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Edited Transcript of KXS.TO earnings conference call or presentation 2-Aug-19 12:30pm GMT

Q2 2019 Kinaxis Inc Earnings Call

KANATA Aug 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Kinaxis Inc earnings conference call or presentation Friday, August 2, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John Ernest Sicard

Kinaxis Inc. - CEO, President & Director

* Richard George Monkman

Kinaxis Inc. - CFO, VP of Corporate Services & Corporate Secretary

* Rick Wadsworth

Kinaxis Inc. - VP IR

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Conference Call Participants

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* Daniel Chan

TD Securities Equity Research - Research Analyst

* Deepak Kaushal

GMP Securities L.P., Research Division - Director and Technology & Communications Analyst

* Kevin Krishnaratne

Paradigm Capital Inc., Research Division - Analyst of Technology

* Paul Steep

Scotiabank Global Banking and Markets, Research Division - Analyst

* Paul Treiber

RBC Capital Markets, LLC, Research Division - Associate

* Richard Tse

National Bank Financial, Inc., Research Division - MD & Technology Analyst

* Robert Young

Canaccord Genuity Corp., Research Division - Director

* Stephanie Doris Price

CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Software and Business Services Research Analyst

* Suthan Sukumar

Eight Capital, Research Division - Research Analyst

* Thanos Moschopoulos

BMO Capital Markets Equity Research - VP & Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to the Kinaxis Inc Fiscal 2019 Second Quarter Conference Call. (Operator Instructions) I would like to remind everyone this call is being recorded today, Friday, August 2, 2019. I would not turn the call over to Rick Wadsworth, Vice President of Investor Relations at Kinaxis. Please go ahead, Mr. Wadsworth.

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Rick Wadsworth, Kinaxis Inc. - VP IR [2]

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Thanks, Operator. Good morning, and welcome to the Kinaxis earnings call. Today we'll be discussing our second 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 Richard Monkman, 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 2, 2019, 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 Kinaxis' SEDAR filings.

During this call we will discuss IFRS results and non-IFRS financial measures. A reconciliation between IFRS results and non-IFRS financial measures is available in our earnings press release and in our MD&A both of which can be found in the Investor Relations 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 IR section of our website. Neither this call nor the webcast archive may be rerecorded or otherwise reproduced or distributed without prior written permission from Kinaxis.

To begin our call John will discuss the highlights of our quarter as well as recent business developments, followed by Richard who will review our financial results. Finally, John will make some closing statements before opening up the line for questions. I'll now turn the call over to John.

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John Ernest Sicard, Kinaxis Inc. - CEO, President & Director [3]

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Thank you, Rick. Good morning, and thank you for joining us today. I'm pleased to report second quarter results that continue to support our strong growth outlook for the year. On a comparative basis during Q2 we grew SaaS revenue by 18% to $28.3 million. We grew total revenue by 9% to $42.4 million. And we delivered adjusted EBITDA of 27% of revenue. We closed a number of large marquee customers in the quarter and also expanded upon existing deployments. This new business has driven a record-setting backlog for Kinaxis and continues to fuel my confidence in hitting our full year growth outlook.

We are thrilled to have earned the trust and confidence of companies in every geographic region during the quarter, including recently announced Johnson Electric and Yamaha. Today I'm happy to share that Guardian Glass was also included in the group of new customers that we added in Q2. These successes demonstrate that the importance of digital supply chain transformation in the market continues to gain momentum and that Kinaxis is uniquely positioned to address this need using our powerful concurrent planning engine.

During the second quarter, we also signed another major strategic partnership. We have teamed with global consulting and digital services leader Infosys, who operates in 45 countries and have a strong supply chain practice serving our core verticals. Infosys complements our growing group of strategic partners, including Accenture, Deloitte, EY and Genpact. Together, our partners help scale our implementation capabilities to support our growth and continue to be key influencers in helping us win new business.

As in previous quarters, partners continue to influence the majority of our new customer wins in every theater. In addition to having growing customers recognize our differentiated value we are pleased to see that Gartner continues to distinguish Kinaxis as a leader in their latest report on sales and operations planning systems of differentiation. We have been named a leader by Gartner in 6 consecutive reports related to supply chain planning which is a testament to the distinctive value we provide to the market.

In short, our successes in Q2 are the result of executing on our sales strategy, our partner strategy and our ability to delight our growing customer base with proven value. Our pipeline remains very strong and our confidence remains very strong. As always, we are razor-focused on the long-term sustained success of Kinaxis.

With that, I'll turn the call over to Richard for an overview of the financials for the quarter.

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Richard George Monkman, Kinaxis Inc. - CFO, VP of Corporate Services & Corporate Secretary [4]

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Thank you, John, and good morning. As a reminder, unless otherwise noted, all figures reported on today's call are in U.S. dollars under IFRS. On a comparative basis total revenue in the second quarter increased 9% to $42.4 million, driven primarily by SaaS revenue which grew 18% to $28.3 million. This growth was due to contracts secured with new customers as well as the expansion of existing customer subscriptions. We recorded $2.4 million of subscription term license revenue in Q2, which was consistent with our previous commentary on the expected cadence of customer-hosted subscription renewals throughout 2019.

