Kinaxis Inc.

Q1 2023 Earnings Conference Call


spk00: Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Kinaxis Inc. Fiscal 2023 First Quarter Results Conference Call. Currently, all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session, and instructions will be provided at that time for you to queue up. I'd like to remind everyone that this call is being recorded today, Thursday, May 4, 2023. I will now turn the call over to Rick Wadsworth, Vice President of Investor Relations at Canaxis Inc. Please go ahead, Mr. Wadsworth.
spk09: Thanks, Operator. Good morning and welcome to the Canaxis Earnings Call. Today, we will be discussing our first quarter results, which we issued after closing markets yesterday. With me on the call are John Scard, our President and CEO, and Blaine Fitzgerald, our CFO. Before we get started, I want to emphasize that some of the information discussed on this call is based on information as of today, May 4, 2023, and contains forward-looking statements that involve risks and uncertainties. Actual results may differ 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 Cadaxis's CDAR filings. During this call, we'll discuss IFRS results and non-IFRS financial measures, including adjusted EBITDA. A reconciliation between adjusted EBITDA and the corresponding IFRS result is available in our earnings press release and in our MD&A, both of which can be found on the investor relations section of our website,, and on CDAR. Participants are advised that the webcast is live and is also being recorded for PlayDoc purposes. An archive of the webcast will be made available on the Investor Relations section of our website. Neither this call nor the webcast archive may be re-recorded or otherwise reproduced or distributed without prior written permission from Kinaxis. To begin our call, John will discuss the highlights of our quarter as well as recent business developments, followed by Blaine, who will review our financial results and outlook. Finally, John will make some closing statements before opening the line for questions. We have a presentation to accompany today's call, which you can download from the investor relations homepage of our website. We'll let you know when to change slides. I'll now turn the call over to John.
spk07: Thank you, Rick. Good morning, everyone, and thank you for joining us today. I'll be starting with slide four. We're pleased to report first quarter results supporting our strong and improving outlook for the year. We achieved SAS revenue growth of 28% in the first quarter. a solid start towards our overall goal of 25 to 27% growth for the year. Similarly, we posted an adjusted EBITDA margin of 17%, which puts us on track towards our new and higher target of 14 to 16% for the year. As strong as these numbers are, the most significant aspect of the quarter was the quality and type of new name accounts we continue to win, We have spoken about our focused entry into the retail market for some time now, and today I'm pleased to share that we now have made significant progress in this regard. You would have seen our recent announcement of our recent win with Javi, a leading global supply chain company serving the unique needs of the very largest quick service restaurants or QSRs in the industry. For those of you unfamiliar with HAVI, I would encourage you to do a little research. HAVI will be using rapid response, including our new module, to help their customers enable advanced predictive and prescriptive analytics using machine learning and artificial intelligence. Provide end-to-end supply chain visibility and powerful what-if scenario planning. I can't overstate how excited I am to have Javi as a customer and to help improve the supply chains of the world-class QSR brands they work with every single day. During Q1, we also won another iconic QSR brand, which unfortunately we can't name at this time, but a true leader in their category. Together with Javi, this win gives us important cornerstones in the massive QSR segment of the retail market. We will continue our focused approach to retail and work to leverage these successes in similar opportunities. We also welcomed one of the oldest, best-loved snacking powerhouses in the world, a true household name. As always, I'm humbled when such globally recognized brands place their trust in Kinaxis. I'm particularly encouraged by our progress during these uncertain economic times. Our win rates remain very robust, even as prospects continue to exercise extra care and rigor in their purchasing processes, which has temporarily extended some sales cycles. As our recent customer additions demonstrate, however, market leaders continue to prioritize supply chain management transformations in their budgets And our sales activity continues to operate at all-time highs. Today, Kinaxis has seven of the top 25 companies in the Fortune 500 and 11 companies named by Gartner, either in their top 25 supply chains or master's category, Gartner's highest classification. These figures represent both amazing accomplishments to date and huge opportunities ahead. Also noteworthy in Q1, our annual recurring revenue grew by 23%. We continue to see good mix of new business between enterprise class and mid-market accounts. Our value-added resellers, or VARs, also contributed some wins with smaller companies in the first quarter. We are in the very early stages of this strategy, but we are pleased to see initial proof points of its effectiveness. Looking further out, growth in our 12-month