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spk10: Good morning, ladies and gentlemen, and welcome to the Connexus Inc. Fiscal 2022 Fourth Quarter Results Conference Call. Currently, all participants are in a listen-only mode, and following the presentation, we will conduct a question-and-answer session. Instructions will be provided for you at that time to queue up for questions. I'd like to remind everyone that this call is being recorded today, Thursday, March 2, 2023, and I will now turn the call over to Rick Wadsworth, Vice President of Investor Relations at Connexus Inc. Please go ahead, Mr. Watford.
spk13: Thanks, Operator. Good morning and welcome to the Connexus Earnings Call. Today we will be discussing our fourth quarter and year-end results, which we issued after closing 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 in this call is based on information as of today, March 2, 2023, They contain 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 CDAR filings. During this call, we will discuss IFRS results and non-IFRS financial measures, including adjusted EBITDA and certain constant currency results and metrics. The reconciliation between adjusted EBITDA and the corresponding IFRS result is available in our earnings press release and in our MD&A, both of which can be found on the IR section of our website, canaxis.com, and on CDAR. Participants are advised that the webcast is live and is also being recorded for playback purposes. An archive of the webcast will remain 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, as well as recent business developments, followed by Blaine, who will review our financial results and outcome. Finally, John will make some closing remarks before opening up the line for questions. We have a presentation to accompany today's call, which can be downloaded from the IR homepage of our website, Kinaxis.com. We will let you know when to change slides. I'll now turn the call over to John.
spk16: Thank you, Rick. Good morning, and thank you all for joining us today. Starting with slide four, the strong momentum in our business continued in the fourth quarter as reflected in key results, including fast revenue growth of 26% or 32% in constant currency, total revenue growth of 44% or 51% in constant currency, and adjusted EBITDA margin of 21% or 22% in constant currency. Moving to slide five. Quite simply, 2022 was a phenomenal year for Kinaxis. Total SaaS revenue grew 22% or 28% in constant currency. Total revenue grew 46% or 54% in constant currency, and we have achieved a year-end adjusted EBITDA margin of 22% or 23% in constant currency. If you consider our constant currency results, you will see that across all metrics, we dramatically outperformed our initial guidance for the year. I couldn't be prouder of the team for their remarkable efforts in 2022 and their commitment to working towards another stellar year in 2023. Turning to slide six, Key metrics we monitor not only highlight significant success in 2022, they give us great confidence and optimism for the year ahead. Specifically, we won approximately 25% more new customers than in 2021 and roughly 40% of our new wins coming from mid-market customers, a part of our TAM that we've only just begun to address. Including acquisitions, we grew our total customer base by 40% over the year, giving us a solid foundation for future expansion. Constant currency annual recurring revenue growth accelerated to 26% compared to 21% in 2021 and continues to point to opportunities for accelerated SaaS revenue growth in the years ahead. I consider this a clear sign of inflection for our business. As of December 31, 2022, roughly 86% of our SAS revenue guidance for 2023 is in RPO, or Committed Backlog. We typically aim for a result closer to 80%. So 86% provides us with exceptionally strong visibility. Blaine will share more details in a few moments. Our 12-month rolling pipeline continues to grow at a pace that suggests sustained, strong market momentum ahead. We began accelerating investments in our sales team during the second half of 2022. And to ensure we have adequate coverage to capture the full potential we see ahead of us, we are continuing to prioritize investments in sales and marketing in 2023. I continue to believe we are in the early days of what I believe is a global transformation for supply chain management solutions. All these achievements have been won while simultaneously moving our ESG program forward. I'm thrilled with our AAA ESG rating from MSCI and our inclusion in the recently released Sustainalytics 2023 top rated ESG companies list for the software category. Moving to slide seven, building on this success, We are in the very early stages of several exciting growth strategies that have increased our total addressable market by a factor of nearly 10 compared to less than just three years ago. As you know, we've penetrated deeper in our verticals with our mid-market strategy where we're having great success. And now, we are also beginning to penetrate smaller companies through our relationships with over 25 value-added resellers. We are excited to see how they will perform in 2023 and beyond. We've also expanded our vertical market reach through the addition of retail. After substantial product work, we are providing ourselves in early bellwether global counts and will continue to take a focused approach to new opportunities in this market through 2023. Finally, and significantly, we are no longer only a supply chain planning company. Thanks to our recent acquisition of supply chain execution product innovator, MPO, we are now in the position to offer an end-to-end supply chain management solution. The planning and execution markets are broadly seen by industry analysts as being of similar size. we see substantial opportunities to sell our supply chain execution products both standalone and as expansion to existing and new rapid response customers. Of course, all of these opportunities complement existing growth factors through our own R&D innovations, including our recently announced machine learning AI-based solution planning AI, growth from our solution extension partners, and growth through future potential acquisitions. We're also thrilled to be able to offer our supply chain management platform in more ways than through our private data centers and now through public cloud with Microsoft Azure and Google Cloud Platform. This will ultimately enhance both the efficiency and effectiveness of product delivery and potentially offer new expansion opportunities down the road. While we acknowledge that the omnipresent uncertainty and disruption in the world increases risk to any outlook, we remain overwhelmingly positive about 2023. We are accelerating our SaaS revenue growth outlook compared to 2022, while simultaneously continuing to invest where most appropriate, with a priority on sales and marketing. These investments are necessary to solidify our position as a leader in the flourishing supply chain management space. With this balanced approach, and despite entering a low period in the normal cycle of our subscription term license revenue, we're anticipating yet another Rule of 40 performance for 2023. As Blaine will soon explain, starting 2024 and over the midterm, We anticipate achieving higher profitability margins with even faster SaaS growth. These are very exciting times. With that, I'll turn the call over to Blaine.
