Earnings call: Kinaxis Inc. reports strong SaaS growth and record cash flow

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Earnings call: Kinaxis Inc. reports strong SaaS growth and record cash flow
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Kinaxis Inc. (KXS), a leader in supply chain management solutions, reported robust financial results for the fourth quarter of fiscal 2023, with a 24% annual increase in Software as a Service (SaaS) revenue and a record free cash flow exceeding $75 million.

The company also achieved an adjusted EBITDA margin of 18% and highlighted the launch of new offerings and AI- and ML-powered capabilities. Kinaxis anticipates continued focus on profitability and reaching a midterm adjusted EBITDA margin goal of over 25%.

Key Takeaways

  • Kinaxis Inc. experienced a 19% SaaS revenue growth in Q4 and attained a 24% increase annually.
  • Adjusted EBITDA margin stood at 18%, with a profit of $4 million for the quarter.
  • The company's cash flow from operating activities was $28 million, with cash and investments totaling $293 million.
  • Annual recurring revenue (ARR) grew to $322 million, with 60% attributed to new customers.
  • Kinaxis provided guidance for 2024, expecting SaaS revenue growth of 17% to 19% and total revenue between $483 million and $495 million.

Company Outlook

  • Kinaxis is transitioning to the public cloud and plans to invest in research and development, particularly in AI.
  • The company’s total addressable market is expanding, and they are focused on capitalizing on every opportunity.
  • They anticipate the STL revenue to double in 2025 and increase by a third in 2026, positively influencing margins.

Bearish Highlights

  • Revenue in the Asia-Pacific (APAC) region has declined.
  • Large enterprise deals are being delayed due to higher-level approvals and cash preservation efforts.

Bullish Highlights

  • Kinaxis won a record number of new customers and launched new offerings.
  • The company achieved strong win rates against competitors and is confident in its pipeline.
  • They expect professional services margins to be close to 30%, exceeding the previous target of 22%.

Misses

  • The company acknowledged they do not expect to reach the 30% SaaS growth target in the next two years, although they remain confident in their long-term goals.

Q&A Highlights

  • Kinaxis addressed questions on SaaS bookings, regional revenue performance, enterprise growth, cloud migration, and professional services margins.
  • The company discussed the importance of upselling and cross-selling to their existing customer base and their increased sales capacity.
  • They expect a future trend towards a 50-50 ratio between expansion deals and net new deals.

Kinaxis's strong financial performance in the fourth quarter demonstrates the company's robust growth in the SaaS sector and its strategic focus on innovation and customer acquisition. With new product launches and a confident outlook on profitability and market opportunities, Kinaxis is poised to continue its trajectory in the competitive supply chain management industry. Investors and stakeholders can look forward to the company's first-quarter results, which will provide further insights into Kinaxis's ongoing initiatives and market performance.

Full transcript - None (KXSCF) Q4 2023:

Operator: Good morning, ladies and gentlemen. Welcome to the Kinaxis Inc. Fiscal 2023 Fourth 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. I’d like to remind everyone that this call is being recorded today, Thursday, February 29, 2024. I will now turn the call over to Rick Wadsworth, Vice President of Investor Relations at Kinaxis Inc. Please go ahead, Mr. Wadsworth.

Rick Wadsworth: Thanks, operator. Good morning, and welcome to the Kinaxis earnings call. Today, we will be discussing our fourth quarter and year-end 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, February 29, 2024, and contains forward-looking statements that involve risks and uncertainties. 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 files. 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 our MD&A, both of which can be found on the IR section of our website, kinaxis.com, and on SEDAR+. 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 Investor Relations section of our website. Neither this call nor the webcast archive may be re-recorded or otherwise reproduced or distributed without prior written permission from Kinaxis. To begin our call, John will discuss the highlights of our quarter near, 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. We have a presentation to accompany today’s call, which can be downloaded from the Investor Relations homepage of our website. We’ll let you know when to change slides. I’ll turn the call over to John.