rolling pipeline continues to indicate that the positive demand trend for concurrent planning capabilities will continue for some time. And as you know, Kinaxis is investing appropriately to fully capitalize on this very constructive environment. As part of that investment, I'm pleased to announce that we have live customers in both Microsoft Azure and Google Cloud Platform, or GCP. As we've mentioned previously, the focus is initially on hosting new customers in these public cloud environments rather than migrating existing customers. We're extremely pleased with both the performance and economics of these arrangements. Rapid Response is also now available in the Microsoft Azure marketplace, which raises our profile in this community. Now more companies will be able to take advantage of the supply chain agility Kinexus delivers by accelerating buying cycles and using rapid response to help contribute towards their Microsoft Azure consumption commitments. As one final note, I'm absolutely thrilled to inform you that the latest Gardner Magic Quadrant for supply chain management was published by Gardner yesterday. With their tremendously deep and objective inspection of our space, this important publication may just be the definitive guide for practitioners looking for a path towards digitizing and driving breakthrough in supply chain management performance. If you're a practitioner of supply chain or you care about those companies like Kinaxis, those of us supporting the craft, I would encourage you to seek it out through the Gartner subscription. In keeping with and respecting Gartner's communications policies, we will be releasing a complimentary copy of this report in the coming days. Watch our news, our social channels, and the website for more details. This one is not to be missed. With that, I'll turn the call over to Blaine to review results for the quarter and our improved outlook for the year.
spk06: Thank you, John, and good morning. As a reminder, Unless noted otherwise, all figures reported on today's call are in U.S. dollars under IFRS. While constant currency figures for all key metrics would have demonstrated even better results, we won't be sharing them for Q1, as the impact of foreign exchange fluctuations on year-over-year comparisons has been waning. However, if that changes, we will consider reinstating such disclosures, if doing so would significantly help with the interpretation of our underlying business performance. Starting on slide five, total revenue in the first quarter was up 3% to $101.1 million. The slower growth simply reflects the extremely high level of subscription term licenses in the comparative period, which as you know, naturally fluctuates cyclically. Our key SAS revenue results grew 28% to $63.1 million. As you would expect, recent strength in our annual recurring revenue growth has been flowing through to higher SAS revenue growth. Subscription term license revenue was $7 million versus $23.5 million in Q1 2022. 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. We also added a new customer in the quarter that has the option to move their deployment on-premise and expanded our deployment with an existing on-premise customer. I'll speak to the impact of those events on our outlook shortly. Our professional services activity resulted in $26.6 million in revenue, or 24% growth over the first quarter of 2022. Generally, this revenue item varies from quarter to quarter based on the number, size, and timing of customer projects underway, as well as the proportion of work assumed by partners. Maintenance and support revenue for the quarter was $4.4 million, up 14%. First quarter gross profit decreased by 12% to $61 million. Gross margin in the quarter was 60% compared to 71% in Q1 2022. These changes are also largely a reflection of the extremely high level of high margin subscription term licenses in the comparative period. Additionally, our recent incremental investments in related teams impacted margins, most notably in professional services. We expect the professional services component of gross margin to improve in future quarters. As a result, we still foresee an annual gross margin in the 60% to 62% range. Adjusted EBITDA was down 48% to $17.1 million, with a margin of 17% compared to 34% in the first quarter last year. Again, this was driven by the subscription term license revenue cycle and recent incremental strategic investments in the future growth of Kinaxis. Our profit in the quarter was $1.2 million, or $0.04 per diluted share, compared to $12.5 million in Q1 2022. Cash flow from operating activities was very strong at $38.9 million, compared with $22 million in the prior year period. The increase largely reflects normal, periodic fluctuations in balances of operating assets and liabilities, most notably receivables, including unbilled receivables, payables, and deferred revenue. At March 31, 2023, cash, cash equivalents, and short-term investments totaled $272.7 million, up from $225.8 million at the end of 2022. Overall, it was a good start to what we anticipate being another year of accelerating SAS revenue growth, balanced with solid profitability. On to slide six. Our annual recurring revenue, or ARR, grew 23% over the first quarter of 2022 to $285 million. This is a slightly lower growth rate than in the last couple of quarters. As John mentioned, given the macroeconomic backdrop, certain prospects continued to exercise extra rigor in their purchasing processes, which has moved some opportunities