spk15: Thank you, John, and good morning. As a reminder, unless noted otherwise, all figures reported on today's call are in US dollars under IFRS. I'll also be sharing certain non-IFRS constant currency results and metrics. which estimates how our business would have performed excluding the effect of foreign currency rate fluctuations. We outline our methodology for the constant currency calculations in the news release. While they are only estimates, we believe they better illustrate the ongoing underlying momentum in our business throughout 2022. We will continue to monitor the foreign currency environment. We will only include constant currency disclosures in the future if the environment produces results that are not fully representative of our underlying business performance year over year. Starting on slide eight, total revenue in the fourth quarter was up 44% to $98.5 million and up 51% on a constant currency basis to $103.5 million. SAS revenue grew 26% to $58.8 million and was up 32% on a constant currency basis to $61.8 million. As you would expect, Acceleration in our annual recurring revenue growth has been flowing through to higher SAS revenue growth. Subscription term license revenue was $9.1 million versus $1.4 million in Q4 2021. This item largely follows the normal cadence of renewals among our small group of on-premise customers or those that have the option to move their deployments on-premise. Our professional services activity was strong again. resulting in $26.2 million in revenue, or 54% growth over the fourth quarter of 2021. The ongoing rapid growth primarily reflects our acceleration in new customer wins. Generally, this revenue item varies from quarter to quarter based on the number, size, and timing of customer projects underway, as well as the proportion of work assumed by partners. Maintenance and support revenue for the quarter was $4.4 million, up 37% from Q4 2021, reflecting recent growth in the base of revenue from our small group of on-premise customers. Fourth quarter gross profit increased by 40% to $61.3 million as a result of strong growth across all revenue items. Gross margin in the quarter was 62% compared to 64% in Q4 2021, primarily due to the negative impact of a strengthened U.S. dollar on conversion of foreign-denominated SaaS revenue. as well as continued investment in professional services headcount to allow for ongoing customer growth. Together, these factors offset the impact of the greater proportion of high-margin subscription term license revenue in the quarter. Adjusted EBITDA was up 87% to $21.1 million, with a margin of 21% compared to 17% in the fourth quarter last year. On a constant currency basis, Adjusted EBITDA was 22% of revenue, These increases reflect the revenue growth we've been experiencing, which outpaced the growth in our total cost base. Our profit in the quarter was $8.6 million, compared to a loss of $2.9 million in Q4 2021. Cash used by operating entities was $2.3 million, compared to $3.2 million generated in Q4 2021. The change largely reflects normal periodic fluctuations and balances of operating assets and liabilities. most notably receivables, including unbilled receivables related to subscription term license revenue and deferred revenue. At December 31, 2022, cash, cash equivalents, and short-term investments totaled $225.8 million, slightly lower than $233.4 million at the end of 2021, despite $33.8 million in cash being used to finance our recent acquisition of MPO. Overall, it was a very strong fourth quarter that contributed to a hugely successful year. Moving to slide nine, I'll let you review the annual results in detail. For now, I would just like to reiterate what John said at the outset. In 2022, we significantly exceeded every key metric for which we gave guidance, including total revenue, adjusted EBITDA, and even SAS revenue growth when you compare a constant currency result of 28% growth to the initial guidance of 23 to 25% growth. That's a fair comparison as we build our initial guidance assuming a much more stable currency environment than transpired. In fact, all our constant currency figures give the best view of how strong our outperformance was during 2022. On a reported basis, we had rule of 40 performance for the year, but on a constant currency basis, we were a rule of 50 company. Now we define these calculations as our SAS revenue growth rate plus our adjusted EBITDA margin.
spk06: I'd like to thank the whole Canaxis team for an amazing 2022. On to slide 10. You can see some of our key metrics.