As we previously noted, given these customer renewal cycles subscription term license revenue will vary quarter to quarter. Professional services revenue was 13% lower compared to 2018 at $8.4 million. Professional service revenue varies quarterly based upon a number of factors, including the number size and timing of customer projects as well as the level of deployment engagements supported by our partners. Overall we remain very pleased with the diversity of our revenue base. For the year-to-date our 10 largest customers accounted for 37% of total revenues with no individual customer accounting for greater than 10% of total revenues. Geographically, for the year-to-date we are seeing an increased percentage of our revenue coming from both Europe and Asia which is consistent with our recent investment in these regions.

Gross profit grew 11% to $29.4 million or 69% of revenue compared to 68% in Q2 2018. This increase resulted from growth in SaaS revenue partially offset by an increase in cost of revenue such as related head count, partner and third party cost and higher depreciation costs associated with the expansion of our data center capacity.

Profit decreased 6% during the quarter to $4 million or $00.15 per diluted share compared to $0.16 per share in Q2 2018. This change reflects the resulting higher operating costs given our accelerated level of investments in sales, products and global operations. These investments were primarily additional head count and higher expenses related to sales commission and marketing activity. Adjusted EBITDA for the second quarter grew 5% to $11.6 million or 27% of revenue compared to 28% in the same quarter of 2018. The increase in adjusted EBITDA is due to an increase in revenue and gross profit, partially offset by the increases in operating expenses excluding stock-based compensation and depreciation.

Cash from operating activities decreased 4% to $8.8 million largely due to recognition of deferred revenue balances and payment of income taxes during the quarter. For the 6 months ended June 30, 2019, cash, cash equivalents and short-term investments grew by $19.4 million to $200.9 million. Our minimum contracted revenue backlog as of June 30, 2019, was a record $247.3 million as detailed in Note 12 to our financials. This amount includes future contracted SaaS, maintenance and support and subscription term license revenue. The vast majority of this backlog was the $229.3 million related to future SaaS revenue.

The total backlog amount will be recognized over a number of periods as follows: $64.3 million will be recognized in the second half of 2019, of which $57.7 million relates to SaaS. Backlog for fiscal 2020 is $87.9 million, of which $81.7 million relates to SaaS business and the remaining $95 million will be recognized in fiscal 2020 and thereafter of which $89.9 million relates to SaaS.

I'm pleased to note that our 6-month SaaS backlog together with our year-to-date SaaS revenue of $55.6 million totals approximately $130 million and forms the basis for continued confidence in our 2019 SaaS revenue guidance of 20% to 22% growth. Total bookings in Q2 were $46.8 million, of which SaaS bookings were $45 million. We are very pleased with this performance. As you know, bookings will remain variable between periods as they depend upon the timing of customer decisions. Our backlog metric is based upon the minimum revenue contracted at the end of the quarter as such is clearly related to the timing of the signing of the customer contract. Trade receivables and deferred revenue balances are accounting cycle metrics which are driven by the timing of invoice. As customer purchase orders are not always issued concurrent with contract signing the issuance of customer invoices, especially for late quarter deals may not be fully reflected in trade receivable and deferred revenue balances as at the end of the quarter. This was the case in the second quarter.

Regarding our current year investment plans, in particular our accelerated investment in sales and marketing, we continue to expect that sales and marketing will be in the 24% to 26% range of total revenue. With our product team expansion and new product innovation investments we continue to expect that research and development will be in the range of 18% to 20% of total revenue. Based on these results and our business outlook we are pleased to reaffirm our guidance for fiscal 2019 which includes total revenue of $183 million to $188 million, SaaS revenue growth of 20% to 22% over the 2018 amount of $97.2 million. Subscription term license revenue of $22 million to $24 million for the full year. Approximately 40% to 45% of that full year amount will be recognized in Q4. Full year adjusted EBITDA margin of 25% to 27% of revenue. And our aggressive hiring plans for both sales and marketing research and development remain underway.

Capital expenditures of $11 million to $13 million range, the majority which were invested in Q2 on planned data center expansion and R&D investments. Thank you for your continued support of Kinaxis.

And with that, I turn the call back over to John.

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John Ernest Sicard, Kinaxis Inc. - CEO, President & Director [5]

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Thank you, Richard. In summary, we are pleased with our progress in the first half of the year and believe we are very well -- very well positioned to deliver on our full year targets. I'm encouraged by ongoing sales activity, the growth of our stable of top tier partners and their level of engagement, our ongoing product innovations and the resulting growth in awareness of Kinaxis. Most of all, I am humbled and encouraged by the top quality brands who continue to trust Kinaxis with their supply chain transformation initiatives. On behalf of Kinaxis I would like to thank you for your support as always for taking time to join us on the call today.

With that, I'll turn the line over to the operator for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Richard Tse of National Bank.

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Richard Tse, National Bank Financial, Inc., Research Division - MD & Technology Analyst [2]

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It's great to see the backlog. I'm just kind of curious, as you're bidding on these deals, have you seen any change in the macro environment? Certainly that backdrop has been a bit volatile of late. Kind of curious to see what your thoughts are on that.

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John Ernest Sicard, Kinaxis Inc. - CEO, President & Director [3]

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Richard, we're definitely seeing I would say more focus on digital transformation and more focus on looking at supply chain improvements. And we're seeing that in every theater that we focus on and frankly in every vertical. When we look at our current pipeline it remains very strong and very evenly balanced across the 6 verticals that we're in. So we're definitely seeing the market heating up.

