Kinaxis Inc. (OTCPK:KXSCF) Q3 2020 Earnings Conference Call November 5, 2020 8:30 AM ET

Company Participants

Rick Wadsworth – Vice President of Investor Relations

John Sicard – President and Chief Executive Officer

Richard Monkman – Chief Financial Officer

Conference Call Participants

Richard Tse – National Bank Financial

Thanos Moschopoulos – BMO Capital Markets

Stephanie Price – CIBC

Robert Young – Canaccord Genuity

Paul Treiber – RBC

Daniel Chan – TD Securities

Paul Steep – Scotia Capital

Deepak Kaushal – Stifel GMP

Suthan Sukumar – Eight Capital

Nick Agostino – Laurentian Bank Securities

Operator

Good morning, ladies and gentlemen. Welcome to the Kinaxis Inc. Fiscal 2020 Third Quarter Conference Call. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. I’d like to remind everyone that this call is being recorded today, Thursday, November 5, 2020.

I will now turn the call over to Rick Wadsworth, Vice President of Investor Relations at Kinaxis Inc. Please go ahead Mr. Wadsworth.

Rick Wadsworth

Thanks, operator. Good morning, and welcome to the Kinaxis earnings call. Today, we will be discussing our third quarter results, which we issued after close of markets yesterday. With me on the call are John Sicard, our President and Chief Executive Officer and Richard Monkman, our Chief Financial Officer.

Before we get started, I want to emphasize that some of the information discussed on this call is based on information as of today, November 5 and contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in the earnings press release, as well as in Kinaxis’ SEDAR filings.

During this call, we will discuss IFRS results and non-IFRS financial measures. A reconciliation between IFRS results and non-IFRS financial measures is available in our earnings press release and in our MD&A, both of which can be found in the Investor Relations section of our Web site kinaxis.com and on SEDAR. Participants are advised that the webcast is live and is also being recorded for playback purposes. An archive of the webcast will be made available on the Investor Relations section of our Web site. Neither this call nor the webcast archive may be rerecorded, or otherwise reproduced, or distributed without prior written permission from Kinaxis.

To begin our call, John will discuss the highlights of our quarter, as well as recent business developments, followed by Richard, who will review our financial results and outlook. Finally, John will make some closing statements before opening up the line for questions. As a final note, we recently held our annual user conference, Kinexions. And for the first time ever, it was fully virtual, fully open to the public and now it’s available as archived content. Just go to the investor relations homepage at kinaxis.com, scroll down and click watch now on the Kinexions ’20 banner to consume sessions on demand. It includes customer presentations, new product innovations and a number of presentations from our new solution extension partners. The invent is incredible crash course on the value proposition we offer our market, so I encourage you to listen-in.

I’ll now turn the call over to John.

John Sicard

Thank you, Rick. Good morning, and thank you for joining us today. First, as always, I hope you and your families remain healthy, nothing is more important. We must all do our part to contain the spread of COVID-19 and we continue to extend our deepest thanks and appreciation to frontline workers everywhere and extend our sympathies to those who have been deeply affected. I continue to be amazed at the resilience of Kinaxis employees and their ability to remain efficient and effective during this prolonged work-from-home condition.

I’m pleased to report that our quarterly results were once again very strong across the board, including SaaS revenue growth of 26% to $39.3 million, total revenue growth of 17% to $55.1 million and adjusted EBITDA margin of 18%. On the strength of our year-to-date results and the growing backlog, we are very pleased to be able to tighten our fiscal 2020 SaaS revenue growth guidance to 24% to 25%, the upper end of the range we initially provided. We are also pleased to be able to increase our total revenue guidance to $220 million to $223 million and our adjusted EBITDA margin guidance to 22% to 24% of revenue.

Given all that has happened this year, I’m incredibly pleased to be able to present this improved outlook. It speaks to the strength of our team, the criticality of our unique value proposition and a business model that relies on long-term subscription contracts with blue chip customers. That said, we recognize that our customers are not immune to COVID-19 and have faced significant disruption themselves. Many of their long term suppliers have similar challenges. Kinaxis has also not been completely immune to the short term side effects. While our backlog and pipeline remain stronger than ever and sales activity continues to be very high in all regions, we are also seeing some customers and prospects choosing to implement for attractive approval processes or delaying the project starts.