spk15: We added $53 million to our annual recurring revenue over 2022, 47% more than we did the previous year. At the end of the year, our ARR stood at $274 million, or 24% higher than at the end of 2021. including currency impacts. Our constant currency ARR results show how currency movements mask even stronger underlying growth. I'll remind you that we view ARR as the best metric to understand the underlying momentum of our subscription business. We are incredibly encouraged to continue to see the growth rate continue to climb, and it supports our view that we have more room to accelerate SAS revenue growth ahead. Looking at slide 11, our remaining performance obligation rose to $598 million, up 24% from December 31st, 2021. Of that total, $550 million relates to the SAS business, up 30% year over year. Of the SAS amount, roughly $230 million converts to SAS revenue in 2023, representing roughly 86% of the midpoint of our SAS revenue guidance for the year. This is higher coverage than normal and gives us good visibility heading into 2023. Further details on our RPO can be found in the revenue note to our financialist. Turn to slide 12. We are very excited about 2023 and pleased to be able to introduce guidance for the year. We expect 2023 SAS revenue to grow between 25% and 27% over our 2022 level. This implies a midpoint of approximately $269 million in SAS revenue. As you know, subscription term license revenue is driven by the timing of renewals. of our on-premise customer contracts. For 2023, we expect this revenue item to be between $12 and $14 million. Based on the renewal cycle as it exists today, and assuming continued very high retention rates, we currently expect 2024 subscription term license revenue to be under half the 2023 amount. It should then rebound to near the $20 million level for 2025, followed by another strong renewal year in 2026. Obviously, a lot can change over that time, but we will update with specific annual guidance on our regular schedule as we approach the out years. We expect total revenue for 2023 to be between $420 and $430 million. This guidance implies another strong year for professional services revenue, which we expect will be driven by ongoing success and winning new accounts in 2023. Throughout the year, we will continue our efforts to shift as much of this work as possible to our system integrator partners. They're targeting a blending gross margin of 60% to 62% and providing guidance for adjusted EBITDA margin of 13% to 15%. I will speak to these figures in more detail shortly. The market for supply chain management and our own unique differentiation within it have never been stronger. So we are continuing to invest, most importantly, in sales and marketing. As a result, we expect sales and marketing to be slightly higher as a proportion of revenue than it was in 2022, whereas we expect R&D to be lower and G&A to be roughly similar in those terms. Consistent with our move to an increase in public cloud strategy and the completion of work to our new head office in 2022, we expect our capital expenditures to reduce substantially from $18.2 million to roughly $6 to $8 million in 2023. Going on to slide 13, returning to my comments on gross margin adjusted EBITDA. As we stated last call, our approach in 2023 is to once again balance our SAS growth acceleration with profitability while keeping in mind that our subscription term license revenue has roughly 100% margins and is expected to decline to a third of the 22 level based on renewal cycles. As you can see from the slide, The expected decline in subscription term license revenue alone accounts for roughly 70% of the forecast gross margin decline and roughly two-thirds of the forecast adjusted EBITDA margin decline. Other factors impacting margins include an expectation of a higher proportion of lower margin professional services revenue in the mix than in 2022. Our change has transitioned to a hybrid private-public cloud hosting model, which sees some duplication of costs initially. absorbing the full year impact of last year's incremental investments, and new strategic investments in key operating functions. As John mentioned, a key priority for new hires in 2023 will be in the sales and marketing area. We will also continue to invest in professional services to keep pace with demand while slowing the rapid growth we've experienced in R&D personnel. We are pleased with our balanced approach to growth and profitability. If we achieve our 2023 targets, we will be a rule of 40 company game, which is generally a guiding factor in how we operate our business. Looking at slide 14, we currently view 2023 as a bottom to our margin profile, with improvement starting in 2024 and over the midterm. We fully expect to be able to capitalize on the strong underlying demand in our market and the numerous early strategic growth issues we have underway. First, we have been in a phase of rapid new customer growth, which naturally attracts somewhat lower margins than expansion business. However, this does set us up for the expand phase of land and expand, which generally has a higher margin profile. We also see efficiencies coming from our public cloud strategy, a declining proportion of professional services in the revenue mix, and tapered investment in R&D and G&A as a percent of revenue. While we provide specific annual guidance as the usual times, we are actively working towards a mid-term two- to four-year model that ultimately sees sales growth of 30% or higher and adjusted EBITDA margin approaching 25% or higher. Basically, a rule of 50 company, if you will. While I appreciate some may want a more specific timeline, we don't intend to force anything unnatural. We will continue with our very successful approach of taking cues from our market and executing accordingly to maximize our opportunities and continue to deliver profitability on our path to being the dominant supply chain management player. With that, I will turn the call back to John. Thank you, Blaine.