into future quarters. Both our initial and updated guidance for 2023 anticipated this could happen early in the year, so we remain comfortable with our SaaS revenue outlook. Our win rates remain very high, and our pipeline continues to grow quickly. Overall, we remain thrilled with demand conditions in our markets, our leading competitive position, and with the opportunities that incremental investments in the sales team will create. Moving to slide 7, at quarter end, our remaining performance obligation, or RPO, was $568 million, up 18% from Q1 2022. Of that total, $528 million relates to SAS business, up 19% year-over-year. Of the SAS amount, roughly $180 million converts to revenue in 2023. This amount, together with earned SAS revenue in Q1, represents roughly 91% coverage of the midpoint of our SAS revenue guidance for the year. which bolsters confidence in our outlook. I'll remind you that growth in RPO varies both with incremental business one and renewals of existing subscription amounts. Q1 2023 was a light renewal period, as is every Q1 in general. For example, you'll notice that our SAS RPO dipped in Q1 2022 as well. Further details on our RPO can be found in the revenue note to our financials. Turning to slide 8, we remain very excited about 2023 and are pleased to be able to update guidance for the year. We continue to 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. One reason for the unchanged view is that a major a new customer we had expected would meet the requirements for SAS revenue accounting wanted an option in their contract to migrate their private cloud deployment to an on-premise environment. As you know, such an option triggers subscription term license accounting, despite their current cloud-based deployment. As a result, we are increasing our subscription term license revenue outlook for the year to $16 to $18 million. The vast majority of the $4 million increase will be recognized in Q3, Naturally, our maintenance and support revenue for the year will inch up as well. Accordingly, we are increasing our total revenue outlook for 2023 to be between $425 and $435 million. As a result of these changes and stronger than expected profitability in Q1, we are now targeting an adjusted EBITDA margin of 14% to 16% for the year. We remain pleased with our balanced approach to SAS revenue growth and profitability as we work towards another year of real affordability performance. With that, I will turn the call back to John.
spk07: Thank you, Blaine. When I think of Kinexus, one word often comes to mind, resilience. It's what we deliver to our customers when they are forced to navigate the often unpredictable conditions of their supply chains. Resiliency is a key strength of our own business during these turbulent times and a direct reflection of the many dedicated Kinexus employees that make it possible. I wish to thank them all for their commitment to our mission. On behalf of the Connexus team, I'm very pleased to have both delivered a solid first quarter and to be working towards an improved and exciting outlook for the year. With that, I'll turn the line over to the operator for Q&A.
spk00: Thank you. We will now begin the question and answer session. If you have a question, please press star 1 on your telephone keypad. If you wish to remove yourself from the queue, please press star 1 again. One moment, please, for your first question. Your first question comes from the line of Thanos Mascalapas with BMO Capital Markets. Please go ahead.
spk08: Good morning, John. With respect to the macro, I think what you're saying is that there's been some incremental extension in sales cycles in some cases over the past 90 days, obviously still a strong demand environment given private outlook. But can you just comment in terms of just what specifically has changed since the last quarter?
spk07: Yeah, I think the main, I'd say the main issue is really in the very trailing section of a of a sales cycle. I'd say the final step where final approvals are being collected and often goes straight up to board level. And so we're seeing, I'd say right now, we're seeing a little bit of an uptick as a result of the activities in Q1. Certainly deals are not evaporating. They're just taking a little bit longer to get through that final that final step. So there's what I would call extra rigor. Now, I would also say, you know, in previous calls, I've been saying that our overall sales cycle, which used to be measured in, I want to say, the 18-month kind of a sales cycle, we're nowhere near that by any stretch. You know, we continue to see, you know, a lot of activity And, you know, it's certainly sales cycles that are more aggressive than what we saw, I want to say, pre-pandemic, where we were experiencing sort of that 18-month cycle. So our 12-month rolling pipeline continues to be very robust. Amazing names we're working with. And so, you know, I think it's really a situation where, you know, final approvals often go directly to a board. And the board is based on a schedule, and those schedules may or may not fall in line with what our pre-knowledge would suggest.
spk08: Thanks for that, Collar. And regarding the QSR vertical and your success there, can you comment on whether that vertical posed some distinct nuances or challenges you had to address there? with respect to, you know, making the platform suit those customer needs, and then with respect also to the pipeline you're seeing for other opportunities in that vertical, if you could comment. Thanks.