John Sicard: Thank you, Rick. Good morning, everyone, and thank you for joining us today. I’ll be starting with Slide 4. Let me start by saying how proud I am of the Kinaxis team. We delivered a very strong annual SaaS growth of 24%, balance with profitability that came in above expectations. Our adjusted EBITDA margin for the full year was 18%. And we had record free cash flow of over $75 million, more than 70% higher than ever before. In Q4, we experienced SaaS revenue growth of 19%, and adjusted EBITDA margin of 18%, which allowed us to finish the year within all our updated guidance targets. We had a huge quarter for renewals, a testament to the incredible value our customers derive from leveraging our unique concurrency approach to managing supply chains. As one noteworthy example, iconic consumer products company, Bosch, was both the renewal in the quarter and a source of significant new ARR, thanks to expansion activity. Bosch confirmed their longer-term commitment to Kinaxis as the platform of choice for supply chain planning. Together, our net customer wins, expansion into the base, and renewals activity fueled a record RPO level, both in total and for the SaaS element alone. SaaS RPO grew 28% from the end of Q3, and a 3-year CAGR is a healthy 26%, demonstrating our exciting growth over a period of time. Now moving to Slide 5, I’m thrilled to say that we won a record number of new customers, both in Q4 and for the full year. This is an impressive accomplishment that reflects, in part, our success across some key growth strategies that I’ve talked about before. For example, we won a record number of mid-market customers. A growth strategy, we initiated just over 3 years ago, and has now become a meaningful part of our business today, and is creating great expansion opportunities for our future. We also want a record number of small customers through our value-added reseller channel, which is just over a year old and ramping up quickly. In all, over 40% of our new wins this year came from our mid-market or smaller customers, including through VARs. As we’ve mentioned in the past, we continued our efforts to moving customers into the public cloud infrastructure. And I’m happy to report that we deployed the majority of our new customers in the public cloud through 2023. In fact, in Q3 and Q4, almost all our new customers were launched from either GCP or Microsoft (NASDAQ: MSFT ) Azure. Given the economic backdrop in 2023, our focus was to simply win the customer. And I’m extremely pleased we did that at a record pace. On previous calls, in 2023, we talked about adding customers like ExxonMobil (NYSE: XOM ), Volvo (OTC: VLVLY ), and Hobby, who is trusted by the world’s largest quick service restaurants to handle their supply chain management needs. To that impressive list, you can now add global names like performance running leader, Brooks Sports, Switzerland-based global agricultural technology giant, Syngenta, which has over $30 billion in sales. France-based global pharmaceutical group, Servier, who is 20,000-plus employees make critical cardiology, oncology, and other drugs. Italian cosmetics leader, Intercos, who provides behind-the-scenes research and innovation for some of the world’s biggest makeup lines. Norma Group, who create the clamps and connectors and systems that keep water and other vital fluids flowing smoothly for industries and for society globally. And finally, KIK Consumer Products, a leading North American private brand manufacturer delivering top-tier national brand equivalent cleaners, bleach, laundry, and dish care products. Our gross customer retention rate remained at an elite level in 2023, solidly in the 95% to 100% range that we target. And our win rate against our top 3 competitors remained very strong, closing over 60% of the deals we pursued against them in 2023. And none of the 3 had a winning record against us. Even with this success, I do see room for improvement as recent additions to our sales team continue to gain tenure with Kinaxis. And as we continue to offer more value to RapidResponse. I’m on Slide 6, today, we are the global leader in supply chain management, empowering businesses of all sizes to orchestrate their end-to-end supply chain network from multi-tier strategic planning through down to the second execution at last mile delivery. New offerings that we have recently launched like supply chain execution, enterprise scheduling, sustainable supply chain, and Planning.AI offer an additional opportunity for growth in 2024 and ahead. In January, we launched AI- and ML-powered capabilities, tailored to help retailers manage the complexity of their operations at a massive scale, including tens of thousands of locations, countless SKUs, constant promotions, and complicated inventory variables. These innovations include a brand new replenishment planning capability for optimal restocking, as well as retail specific enhancements to Demand.AI and Demand Planning. The retail market is the largest of any we serve in terms of number of potential customers and we’re excited to further penetrate this under supported vertical. All these innovations will help us win new customers and expand within our install base, where we now have a dedicated team focused on driving results. In 2023, additions to our annual recurring revenue were split roughly 60-40 between new customers and expansion with existing customers. We have a massive opportunity to penetrate this rapidly growing group further, and I am pleased to see early success from this team. On to Slide 7. I mentioned last quarter that our business development team indicated a record number of initial meetings with prospects, a stage in the funnel development prior to our pipeline. I’m pleased to say that the team hit another all-time high in Q4, helping to drive a new all-time high for our work order rolling pipeline, which is reaccelerated for the first time since early 2023. We’re mindful of ongoing uncertainty in the macro environment, but we’re encouraged by these green shoots of improvement. As mentioned on our last call, we have been intensifying our focus on profitability and are in great shape to do that. In 2022 and in 2023, we made important investments in sales and other functions that put can access in a much stronger position across our business. In 2024, we will take advantage of ongoing operating leverage to continue to market towards our midterm goal of 25% plus adjusted EBITDA. I’ll now turn the call over to Blaine to review the financials for the quarter and year, and discuss our outlook in detail. I’ll conclude with a few remarks after that. Blaine?