spk16: While all the metrics we've discussed certainly point to a very successful 2022, and the potential for another strong year in 2023, the truest measure of our success continues to be the quality of companies who put their trust in us. In past calls, we've shared the names of some customers who joined during 2022, including Kimberly Clark, Siemens Healthcare, Bayer CropScience, Carlsberg, NI, or National Instruments, as they used to be known, and Ecotera, maker of leading tea brands like Lipton and Tazo, I'm pleased now to highlight a few more. I'm thrilled to announce automotive giants General Motors and Mazda to our portfolio of customers. In our industrial vertical, farming equipment manufacturer Agco and the construction industry innovator MyTech were also added. In high-tech, we added telecom network equipment provider, Ciena. And in pharmaceuticals, drug discovery firm, Shioniji. In a year of record-breaking net new customers, the full list is so much longer, of course, and includes some of the world's best-known brands. What all this success tells me is that despite the widespread turmoil and uncertainty in the world, possibly because of it, in part, the urgency for digital supply chain transformation has never been greater. We continue to see that as a long-term driver for our business. I'll end the call by thanking the Global Connexus team, which exceeded 1,500 quality individuals at year-end and is still growing. They not only do the hard work behind the results that Blaine and I are so privileged to present each quarter, but they are the reason that Kinaxis continues to be recognized for being such a great place to work, wherever we have offices. On behalf of this great team, we look forward to delivering a tremendous value through 2023 and beyond. With that, I'll turn the line over to the operator for Q&A.
spk10: Thank you. And if you would like to ask a question, simply press star 1 on your telephone keypad, And if you would like to remove yourself from the queue, please press star 1 again. We will take our first question from Richard C. with National Bank Financial.
spk04: Please go ahead. Yes, thank you. And thank you for all that information on the margins going forward. You know, John, you talked about, you know, all these opportunities, and the deck sort of shows, you know, retail, small companies, supply chain. Obviously, a lot going on there. Can you maybe talk about the timing of the go-to-market for those growth opportunities in terms of when you plan to really lean in on them?
spk16: Frankly, the time is now. We are actively engaged in all of those vectors at the moment, including the smaller end of the customer PAM, which adds approximately 12,000 opportunities working through our 25 VARs. And that VAR group is continuing to grow, so we're actually thrilled with the start of that program, recognizing that success won't happen overnight. We're being very patient. We're optimistic, but obviously being very patient. Many of those VARs are in geographies where we are not, and so we're excited about that too. That's another expansion opportunity. On the retail side, We're working with an absolute world-dominating kind of retail subsector. We cannot wait to share some of that with the public. Certain names are just known by virtually every human on the planet. So we're thrilled there. So frankly, we're firing on all cylinders across all of those growth sectors.
spk04: Okay. And like, if I sort of looked at the, let's say the existing business as it was, and if you add all these things on top of it, and I look at your midterm growth rate for SAP, so it's 30%, it almost seems a bit conservative in mind of those opportunities. Like, can you help me sort of reconcile that?
spk14: Great question.
spk15: We see there's a lot of upside, but obviously I have my own Excel spreadsheets and my own financial models I need to work with, and we're going to be prudent in making sure that we have a very good site into where the future is going. And, you know, John mentioned a couple of areas that we think that we can really expand into, but, you know, we have the MPO and the connector that we're building that will be in the first half of the year that I think is going to present a lot of opportunities. We have planning.ai ready to go for us as well. We have our secret project from an acquisition we did back at the start of last year that should be the first half of this year as well. So there is a number of different opportunities, and we're excited to be able to obviously exceed your expectations and our expectations as we move forward. But as of right now, from what we see today, I think we're prudent with saying our midterm growth rate at the end going to be exceeding 30%, which we're pretty excited about.
spk06: Okay, great. Thanks, guys.
spk05: And our next question will come from Daniel Chan with PD Cowan.
spk10: Please go ahead.
spk03: Yeah, thank you. So the RPOs come in at 86% of the midpoint of next year's SAS guidance. Is there something different about this year where you'd expect a change in that ratio, which was typically the lower 80% range? With higher sales pipeline activity and a stronger deployment activity, given your professional services mixed expectations, I would have expected that ratio to compress, if anything.
spk15: Yeah, that's a great question, and I'm happy you raised it. 86% is the highest that we've seen that going into a year. I think we've all seen some of the macroeconomic environment that we're facing right now, and we're being prudent about there's some things out there that are happening in the economy that we just want to be careful about. It's not every day that you see a lineup of Microsoft and Amazon and Google doing layoffs. And so that has us cautious about the outlook. Now, all of our metrics are showing that things are looking really strong for us in the year. So we're not worried on a quantitative perspective. But I think the qualitative aspects of the environment that we're in, we're being prudent right now.
spk03: Okay, that makes sense, and thanks for all that color. I wanted to dive into the professional services a bit. It looks like you're looking for a continued increased mix next year. Just what's driving that, and what are your partners telling you?
spk16: Well, frankly, 2022 was a record-breaking year for customer ads, and so obviously that was reflected in some record-breaking revenue for professional services for us as customers were working to accelerate their transformations. But make no mistake, our partners, if you will, are as tapped out as we are in keeping pace with the number of transformations that are happening. And again, I look at professional services as being transient revenue. Of course, when you see an acceleration in net new accounts, and they all want to see values as quickly as possible. We flood the streets not only with our resources, but obviously our partners are flooding the streets with theirs to bring about that value as quickly as possible. And so long as we continue along this trajectory, by the way, and this is what Blaine was saying, we're going to continue to invest. We're not going to be that company that delay go-lives by three months because we don't have enough people and our partners don't have enough people. So we have quite a lot of visibility in the pipeline that gets shared with our partners, obviously. And we're keeping pace. So far we've been able to keep pace with the net new wins. And between us and our partners, we're keeping pace with the delivery of value that comes with rapid response. I think you'll continue to see that so long as we continue to see these types of record-breaking net new wins.