spk07: Yeah, absolutely. Love that question. And certainly, you know, the QSR space in general is where you see tremendous volume. You see use cases that are heavily leveraging machine learning and artificial intelligence, demand sensing, the consumption of sentiment data as part of the forecasting. I'm thrilled to see our performance there, just amazing. In the case of the early QSR accounts that we're working with, with what I would call sizable footprints, we are presenting those QSRs with better results faster, which is just thrilling to see. It's really a testament to to the work coming out of the R&D function. And frankly, much of that came from the Rubicloud acquisition and the team. That's when it all started. The bench strength machine learning that came from that team is really fueling the use cases in that space. It's just getting started, as I said, but, you know, We can certainly name Javi, and those that wish to know who Javi serves, well, it's relatively straightforward to find that. And hopefully very soon we'll be able to announce the other very large name brand in QSR that we're working with.
spk05: Great. Thanks, Sean. I'll pass the line.
spk00: Your next question comes from the line of Richard C. with National Bank Financial. Please go ahead.
spk12: Good morning. This is Mihir calling in for Richard. Congrats on the quarter. So I just wanted to ask, would you be able to quantify how much hosting workloads on the public cloud versus your own data centers has kind of impacted margins?
spk06: Oh, yeah. So right now, the vast majority of our hosting is still with our private data centers. We are obviously moving much more towards public cloud, but it's early days. Both with Microsoft and GCP, we do have customers, a number of customers that have already migrated over, and we're going to continue to grow that. We do have some migration costs that are going to be hitting our COGS line, which will dampen the early years or early quarters, at least, for for gross margin, but it's, I'd say, a fairly insignificant amount at this stage.
spk12: Okay, thanks. And then just one follow-up. Just thinking about the trajectory of the pro-service margins, how should we see that scaling as we move through the year?
spk06: Yeah, we came out of a quarter that, I'll tell you how my My heart and my brain was going throughout the quarter. First month, I was pretty worried about their margins, and it was a lot lower than I would have liked. I got to the second month of the quarter, and it was a little bit better, but still a little bit worrisome. And then we got to the third month of the quarter, and they had a phenomenal, I guess, revenue month in that part of the quarter and showed a lot of trajectory in the right direction. Now, coming in mid-sevens for margin is not what we want for that type of margin profile. We much prefer what we had in 2022, but everything is indicating based on the last month of the quarter as well as where we're starting Q2 that we're going to get up to at least, if not higher, on the margins that we had in 2022. Okay, thanks.
spk12: I'll pass the line.
spk00: Your next question comes from the line of Scott Fletcher with CIBC World Markets. My apologies. Please go ahead.
spk10: Hi. Good morning. This is Scott Fletcher on the line for Stephanie Price. I just wanted to ask a question about partner sales and sort of the traction you saw in the quarter. If you could just sort of dig into how that's trending and what you're seeing there.
spk07: Yeah, so we continue to see the vast majority of net new wins being influenced by our global alliance team or global alliances that we've established. I mentioned in the opening remarks that our value-added resellers, our VAR initiative, which started not that long ago, relatively new initiative for us. Well, they're on the board. in Q1. They're contributing already, very, very short period of time, and they're in geographies that we are not in. The whole point of the VARs section of our business was to expand into geographies and also go after what I'll call the small to midsize accounts. So that's showing some great progress. We also have Solex partners, what we call Solex partners, solution extension partners. So these are other software vendors that are building intellectual property on top of rapid response. And we go to market in lockstep with them. And we've seen some great success there with our relationship with Planet Together on the production scheduling side, and certainly progress on the transportation load optimization with Foreflow, just to use a couple of examples there. And so they've been on the board also I would say even more significantly, those relationships are helping us, you know, I'd say remain qualified for other very large accounts. The fact that they're in providing their unique intellectual property, you know, puts us in a game we might ordinarily not be able to play. So that's the color I would provide on what I'd call the partner influence on net new wins.
spk10: Thanks, John. That's helpful. I can link there.
spk00: Your next question comes from the line of Christian Skro with Eight Capital. Please go ahead.
spk11: Hi, good morning. I wanted to start on NPO and Kinaxis' expansion functionally into supply chain execution. Maybe give you a chance to unpack some of the updates there. How do you think of NPO coming under the umbrella both maybe in the way of branding over time, but also in your go-to-market, in your conversations with customers?