Blaine Fitzgerald: 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 8, I’m pleased to report fourth quarter results that delivered on our performance goals for the year. Total revenue in the fourth quarter was up 14% to $112 million, which is affected by the normal subscription term license revenue cycle. Our SaaS revenue grew 19% to $69.9 million, and our subscription term license revenue was $2.9 million versus $9.1 million in Q4 2022. Subscription term licenses largely hold the normal cadence of renewals among our small group of on premise customers are those that have the option to move their deployments on premise. Professional services activity resulted in $34.3 million in revenue, so 31% growth over Q4 2022. Our reflection of the record number of customer wins in the quarter and year. We remain focused on being partner-first when it comes to delivering professional services, but obviously we’re very pleased with this result. Maintenance and support revenue for this quarter was $4.9 million, up 12%. Fourth quarter gross profit increased 12% to $68.9 million. Gross margin in the quarter was 62%, the same as the comparative period. Software gross margin was 76% compared to 80% in the comparative period, reflecting both the lower subscription term license level and the duplicative cost related to our public cloud transition. Shortly, I’ll talk about normalized results that adjust for these two factors. Professional services gross margin was extremely strong at 29% compared to 13% in Q4 2022 due to our favorable pricing environment and ongoing efficiencies in delivering projects. Adjusted EBITDA was $19.7 million for an 18% margin compared to 21% in the fourth quarter last year. Our profit in the quarter was $4 million or $0.14 for diluted share compared to $0.30 in Q4 last year. Again, these results were affected by the two factors I just mentioned. Cash flow from operating activities was $28 million compared to negative $2.3 million in Q4 2022. Cash equivalents and short-term investments grew $293 million from $225.8 million at the end of 2022, and even up from $290 million last quarter, despite significant investments in a share buyback, which I’ll discuss momentarily. Our record free cash flow for the year was $77.1 million, up from $6.3 million in 2022, and more than 70% were $30 million higher than in any previous year. The free cash flow margin was just over 18% and slightly higher than our adjusted EBITDA margin in 2023. Our goal is to deliver a trailing 12-month free cash flow margin that more closely mirrors our adjusted EBITDA margin. So we are pleased with this progress. We remain highly focused on being a strongly cash-generative business. On Slide 9, our annual recurring revenue, or ARR, grew to $322 million, an increase of $18 million over Q3, which is over 60% higher than additions in any other quarter this year. Year-by-year, the ARR balance grew by 18%, which is less than its full potential given cautious spending in the uncertain macro environment throughout 2023, as we’ve discussed throughout the year. Significantly, roughly 60% of our annual growth in ARR came from new customers. Many software and supply chain peers rely much more on upsell activity for growth than we currently do, and that’s a huge opportunity for us to head. Moving to Slide 10, at quarter end, our total remaining performance obligations, or RPO, left 25% over the Q3 balance to a record $741 million and gained 24% from the year ago period. Of the RPO in total, $701 million relates to SaaS business, up 28% sequentially and 27% year-over-year. The 3-year CAGR for a total RPO is 25% and 26% for a SaaS RPO. I encourage you to focus on these excellent longer-term results as quarterly results fluctuate significantly with normal renewal cycles. Our fourth quarter was characterized by both strong ARR additions as well as very strong results. Of the year-end SaaS RPO amount, $274 million converts to revenue in 2024, representing roughly 88% coverage of our full-year SaaS guidance at the midpoint. Further details on our RPO can be found in the revenue note to our financials. I will leave it to you to review of our full year 2023 results in greater detail, but let me just reiterate what John said about our very strong performance. Our SaaS growth of 24% is a standout result in an unusual year, and even after making important investments, we delivered an adjusted EBITDA margin of 18% or 4 percentage points above the midpoint of our initial guidance for the year. We also achieved record-free cash flow in the year, won a record number of new customers with a 60% plus win rate against key competitors, and maintained 95% to 100% growth of customer retention. I’d like to thank the whole financial team for such exceptional results. As we move to Slide 11, we are initiating our 2024 guidance. By far the biggest determinant of annual SaaS growth is the ARR growth rate entering the year. As you know, we published ARR precisely to give you a good leading indicator of our future SaaS growth trend. For example, we ended 2022 with 24% ARR growth and grew SaaS revenue 24% in 2023. Of course, the relationship is not always one-to-one like this, but ARR growth and its directional momentum is by far the most important factor. We expect that the connection between these two metrics will only become tighter as SaaS business has an ever-increasing portion of ARR. We exited 2023 with 18% ARR growth, and quarterly expects SaaS revenue growth of 17% to 19% in 2024. As John pointed out, we’re seeing some encouraging green shoots of improvement in the environment and this could start to benefit ARR growth in 2024. We expect total revenue of $483 million to $495 million or 13% to 16% growth. This reflects 2024 as the lowest part of our normal subscription term license revenue cycle for which we expect $9 million to $11 million in the year. Roughly 50% of the amount expected in Q1, 10% in Q2 and the remainder split relatively evenly over the back half of the year. Looking further ahead, subscription term licenses should roughly double from 2024 to 2025 and then increase approximately another third from there in 2026. We expect a gross margin of 60% to 62% and an adjusted EBITDA margin of 16% to 18%. Both margin results are affected by the normal low point of the cycle for subscription term license revenue, which carries near 100% margin and the duplicative cost related to our public cloud transition. With respect to CapEx in 2024, we expect to invest approximately $10 million to $11 million, including approximately $8 million for a private hosting infrastructure. We would expect to invest significantly less in our data centers in 2025 as we continue to work towards a public cloud first model. Moving to Slide 12, as we discussed last call, we’ve been gaining operating leverage and intensifying our focus on profitability. As you can see that trend continues throughout 2023, as operating expenses continue to decline as a percentage of normalized revenue. Normalized revenue averaged our subscription term license revenue over a rolling 4-year period to approximate related contract terms. In 2024, we expect this trend to continue directionally. Our investment allocation will shift someone as we absorb previous investments in our sales force and focus new investment into exciting R&D initiatives, including AI. I’ll now take a few minutes to walk through the impact on 2023 results and 2024 guidance of the normal subscription term license revenue cycle and our public cloud transition. Turning to Slide 13, as you know, due to accounting rules, our reported subscription term license revenue is highly variable between periods despite a very stable underlying business. Averaging that revenue over a 4-year rolling time frame, as I described a moment ago, provides a better view of normalized software gross margin and adjusted EBITDA margin. Our use of public cloud started modestly in 2022, accelerated in 2023, and will continue to expand rapidly throughout 2024 and 2025 to become our default hosting choice for the small amount of private hosting remaining. In the meantime, we are incurring certain public cloud migration costs and significant duplicative costs of supporting two infrastructures, including public hosting fees that aren’t added back to either through depreciation as the servers in our private cloud arm. The analysis on this slide estimates an apples-to-apples view that allows you to better compare our margin achievement with past performance. On this basis, for 2023, normalized adjusted EBITDA was 21.5%, and you can see the separate term license in public cloud transition impact. Our normalized software gross margin for 2023 was 77.8%. For 2024, we expect our normalized adjusted EBITDA margin guidance would be 24% to 26%, including a normalized software gross margin of 78% to 80%. In short, both our software gross margin and adjusted EBITDA are moving in the right direction on this apples-to-apples basis. We are confident that in the next 1 to 3 years, under our public cloud first model, we will achieve our midterm adjusted EBITDA margin target of 25% plus. This target is based on normalized revenue to remove the year-to-year volatility of subscription term licenses. On Slide 14, since our Q3 results call, we have been very active on our normal course issuer bid, which allows us to purchase up to 5% of our stock for approximately 1.4 million shares. During the 3 months ended December 31, 2023, we repurchased approximately 329,000 shares for a total investment of roughly $36.6 million. We are pleased with these investments. As I reflect on my 4-year anniversary at Kinaxis, I’m extremely proud to be able to say that our customer base, revenue, free cash flow, RPO, and pipeline have all more than doubled over that time. And it feels like we’re only getting started. Our market is in early stages and in excellent shape. We have an excellent competitive win rate and elite customer retention rate. We’re addressing companies of all sizes in more verticals than ever with more products than ever to sell. These are the fuels of our long-term growth engine and we are fully focused on reaccelerating growth as we move forward even as we improve profitability. The last 4 years have been fun, but I can’t wait to see what happens over the next 4. I’m looking forward to kicking it off in 2024. With that, I’ll turn the call back to John.