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Richard Tse, National Bank Financial, Inc., Research Division - MD & Technology Analyst [4]

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Okay. And in regard to that pipeline is there any way you can maybe help us or quantify the coverage of that pipeline perhaps what it is today versus what it was relative to last year? Just trying to get some comfort around this reacceleration here notwithstanding your comments on the backlog.

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John Ernest Sicard, Kinaxis Inc. - CEO, President & Director [5]

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Yes. Well, certainly what -- if I compare our pipeline today versus 12 months ago it is much more evenly distributed between North America, Asia and Europe. And a year ago I might have seen Europe as slightly depressed in comparison. And part of that was our focus. If you recall, a year ago we made a very definitive decision to invest in Europe as a primary geography. And the result has been a strengthening of the pipeline. I would say today we're seeing more strength in aerospace and defense than we were, for example, a year ago. These are what I call macro level differences. And overall the pipeline remains strong today as it was -- certainly as it was a quarter ago.

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Richard Tse, National Bank Financial, Inc., Research Division - MD & Technology Analyst [6]

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Okay. And just one last one for me. I think you said the majority of your wins are influenced by partners. Could you maybe give us a sense of what that was compared to again relative to last year and I guess related? How many partners do you think you need to sort of be at the point where you can sort of just mine that base without having to add more? That's it.

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John Ernest Sicard, Kinaxis Inc. - CEO, President & Director [7]

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Yes. Great question. And so when I compare partner influence today versus a year ago it's higher -- it has continuously -- every quarter seems to be gaining some momentum there which is very healthy. Our own opinion about partnership is these aren't what I would call marketing relationships. The partners that we sign are ones that have a very specific desire to grow a practice around RapidResponse and a practice around concurrent planning. And so there -- these are very serious engagements for us. In many cases, these are partners that have existing customers or prospects that are looking at supply chain transformation. And so this is what's fueling the relationships that we form.

I don't know that I would say there is some specific number. We always have partners that I would call in the incubation period where we are talking to them. There is a relationship brewing. When we make an announcement such as Infosys, it's because we've signed an agreement. It's not just a verbal agreement. We've signed an agreement and there is a serious activity and serious collaboration occurring between us. So I can honestly say that we are at the pinnacle point and we're no longer accepting partnerships. That is not the case because there are always interesting not only large but I'd say interesting boutique firms that have very specific areas of expertise and those we're always interested in.

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Operator [8]

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And your next question comes from the line of Thanos Moschopoulos of BMO Capital Markets.

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Thanos Moschopoulos, BMO Capital Markets Equity Research - VP & Analyst [9]

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John, you are achieving a high 20% EBITDA margin which on the one hand is obviously fantastic but on the other hand makes you wonder if you're reinvesting enough back into the business given the huge market opportunity ahead of you. And I realize it might be too early to talk about 2020 and beyond, but maybe in more general terms how are you thinking about the right level of spending and the careful balance between investment and margins?

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John Ernest Sicard, Kinaxis Inc. - CEO, President & Director [10]

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Yes. So we're always going to be focused on growth first always. And as I stated last -- in the last quarter, we are accelerating our spend in sales and marketing and on the products team quite frankly. And so we continue to focus on that. We have open head count in every theater. And our expectations, as Richard pointed out on the sales and marketing, our expectations is that we'll hit that level of investment, the 24% to 26%.

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Thanos Moschopoulos, BMO Capital Markets Equity Research - VP & Analyst [11]

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Okay. And John, given that some clients are looking at broader transformation initiatives, as you alluded to that are probably extending beyond just the planning piece, I imagine deals are getting more complex. And is that leading to change in sales cycles at all?

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John Ernest Sicard, Kinaxis Inc. - CEO, President & Director [12]

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We're not seeing a change in sales cycles. Frankly, we -- it is one of those measures I look at somewhat as a leading indicator to get a sense for the market maturity. But these are quite important decisions. When someone is looking at a supply chain transformation or digital transformation, they're making a decision that will affect the next 20 years or longer. And so we're still sort of seeing that an average of kind of an 18-month window as they go through the interest and intrigue phase, the trust and confidence phase, and ultimately the deployment, selection the deployment phase. So we're not necessarily seeing a shift, we are seeing I'd say some degree of more breath in some of the deployments. The notion of concurrency expanding beyond demanded and scheduling and moving more into capacity and production scheduling and things of that nature. So we continue to see a broader footprint not only with existing prospects but also with our current customers and current deployments.

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Thanos Moschopoulos, BMO Capital Markets Equity Research - VP & Analyst [13]

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Great. And then finally, how do you feel about your deployment capacity? I mean obviously, you've brought on a lot of new partners. But in terms of where you are with respect to onboarding them relative to the geographies where you're closings some new deals, has that deployment capacity been able to scale -- to support the growth or has there been any bottlenecks that you need to address?