spk07: Sure. So MPO, that acquisition was really designed to extend our concurrent offering, extend our value proposition onto the execution side of the supply chain. And this is very, very significant. I really do think this is a fundamental shift that we're seeing in the industry where supply chain planning and supply chain execution are becoming one. The lines are blurring there. And so that was the thesis behind that acquisition. And since that time, we've been hard at work integrating the technologies. When we got them, they had a limited sales team, limited sales resource. So we've been working to increase, I'd say that the sales The sales size, the size of the team is no longer really a barrier in our go-to-market. We have a good pipeline building. And again, the point of the exercise is to offer supply chain execution related use cases to our existing customer base. And while simultaneously growing our footprint in the supply chain execution space that MPO had been building themselves. Generally speaking, I'd say the industry analysts would size the supply chain execution market as roughly the same size as the planning market. Think of a doubling of the TAM, if you will. And so we're obviously really thrilled with our progress there. And more importantly, I really think this will become the new standard going forward for supply chain excellence. There won't be two distinct categories. In fact, we may even see you know, the terminology supply chain planning being abolished because, you know, people will be thinking about supply chain management or supply chain, even better yet, orchestration.
spk11: That's all. I'll ask just one more question this morning on the build-out of the sales team and maybe to lead. Congrats on sounds like having aggressive plans to hire there through this year which is certainly a sign of confidence um maybe just unpack for us you know where you're adding sales team staff how you're thinking of structuring the team um and how the go-to-market will look you know how you're incentivizing aligning people to attack you know market opportunities as you grow the team this year yeah well we continue to grow uh
spk07: The sales team, for sure. And those that, you know, have done the analysis would see that our sales efficiency numbers are, I might even classify, best in class. Maybe that's bold, but I'm bold. I bet I would get behind that statement of being best in class. And so, you know, as we continue to monitor sales activity, as I mentioned, we're seeing a lot of sales activity right now. And by that, I mean... We monitor every single demonstration done, every proof of concept, every interaction done with a prospect gets measured, and we monitor that as a sales support activity, what we call an SSA, and we're seeing that as a leading indicator to drive the sales team. So we're going to continue to grow our footprint of the sales function in North America, Europe, as well as Asia Pacific and primarily Japan is where we're focused. We're also growing what I call the install-based sales rep group. So we're at a scale now. We're having dedicated sales account reps that focus solely on the base. It makes a lot of sense. And so we're investing aggressively on that team as well.
spk11: That's plenty of helpful color. Thanks for taking my questions, John. Thanks.
spk00: Your next question comes from the line of John Shooter with RBC. Please go ahead.
spk13: Hi, it's John Shooter on the line for Paul Treiber. Just a quick question on your mix of verticals. Are you seeing any difference in the buying patterns across verticals, or is it pretty consistent?
spk07: It's a great question. It's quite consistent. I look at the pipeline and I would say our traditional verticals where there's a lot of activity continues to be, I'd say, active. We see a lot of activity in the automotive industry right now and I would posture that the automotive industry was heavily hit by the impacts of COVID. The very, very rapid move towards electrification of that industry is also causing some major disruptions in supply chain. And so we're seeing a lot of pickup in that area. We continue to see high-tech electronics and life sciences and some great activity in those areas as well. So, you know, and obviously in the CPG and retail functions, we continue to see some very good progress. As mentioned, you know, one of the most iconic snacking brands on the planet, you know, and seeing them place their trust in Canaxis, we're just thrilled with that. So it makes me want to eat chocolate, let's just say. So, you know, we continue to see broad activity. Now, as it relates to geographies, I haven't necessarily seen a shift there also. It's quite even. In fact, most supply chain practitioners are all having the same conversation. What am I going to do next time? You know, some might say, oh, the supply chain is stabilizing. Well, it's certainly not as volatile as it was in the midst of the pandemic, but Make no mistake, every board is asking every CEO, what are you going to do next time? And so it is absolutely driving a uniform conversation around supply chain excellence for the future. Something that is unique, and so I'm glad you asked the question, is the very, what I would say, rapid adoption of rapid response for small accounts through our VAR program. Many wouldn't necessarily know the name, but we are serving manufacturers that are in the $100 million range and some that are in the $150 billion range and everywhere in between. What that tells me is that we're able to solve supply chain problems across that broad spectrum, and we're starting to see more pipeline activity in the small to medium size, which obviously is an enormous TAM. And we're proving that the economics work, but so does the solution. It's not like rapid response is so complex that only the biggest and largest corporations can use it. So we're proving the economics and we're proving the use case works for both parties. So it's an absolute win-win. And we are seeing that's one area where I might describe it as emerging.