A - John Sicard: Thank you, Blaine. Moving to Slide 15. As you’ll remember in 2023, Kinaxis was recognized by Gartner (NYSE: IT ) in the very top right corner of their Magic Quadrant, positioned furthest in the completeness of vision and perhaps even more importantly for our customers and prospects highest in our ability to execute. We were the first and only vendor to ever achieve that distinction. It was the 9th consecutive time we were named a leader in the Magic Quadrant, and it goes a long way explaining the strong win rates and retention rates I mentioned earlier. On Slide 16, while we are clearly an established leader, it’s also true that our opportunity is just beginning. We have more than doubled our customer base in just the past 3 years, with 2023 being the biggest contributor yet. Today, we serve companies that help keep more than 100 billion teeth clean each year, ensure more than 35 million pets are fed nutritious meals each year. We help caffeinate over 85% of Canadians serve quick served coffee. We help supply 75% of all tofu products in the U.S. We help support historic human journeys into space. There’s so much more. The market for supply chain management is in excellent shape, and I believe its renaissance will continue for many years to come. Efficient and resilient supply chains require concurrency of the foundation, and as reflected through our many new patents, our advancements in applying artificial intelligence, machine learning, and generative AI to that foundation is the path to what I believe will be the new gold standard. More importantly, this new gold standard will be accessible to all manufacturers, from small size to enterprise, and eventually for all market verticals. Our TAM is growing, and we are working hard to serve every last opportunity that presents itself. Thank you for your ongoing interest in Kinaxis. I’ll turn the line over to the operator for Q&A.

Operator: [Operator Instructions] Your first question comes from the line of Daniel Chan with TD Cowen. Your line is open.

Daniel Chan: Hi, good morning. Really good booking for this quarter. But as you highlighted in the prepared remarks, it also implies that the SaaS RPO is 88% of the 2024 SaaS guide. I guess that implies a lower proportion of deals are expected to close in 2024 than historically. I guess, we would have expected more deals closing as the pipeline matures. You talked about the sales team moving up the learning curve this year. And I believe you revised your sales cycle of 12 months in the filings down from 18 months. So how do we reconcile the implied lower deal closings when these dynamics would suggest otherwise?

Blaine Fitzgerald: Yeah, thanks, Daniel. Good question. You, obviously, are referring to the fact that we have committed RPO for SaaS around 88%, against, what we’re guiding right now. SaaS here is about 86%. And, we obviously don’t include the termination clauses, so any options there for termination clause or any renewals that are in that, that number that may came coming in well. So we don’t think that there should be a slowdown in 2024. We do think that they’ll continue to accelerate. We see a lot of opportunities. Our pipeline, as we mentioned, is at all-time high. So, right now, it’s a matter of executing the way that we know how to in 2024.

Daniel Chan: Okay, thanks. Maybe some more details on the geographic, on the different geographies as well. If we look to APAC revenue declined by 17% in Q4, I think it was also down 18% in Q3. U.S. growth seemed to slow to 6%. Are these due to one-time revenues in the comparable periods, or was there any change in customer churn? Any color would be appreciated. Thank you.

Blaine Fitzgerald: Overall, I think, every year we have different areas that grow faster and slower versus other areas. I think the main thing that we’ve seen as EMEA did extremely well in 2023 is probably one of our strongest years that we’ve ever seen with EMEA. North America, I think, was a solid year. It’s our largest region by far. And so we don’t see as much variance from that area. And in APAC, we’re continuing to grow our presence there. We have a new leader, which we are very excited about some of the opportunities that we have in front of us right now.

Daniel Chan: Thank you.

Operator: Your next question comes from the line of Thanos Moschopoulos with BMO Capital Markets. Your line is open.

Thanos Moschopoulos: Hi, good morning. Just given that mid-market has been ramping and the retailer channel has been ramping, I guess the implication is that enterprise growth has been subdued. So if you could expand on that, I guess, some of its macro and as you’re looking to maybe better environments. But, I mean, our expansions from existing customers unfolding at the pace you’d expect in terms of new initial wins, our sales cycles starting to look better or are they getting worse? Just any color in the enterprise dynamic would be helpful. Thanks.

John Sicard: Yeah, so in 2023, I’d say the enterprise customer wins were roughly identical, I’d say to sort of small- to medium-size. Certainly, we saw an uptick in small- to medium-size as it relates to our work with bars. The enterprise market is still a massive opportunity for us. We mentioned before ExxonMobil, Hobby, Volvo, in the past, we had the biggest deal was an enterprise account expansion in Q4. That was the biggest that we had for the year. So it’s still extremely healthy. On the energy sector, we talked about ExxonMobil, I want to say we have 3, maybe 4 of the top 5 in the world. So we’re just getting started there. These are companies that turn over roughly $400 billion in revenues. They’ve got quite complex selection. And so we’re not slowing down there by any stretch. So I don’t – to answer your question, Thanos, I wouldn’t say there’s anything peculiar about enterprise in the market today.

Blaine Fitzgerald: Maybe I’ll add into this. We have actually two segments that we look at enterprise. There’s enterprise and there’s what we consider large enterprise. And year-over-year, we have seen the large enterprise slow down compared to what we saw in 2022. And that was particularly because of the sale cycle we have attached to those particular size of companies. As you mentioned really well, the mid-market is on fire right now and it grew extremely well year-over-year. Enterprise grew year-over-year, but large enterprise, those really, really big guys, is taking a lot longer getting over the line on some of the deals.