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John Ernest Sicard, Kinaxis Inc. - CEO, President & Director [14]

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It's a great question. And some of this I would say is region specific. In Asia Pacific, we are hyper-focused on growing that particular area. We're seeing a lot of activity. And so we're very focused on maturing and growing the talent pool available for deployments as it relates to partners. Now we have hundreds of people with certifications now outside of Kinaxis. There are hundreds of people that have gone through certifications. There's certification -- the certifications that we have given out now are measured at well over 1,000. I don't know the exact number of hands here but I know there are hundreds of -- there is hundreds of consultants out there already across our customer base. And there's never a month that we're not doing training. All the training is done digitally, certifications are done digitally. So we've prepared for scale. And if anything, it's region-specific as deals crop up in certain theaters making sure that we have enough coverage from the partner ecosystem to do the deployments.

We're also involved in our own deployments. There are occasions where we have customers who prefer to use us as prime. And certainly we have projects today where we're the prime deployment agent and we'll continue to grow professional services to make sure that our customers are receiving the service levels that they're looking for.

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Operator [15]

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And our next question comes from the line of Robert Young with Canaccord Genuity.

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Robert Young, Canaccord Genuity Corp., Research Division - Director [16]

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In the comments earlier on the funnel, I think you said it was as strong today as it was a quarter ago. Of course, this quarter you converted a bunch of the funnel into backlog, so were you making that comment specifically to say that there's activity in the funnel in the near term that could continue this kind of growth and backlog we're seeing?

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John Ernest Sicard, Kinaxis Inc. - CEO, President & Director [17]

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Well, we're continuously monitoring what I would call unsolicited inbound leads which continues to be strong. We're involved in a lot of events, in supporting a lot of events today. And we're also building the AE team and building the sales, our sales capacity. And those have direct impact on the number of prospects that we have to work. We still have well over 2,000 in our TAM. And we haven't tapped the mid-market for example yet. So we continue to look at opportunities to grow the TAM as we grow the sales team. And so I would say I'm very happy with the pipeline today. I'm happy with the diversity in geography and the spread across all of the -- all the market verticals, it's just plain very healthy.

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Robert Young, Canaccord Genuity Corp., Research Division - Director [18]

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Okay. I think a lot of people are trying to understand how the timing of the investments in the channel and the expansion and sales, how that's going to benefit the financials. And so if I think about the strategy, you added a channel over the last several years to take pressure off of pro services, to get in front of more deals, to expand your capacity. Then now you've expanded sales to improve Europe specifically. But to convert more of that activity that you're seeing that in the channel, and then so what's the next step? Like when do some of the activity as the sales force, when does start to fall into actionable deals? Is there any timing you can help walking…

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John Ernest Sicard, Kinaxis Inc. - CEO, President & Director [19]

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Yes, obviously. When we hire an AE, and I think about AE coverage, right. I look at the pipeline, I look at the maturity of the pipeline, where they are in the funnel. And we've been at this a very, very long time. So we feel like we have some science behind how what I would call deal flow and velocity, deal velocity. So when we -- we stated last quarter that we were investing, accelerating our investment in sales and marketing ahead of even where we were -- where we were in January 1, okay. So we were not far into the year and we realize that we were seeing what I would call forward momentum in the market and making those investments in sales and marketing. Now again I go back to what is the average deal cycle. And we still see it at the 18-month kind of a range. Some are a little sooner and some -- I mean, some are measured in years, quite frankly. Some are just staggeringly long, but some are fast. And -- but in any case the reason for us making those accelerated investments is noted measurement of momentum that causes us to say we -- if we don't make these investments now, we'll have a coverage problem 18 months from now, think of it that way. So we're making the investments now knowing the need for coverage. And we continue to monitor those, what I call forward-looking measurements as it relates to making our -- placing our investments.

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Robert Young, Canaccord Genuity Corp., Research Division - Director [20]

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Okay, that's helpful. And you said that you had activity in every major theater every major geo, I assume that's the same as that. Should I assume that's like North America, Europe and Asia? Or would there be something more granular? And then, it seems as though that North America seems to be lagging a little bit now. It may be that Europe and Asia have been accelerating it. So North America just doesn't look as good. But is there investment that needs to happen in North America in the sales force? And then I'll pass the line.

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John Ernest Sicard, Kinaxis Inc. - CEO, President & Director [21]

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Yes, so Rob, we're making investments in every theater, North America, Europe, and Asia in sales. And as you can appreciate, not every customer would allow us to make a selection announcement. We're obviously pleased to have Johnson Electric, pleased to have Yamaha, and today announcing Guardian Glass, and there's others. And some will allow us to make a -- an announcement. And as press releases are approved, we ship them out. The moment press release is approved, you'll hear about it. And in some cases we have customers who won't do a press release until they're live. And in some cases they won't do a press release at all, period. They don't want any of their competitors to know that they are transforming their supply chain with Kinaxis. So just answer your question, every theater is active, every theater is seeing a very healthy pipeline and every theater we're investing in sales and marketing.

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Operator [22]

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And your next question comes from the line of Paul Treiber of RBC Capital Markets.

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Paul Treiber, RBC Capital Markets, LLC, Research Division - Associate [23]

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Just wanted to focus on product innovation for a second and the impact that it's having on your customer wins or pipeline. In the past couple of announcements you made is on the machine learning, like self-healing supply chain and then the next generation platform that allows apps on top of RapidResponse. Are you seeing -- is that having an impact on your funnel? Are you seeing customers interested specifically in those new innovations?