spk13: That's helpful, thanks. And just on the cash position, after the strong cash flow this quarter, it looks like you guys are back over 200 million net cash. So what are the potential uses there? Are you thinking about acquisitions at all? And how do you think about that?
spk06: Yeah, great question. We're obviously absolutely proud of our strong cash version. Closing on $300 million is always a nice place to be. And it gives a lot of options as to what we can use it for. M&A is something that we are considering, but we're being very thoughtful about it. We have an idea of the types of companies that we want. We're a Canadian company, but we don't like hockey stick companies. So we don't like companies that say that they're going to have this huge inflection point goes straight up based on a whole bunch of losses as we continue to look at companies that meet our needs either through acquihires or ip that we need we are going to evolve our process and we're doing that right now as we just brought on a new leader for our corporate development team so we're pretty excited about the direction we can grow both organically and inorganically the one thing to remember is that We're a build-first company, and we're always going to be a build-first company. But I think the ability to increase through inorganic growth is a great complement to that build function that we have in place already.
spk00: Your next question comes from the line of Martin Toner of ATB Capital Markets. Please go ahead.
spk02: Thank you so much. Good morning. Congrats on a nice quarter. Just wondering, I wanted to pick up on the comments you made about integrating planning and execution with MPO. What other competitors have done that?
spk05: You know, I don't know.
spk07: I can't find one that has fully integrated in a concurrent environment. And when you think about what has really shone a light on this as a key use case, during the pandemic, it was near impossible to find containers. There were a lot of containers stuck at port. In other words, the transportation risk of material in motion had never been higher. And practitioners were trying to understand the implications of transportation risk on current plans and current promises. There's an absolute direct link between the material and motion risk and the promises made to the street and the promises made to customers. The problem is there was a broken link between those two. And this is why we are really keen on investing and fusing these things together so that we have true end-to-end concurrent supply chain orchestration from tip to toe. But to answer your question, I quite frankly have not seen another equivalent. And again, part of that is because we have a very unique, what I would call a very unique engine in our concurrent planning function and so we're just extending it to include uh now use cases that are on the um on the on the execution side on the you know what i would call the transportation risk side great thanks for that john so it's been a while now since panasonic bought blue yonder have you seen any uh change in
spk02: the way they approach this market or how you see them in competitions and RFPs?
spk07: Yeah, no, I would say that, you know, our primary competition continues to be the incumbent. You know, SAP tends to be our largest competitor. They're omnipresent. They have a very legacy footprint, but they are omnipresent as... you know, as a legacy provider. And so I would still put them as number one. We continue to see Blue Yonder from time to time, and we see 09 from time to time as well. I would probably put them in that kind of a sequence. But I wouldn't necessarily say that we're seeing any difference in how we go to market. When Kinexus competes, in fact, one of the bold things I say is software doesn't matter. techniques inform technologies, not the other way around. And so if we can get prospects to bond on technique first, then we obviously do very well because I don't believe that any other providers in the industry can provide the same level of concurrent planning that we do. And so that's been a very, very potent go-to-market strategy for us, and we're going to continue to do it that way.
spk02: Thanks, John. Can you confirm that your pipeline is still a record? And can you comment on the growth in the pipeline compared to this time last year and compared to your current ARR growth?
spk06: Well, so let's talk about pipeline, and I'll clarify the ARR growth question that you had. Absolutely, it's a record. And we don't comment on the percentage growth that we've had, but it's growing at a very nice growth rate to make me believe that all of our guidance right now are definitely achievable. With respect to AR, maybe if you could clarify that question in comparison to the pipeline.
spk02: Well, I'm just thinking that, you know, the pipeline, you talked about robust growth in the pipeline at this time last year, and at present, ARR growth is you know, AR growth was, what, 23. So I just wanted to give you the opportunity to comment on the growth of the pipeline relative to those two things.