Thanos Moschopoulos: So just to clarify, if you look at maybe the discrepancy between the growth through guiding for SaaS revenues, this year versus what you’ve done historically and versus your 30% long-term aspiration. Would it be primarily that very large enterprise that would be the main factor and then just directionally has that gotten any better or worse in recent weeks?

John Sicard: Yeah. So, overall, we’re going to have a different mix than we anticipated to get to where we are. We need our mid-market, we need our SMB to grow faster than enterprise and large enterprise just because of the nature of how many customers we have or the customer profiles we have right now for those size of customers. But as large enterprise we expected to keep coming, but they’re still in our pipeline it’s just a matter of they’ve been sitting in our pipeline longer than we had seen in 2022.

Thanos Moschopoulos: All right. I’ll pass the line. Thanks.

Operator: Your next question comes from the line of Doug Taylor with Canaccord Genuity. Your line is open.

Doug Taylor: Yeah, thank you. Good morning. I appreciate the detail you provided on Slide 13 with respect to the normalization of your costs. Blaine, a couple of questions here on the public cloud transition. I believe last time you said you were ahead of schedule. Can you update us on the status of the migration and perhaps speak to when, if at all, over the course of this year, we’re going to see the pressure from those duplicate costs start abating, if at all?

Blaine Fitzgerald: Yeah, good question. So, overall, I think we’re on track and you’re right. I would say in Q2, we got a little bit ahead of our skis and we’re migrating faster than even what we would plan and what we wanted. Obviously, there’s an optimal time to do the transition and to do the migration, so that we can offload some of our costs at the right time that come from the private cloud and then, obviously, turn it up on the public cloud side. But there’s also the optimization that you have from the cost that you have with either GCP or Azure that we are going through, obviously, a process of decreasing that unit cost and unit economics over time. What we’ve done is we’ve actually looked at region by region, and we have the first region that is, which should be 100% migrated over, will happen in 2024, and that will be probably the APAC region. From there, we’re obviously looking at EMEA and North America to come online as well. But what we’re trying to do as much as possible is make sure the economics make sense for this migration so that we can actually reduce the duplicate of costs, but also make sure that we do that in an optimized fashion.

Doug Taylor: Okay. So in that, are you saying then that, even with the 6% public cloud normalization that we see here for fiscal 2024, that is inclusive of some relief on to some degree by the end of the year?

Blaine Fitzgerald: Yeah, there should be some relief. Some of the one-time migration costs that we’re seeing right now will be alleviated, I think, by the end of this year. There will be all the APAC duplicative costs that will be removed. And it doesn’t mean that we’re not still migrating North America and EMEA. We’re just not doing 100% of it at this stage. Part of the reason we’re doing that is because of technical capabilities and part of the reason is because of cost effectiveness. But by the end of this year, we should see some reduction in that duplicative cost segment.

Doug Taylor: Okay, and let me just ask a question on the professional services organization, two parts. One, once again had a pretty impressive margin result. They’re almost 30%. I think you referred to it as extremely strong. So I’ll reiterate the question is to the sustainability of those kinds of levels in the near- and medium-term. And then the second part, I think, from your guidance here would suggest ongoing growth of your professional services kind of in line with the SaaS revenue growth for this year. I just want to gauge your ability and willingness to continue to expand at that same pace here in the coming years.

Blaine Fitzgerald: Yeah. Again, a good point. We are trying to move more and more towards partner first. I think we’ve been saying it for the last number of years, we’re trying to. I would say that we’ve got some exciting developments on some of the partner side that I think will help accelerate this over the next year. Things that we can’t talk about at this stage, but we do believe there is a path forward to start to reduce the amount of professional services that we’re taking on and to, again, put that in the hands of our partners before ourselves as we move forward.

Doug Taylor: And just to double back on the margin question for professional services, and then I’ll pass the line.

Blaine Fitzgerald: Sure. For margins, yeah, we’re streaming out to come in close to 30% or hitting, I guess, 29% for our core growth. It’s opening our eyes to, again, the pricing strength that we have in place, as well as the utilization of our team to make sure that we’re getting the most out of them as possible. We had always said that, I think, that the ultimate place for us to land is around in 80%-20%, where we have 80% margins on the subscription side and 20% on the PS side. But at the same time, we’re starting to open our eyes thinking that there might be more margin available on the professional services. So we do think that there’s still some expansion. The full year is around 22%. And, I think, there’s some expansion on top of that. So we are planning right now for a little bit higher margins on that front going forward.

Doug Taylor: Thank you.

Operator: Your next question comes from the line of Paul Treiber with RBC Capital Markets. Your line is open.

Paul Treiber: Thanks very much, and good morning. Just wanted to hone in on renewals. You commented on the prepared remarks that renewals really strongly saw in RPO. What trends are you seeing across the board in terms of renewals? Is there typically expansion included in it? Any change in duration? And then are you benefiting also from any pricing changes?

John Sicard: Yeah, so on the renewal front, a couple of considerations. One, it is not uncommon to hit a renewal period that has an expansion component to it. We certainly track that. And then in the fourth quarter, we had a rather large 7-year renewal with big expansion, which is really a testament of a company who absolutely is doubling down on our approach and basically baking in their next 7 years with us. So we are seeing those types of negotiations. As I mentioned earlier, as well our churn is very low, our renewals is north of 95% to 100% of what we target. I consider that to be, if not best-in-class, near best-in-class, and elite performance. In the fourth quarter, in terms of that particular renewal, we saw it coming. We didn’t necessarily see the magnitude of the expansion in the number of years is not common to go for 7 years is not common, and it’s more common to see 3 and 5.

Operator: And your next question comes from the line of Stephanie Price with CIBC. Your line is open.