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John Ernest Sicard, Kinaxis Inc. - CEO, President & Director [24]

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Absolutely. We're getting a lot of interest in these areas. And as it relates to our platform initiative, the ability to extend RapidResponse without the need of Kinaxis R&D provides our customers the ability to extend RapidResponse with unique, what they would consider unique to their business capabilities. More importantly, it will allow partners to engage in producing extensions to RapidResponse for their customers. So it's we're heavily engaged in that area. We're certainly -- and I made this point in the last earnings as well, we're making significant investments around the CPG space. And every time we enter a new market we have exactly one product and that one product serves all markets. And it's a great leverage point. As we expand into CPG we continue to make investments in R&D as it relates to that specific market segment. They have specific analytics needs, specific math needs and we continue to make investments there. And certainly those investments are paying off in a strengthening pipeline.

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Paul Treiber, RBC Capital Markets, LLC, Research Division - Associate [25]

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In regards to the platform and the ability for customers and partners to build applications, are you at the point now where the customers and partners are building the applications and investing in the capabilities to do that?

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John Ernest Sicard, Kinaxis Inc. - CEO, President & Director [26]

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Well, it is early days. We have not made any formal announcements on the platform product and the platform readiness. It is at a mature state today. We are engaged with partners in that initiative. It's not just a lab exercise today. We have existing partners that are engaged working alongside R&D. And I'm anticipating some rather -- I'm anticipating some rather exciting news by at least the connections conference which I know you may be attending. So stay tuned.

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Paul Treiber, RBC Capital Markets, LLC, Research Division - Associate [27]

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Okay, we'll wait for that. Just one last one. Just trying to bridge between backlog and then guidance specifically on SaaS. If you take a look at that the first half revenue combined with the backlog, it looks like you only need about 4 million in new bookings for the year to reach the midpoint of SaaS guidance. What are some of the moving parts that we should think about as you progress through the year?

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Richard George Monkman, Kinaxis Inc. - CFO, VP of Corporate Services & Corporate Secretary [28]

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Well, Paul, thank you for noticing that. And that really is one of the key strengths of our business, that visibility and the ongoing base of subscription revenue. But keep in mind that while we will close a 3-year deal, we look at the timing that, that revenue is in the current year. So you're right, we are in a extremely strong position. And it's not unusual though to have deals closed later in the quarter. And so therefore we're factoring that into our revenue guidance, but --and by the way, that backlog is just the minimum committed backlog. So part of the remaining 4% or so to hit the midpoint of our guidance is not only new named customers and expansions but is also those customers that are scheduled for renewal in the remainder of the year.

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Operator [29]

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And our next question comes from the line of Stephanie Price of CIBC.

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Stephanie Doris Price, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Software and Business Services Research Analyst [30]

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Hoping you can talk a little bit more about the reinvestments in 2019 and where we are in the process and how we should think about those investments kind of scaling in the back half of the year.

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Richard George Monkman, Kinaxis Inc. - CFO, VP of Corporate Services & Corporate Secretary [31]

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Well, thank you, Stephanie. So the focus is first on sales and the sales and marketing. And as we noted earlier, we are in the process of accelerating beyond our original growth plans. And so those primarily are an increase in not only the account executive is selling a representative but then also the team that supports the AE. And so these are industry principal people that understand the specific verticals that we're in as well as increased technical people. So that whole team is scaling in tandem.

We've also with the recruitment of Andrew and team, we are accelerating our product innovation. And so we have made significant new hires on the product team and in fact are accelerating and bringing in some of the planned growth from 2020 and product into 2019. So those are the 2 key areas. We made significant investments in the data center infrastructure last year and the early part of this year. And so we're very comfortable with that, that capacity. And -- but we will be also expanding our global support team into theaters further. So it's really investments across the board but primarily focused on the selling and on the product side of things.

Now one thing that's very exciting is that, and we just -- we just announced that with the growth in particular in our Ottawa headquarters we have come to an agreement on a new facility. And so we will be moving into that facility in 2021, and so we're in the early stages. That's not going to have an impact on the -- material impact on the financials this year. However, it has demonstrated our commitment to Ottawa as well as the rest of the other theaters and is creating quite a bit of excitement in the community.

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Stephanie Doris Price, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Software and Business Services Research Analyst [32]

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Great, thank you very much. And then in terms of the Infosys partnership, wonder if you could expand on that a bit more about the regions and verticals that the partnership is going to be initially focused on?

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John Ernest Sicard, Kinaxis Inc. - CEO, President & Director [33]

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Yes, so there -- I mean this is, Infosys is a tremendously mature firm as it relates to supply chain. And as I mention, they operate in 45 countries. And frankly they operator in every market segment that we do. So there will be no restriction in terms of what theater we will work with them on. And there will be no restrictions whatsoever on which market vertical they wish to engage in. They are quite strong in every one of them.

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Operator [34]

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And our next question comes from the line of Paul Steep with Scotia.

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Paul Steep, Scotiabank Global Banking and Markets, Research Division - Analyst [35]

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Could you talk a little bit about -- you talked about upsell into existing accounts, maybe talk about what you have seen in terms of one module adoption and further uptick in those clients? And then maybe secondly, the trend in net revenue retention, how that's trending in terms of both not just expansion of the client but also maybe price uptick.

