have in place right now. So we think that ARR is going to get us to a position to get to that 30% Midterm SaaS revenue growth that we have in place. But I'll let John add any color that he wants to have on this because I think it's something that we've We've been very focused at let's get those new name accounts in.

Speaker 3

We were able to say that we have these records coming in place and we had a record incremental bookings also for Q2, Which is nice. But we also want to do exactly what everyone else is hoping for is get the revenue in the door and we're seeing that path right now. We're in the early stages of growing that path.

Speaker 2

Yes. It's everything that you notice Thanos, we notice first. So when we looked at this phenomenon, There's a couple of things that really surfaced for me, really, really, really exciting things. First, I can say for the first time in the history of selling enterprise class software in the supply chain space, our sales cycle time fell Under a year overall. That's pretty exciting.

Speaker 2

This is like an acceleration in, I'd say, the market. The market is clearly seeing that we've got to rethink our supply chain governance models. So that's exciting. Now the other thing we're seeing is, I'd say, a remarkable surge in the SMB space. So obviously those deals, much smaller companies.

Speaker 2

I think I mentioned this in the past, we've closed business with a company that does less than $100,000,000 in revenue. That's phenomenal, for a lot of reasons. 1, it proves that the financial formula works for both parties At that scale. And also the technology complexity works for both, Right. This can be absorbed by companies of that magnitude, which is quite exciting.

Speaker 2

Enterprise class, one of the trends that we're seeing is, yes, sales cycles are shrinking, Just very exciting. But initial deals are as Blayne noted, initial deals are starting smaller and ramping up. Some of those ramps are outside of the ARR range, but they're baked into the contract, Right. So they baked in a year 2, 3 and sometimes beyond those points. And so we'll see a natural what I might call a Natural escalation occur because they're contracted and they're sitting out just outside just beyond that 1 year horizon.

Speaker 2

And then lastly, clearing 300 customers and continuing to see record logo growth, Which is unbelievably exciting for us to me that that is creating a It's creating its own little mini market, if you will, as we produce new products and sell back into it. We expect to start seeing perhaps a more balanced ratio between subscription from the base versus subscription From Landing Net New. Now, current state of the pipeline and I look at the current state, When I think about pipeline, years ago, it might have been the size of an orange. Now it's more like a watermelon. It's just growing.

Speaker 2

It's quite exciting, different mix, but I think we're going to continue to be able to say Net new logos are going to be the story for a while here as we start seeing more and more adoption.

Speaker 6

I appreciate the color. And then just on the term license guidance, given that you had an unexpected Term license win, why are you not raising the full year term license clients? Is there maybe a term license renewal that Is now going to transition to cloud or what's the dynamic?

Speaker 3

Yes. No, there's a term license Customer that has come in, I will use the words that how the contract was constructed, The recognition of revenue may be dependent upon certain clauses in that contract. And so It doesn't mean that I'll just say just could that revenue will come in. It's a matter of when. And so I haven't figured out which period is coming at.

Operator

Our next call comes from Paul Treiber from RBC Capital Markets. Your line is open.

Speaker 3

Thanks very much

Speaker 8

and good morning. Just wanted to quickly clarify John's last comment just on ARR and the calculation there. You mentioned that the expansion in year 2 and 3 is outside of ARR. Can you just walk through the ARR calculation? And then is there a risk Any risk of the expansion may not occur and that's like if it's not contracted.

Speaker 8

Can you just walk through how you think about the future expansion?

Speaker 3

Yes. So the example that John spoke about, it's committed ARR, it is in our RPO right now and it will come through. So there's They're contractually obligated to pay that amount. So I have no concerns. The way it works that in our calculation is If we have a ramping deal and I'm just going to throw out like random numbers.

Speaker 3

So say in year 1, they are committed to pay based on certain modules, certain amount of users, Say it's $100,000 which would be low. If they came with that amount, that's what we would recognize AR for that 1st year. If say in year 2 is now ramped up to $300,000 we wouldn't start recognizing that ARR until we've Gone over the cliff of it's within 12 months that we expect to recognize a certain amount of revenue that's recurring. And so we're in a period where We're more in the 100,000 range versus the 300,000 range for that particular customer.

Speaker 5

Okay. Thank you. That's helpful.

Speaker 8

Just in terms of customer wins, it sounds like the momentum has been much stronger than you Would have expected at the start of the year. Is there any way to quantify how customer wins have been tracking versus your expectations?