Retention rates remain high and we continue to achieve over 100% net revenue retention with our current customer base. Our value is evidenced by the renewals with long-term customers like Teradyne, who have been with us for 25 years and Casio, a 17 year Kinaxis customer. However, we have experienced some instances where customers coping with significant adverse financial situations are not currently in a position to renew their subscription agreement. These types of impacts on the broader market were documented in an August industry forecast for supply chain management software, and are consistent with the experiences I’ve just described.

Notwithstanding these side effects, it is clear to me that supply chain transformation initiatives have never been more urgent. And I am pleased to see a growing pipeline that is now larger than just three short months ago. Fueling our pipeline even further, we have just concluded our Annual Kinexions Conference, which was virtual this year. We had a record breaking registration of over 3,000 people representing over 500 companies spanning 70 countries. What is especially encouraging is that the majority of companies attending were prospective customers looking to understand how others are leveraging concurrent planning to absorb unprecedented levels of disruption.

The quest for hyper agile supply chain has never been more relevant than today, and Kinaxis is ready and well poised to serve this ever growing need. Supporting this view, I’ll add that the industry forecast I mentioned also predicted a stronger year for supply chain management software projects in 2021 with SaaS offerings benefiting disproportionately. Our acquisition of Rubikloud is progressing according to plan. Recently, we were able to announce our first joint customer, Coty, an iconic multinational beauty company with over 70 brands. We said that one of our primary interests in Rubikloud was for its value to our consumer products vertical. And this is but one demonstration why. Naturally, we are working on many more joint opportunities in consumer products and look forward to sharing more news of our success very soon.

Rexall, a retail customer who we welcomed with the Rubikloud acquisition, presented at Kinexions. Rexass has over 400 pharmacies dedicated to providing exceptional patient care and customer service in 180 communities across Canada. Rexall shared their success in improving demand forecast accuracy by over 20% since moving to our solution. We also welcome Superdrug as a new Kinaxis customer. Superdrug is the second largest health and beauty retailer in the United Kingdom. We are very excited to be in the retail vertical and have identified over 700 potential new targets that fit within our total addressable market.

I’m thrilled to share that our strategy to open and extend our RapidResponse platform to the development capabilities of third-party partners is making real progress. We delivered the extended platform on schedule in mid 2020 and already have five partners that have offered entirely new functionality and mission critical data through RapidResponse. Customers will soon be able to take advantage of new capabilities for transportation optimization, planning and recycling flows and enhanced production line scheduling amongst others. The ability for third-party extensions to be developed on RapidResponse will ultimately accelerate and expand the value our customers will gain, and represents an entirely new vector of growth for Kinaxis for years to come.

Now, I will ask Richard to provide further detailed commentary on the financials for the quarter and our outlook.

Richard Monkman

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. Total revenue in the third quarter increased 17% to $55.1 million. SaaS revenue grew 26% to $39.3 million, driven by new customer wins, as well as the expansion of existing customer subscriptions. Subscription term license revenue was approximately 1 million in line with our expectations for the quarter and previous commentary.

As we’ve consistently noted, subscription term license revenue is primarily tied to the renewal cycle of our customer hosted software subscriptions as we recognize as right to use component of a longer term subscription in the initial month of the term. Our professional services activity remains strong again, resulting in revenue growing 23% over the corresponding 2019 quarter to $11.5 million. The growth reflects the proven ability of our expended delivery team to support engagements.

As we have noted in the past, professional services revenue will vary from quarter to quarter based on the number, size and timing of customer projects underway, as well as the level of deployments assumed by our partners. We continue to be pleased with the diversity and strength of our total revenue base. For the year to date, our 10 largest customers accounted for 28% of total revenues with no individual customer accounting for greater than 10% of total revenues. Gross profit grew by 10% to $36.6 million with the gross margin of 66% compared to 71% in Q3 2019. The change reflects the increased level of investments in our professional services, customer support and SaaS delivery capabilities, as well as the impact of a higher level of subscription term license revenue in 2019.