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Richard George Monkman, Kinaxis Inc. - CFO, VP of Corporate Services & Corporate Secretary [36]

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Sure, Paul. Thanks for the question. So I'll start with the net revenue retention. Again it remains over 100%, that's one of the debts that we have and the stickiness if you will with our customers. And yes, it is generally the case that there is an increase on renewals in terms of the pricing. But the primary growth vectors if you will for expansion, and it's still about 1/3 of our incremental revenue comes from customer expansions is just a deeper penetration within the customer. So that includes everything from additional users or seeds, if you will, to if you will recall one of the key elements of support that we provide is ability to model sites, so manufacturing or distribution centers. So customers securing additional sites as well as on the application. So we're fortunate that we have a number of those drivers for the expansion. So absolutely it's a focus. In fact, we now have dedicated salespeople just on -- focused on the customer base. And we expect that stickiness and expansion to continue.

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Operator [37]

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And our next question comes from the line of Daniel Chan of TD Securities.

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Daniel Chan, TD Securities Equity Research - Research Analyst [38]

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I just wanted to expand on Paul's question a little bit on the guidance here. Richard, I was hoping if you can give us a little bit of color of how you build it up. Obvious with the number of marquee closures that you had in the quarter, guidance remains the same. So when should we expect some of these announcements and these marquee or these big deal announcements to kind of make you drive some of that guidance up higher for the year?

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Richard George Monkman, Kinaxis Inc. - CFO, VP of Corporate Services & Corporate Secretary [39]

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Well, the -- as we -- as I noted in my prepared comments, and I think in one of the -- sort of in directing one of the questions earlier that Dan it's not uncommon to see deals later in the quarter which really means that their contribution, even announced deals, was not significant in the quarter and therefore will be seen in the outpours. But this is a trend that continues. So for instance, Q1 closure deals really started tracking revenue, often would start tracking revenue in Q2 and so on.

I think if you go back to the mechanics, so one of the things we've been known for ever since as being a public -- being a public company is that when we do provide subscription guidance we have in the order of 80% of that in backlog at beginning of the year. So in other words in the forward 12 months. And then the 3 elements to close the remaining 20% of the guidance are new name wins, expansions and those renewals.

So in our mind, it's very logical that as you move through the year, you're going to see a tightening of that percentage moving into the 90% range, being at essentially sort of 96% or so of the full year number mid-year is a strong basis for our confidence I'll say. But we know that deals can be lumpy and so therefore where we believe that this is the appropriate guidance at this juncture. And of course, we will revisit it at our next conference call.

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Daniel Chan, TD Securities Equity Research - Research Analyst [40]

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I also want to drive in on to your margin guidance. The first half margins have been really strong. Are there a number of investments that you expect to ramp significantly in the second half? If my math is correct, second half EBITDA margins would have to come in at around 21% for you to get to the midpoint of your margin guidance. And we haven't seen that kind of level in H2 since you've been a public company. So are you expecting outsized investments in the second half coming in to drive that margin guidance that we see?

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Richard George Monkman, Kinaxis Inc. - CFO, VP of Corporate Services & Corporate Secretary [41]

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Yes, Dan, there's a few factors there. So yes, sort of as a public company, but remember it was 2018 that we were required to adopt IFRS 15, which changes the timing of the revenue for the customer hosted arrangements that is primarily driven by the subscription term license. And we've noted that the subscription term license will be considerably stronger in Q4. In fact the 40% to 45% of that total $20 million to $24 million number that we guided to will be in Q4. As such, mathematically, now when you've got the -- when you have the first 2 quarters and you've heard this guidance on the fourth quarter, you will see that our expectation for subscription term license in Q3 is at a lower level.

And as such, that is one of the key drivers for EBITDA performance. Gross profit as well as the EBITDA performance. So it is -- that is a factor that you're going to see a lower EBITDA performance in Q3. But the other key driver is obviously our investment and our spend. And we've talked about the increases in -- across the board, but in particular in sales and marketing and product. And so these are actually well underway. And given that they're heavily focused on people are going to be sustained through the next 2 quarters. So yes, we are signaling that we are accelerating our -- we'll continue to accelerate our investment in sales and marketing, and you'll see that uptick in the next 2 quarters.

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Operator [42]

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And our next question comes from line of Deepak Kaushal of GMP Securities.

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Deepak Kaushal, GMP Securities L.P., Research Division - Director and Technology & Communications Analyst [43]

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John, Richard, I wanted to just go back to the question from Rob earlier on revenue by geography. So when I look at on the U.S. market in particular for last 3 years, it seems like you guys have been stuck, for lack of a better word, between $100 million and $120 million in revenue. What does it take to unstuck this market? Like, does that require a refocus like you did in Europe or sales and marketing spend above 25% of revenue? How should we think about that?

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Richard George Monkman, Kinaxis Inc. - CFO, VP of Corporate Services & Corporate Secretary [44]

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Yes, I can appreciate from the information that you have that you may come to that conclusion, but that's not really the characterization certainly that we would see. Because first off, this is total revenue. So it's not just subscription revenue, it's professional services revenue.