Stephanie Price: Hi, good morning. You mentioned in your prepared remarks that the pipeline exit at Q4 at an all-time high with gross reaccelerating. Just hoping you can dig into that statement a little bit when you think about the ARR growth in the quarter, which was kind of flat sequentially in what’s typically a seasonally strong quarter. How do you think about that pipeline converting into ARR growth and ARR growth accelerating from here?

John Sicard: Well, we’re certainly feeling pretty good about our win rates against our top three competitors. We’ve been tracking that. We have, what I might call, repaired a few failed deployments in the process and taken some business back from those competitors. And so that, I think is voting well for the pipeline as we move forward. We’re also tracking very strong sales experience as we enter 2024 as well. And based on what we see and, of course, we’re listening to other vendors and what they’re saying about macroeconomics and the condition out there, certainly it’s not what I would call predictable. But the fact that we’re looking at is that we have doubled our accounts in 3 years. We’ve just had 2 years in a row with record breaking net new wins. 2022 is a record breaker of net new ads and 2023 beat that number. So we’re feeling pretty good about the health of the pipeline. We’re feeling good about not seeing any, what I’d say, concentration problems in the pipeline. It’s healthy in all geographies and all verticals.

Stephanie Price: Thanks for the color. And then, Blaine, maybe one for you, just on a little bit more details around that cloud normalization. And thanks for the color in the slide there. I just wanted to dig into it a little bit more. So if you think about fiscal 2025, should we expect the overall public cloud cost to come down or other costs related to the North America and EMEA transition that could offset the end of the APAC transition? And maybe related, can you just touch on that private cloud CapEx you mentioned in fiscal 2024?

Blaine Fitzgerald: Sure. So public cloud costs in across the board is going to go up. I think that’s a definite that’s going to happen in North America, APAC and EMEA. We still have a growing footprint in EMEA and APAC if we haven’t gotten 100%. We are still having a significant percentage that has moved over. So we should see that go up. But I think what you might be asking for, you’re looking at, is the duplicative cost. Is that percentage going to be as big as it was in 2025? The answer is no. That should shrink specifically because of APAC, but also because of some of the optimization things that we’re doing with the, I guess, across the globe with public cloud on the unit economics, which we expect to decrease significantly over the next year. In terms of CapEx, so we mentioned that we’re investing or we should be putting around $8 million of CapEx that are related to private cloud in 2024. One of the reasons is that we’ve always had this belief that we want to have a hybrid environment. We have obviously the environment with GCP, we have the environment with Microsoft Azure, but we will also have that private hosting element as well, because there are going to be some situations, particularly because of, essentially, security and some of our aerospace and defense that don’t want to be on a public cloud environment, where we’re going to have to keep it on our own private cloud. And so we do have some investments that we have to maintain over time. Interesting happens that it’s coming due in 2024. I expect there will probably be a smaller portion in 2025. But it will be something that we’ll have to maintain going forward. But as a percentage of our total revenue, it will be a small portion as we grow.

Stephanie Price: Okay. Thanks for the color.

Operator: Your next question comes from line of Kevin Krishnaratne with Scotiabank. Your line is open.

Kevin Krishnaratne: Hey, there, good morning. Again, on the ARR, if I actually look at it on an ex-FX basis, it looks like it picked up slightly from 17% to 18% sort of what drove that? And then more bigger picture question actually, I know that that ARR growth does sort of blend in the term and the SaaS. So if you did 18% end the year on ARR, can you give us a sense of what the SaaS ARR growth would have been?

Blaine Fitzgerald: Yeah, it has picked up a little bit. And in fact, if you look closely, it is a slight record in our net ARR that you would see in terms of what we had in Q4. It almost looks like it’s the same as what we had Q3 of 2022, but technically we’re slightly ahead. But we don’t break out the SaaS portion versus the term license portion of ARR. But I can tell you that the term license is a much smaller piece of that total amount, less than 10%.

Kevin Krishnaratne: Sorry, It’s less than 10% of your ARR.

Blaine Fitzgerald: Yeah.

Kevin Krishnaratne: Got it. So it’s probably pacing a bit higher. I’m just trying to think about how do we think about sort of the SaaS revenue set point sort of as you had in the Q1. I know you’ve given us the guide for 17% to 19% for the year, but just thoughts on the starting point for Q1?

Blaine Fitzgerald: We don’t give guidance for the quarter. Yeah, we don’t provide guidance for Q1. We’re feeling confident in the full year and that we should be able to achieve our guidance.

Kevin Krishnaratne: Okay. Got it. No, fair enough. And this is another one for me, just on the competitive win rate, you mentioned 60%. Has that gotten better? How’s that trending? And if you are losing against those three, what are some of the key reasons for why that may be the case?

John Sicard: Yeah, it is getting better, I think, as I just recently mentioned, in fact, we’ve been engaged in repairing some challenges with our competitors and coming in to repair those deployments, and we’ve been doing quite well in the win rate as well. Some cases, we are in a situation where we might be in a vertical that Blue Yonder has a stronger presence in. We’re not all equally strong in every market vertical. We’re not equally strong with every use case. And so, I’d say, if there is any challenge and, again, our win rates have been north of 60%. If there isn’t a challenge, we might see it in a market segment where it’s a little more nascent for us and it’s a little more mature to that. The same could be true in situations where use cases are a little more nascent for us and very mature for a particular competitor. As it relates to SAP, they’ve been omnipresent for as long as I’ve been here, and it’s been decades. They’re the incumbent. And so, the other side of the equation that we will see is losing to do nothing. Where somebody says, I’m just going to stay the course with what I own and not make any further investments this year. Interestingly, though, even in the current pipeline, we’re seeing a very similar situation where somebody made that choice in the life sciences space 3 years ago and are now coming back to us. And, much of that is, I think, the reflection that continuing to leverage legacy approaches, while one might say that’s economically sound, it certainly challenges, it relates to building, I’d say, a sustainable and efficient and resilient supply chain. And so, that’s how I would provide color on that question. In some cases, competitors that are stronger in particular vertical. In some cases, more so SAP, where we’ll see an account do nothing.