spk14: Thanks for that, John. And just one more if I can.
spk03: What happens when the supply-demand dynamic starts to stabilize in the professional services space? Do you think you'll be able to sustain these levels of professional services, or will you have to cede some revenue back to them? How do you think about ramping up your team as as that balance is achieved. Thank you. We absolutely have a partner first strategy.
spk16: There's no question. The last thing we're going to do is put our hands in the pockets of our partners. We want them to be wildly successful and if anything, we're the backstop for ensuring that our customers are receiving the value for their subscription as quickly as possible. In terms of you know, where we see, you know, how far ahead do we see this? You know, honestly, I still say this inside of Canaxis, it's chapter one, book one, maybe page two, you know, maybe. There's so much yet ahead of us. You know, we're clearly not in every vertical. I remember talking about our TAM being 3,000 and it's, you know, well north of 20, 30,000 when you start adding the mid-market, and the small to medium-sized enterprises. And when you start leveraging bars that are in geographies where we have no footprint whatsoever, we see a very, very long path ahead in terms of the demand for rapid response.
spk06: Thanks, Jeff.
spk05: And our next question will come from with BMO Capital Markets.
spk10: Please go ahead.
spk00: Hi, good morning. So clearly from the strong results and the guidance, it seems like you're not seeing any sort of a slowdown. But just to be explicitly clear, was there any change at all in customer behavior in recent weeks? Any geographies or verticals, anything to call out? Or is it supposed to even add to what you're saying?
spk16: Yeah, I'd say the only – it's a great question, and obviously we're watching these market dynamics probably as closely as everyone else. I wouldn't say there's been a shift in their attention. I've had probably 150 or so one-on-one conversations with chief supply chain officers over the last couple of years, and the narrative is very, very similar across all of them. Boards are asking their CEOs, what will you do next time? Supply chains are clearly not as resilient as they thought they were. And so there's a lot of board-level attention on supply chain excellence and supply chain transformation. The one thing I would say is that we're seeing a slight elevation, if you will, in the process where boards are required, board signature required for projects like this. And that's somewhat new. Now I will say this. That is on the backdrop of a diminishing overall sales cycle. We've been monitoring that for several years. And we saw a drop in average sales cycle in 2022 than we saw in 2021. 2021 was a drop from 2020. So two things are happening. I think sales cycles are shrinking a bit. So that's good. We certainly hope to see that trend continue. And approvals, approval governance if you will, is going right up to the board level in many cases.
spk00: Okay, thanks for that caller. And then as far as the clouds, you've committed to 100 million of cloud capacity over the next seven years. So how do we think about just over the next year or so the pace of the ramp? I mean, is 2023 primarily you're getting your feet wet and being kind of, you know, cautiously wrapping it up? Or how do we think about how that evolves?
spk14: Well, why don't I start and then hand over to John.
spk15: Yeah, we're already, so Microsoft Azure is up and running. We have customers already in place right now using that on our platform. Google is the agreement we have, and we committed to $100 million with them over seven-year periods. And that is expected. We have a bellwether company that's going to be very well known, and we'll be starting it off fairly soon. And so we're excited to get that going as well. But there's obviously a lot of demand. We're making sure that we're focusing on newer customers that want to come on using public cloud. Our existing customers are very happy with the private cloud environment that they have. But we are planning at least right now to focus on the new customers and then eventually potentially some migration where it makes sense.
spk16: And just to add to that, as Blaine said, we're fully operational with Azure and very, very close with hosting on Google Cloud. And we're thrilled with this. I might have mentioned this on past calls. We saw this as an existential threat to our business as it relates to capacity. We saw, if you will, the momentum building and didn't want to be in a position of not having infrastructure to host our customers. So this gives us that kind of scale. It prepares us for that scale. And we may not just stop at those two. We will see in the months ahead whether others are added just to give us that level of flexibility. But we are thrilled with the relationship. The Google Cloud folks are working exceptionally well with them. and quickly with them to get rapid response fully operational on their environments.
spk06: Great, thanks. I'll stop the line.
spk05: And our next question will come from Kevin with Connexus. Please go ahead.
spk01: Hey there. Good morning. John, just a question for you. You answered a previous question in terms of being Chapter 1. You're not in every vertical. I was wondering if you could call out maybe some of the verticals that you're not in that you see as most exciting and biggest near-term opportunities and sort of how you think about your plans to get into those. Is that M&A as a partner-led? Anything you could share there would be appreciated.