spk06: Sure. Well, why don't we just jump into AR? Because pipeline is growing really, really well. AR growth, I'll be like every other CFO, I always want more. And we have very high standards and very high targets that we go after. And Q1 is no different than any other quarter. I wanted more, and I still want more. But if I look back one year, our year-over-year growth on a constant currency basis for ARR was 24%. On a constant currency basis again, we were at 24%. So we're pretty much in line with what we did a year ago. The thing that we didn't tell you at the start of the year and what we don't give disclosure on is there's a profile of our pipeline. And we had expected a slower start in Q1 with a very strong profile in Q2 to Q4. One of the things that we do on a weekly basis, we talk about our pipeline with our sales team. I've never seen our sales team more bullish than they've ever been. Like this is the most bullish I've ever seen them in a quarter. And coupled with the, what everyone will start seeing very soon with the Gartner MQ results, I think we've got some great tailwinds that are available. So I'm looking like it's going to be a good ARR growth year, but it all depends on the profile of the pipeline. And as you know, as I just mentioned, we had a pipeline that was smaller in Q1, which I think we'll pick up. Now, all that being said, John mentioned install base. And we can't always name all of our companies or brands that we use. But I think we have a huge ability to expand on some of the customers that we have in place. If you take into example, I brush my teeth with one of the products that we have this morning. I also have a vaccine that I've had recently from one of our customers. One of my vehicles, I had to fill up gas from one of our customers. And if you think about when I was driving in this morning, I had to decide between, do I want to go to my favorite Canadian QSR or do I want to go to my favorite global QSR to grab a little bit of food before we got started this morning? All of those are great options for us to figure out how can we really do the expand on this customer base that is growing and we have phenomenal brands that are joining us. So to say it very briefly, I'm pretty excited still.
spk02: Fantastic. I really appreciate that color. Last one, Blaine. How much of a positive should the growth in deferred be to free cash flow, like on an annual basis? Is there kind of a rule of thumb I should use? Just wondering if I have that correct.
spk06: I'll just say I don't really look at deferred too, too much. We have it will always very depend on where we have our subscription term license revenue that's in place. And so when that flushes out, But for the most part, you should expect the Q1 always to be a fairly nice growth. Obviously, you just saw that in quarter one here. But we don't really look at deferred as an indicator for our cash growth.
spk05: I see. Okay, thanks. I'll pass the line. Thank you very much.
spk00: Your next question comes from the line of Sutan Sukumar of Stifel. Please go ahead.
spk04: Good morning, Jen.
spk03: Just a follow-up question on the M&A front. I'm just wondering how your outlook and priorities have been changing with respect to M&A. I'm wondering if you expect M&A activity to meaningfully pick up compared to what we've seen historically, and if there is still focus on technology or do you see more opportunity now to acquire, to grow a share in a particular end market or geo?
spk07: Yeah, it's a great question. You know, we definitely have a use case thesis in serving the market. And so, you know, we're being very thoughtful about the candidates that we look at. It's very difficult to forecast, as you can imagine. But again, our focus is in really building out the product rather than buying market share. It's really about extending use cases. When you look at what we did with MPO, it was absolutely motivated behind a use case thesis. And so we're going to continue that very thoughtful approach. We have recently added to the muscle, I'd say, the internal muscle around M&A. here inside of Kinaxis, and so nothing imminent. I can't share there's anything sort of imminent, but the thesis absolutely is to focus on use case expansion. We won't do anything unnatural, and it has to be the right product fit, has to be the right cultural fit, the right financial and valuation perspective. And that's what we're going to continue to do.
spk04: Great. Thank you.
spk03: And my second question is around your mid-year targets that you shared last quarter. Just wondering if there's been any update or change on the outlook there.
spk06: Yeah, absolutely. Our mid-term targets still remain. We are, I think, 30% Revenue growth in the midterm is, or SAS revenue growth in the midterm is something that we're going after, and 25% adjusted EBIT is something we're going after. So no change on that to the midterm.
spk04: Excellent. Excellent. Great. Thanks for assisting the questions, and congrats again on the quarter. Thanks. Appreciate it.
spk00: Your next question comes from the line of Nick Agostino with Laurentian Bank Securities. Please go ahead.
spk14: Yes, good morning. Just, I guess, two quick questions for me. First, going back to the, I guess, some of the caution you're seeing from some of the prospects, can you just qualify whether, if there's a particular sector or group of sectors where you're seeing that caution, or is there a geography that you can point to where you're seeing that caution?
spk07: Well, first, it's absolutely a subset that we're seeing it. Nick, I... I can't honestly say that there is sufficient numbers to suggest that it's one geography or one sector. So it isn't what I would call broad, so broad as to suggest there's some characteristic there. So I know it's kind of a short answer, but I don't see anything that would suggest there's some characteristic. you know, based on either size of account, based on vertical, or based on geography.