Kevin Krishnaratne: Got it. Thanks for that. I just want to flip one last one in. I didn’t see it in the deck, but are you guys still committed to the 30% SaaS growth outlook longer term and 35% EBITDA margin? Thanks.

John Sicard: Yeah, so for let’s just go back to, I think it’s a longer term. We gave midterm outlook for SaaS growth of 30% last year, and we also gave the 25% EBITDA margin. So let’s talk about the 30% first. At this stage, I will say that the math has changed from because 2023 and that we don’t see it in our next 2 years. But as you rightly pointed out, is that the single target for us? Absolutely, we think that we can get there. For all the reasons that we talked about on the call, at that great retention rate, the fact that we have these low yield customers that are driving a committed RPO, that’s the highest it’s ever been. We think that we are in a position that with our new modules, with the new verticals we’re going into, that it is something that we have to have this targeted there because we know it’s capable. But I will say in the next 2 years, I don’t have a site to 30% at this stage. And the 25% of adjusted EBITDA, absolutely we think that we’re all on that path. We think we’re going to do it in the next 1 to 3 years and that it will be sustainable over a long-term. After that, I think as you mentioned, do we think we can get up to 30% and 35%. We do think that’s a long-term target similar to where we’re putting that status revenue growth number at 30% as well.

Kevin Krishnaratne: Okay, thanks. I appreciate the color.

Operator: Your next question comes from the line of Richard Tse with National Bank Financial. Your line is open.

Richard Tse: Yes, thanks. I just wanted to know if you guys could elaborate a bit more in terms of what’s holding back these large enterprise deals. Is it just macro or is there some other reason? Mainly because I think you talked about sort of the last question sort of seeing a course towards this sort of accelerating growth. And now that seems to be the color [ph] in terms of the moderating growth. So just really try to understand what’s happening on that large enterprise side?

John Sicard: Yeah. So, Richard, I’d say a couple of things. One, I’m going to reiterate what I’ve said in past calls and we continue to see this. And one of the larger deals in the fourth quarter, which felt quite assured, was delayed as a result of CEO and board-level signatures that were required. And those types of delays, it appears that large enterprise, that is more common. We’re seeing that more common for the larger and extremely large enterprises. And I can maybe surmise that’s cash preservation reaction, let’s just say, by those accounts. And, certainly, there’s competition for dollars in large enterprise. So that’s one of the challenges we’re seeing. The other is less so a situation where we’re not getting those deals across the line, but they’re getting smaller. People are taking right-sized chunks and paying for their journey as they go. And that’s another trend that we’ve seen even in, what I’d say, the ultra-high enterprise. Now, interestingly, and this has happened multiple times. It happened in Q4 where following very successful deployments with extremely large enterprise, the expansion comes in at the size that we would have expected in whole, in the past. So, in some cases, we’re seeing a delay in the expansion. People are starting their projects in a much smaller footprint, proving it out. And if we get to that proof point, the expansions bring those enterprises back to their, what I’ll call, full potential.

Richard Tse: Okay. And so, when it comes to the pipeline, can you maybe comment about the mix between large and then mid-market versus small?

John Sicard: It hasn’t really changed that much as it relates to our win rates approximately 50% of our wins were large enterprise and 50% were small and medium. Our VAR program now has, I believe, 30 partners. Don’t quote me on precisely that number, but it’s close enough, approximately 30 and we’re adding more. These are third-party resellers and geographies that we’re not in serving, serving a candidate we’re not going after directly. So, I think, we’ll see as a mix of net new wins. We’ll be grabbing land through those mechanisms. But we still have a very healthy pipeline of enterprise deals that you’ll hear about throughout the year.

Richard Tse: Okay. And just one last one for me. You’ve made a lot of organizational changes, I think over the past, call it, 12 months, especially on the sales side. So, when it comes collectively to those changes, what do you think you are in terms of your peak productivity, or in terms of where you want that group to be? or Are you three quarters away there, 90% there? Just trying to understand, what point of scale you’re out there?

John Sicard: Well, like any business, I’m always looking for operational efficiency. In some cases, we have individuals that have planned retirements and things of that nature. So that’s not uncommon. And certainly, we look at organizational structure, for me, anyway, I think about the next 3 to 5 years and make adjustments based on that thesis. So, I don’t think there’s anything really to call out other than normal course business operations.

Richard Tse: Okay. Thanks.

Blaine Fitzgerald: I’ll give you with a little bit of color on that. I think one of the other things you were asking about is, so we had around 29% year-over-year growth in sales and marketing. And a large reason for that was because we increase our headcount on the sales team at the back half of 2022 and the first half of 2023. And what we’re seeing obviously is getting to that 18-month range, which is where our account execs get extremely productive. There are 3.5 times more productive than someone who’s less than 12 months is an example. And we’ve gone through a process of maturing and getting that tenured AE in place over the past year. And so, we’re expecting to see higher productivity from that team as we go into 2024 as more and more of the reach that 18-month range.

Richard Tse: Okay. Got it. Thank you.

Operator: Your next question comes from line of Christian Sgro with Eight Capital. Your line is open.

Christian Sgro: Hi, good morning. Could you comment on the typical expansion motion with the newer customer? Sometimes they sign on maybe for less than they would have in the past to get going for you upselling capabilities, new sites of geographies over time? How does that expansion effort look on average?

John Sicard: Yeah, the most typical is geographies, especially for large enterprises, it’s not uncommon for them to tackle the use case, focus on a geography, build a blueprint and then rinse and repeat. And so for us that geographic expansion leads to both, two dimensions with growth, let’s just say, but certainly on user counts and things of that nature. And I would say that’s the most typical that we would see. It is also for companies that are more mature geographically where they have a foundation across their entire enterprise, then they’ll look to expand different use cases. They may start with sales and operations planning, for example, and start moving into inventory optimization or other components that business after the fact. So it’s a bit of a mixed bag there with the one caveat that most of it is geographic.