Speaker 2

Well, there's a couple of things. 1, we obviously track overall sales cycle. And it's been over the past, I want to say 2, 3 years, it's been slowly coming down and the compressing, I'd say. And then this quarter, we measure this religiously this quarter, first time ever, less than 365 days is a pretty big milestone for us, Less than a year, this has all kinds of implications in terms of how we ramp up net new sales, when we look at the pipeline, How we ramp up sales executives and work with partners. So that's one of the key areas that we focus on.

Speaker 2

The other, Obviously, we're studying net new wins across the segments that we serve and the size companies that we serve. And as I stated in the script, about half of the customers were in the SMB space and half were in the Enterprise space. So I think that trend continues. I think over time, obviously, the TAM Of SMB versus TAM and enterprise deals will be larger in general. They may have ramps.

Speaker 2

We're happy to do those. It's very, very common for extremely large enterprises to bake in a 3 to 5 year contract where they know what they're going to do. They just don't want to pay the full freight on year 1. It's impossible to cover every country, every theater, every product family In a short timeframe like that. So it's very common to have that ramp.

Speaker 2

And in the case of SMB, we in some cases still have ramps Because they don't choose every module right away. They start with what is most urgent and then grow it from there. So far looking at the pipeline and current activity and current state, as I said, I think we're going We're going to be talking about this net new logo

Speaker 5

surge

Speaker 2

for some time.

Speaker 3

I'll just maybe add in on that. There is so the it's a good thing To touch on, which is a number of new name accounts that we are seeing at any particular quarter and is that within our expectations. John touched on the SMB side and we haven't talked about Value out of resellers, but I'm sure someone will ask a question at some point either in this call or during today. And we had a obviously A conservative outlook as to how this would grow. We're seeing where the pipeline is right now and it is a lot bigger than what we expected at this stage.

Speaker 3

And so That will also contribute to the amount of new name accounts we come in place. But we're very happy with where That pipeline is and that will help contribute with the beats that we're seeing on you name accounts.

Speaker 8

Just one last question for me. Just on land and expand, can you speak to what's your typical expansion rate historically or just general thoughts around that? And then Can you give us a sense for the magnitude of how that's changed here?

Speaker 2

Yes. In past conversations, we've talked about looking at the whole cohort Where subscription would on average see sort of a 3x over a 3 year sorry, a 2x over a 3 year period. That would be a typical over the over past segments. Now with In cases like that, that was when we were dealing with enterprise. We had no SMB space.

Speaker 2

It's a little early now to look at The sum of both, in fact, I would expect to see those 2 cohorts having differing Ratios, looking at SMB versus enterprise. I haven't seen anything to suggest That the ramping, if you will, the subscription ramping would be any different. But I will admit that we haven't been monitoring. It's been a little earlier too early to say whether the SMB market will be yielding different ratios. We just don't have the years of history To be confident with the number.

Speaker 8

Thanks for taking the questions.

Operator

Our next question comes from Richard Tse from National Bank Financial. Your line is open.

Speaker 5

Yes. Thank you. It's nice to see the growing growth. Like you said, 300 customers plus Today, can you maybe share the mix of SMB versus enterprise in terms of the wins? And then I guess related to that, Is the cost to acquire and serve those SMB customers the same on a relative basis as large enterprise?

Speaker 3

Sure. So on the call, we mentioned that our enterprise versus, I guess, mid market and SMB is around fifty-fifty. We don't Split out the SMB versus mid market. Cost of acquisition, I'll say for mid market Is quite similar to enterprise. Once you get to SMB, especially because of the relationship with the value added resellers that are mainly Concentrate on that area.

Speaker 3

The cost of acquisition is higher. But as you can imagine, there is or sorry, the cost of The gross margin that we have at the initial deal is smaller for those SMBs. But as you can imagine, we don't have the sales, we don't have some of the support and some of the PS Issues that we have with our own business, so the contracted margins we have with that. Overall, We are continuing to evaluate and I think what John mentioned on the expansion piece of the business, as we expect A higher percentage of expansion with those SMBs, that's going to contribute to larger gross margins over the lifetime of the contracts. But as of the early days, the margins are thinner for SMBs.

Speaker 5

Okay. Thanks. And John, I appreciate your comments about sort of this $1,000,000,000 revenue target and 25% margins. But if you kind of look ahead, let's say, on the next 3 years. Like what's your kind of vision for the company from almost maybe I guess product perspective?