spk16: Yeah, absolutely, and I'm sure I've said this before. I'm 100% sure I've said this before, that we are actually more verticals than we promote openly. Our model has always been to find very strong bellwether accounts, prove ourselves as scalable, prove our fitness for those verticals, and then work to expand from that point. You know, we are... When I think about the verticals that are most interesting, certainly any vertical related to energy right now has a lot of interest. And again, I think these are verticals that are actually very important for humanity. Achieving very efficient energy distribution It's pretty critical. So we're pretty excited about that sector. Certainly there are other ones. When I think about retail, I don't think about it as one sector. Retail is larger than the sum of all of the other verticals that we serve because there are so many sub-segments. When you think about things like quick-serve restaurants and and pharmaceuticals, pharmacies, and things like that. It's not just garments, let's just say. So I look at the opportunity in retail quite a bit as we expand through all of the sub-segments, which is really exciting for us.
spk01: Got it. Appreciate it. A few clarifications for me. In the MD&A, you talked about that you've maintained your net retention levels being over 100%. Uh, any, uh, any thoughts on giving us a bit more, uh, detail there, uh, on, you know, is it 110? Is it higher than that? Uh, and if not, if you can maybe talk about, uh, net retention levels, uh, mid-market versus, uh, enterprise. Sure.
spk14: Uh, I'll, I'll jump in on that.
spk15: First off, it's, um, I think we, we've always historically talked about, uh, our net revenue retention being over 100%. There's a healthy margin. We're, uh, Not afraid to admit there is a healthy margin between where we're at and 100% level. It's helped by the fact that we have extremely high gross retention. Our churn level is very low. We're very fortunate that our customers really love our solution. And so we're in the high 90s for our gross retention. And then the other piece of that is the expansion. Now, we don't provide this because it's hard to do apples to apples comparisons for products. our customers and our net revenue retention versus others, although we have a very comparable or competitive NRR. The big difference is that when our customers first jump onto our platform and come onto our platform, they usually come on at a much higher level than other companies would have. And so the initial contract that we have right off the bat is generally a pretty high amount. Now, saying that, I mentioned earlier on, we have a lot of upsell and a lot of cross-sell opportunities that are coming to the market in the first half of this year. That could show some acceleration even with where we're at right now on our NRR. So Rick and I are hard at work trying to decide if this is something that we will want to show a little bit more insights into going forward. Right now, I would say it's to be determined, but we're very happy with where NRR is at today.
spk01: Okay. No, thanks for that. And just maybe just one last minor one for me. You continue to mention the sales cycle dropping. Just to be clear, are you seeing that within your enterprise base, or is that being driven by the fact that you've got just a changing mix of smaller mid-market customers on? I just want to get some clarity on that. Thanks.
spk16: It's a great question and obviously a really good indicator for us on what I may call the readiness of the market and the maturity of the market for transformation. I couldn't say that there's specific sub-segments of our pipeline. We're looking at it as an average. Again, I've witnessed extremely large enterprise enterprise class customers and deals come through in a very short period of time in comparison to years past. And in general, the smaller mid-sized accounts will tend to happen a little bit faster. But overall, I think we're seeing a general wake-up of the discipline of supply chain. The discipline of supply chain is realizing that the mechanisms that were in place prior to the pandemic may not survive the next three years, let alone the next 30. And so this is what's really driving the interest and the acceleration and working towards transformation and digitizing the supply chain.
spk06: Good stuff. I'll pass the line.
spk10: And our next question will come from Paul Treber with RBC Capital Markets. Please go ahead.
spk12: Thanks very much and good morning. Just can you speak to scalability and how you're improving it? The TAM that you mentioned is large, 19,000 customers. We've only scratched the surface to 300. That's maybe, I don't know, 25, 30 per year, maybe a little more last year. What number of customer additions do you think you can add at scale per year? And then working backwards, how do you improve your sales cycles or the process to add that many customers per year? Yeah, we think about that a lot.
spk16: In fact, training and enablement as a strategy is very front and center of my mind right now. I used to worry about the availability of compute power. I don't anymore with obviously strong relationships with Microsoft, Google, and perhaps some others. that will give us that kind of scale. And so the rest is scaling the partner ecosystem to get them ready to accelerate deployments as we continue to see momentum. I truly believe that it's only a matter of time. Every single manufacturer on this planet is going to be forced to transform their legacy methods. Those that don't will be left behind. It's really that simple. So now it's a question of, okay, well, at what rate will we see these changes occur? And so obviously we monitor that very diligently, not only internally, but with our largest partners, partners like Accenture and Deloitte and many others that are all obviously seeing exactly what we are. And so I'd say that the thing that needs to happen to prepare for this momentum is to ensure that we have adequate coverage of consultants to do the deployment work once the customers, once all of these accounts decide it's time. So that's where I see the scalability risk. And so we've been hyper-focused right now on training and enablement, not just internally, but The way I've described it internally is it starts with partners. If you can satisfy the needs of our partners, then by default you satisfy the needs of internal resources.
spk12: That's helpful. With Rapid Start, obviously it's been a significant streamlining of the sales process there. Do you see the sales or the integration over time becoming more more straightforward and less complex, or will it always remain like a relatively complex deployment just given the nature of the problem that you're solving?