spk14: Okay. And I guess really my next question is, I think I'll just answer it and you just confirm, but when you look at, if you try to compare the level of caution you're seeing now, given that it's just a subset, and if you compare that caution to, say, back to the beginning of the pandemic, or if we could even try to go as far back as, say, 2008, the last major recession, how would you put or rate on a scale of 1 to 10 the level of caution you're seeing compared to those two prior events?
spk07: I've never really thought about the problem in that context. I might say that this isn't something that I would measure in months. When we're looking at this rigor, this extra rigor we're seeing during the final stages of of our sales cycles, it's something that I would measure in weeks. And that's why I wanted to make sure in a previous question I mentioned that we're not seeing anywhere close to the types of sales cycles we were seeing prior to the pandemic. We've actually seen, since the start of the pandemic, an acceleration in overall sales cycle. And I was saying it was closer to sort of the 12 to 13 or 14 months maybe, you know, during the pandemic. And so I wouldn't say we're close to where we were prior to the pandemic. And I think it's, you know, just a function of some of the current economic fears that are out there and the extra rigor that boards are asking their corporations to go through.
spk14: Okay, I appreciate that color.
spk07: I would also say, sorry, Nick, I would also say just to reinforce all of this is built into the strength of our guidance. And so, you know, despite these challenges, and like I said, the deals aren't evaporating, you know, we're just being forced to adhere to the processes and more so the timelines often associated with board meeting schedules That's what we're seeing. Okay.
spk14: No, I definitely appreciate that color. And my last question, you mentioned earlier about when it comes to small, medium-sized customers and making those economics work, how would you compare, say, the margin contribution from those transactions compared to, say, the larger deals you're doing on the enterprise side? Would you say they're similar?
spk06: Well, I think there's like three categories, and it's talk about is there's Enterprise, which we've obviously historically done really well with their margin profile. Mid-market, we're doing extremely well with disrupting the mid-market right now and having more and more customers come on board at the mid-market level. Again, their margins are actually showing up very close to what we have to the Enterprise customers. When we get to SMB, A lot of it are being driven by value-added resellers. And we have a much smaller cohort of customers in that group at this stage. And for us, SMB, just so everyone's aware, is anything below $500 million of revenue per year. But what we're expecting is to have a little bit of tighter margins on the smaller customers, especially in their early years. Over time, I think this is something with rapid start being in place, with optimization of our cloud position that will get those margins higher towards what we would expect on the mid-market enterprise. But I'm expecting that they will have smaller or tighter margins in the early years.
spk05: Okay. I appreciate that, Collin. Thanks, guys. Thanks.
spk00: Your next question comes from the line of Kevin Krishnarathne of Scotiabank. Please go ahead.
spk01: Hey there. Good morning, gentlemen. Just one quick one for me on MPO. I think we have a view of what that business may have done last year, single digit million revenue. I'm wondering if you can talk about, you know, I know it's small, but the way you think the profile of that might look during the year. I know the sales cycle there, I think, is shorter. You've got your connector now up and running. Just wondering if you can maybe talk about how you see that piece of business sort of evolving over the coming quarters here.
spk06: Yeah, I'll try and give as much information as I can. So I would say they were single digits in 2022. I expect double digits in 2023. I still expect them to be profitable or very, very close to profitable at this stage. And I think what we're seeing is some great upside from the connector that we're building and the current customer base that we have in place. So everything leading for us to believe that was a good acquisition still.
spk01: And that connector was completed in Q1?
spk06: Phase one was completed. And so we're already in process of some potential new customers coming on board through Maybe the Kinaxis side first, but phase two is just about to finish and phase three will be at the end of the year. But I will say customers are already lining up. Our current Kinaxis or rapid response customers are already lined up to see if it makes sense for them.
spk01: Okay, great. That's it for me.
spk05: I'll pass the line. Thank you.
spk00: There are no further questions at this time. I will turn the call to Mr. Wadsworth.
spk09: Thanks, operator, and thank you, everyone, for participating on today's call. We appreciate your questions, as always, and your ongoing interest and support of Kinexis. We look forward to speaking with you again when we report our second quarter results. Thanks, and goodbye.
spk00: This concludes today's conference call. You may now disconnect your lines.

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