This year, we have aggressively expanded our team’s capabilities across all functions organically, as well as through our two acquisitions. In particular, we have significantly expanded the capabilities of our product team. We have invested with a longer term view and for some functions at a level above our 2020 revenue growth. As a result of these investments and again, the relative contribution of subscription term license revenue, our profits during the quarter decreased to $0.7 million or $0.03 per diluted share compared to $0.17 per share in Q3 2019. Adjusted EBITDA for the quarter was 16% lower or $10.1 million.

Our Q3 cash flow from operating activities was up 326% to $4.5 million from $1.1 million for the third quarter of 2019. As at September 30, 2020, cash, cash equivalents and short term investments totaled $210 million compared to $212.6 million at the end of 2019. Approximately $60 million of our cash, however, was used during the third quarter to fund our acquisition of Rubikloud.

Our minimum contracted revenue backlog remains strong. As of September 30, 2020, it grew by 26% to $364.7 million as detailed in note 13 to our financials. This amount includes $334.9 million of SaaS revenue backlog, which represents 6% increase from September 30, 2019. The backlog will be recognized over the following periods; $43.2 million will be recognized in Q4 of 2020, of which $38.1 million relates to SaaS business; $136.5 will be recognized in 2020, of which $124.3 million relates to SaaS business; and 185 million will be recognized in fiscal 2022 or thereafter, of which $172.5 million relates to SaaS business. Total bookings in Q3 were $75.3 million of which SaaS bookings were $71.5 million, up significantly from the last quarter and Q1 of this year.

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Based on our strong year-to-date results, backlog and with one quarter remaining, we are tightening at the high end of our initial range our SaaS revenue growth expectations to 24% to 25%. Given our strong Q3 SaaS revenue and long history of quarterly sequential growth, we appreciate that some investors may have expected that we would have raised our full year guidance in line with the 26% year-to-date growth.

Let me explain why we believe that our 2020 guidance is appropriate. As John noted, the overwhelming majority of customers have renewed their subscriptions. However, some customers have advised us they’re not in a position at this time to renew given current market conditions. Due to some of that activity in late Q3, we were required under revenue recognition rules to bring forward some of Q4 revenue into Q3 that would have otherwise been recognized. Accordingly, our SaaS revenue guidance for the year remains appropriate.

We are maintaining our annual guidance prescription term license revenue at $16 million to $17 million. Overall, we now expect annual revenue to be in the range of $220 million to $223 million. We now anticipate adjusted EBITDA margin for the year to be in the range of 22% to 24% of revenue. The improved outlook relative to our last update reflects both our higher total revenue guidance for 2020, as well as lower travel and event expenses. As per our practice, we will provide 2021 guidance when reporting Q4 results, but I would like to make a few comments now to remind listeners of some of our previous statements.

We have noted that subscription term license revenue varies directly in line with schedule renewals for the underlying customer hosted subscriptions. As these subscription arrangements have an approximate three years term, we anticipate a low level of subscription term license in 2020, specifically in the $3 nillion to 5 million range, and then returning to the mid $20 million level in 2022. Furthermore, our expense structure has increased in line. but there’s significant investments through both organic and acquisition growth. As John mentioned, we’re very pleased to be able to maintain or increase our strong guidance throughout this very unusual year. While we continue to see the near term impacts of COVID-19 on our end markets, sales pipeline growth and increasing recognition of our unique product differentiation provide confidence. Thank you for your continued support.

With that, I turn the call back over to John.

John Sicard

Thank you, Richard. As I mentioned earlier, we hosted over 3,000 registrants from over 500 companies, spanning six continents and 70 countries at our virtual Kinexions just two weeks ago. It was an opportunity for us to launch some exciting new product capabilities. I’d like to provide you with some additional detail on what we shared at the event.

Our new supply chain command and control center gives companies instant visibility and actionable insights into the health of their business through an intuitive and interactive dashboard that combines traditional data with new digital disruption detection signals. From a single place, companies can manage day-to-day volatility in real time by prioritizing and automating routine responses. The automatic capture of decision data leads to future AI based decision making and recommendation improvements. The solution extension partners I mentioned earlier will extend the power of the command and control center application with new planning capabilities and digital inputs.