Christian Sgro: Okay, that’s helpful. And then plenty of cash on the balance sheet and buybacks are used to capital this year, but what are your thoughts on M&A, and your appetite for M&A, as you look at it the outlook 2024?

Blaine Fitzgerald: Yeah, under the right circumstances, M&A is open. We have a new head of corporate development who’s been here with us for about a year now. Obviously have a healthy pipeline of opportunities that we’ve been looking for, but hopefully as any good and thoughtful company, we’re very picky about what we want and meet the needs of our product, and we don’t want to have something that we’re requiring technical debt, obviously. We also have a company that is trying to grow our profitability, so I don’t want to have anything that’s going to stand in the way of us getting to that 25% adjusted EBITDA midterm target. We know who’s going to achieve it in the next 1 or 3 years, so there’s going to be something to disrupt that, something that we’re not going to be looking at. But to put it directly, that cash will be used for now one or two ways. We’re going to continue to look for eminently opportunities that make sense for us. But, also, we have a normal course issuer bid that we are going to continue to buy stock when it makes sense. And we think we have a lot of room to do that. And the nice thing about that, I think, for all the investors listening on, is that 2023, we actually covered all of our stock-based compensation we had with our employees based on that buyback that we had in place. We’re going to continue to do that, and we think we’re helpfully using our capital in place the best we can.

Christian Sgro: Thanks for helpful color. Thank you for taking my questions.

Operator: [Operator Instructions] Your next question comes from the line of Suthan Sukumar with Stifel. Your line is open.

Suthan Sukumar: Good morning, and thanks for taking my question. I just wanted to touch on expansions. Just given the record number of customer wins to date, how much of the expansion opportunity you see ahead in the near-term is contractual versus not? And how do you see the bookings mix of expansions versus net new evolving in the coming quarters? Just curious if it’s going to get to a 50-50 ratio or may skew to expansions over time?

John Sicard: Yeah, so obviously we’re at a 60-40 ratio right now, which I would love to say that 60-40 ratio as long as we can, as long as the total number keeps on growing. I think it will start trending towards a 50-50, as you mentioned, over the next year or so. Obviously, a lot of opportunities we see that come in from expansion deals have a much shorter sales cycle, and they flow through a lot quicker. Obviously, we’re not generally going through a situation where we’re not going through a situation where we’re going to competitor. But when we look at our peers that we go against a lot of them have two-thirds of their new deals are coming through expansion. And I kind of look at them almost enviously, because I know how the impact is on our bottom line, and I know that’s something that’s in our future, but we are trying to be as patient as possible by making sure that we get as much land as we can. But that doesn’t stop us from saying, we need to start that role of getting as many of our installed base customers expanding and upselling and cross-selling in any fashion we can to get them in the door to help them out really and to drive them out if they need within their own supply chain.

Operator: Your next question comes from the line of Mark Schappel with Loop Capital Markets. Your line is open.

Mark Schappel: Hi, thank you for taking my question. John, just building on an earlier question about 18 to 24 months ago, the company expanded sales capacity pretty meaningfully to drive further growth and given the moderating ARR growth and SaaS revenue growth. I was wondering if you could just kind of comment on what your plans are with respect to sales capacity coming near or so.

John Sicard: Yeah, so two things I would say, when I think about expansion, I think about it two ways. Obviously, fantastic if you can get both, but there’s certainly the SaaS revenue growth that we’re looking for, but there’s also net new accounts to make sure that we’re building a strong base to expand in. And as I said in the script, 2023 was about winning customers, eliminating all friction. The way I described it to sales is you have to make it irresponsible for someone to choose anyone but us and create the conditions where that can be true. Knowing in advance what happens when you win a logo, great things. As Blaine said, you have an account that you can upsell into much simpler than landing it for the first time. And so part of our investment in sales and the training and everything that we’ve done over the last couple of years, well, they yielded exactly what I might have hoped. Sure, more SaaS revenue would have been phenomenal, but we’ve more than doubled the number of counts. We’ve had two record breaking years in a row of net new names that we can now farm into. One of the investments we made in sales was to build out a team and an executive that is solely responsible for serving the base. So I’m feeling pretty good about the decisions that we made in the past about sales. And as Blaine just said, I think, when we do our work here in the next couple of years, you’ll see a move to perhaps more of a 50-50 split between net new and what is being farmed from the net new accounts that we’re winning every year.

Operator: Your next question comes from a line of Martin Toner with ATB Capital Markets. Your line is open.

Martin Toner: Thanks so much. Good morning, gentlemen. Quick question on 2025 and the STL cycle. You’re pointing out in Slide 13 that EBITDA margins are being impacted by public cloud normalization. Can we expect a normal cadence for STL in 2025, which would – will that create a shot in the arm for margins?

Blaine Fitzgerald: Yeah, 2025, as I talked about in the script, we’re expecting it to double. So STL should go from, we obviously mentioned 9 to 11, we expect it to double in 2025, and then increase approximately one-third in 2026. And so that should put us closer to the normalized total revenue that we would expect. And we’ll – you’d obviously, if we had the same slide that I had in the presentation that shows the normalized EBITDA, you should expect the STL line to be closer to zero.

Operator: There are no further questions at this time. I will now turn the call back over to Rick Wadsworth for closing remarks.

Rick Wadsworth: Great. Thank you, operator, and thank you everyone for participating on today’s call. We appreciate your questions as always and your ongoing interest in support of Kinaxis. We look forward to speaking with you again when we report our first quarter results. Bye for now.

Operator: This concludes today’s call. You may now disconnect.

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