Speaker 5

Are you kind of Moving potentially beyond sort of supply chain planning, there were certainly glimmers of that at your recent user conference, but Maybe help us to kind of understand what the company looked like from a platform product perspective?

Speaker 2

Yes, absolutely. There's a few things that Our perhaps quite unique about Kinaxis that are noteworthy one, we have exactly one code base. We do not believe in custom coating. In fact, when I meet with prospects, I often If anyone ever tells you that they can do anything they need to be done with enough time and their money, run. This isn't the path to excellence.

Speaker 2

And so when you look at Kinaxis being able to support some of the largest CPG companies, some of the largest, life science, automotive, aerospace and defense. Now the oil and gas sector, you start seeing Quite unique supply chain is being supported by this platform. It's unbelievably exciting and certainly gives me great confidence In our journey towards $1,000,000,000 and well beyond frankly. So when I think about the next 3 years, We're going to continue along that path. I think about for lack of a better Analogy being the sales force of supply chain, being the ubiquitous golden standard Regardless of industry and regardless of size, and so some of the things that excite me, While might not be wildly financially a huge part of our business, when you close a deal under $100,000,000 it tells you that the economics work for both parties.

Speaker 2

That's a momentous thing. It's just momentous to realize that the economics work for both because now you start thinking about what kind of impact could you have on the planet If you could serve every manufacturer that does $50,000,000,000 or higher, it's just an incredible thing. Again, using this you have this company that does less than 100 $1,000,000 in revenue using the same technology as a company doing $150,000,000,000 They're using exactly the same software. So that's exciting. I think about the next 3 years, I think we're going to continue down that penetration, that land route.

Speaker 2

Leveraging RapidResponse, when I think about innovation, Kinaxis can never be the bottleneck for innovation. And so we've been focused A lot of our energy is focused on building out RapidResponse as a platform and allowing partners to create their own intellectual Property on top of that platform. That's just going to accelerate innovation for a growing market And not only growing market, a market that's desperately in need of transformation. So that to me are the sort of key ingredients to fuel the confidence behind A $1,000,000,000 and beyond. That's how I think about it.

Speaker 2

Obviously, machine learning, we have more patents in machine learning than It's so concentrated, you have no idea how many people are focused on this, focused on leveraging Machine Learning for the purpose of automating the obvious, for the purpose of demand sensing, absorbing, What I would say is unstructured sentiment and signal data that we've never been able to process before, it's unbelievable what's happening there. I think all of those things are going to be fueling a continued surge in our business.

Speaker 5

Okay. Thank you. I'll pass the line. Thank you.

Operator

Our next question comes from Robert Young of Canaccord Genuity. Your line is open.

Speaker 7

Hi, good morning. I'm just trying to understand the professional services, The amount of growth here in the quarter relative to all of the new wins and The high level of the logos, is this just a function of smaller wedge contracts that are easier to deploy? Or is there some other Dynamic at play.

Speaker 3

Sure. I'll at least start and John can always add in some color if he wants to as well. So when we think about our professional services growth, we've been doing our best to make sure our partners are involved. We like to make sure that our partner is a partner first type of organization where we want them to be focused on growing their footprint and they point to us As being the solution that they think should be used going forward. So part of the growth that you're seeing there is on that.

Speaker 3

Now We like to talk about records. Sometimes talking about records just gets boring and we don't talk about all the records. And we had a record bookings number for professional services in Q2, Which we did mention before. And we're extremely excited with the fact that we have a long runway In terms of where we think that revenue is going, but ultimately what we're trying to do is move that revenue stream As much as possible into the hands of our solution integration partners that are out there.

Speaker 5

Okay.

Speaker 7

That's great to hear. And then the win rates being strong and sales cycle decreasing to the high level of new logos. I mean, how does this change Your outlook on the sales headcount, is efficiency increasing or like do you have to expand to keep Capitalizing on all of this top of funnel activity. Now pass the line.

Speaker 3

Sure. Yes, our sales efficiency has come down a little bit from Crazy high numbers, which when I say crazy, it means like I think we were missing out on opportunities. I've mentioned this before. I think they're at the levels that are what I would say are just best in class, and they're not crazy anymore. So best in class is getting us to a position where we're pretty comfortable with the Continued growth at sales and marketing at a reasonable level rather than bring on as many as we had now.