The second element is, at least prior to 2018 it included the ratable level for the subscription term license. In fact, you may recall that on our adoption to IFRS there was approximately $20 million of revenue related to subscription revenue that we had to retroactively put into our books. And so that is revenue that would have -- you would have seen in the future periods. And given our legacy, that was significantly weighted to the North American market.

So it's a combination of factors. But that professional services revenue is down. It is down for the North American customers in particular, given the strength of our partner network and our encouragement of the partners to pick that up. But we are also increasing our investment in North America in the sales team. From a relative basis, that was significantly higher given -- in Europe, and you could see the results of that already, and in Asia.

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Deepak Kaushal, GMP Securities L.P., Research Division - Director and Technology & Communications Analyst [45]

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So thank you for that. That's helpful. So if we think about a 20% or plus overall corporate growth rate going forward, is that going to be equally balanced between North America, Europe and Asia-Pac, or do you expect more outsized contribution from international markets?

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Richard George Monkman, Kinaxis Inc. - CFO, VP of Corporate Services & Corporate Secretary [46]

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Well, we do believe it's going to be across all theaters. But given, just from a mathematical base, given the current level of Europe and Asia, one would expect a higher relative contribution in terms of percentage there. As John noted and we've discussed before, our long-term goal is to see essentially equal contributions across the 3 core theaters. And so, yes, for the -- at least for the midterm I would anticipate that we will see higher level of sustained growth in Europe and Asia…

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Deepak Kaushal, GMP Securities L.P., Research Division - Director and Technology & Communications Analyst [47]

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Got it. Thanks for that. And for John, more of a conceptual question. We're seeing some fallout in the supply chain from the 737 MAX grounding with Boeing. Just conceptually, how does an event like this impact your business? And business as usually, if they're your existing customers, does it raise a crop of a bunch of new customers or new product opportunities? How does it impact your business? How are you taking advantage of this to expand your opportunities?

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John Ernest Sicard, Kinaxis Inc. - CEO, President & Director [48]

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Well, frankly, our business is always impacted by volatility in the marketplace, whether it's supply shortage or demand spikes or tariff wars. All of these types of things lead to either margin erosion or revenue erosion. And both affect our customers. They care deeply about both of those sides of the equation. So I would say as a general statement I can't say that the MAX 8 or tariffs or any of those things, we don't necessarily track the pipeline growth associated with specific events like that. I can't say that we are seeing a general uptick in market interest in digital transformation. That I would say is undeniable based on the measurements that we have in place monitoring the market and monitoring the pipeline. So I guess that's the best way I can answer that question. I don't know that there is a specific correlation between a singular event like a MAX 8 or a tariff, change in tariffs with the growth of the pipeline.

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Operator [49]

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And our next question comes from the line of Kevin Krishnaratne of Paradigm Capital.

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Kevin Krishnaratne, Paradigm Capital Inc., Research Division - Analyst of Technology [50]

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Kind of another question again on the sales cycle. Now again I kind of appreciate the complexity of these transformations in the 18-month window is still there. But I'm just wondering what's more on the front end. If you can talk about maybe the proof-of-concept stage? Or as you're getting more mature, as you're bringing more partners on, are you seeing any change in how quickly you're able to do the POC, the initial conversation with the customer? How is that going?

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John Ernest Sicard, Kinaxis Inc. - CEO, President & Director [51]

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Yes, I'd say we're not -- I haven't seen sort of a remarkable acceleration in the sales cycle. As you can appreciate, our customers tend to be very large global complex manufacturers. And so their environments are equally large, complex and global.

And so running through proof of concepts often involves testing environments and testing concurrency across different geographies. It's not just testing one product line in one geography. Often we'll have prospects wanting us to ensure that our philosophy will span their entire ecosystem. So I'm not necessarily seeing an acceleration in that process.

What we are seeing is more interest in concurrency. I mean, there was a time people didn't believe it was possible frankly. And now we are seeing a lot more interest in the merits of that technique versus what I would call the legacy technique where you study one supply chain function at a time. In our world, we deal with concurrency right at the base and we're pioneers in that field and that's always been our philosophy. So if anything, we're seeing a lot more interested in this technique. And our prospects are asking us to expose them to it and to educate them on what life is like for them once they transform and move into that philosophy.

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Kevin Krishnaratne, Paradigm Capital Inc., Research Division - Analyst of Technology [52]

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Okay. Great. Thanks for that, John. Second, we're moving over to partners. Can you just remind us or just confirm, I guess, where you are with partner-led engagements more on the initiation? Is it mainly the case that a new customer, potential new customer's first exposure to RapidResponse is from a partner they're already engaged with and then partner suggesting that? Or are there still cases where customers are coming to you and then depending on the vertical or complexity, I know you mentioned your desire for more boutique type of shops where you might direct them to a appropriate partner. Just how do we think about the sort of initiation stage of these eventual partnerships?

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John Ernest Sicard, Kinaxis Inc. - CEO, President & Director [53]

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The answer is quite frankly both. There are definitely cases where we'll have a customer engage with us, either its unsolicited inbound interest or a meeting at a large supply chain event where we initiate the engagement, but rest assured one of the first questions we ask is, you know, who do you work with from an SI or partner perspective. And so it's quite common for us to engage collaboratively with our partners as we go through a sales cycle. And frankly there are cases where we'll sign a partner and they already have engagements. They have interest from an existing customer of theirs and they're pulling us in. I'd say just about uniformly the deal, the progression of a sales cycle happens collaboratively and that is pretty uniform.