spk16: Boy, do I love that question, Paul. And this is another trend that we're seeing actually post-pandemic is the recognition that best practice is what's necessary. This notion that every supply chain is unique and needs some kind of custom solution is flat out flawed logic. And so that recognition in fact is what is driving the success of Rapid Start. The notion that someone could begin their journey with the combined intellect of many different accounts and many different verticals is really appealing. And so absolutely we have been working to engineer And we're thrilled obviously with rapid start the ability to shake hands and go live in 12 weeks You know is a testament to that thesis And so absolutely I think we're going to continue to see that I think that we're going to continue to see the the mid the small to mid players Basically saying I'll have what they're having to quote famous movie you know where They really want the sum of the intellect of the larger players and say, look, I'm not here to reinvent the wheel. The wheel's magnificent. I'll take the wheel. And so I think over time, we're going to continue to see compression in deployment cycles.
spk12: And just lastly on MPO, can you provide an update on MPO in terms of like product integration and the timing for that and how that fits into the long-term strategy there.
spk16: Yeah, so as I said in the opening remarks, MPO for us provides the execution-related functionality that makes us a supply chain management solution provider as opposed to just supply chain planning solution providers. So the engineering is underway to make those two, you know, those two products. And, you know, the thrilling bit, especially post pandemic, you know, many of our customers are saying there's a tremendous amount of risk associated with material in motion, you know, where, you know, the transportation lanes aren't as trustworthy, let's just say, as they might have been in the past. And so that generates tremendous amount of risk. And MPO has a very similar philosophy. They had a very similar philosophy of concurrency. They were just connecting concurrent functionality associated with execution, supply chain execution. And so We're bridging, obviously, those gaps. We've already made some sales, obviously, of that product line independently and working with existing customers to take advantage of the, let's just say, the combination of our solutions and providing an end-to-end, fully concurrent supply chain management solution. So we're quite thrilled with the progress.
spk06: Agreed. I'll pass on.
spk05: And our next question will come from Stephanie Price with CIBC.
spk10: Please go ahead.
spk09: Hi. I was hoping you could talk a little bit about upselling rapid start customers, particularly enterprise rapid start customers on more fulsome rollouts. Are you seeing that happening now or is this more of a future opportunity here?
spk16: We're seeing it happen now, Stephanie. In recent quarters, we've seen somewhere between 20%, 30% of new customers choose to go strictly with Rapid Start. They're telling us, look, we need to show value in between board meetings. That's quite a potent thing to say, that in between board meetings, you could be providing go-live of a concurrent planning environment. And in all of those cases, post rapid start, go live, we're seeing rapid adoption and expansion of those accounts. That's exactly what it was designed to do, frankly. And in many cases, they continue to iterate along the same type of pace, following what I might describe as an agile deployment methodology, where you're seeing go-live value in 12-week increments. So it's been very, very successful. It has been a differentiator for us against our competitors. And obviously with every win, we learn more. The engineering team continues to improve on that product. So we're thrilled with the strategy, and we're going to continue to press hard on it.
spk09: Great, thanks. And then in terms of some of your new areas of focus, including supply chain execution and the retail vertical, just curious if you are planning on looking at that completely organically, or could there be some M&A that you're looking at doing, and maybe related, just to comment on the valuation environment here?
spk16: Yeah, both is really the answer. It's an and, not an or. And so we're working very diligently on our retail offerings as we speak. As I said, we can't wait to share more detail about that and hoping that will happen in the coming months, certainly during the year. At the same time, we have a very healthy M&A strategy. In fact, recently, hired an executive to help us with that as we continue to grow. We're not consolidators. As you know, our path on the M&A front, our strategy on M&A is not to consolidate revenue. Our strategy is to look for technically accretive white space, if you will, for our concurrent planning strategy and accelerate the delivery of that technology. So you'll see us continue along that path. There's nothing imminent, I would say. There are some very specific areas of interest that are directly aligned with our growth factors, however.
spk05: Great. Thank you very much. And our next question will come from Robert Young with Canaccord Genuity.
spk07: Hi, Canaccord Genuity. A couple of quick ones. The mid-term targets in the deck, Ari asked about the top line, 3%, but the adjusted EBITDA margin at 25%, that seems relatively low to some of the aspirational targets you've given in the past. Is that tied to this two to four years, or are you trying to signal that maybe the long-term margin potential of the business is maybe lower than, is that the same margin profile that you highlighted at the IPO and you're significantly higher scale now?
spk15: Yeah, great question, Rob. Let's go back. I mentioned this last year. We're a 30-35% adjusted EBITDA company that's right now investing to grow our business as fast as possible.
spk13: That's still the same comment.