Speaker 3

What you would see from our sales and marketing team Is that we have a large cohort of sales folks that are still early in their tenure at Kinaxis and the Productivity or the efficiency they get doesn't take place until closer to the sales cycle times that we just mentioned. So We are in early days of getting that new cohort ready to go and accelerate and expand our wins even more in the future. I'm excited to see when they get past that 12 month mark because we might see another acceleration.

Speaker 7

Okay, great. Thanks.

Operator

The next question comes from Mark Schappel from Loop Capital Markets. Mark, your line is open.

Speaker 9

Hi, good morning. Thank you for taking my question. John, just stepping back a little bit here at a higher level, could you just speak to the changes that you're seeing with respect To executive sponsorship for Supply Chain Software over the last, say, 6 months or so?

Speaker 2

Absolutely. I'll tell you Chief Supply Chain Officers are being invited to every Board meeting, not just once a year. I mean, there it's People are realizing that supply chain done well is a weapon. And so coming out of the pandemic, Many have realized, well, I'll say first many boards are asking their CEOs what are you going to do next time. Of course, CEOs aren't necessarily supply chain practitioners, so they swivel and ask the Chief Supply Chain Officer, what are we going to do next time?

Speaker 2

And oh, by the way, Board is also taking governance responsibility for ESG. There is no discipline on this planet that So Boards are saying, can you be more resilient, which basically means can you absorb volatility Faster. Can you absorb or avoid hardship faster? And oh, by the way, do less harm. And so those two narratives are colliding, Which is what I believe is causing this surge.

Speaker 2

It's causing what I often describe as a supply chain renaissance, A rebirth, people are rethinking. And look, every 30 years, you think about this, right? 30 years ago, where were we with technology? 60 years ago, where were we with technology? These types of periods cause you to rethink And adopt new ways, new techniques, that are giant leaps forward.

Speaker 2

So conversations have been really, really fascinating. There's nothing I enjoy more than spending time with practitioners and learning the new language They used to describe the pain they're experiencing. So if you were if I were to Answer the question, how is the narrative changing? Well, first, I would say there's this realization that the pain they're feeling is not a failure in technology. It's a failure in It's a failure in technique and that is what is fueling a great resurgence in this space.

Speaker 2

It's not just, hey, I need to keep doing what I'm doing only a little bit better. They're having conversations about doing things That's absurd. There's no breakthrough in that, right? Even if you get a stamp licking machine, well, that's still not going to make Communications faster, right? So this is what we're seeing now and why I'm well, as some might tell, I'm a little excited about The state of the business and obviously the state of the craft of supply chain, it's fascinating to hear the narrative.

Speaker 9

That's helpful. Thank you.

Operator

The next question comes from Kieran Srivijan from 8 Capital. Your line is open.

Speaker 10

Good morning, guys. Thanks for taking my question. I'll just start here with The NPO being rebranded and fully integrated, are you approaching certain end markets differently? Maybe a few thoughts on how your changes to the broader branding strategy given the new CMO as well?

Speaker 2

Yes, absolutely. I think I might have said this during the last earnings call that Well, I certainly have said it publicly that there may be a day people will no longer use the term supply chain planning. That's just one side of a 2 sided coin. And so with our acquisition of NPO, we're able to satisfy the needs of Supply chain orchestration is the fusing together of planning a thing and executing on that plan, Course correcting when invariably the plan never happens, right? It's one thing to plan things, it's another to actually Execute in an environment that's forever shifting.

Speaker 2

And so that's one area that of the narrative that we're seeing Change and obviously with our acquisition of MPO puts us in a very advantageous position To be able to fuse together those two elements of supply chain.

Speaker 10

Thanks. And for my second here, just looking to unpack How your AI and L solutions are positioned today? How has the competitive landscape changed with regards to any other innovative AI features you're seeing? Also how crowded is the AI Pointed Solutions Marketing SEM? And I'll leave it there.

Speaker 10

Thanks.

Speaker 2

Yes. Well, that's a great question. And as a software engineer Myself, I'm always enthusiastically researching these types of technologies. And like anything, Techniques inform technology is not the other way around. There's a lot of interesting technologies that have no value.

Speaker 2

Value is always in the eye of the benefactor. In our case, the benefactor is the Chief Supply Chain Officer. So I have as many conversations With data scientists and our PhDs in machine learning, here at Kinaxis, as I do with practitioners and work To really tie the needs of the practitioners with the abilities of the science. Now I will say there are a lot of competitors out there that are Leveraging machine learning and AI to improve a specific function of supply chain. I think that's incrementally better.