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Kevin Krishnaratne, Paradigm Capital Inc., Research Division - Analyst of Technology [54]

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Okay. Great. And then just last one again on partners, just if you can remind us how we should think about pricing. Like I completely understand that on pricing I get you that you are very firm on that given the great value that you provide. But do you see any instances where, say, a partner might in a way sort of eat some of the cost as a way to win that end customer as part of a much bigger supply management? I'm just trying to think about how you think about pricing on a customer's point of view with a partner.

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Richard George Monkman, Kinaxis Inc. - CFO, VP of Corporate Services & Corporate Secretary [55]

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Yes, so thanks, Kevin. It's not a model whereby it's seldom a resell, it's a partner-influence deal. And in most instances, the partners are really focused on the long-term professional services level of engagement. They may be the ones already leading that digital transformation and so see us as the key factor in affecting that change. And in some cases partners are prohibited, for instance, the accounting related, from taking any type of contingency fee. So it's not really a factor. And quite frankly the -- our pricing is really driven more on the ROI. And so what we work with the partners is to demonstrate that return on investment. And so it hasn't really -- we haven't really seen an erosion from that perspective. So we can be extremely competitive and drive that ROI. And so it's not a -- it's not something whereby we just sell and resell, it's done, but it's not done on a large-scale basis.

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Operator [56]

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And our next question comes from the line of Suthan Sukumar, Eight Capital.

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Suthan Sukumar, Eight Capital, Research Division - Research Analyst [57]

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You've been quite active in adding new channel partners. Are some of these current partnerships already positioning you for the mid-market? Or would you be looking to expand your partner ecosystem further when you do make a push down market?

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John Ernest Sicard, Kinaxis Inc. - CEO, President & Director [58]

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Yes, that's a very interesting observation and question. I would say, yes, we are engaged in certain theaters and certain verticals where the prospects you might consider them to be more of the upper end of mid-market. I wouldn't say there is any partners specifically that are focused or directed to focus on mid-market. I made that statement a little bit earlier that when we talk about our current TAM of just over 2000, that tends to be the elephant, the extremely large complex global in theater in the 6 verticals that we published, that's what the current TAM is. But I would say we have existing customers that I would consider to be mid-market. And in some cases we have partners that are, I would say, working on opportunities that are both in the, it's the elephant category, the global enterprise category. And in the mid- to upper-mid-market category. Again I wouldn't say that we have any partnerships that we have signed where they are either directed nor individually focused on mid-market.

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Richard George Monkman, Kinaxis Inc. - CFO, VP of Corporate Services & Corporate Secretary [59]

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And just to give a bit of a balance. So typically when we focus on customers, they generally need to have sufficient, as John would say, pain to really use RapidResponse. And so typically it's not unusual to be sort of a $1.5 billion or large, and in many cases multiple billions of dollars in revenue. So for us mid-market is really sort of $0.5 billion to $1.5 billion. And there are significantly more, I mean, by factor of 3 to 4 accounts in that total addressable market.

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Suthan Sukumar, Eight Capital, Research Division - Research Analyst [60]

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And I also just want to follow up on your upcoming next-gen engine launch and RapidResponse as the platform strategy. Curious to see -- curious to know, what are you guys seeing, if any, from an industry and competitive response to these product and tech enhancements? And more broadly, what are you guys seeing overall from competitive environments?

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John Ernest Sicard, Kinaxis Inc. - CEO, President & Director [61]

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Well, we continue to see primarily SAP as a competitive -- in the competitive landscape. They are typically the incumbent, which is why we typically see them. Now they've long -- I believe anyway I would say, call it a different philosophy in how to solve supply chain planning problems, and this is why I say we often lead with technique first, not technology, we lead with technique. And we bond on technique first. And when we get to the point where a prospect says you need to tell me how to do that, well, then that's where the technology comes in. The notion of RapidResponse as a platform, and we have been working on this for many years. This is not some new initiative we started last year, and this next gen engine has been 3 to 4 years in the making. So you can appreciate quite -- this will be a very major release for us and major technology boost. It's going to allow us to more rapidly enter new markets. So partners will obviously be very interested in getting us beyond the 6 core verticals. This allows for, you know, what I call mass runtime configurability that we've just never seen before. And this allows us to break into new market verticals through partner leverage much, much faster than it was ever capable.

And we're also seeing a lot of pull from customers. So it's a response to what customers tell us they're looking for and being able to apply unique capabilities to RapidResponse, what they consider to be company differentiators for them and looking to apply that directly to RapidResponse. So we're pretty excited about it. We're right around the corner. I think I mentioned this, our connections event will be a very interesting event for us as it relates to RapidResponse as a platform. So stay tuned.

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Operator [62]

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There are no further questions in the queue. I turn the call back to our presenter for closing remarks.

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Rick Wadsworth, Kinaxis Inc. - VP IR [63]

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Thanks, operator. Thank you, everyone, for participating on today's call. We appreciate your questions as always and your ongoing interest in and support of Kinaxis. We look forward to speaking with you again when we report our Q3 results. Bye for now.

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Operator [64]

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And this concludes today's conference call. You may now disconnect.