spk15: The only difference is we have a mid-term stepping stone we need to get to, which is the 25% range that we talked about. Long-term, absolutely. We're a plus 30% adjusted EBITDA company. We have no issue saying that and we'll continue to Shout that at the tops of our lungs because what we're doing, the whole reason around this midterm guidance that we've been providing and this midterm outlook is as a product, we're known as a trusted visionary. Our customers and our prospects, they look at us and they say they've done it. They've done exactly what they told us they were going to do and they have the best visionary. Gardner keeps on saying that, but our partners and our customers reiterate that. I'm just trying to emulate them a little bit on the finance. We're trying to give you the stepping stones on where we're going with our business model over time. We are, in the mid-term, going to be getting to that plus 30%, plus 25%. In the long-term, we're going to be getting to that plus 30%, 35% levels for just the EBITDA. So as much as we can right now, what I'm trying to do is give you the stepping stones and the path for our business model in the short-term, mid-term, and eventually the long-term where we're going.
spk10: And our next question will come from Martin Toner with ATV Capital Market. Please go ahead.
spk14: Thanks so much, everyone. A great quarter. Most of my questions have been answered, but I got a couple of ones kind of housekeeping. I think you mentioned a 2023 CapEx number. What was it? Sorry, it's $6 to $8 million. Perfect. I noticed that ARR growth was below Q4, SAFT, stocks and currency revenue growth. And I think that's the first time that happened in a bit. Can you kind of address any reasons why that was?
spk15: Yeah, we had an amazing Q4 2021 as well as 2022. The comparisons that we have are just, it's obviously a year end. number that we compare against versus a period that takes place. We had an absolutely amazing Q3 2022 this year. And so it's just a matter of the timing of when contracts were finalized and when the revenue hits there. It's also on a constant currency basis, just the differences in how we calculate it. For ARR, it's a period end versus the revenue items over a period of time. So we had about one-third to 40% of our revenue that was impacted by constant currency. And there'd be different, I guess, rate impacts based on the periods that we're comparing against.
spk05: And our next question will come from Christian Scrow with Eight Capital.
spk10: Please go ahead.
spk11: Hi, good morning. Just one question from my end. The new customer split out was 60-40 between enterprise and mid-market. What does that mix look like in your current pipeline and would you say in the mid-term between, again, enterprise and the market?
spk16: It's roughly the same. Frankly, I don't think there's enough distinguishing factors when you look at the global pipeline and every geography and every vertical to suggest that there are certain some elements of the pipeline that are dramatically different. So I would say it's roughly the same.
spk06: That's helpful. Thanks very much.
spk05: And our next question will come from Susan Sukumar with CECL. Please go ahead.
spk06: Good morning, gents, and congrats on the results.
spk02: Could you touch on what you see today in the competitive environment and the impact on your pricing power, given that you now have more end-to-end capabilities with MPO?
spk16: Yeah, so the competitive landscape really hasn't changed that much, frankly. We continue to see SAP as the largest competitor, given their legacy footprint in the space. And we're often being called to replace their legacy footprint. We continue to see Blue Yonder and 09 from time to time, depending on the sub-verticals. But again, I've always said this about competition. I really don't believe we compete so much on a product basis. It's really technology basis. It's really competing on technique. And I frankly don't see any other provider in our space that take the same posture as we do around concurrent planning. And I think that gets recognized by the likes of Gardner and other analysts out there that continue to place us very high both on execution and on our vision for what is necessary for supply chain excellence. So frankly, I haven't seen a whole lot of difference We continue to be thrilled with the pipeline and, you know, as reflected in the 2023 guidance. We're excited with 2023, but I have to say I'm even more excited about 24, 25, and 26.
spk05: And our final question will be a follow-up from Robert Young with Canaccord Genuity.
spk10: Please go ahead.
spk07: Hi. The second question I had was around the sub-term guide 12 to 14. If I look back to 2020, which would be the three-year cadence, it's exactly the same guide you gave at the beginning of the year. You ended the year at about $18 million. So the guidance is down on that three-year cadence. And so that implies either you're converting customers into SaaS or you're not expanding those customers. Or maybe there's a five-year contract that's
spk15: obscuring it i just i think it's an important thing for investors to understand because it's such a high gross margin component and you know the ebitda guy is a little bit lower so if you give us some context around that that'd be helpful yeah so we've gone through a process where some of those on-prem customers are the customers that choose to have the option to go on-prem um are no longer choosing right away three-year deals they want to have longer deals they're getting to uh more often now we're seeing four to five-year deals so That three-year cycle no longer exists, which is thankful that we have the majority of our revenue being SAS, which we can obviously get a lot better on forecasting. But the renewal cycles, we haven't lost anyone. We have obviously had some expansions in that time, but our guidance is purely based on what we see the renewals for the customers that we have in place that are coming due this year.
spk05: And that will conclude today's question and answer session.
spk10: At this time, I would like to turn the call back over to Rick Wadsworth for closing remarks.
spk13: Thanks, operator, and thank everyone for participating on today's call. We appreciate your questions, as always, and your ongoing interest and support of Kinexus. We'll look forward to speaking with you again when we report our first quarter 2023 results. Bye for now.
spk10: And that will conclude today's conference. Thank you for your participation and you may now disconnect.
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