Speaker 2

There's no breakthrough in it. It's incrementalism. And so at Kinaxis, we think about leveraging Machine Learning and AI above a concurrent environment when you can start automating decisions That have implications across a vast number of processes in supply chain. That's where the breakthrough comes in. And so that's where we have been working very, very closely with innovators like Hobby, Other innovators in the CPG space that are dealing with enormous datasets where signals can dramatically impact Their demand at a moment's notice and that needs to be absorbed all the way through right through to distribution.

Speaker 2

So our machine learning AI posture and all the patents we're working on Is around that. The other area, there are many machine learning technologists out there that say it's just a really smart black box, you should just do what it says. And of course, humans don't trust what they don't understand. And so explainability is everything. Explainability is everything.

Speaker 2

Especially now, we're dealing with a lot of very smart practitioners out there that are saying, okay, I see the answer, but I don't understand it. And so a lot of our patents and a lot of our investments are going towards explainability, which is actually a technology. When you Unpack what machine learning and artificial intelligence are surfacing for you is understanding why did you surface that for me. And so this is where we are spending our energy and I think that's where the breakthroughs are going to come from. Thanks,

Speaker 5

Tom.

Operator

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

Speaker 11

Hey, guys. Martin Toner here. Congrats on another good quarter. At Connections, There were a tremendous number of new initiatives announced, very impressive. What's the OpEx impact?

Speaker 11

Would you see the OpEx impact of how busy you are there? And when should we expect EBITDA margins to start to improve?

Speaker 3

Sure. Well, obviously, I'll answer this is Martin Toner. The OpEx is it's usually in the past at this stage. So the R and D impact that we had Was something that we put through our P and L already for the most part. That's why We've talked about where we are in the progress of those initiatives.

Speaker 3

There is like Phase 2, Phase 3, Phase 4 and where Those products could go. I think Supply.ai is a good example. We have 2 main use cases That it's focused on. There's going to be more use cases in the future. We're seeing a high amount of demand already for those first two.

Speaker 3

Demand. AI is I'm just blown away by some of the results we're seeing with our Early adoption and how much better the forecasts are getting on the demand sense and demand planning side of those customers. So That's another area that we'll continue to focus. But it's going to be natural R and D investments that we're going to have in there over time. I think the sales and marketing will be the main driver of OpEx as we continue to move forward, as we try and make sure we have a good balance where sales efficiency is.

Speaker 3

But overall, we've talked about where we want our midterm targets to be for adjusted EBITDA and that's that 25% in the next 2 to 4 years. We are absolutely focused on getting to that position and I have no worries that we're going to get there.

Speaker 11

That's great. Thank you. And I apologize if I missed this earlier, but You talked a little bit about customer caution. And can you just tell us What does the pipeline look like today compared to when you announced last quarter's results?

Speaker 2

Well, recently we saw another, I'd say, tip over a record in terms of that pipeline. The shape of it It's shifting a little bit as I said as a result of our investments in the SMB space And our investment with VARs that's starting to contribute. I won't say that the VAR contribution is huge right now, but It's essentially where we expected it to be, and we're investing quite a bit of energy right now in training and preparing the VAR community To sell on our behalf, not only sell but to deploy on our behalf. And That's the commentary. I wouldn't say there's any huge shift in terms of The market verticals that we serve, I think I mentioned earlier that CPG It's definitely one of the larger segments for us.

Speaker 2

We've done exceptionally well there. And some of the names that we announced During the call are just an example and so we're seeing some continued Pipeline interest from that particular segment. I will also say maybe just to To make sure this gets mentioned as it not only relates to the pipeline, but relates to deals that are closing. We had mentioned that when we're cautious because of some delays in getting ink to dry, getting signatures done, I've been studying that very, very deliberately and that's mostly in the enterprise class for one thing. That's one thing that we've noticed And it's mostly with the very largest deals that we will see that.

Speaker 2

In fact, one of the Well, definitely one of the top three deals that we were working on slipped just outside the quarter because of such a thing, Very large in the automotive space where it just slipped outside by days. And We continue to see a little bit of that prolonging of signatures during that Process and sometimes goes back to the Board and so on. So we're not we remain confident at that stage that Inc. Will drive, but in some cases, we're seeing little slips that are elongated there. Ultimately, I think the pipeline is Strong gives us confidence in the year.

Speaker 2

Guidance gives us confidence in our ultimate midterm goals. We have little code words here at Canaccus to talk about that path to $1,000,000,000 and beyond That keep us razor, razor focused. We all have a flagpole we hang on to.

Operator

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

Speaker 12

Good morning, gents and thanks for taking my question. First question I wanted to ask on Was on Planning dot ai, it sounds like early progress has been encouraging here. Can you provide an update on some of the early Results and engagement you're seeing with initial customers and when do you expect to make a full commercial rollout? Just wondering what the factors there might be.

Speaker 2

Yes. Well, it's 1st of all, it is commercially available, make no mistake. And for those that attended Connections You know, would have seen some great demonstrations of which and some great sessions around our machine learning and AI Pascar. So I would say, in terms of results, Maybe I'll add this color, because in some cases we are replacing competitive products, which is always exciting for me. I There's only one thing I enjoy more than replacing a competitive product.

Speaker 2

It's when you get proof positive that your forecasts are 2x better And they're in some cases more than that faster. So you're faster and better, Which is very, very exciting. So obviously, we're leveraging that success with real life customer examples. Trust me, in the world of demand sensing and ingesting sentiment data and weather data and promotion data, Huge, huge volumes. And when you're able to prove that your results are not only Significantly better than something that had been being in place for decades, decades of mathematicians working on this.

Speaker 2

We step in Giant leaps forward in accuracy and a huge improvement in speed. It's just it's super exciting. So Obviously, we're working to leverage that and I think we're going to continue to see that penetrate through the customer base and through

Speaker 3

Thanks.

Speaker 12

Thanks for the color. I want to touch on supply Can you talk a little bit about how much of a role is having Execution Now with capability? How is that helping With new customer discussions on new win rates there?

Speaker 2

Yes, it's a great, great question. This is something that we came coming out of The pandemic, many people realized that material in motion was one of the biggest areas of risk. You couldn't find a container to save your life. And even you could find 1, the cost of said container was in some cases, 5, 10x, 20x more to get that capacity. And so that is ultimately what caused the urgent in fusing together the 2, I would say, Fusing supply chain execution and planning has been a topic talked about for decades.

Speaker 2

So it's not like that's new. But being able to actually produce an end to end concurrent system that actually does it, that's been relatively new. Now it's early days for Kinaxis, Certainly. We just absorbed the acquisition of MPO. It's going exceptionally well.

Speaker 2

Martin, who led that organization, Has a very, very senior role here with us. He is not only academically incredibly bright, but he understands Tremendous about business and is definitely the smartest I've met in the world of supply chain execution. So He is already infusing his intellect into our product management Function. So in terms of the impact it has on sales, in some cases, it got us in the door. And in some cases, it's an opportunity for us to Expand with our own customers And being able to offer up a supply chain execution attachment, if you will, to RapidResponse.

Speaker 2

So very early days, Let me tell you the use case is unbelievably natural.

Speaker 5

Thank you. That's helpful.

Operator

There are no further questions at this time. I turn the call back over to you, Mr. Wadsworth.

Speaker 1

Thanks, operator, and thank you for participating on today's call, everyone. We appreciate your questions and your ongoing interest and support of Kinaxis. We look forward to speaking with you again when we report our 3rd quarter results. Bye for now.

Operator

This concludes today's conference call. You may now

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Key Takeaways

  • SaaS revenue grew 25% and total revenue rose 31% in Q2 with adjusted EBITDA margin at 14%, keeping the company on track for its annual targets.
  • Kinaxis won a record number of new customers in Q2, including enterprise‐class logos like ExxonMobil, Shell, Peloton and Brita, and saw its sales pipeline reach all‐time highs.
  • Major product innovations were announced, including Enterprise Scheduling, a consolidated supply chain execution suite, sustainable supply chain planning with embedded carbon factors, and Demand.ai for advanced demand sensing.
  • Kinaxis was named a Leader in Gartner’s Magic Quadrant for Supply Chain Planning Solutions for the 9th consecutive time, positioned furthest on both vision and execution.
  • The company reaffirmed its 2023 outlook of $425–435 million in total revenue, 25–27% SaaS growth and a 14–16% adjusted EBITDA margin, while announcing key leadership appointments to support its $1 billion revenue and “Rule of 40” mid-term goals.
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Earnings Conference Call
Kinaxis Q2 2023
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