Kinaxis is also strengthening its demand management portfolio. With enhanced demand sensing capabilities, companies can increase revenue, improve on time delivery and significantly reduce stock outages by incorporating real time demand signals, data inputs and automatic machine learning. The result is light touch and a much improved accuracy for short and long term forecasting. Through the Rubikloud acquisition, the addition of AI powered promotions planning capabilities helps consumer products and retail companies identify the best business opportunities, reduce missed dollar opportunities and increase promotions revenue uplift. All this new functionality attracts new subscription dollars, which means a larger total addressable market, as well as a more highly differentiated product.

As Rick mentioned at the outset, all our Kinexions sessions are available on demand, so we encourage you to register and dig deeper into our new capabilities at your convenience. And hear for yourself how our customers describe the value of current planning firsthand. As always, thank you for taking the time to join us on this call.

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

Question-and-Answer Session

Operator

[Operator Instructions] First question comes from Richard Tse with National Bank Financial.

Richard Tse

Just want to dig into these non-renewals a bit more. Based on your comments, are you suggesting that these clients are kind of in a situation of financial distress on their own and that’s kind of causing them to be in this position here?

John Sicard

Well, it’s difficult for me to judge with precision what our customers — what is guiding our customers’ decisions. I will say, you know, it’s quite typical during a pandemic like this for a lot more scrutiny around investments. And not every company in the world is surviving through this pandemic, as well as others. And so what I would tell you is our net revenue retention remains over 100%. And the overwhelming majority of renewals have taken place, our confidence remains high and our midterm growth in that mid 20 percentage range. So I think some of these conditions are I would say temporal.

Richard Monkman

And if I may, John, and Richard, thanks for that question. As John noted, with the overwhelming majority of customers renewing, this situation was a little different in that, just because of the revenue recognition rules. We have to pull revenue that we anticipate in Q4 into Q3. So the total revenue was anticipated as Q4 it was the timing. And so that really is why we wanted to highlight that because when you take a look, you’ll see that revenue is probably going to be in line and Q4 with the Q3 with this guidance.

Richard Tse

The only reason I asked about — whether they’re in financial distress is that everything we’ve heard just in the industry is that supply chain has been so critical during this pandemic and yet, these customers are sort of leaving and sort of this begs the question, is it related to that? So anyways. With respect to the pipeline, so just to kind of allay fears here. You talked about the pipeline on your call. Can you give us an order of magnitude in terms of the sequential increase? No doubt, I’m sure you had a lot of inbounds from that conference recently, which was widely well attended. But could you give us some perspective on that would be helpful.

John Sicard

It continues to strengthen from the same period last quarter. That’s just the fact. It is larger now than it was three months ago. I like monitoring, not just the overall size of the pipeline but the health and not just the health, but I’d like to see is it healthy in all regions, in Europe and in Asia. And I can say that we’re seeing more activity, more sales activity now than we were three months ago. That’s a fact. Obviously, our Kinexions conference happened just two weeks ago. I can tell you that the registration and participation was greater than we had anticipated. It was wonderful to see, but not surprising. I think supply chain as a craft has been around as long as humanity has been, and it will be around for thousands of years to come. And under current conditions, it is not unnatural for manufacturers to be looking for ways to absorb this unprecedented, ferocious disruption.

And so opening this up to the public, I can tell you that the majority of companies were prospective companies looking to learn. We had wonderful customers that talked about their journey and the manner in which they were absorbing disruption. And I think that was the magnet for attending. So obviously, just two weeks ago having this wonderful group of prospects in our home is a wonderful thing for us and we’re obviously working those prospects given how warm they are. So that’s the way I would describe our current condition with the pipeline.

Richard Tse

And just one last quick one for me. Do you think these nonrenewals are materially enough that they would affect 2021? Or do you think the growth in your pipeline is robust enough to kind of give you confidence here that you’ll sort of continue the track that you’re on?

John Sicard

Well, with the renewals, again, the overwhelming majority from both the dollar and number perspective have renewed. Our net retention is above 100%. And so I can’t comment on the long-term. But in the near-term we see that carrying out over the 100%. Then as John noted, it’s a matter, you can see the backlog and you can see the ratio, if you wanted to do your own projection as to growth. And then it’s a matter of our activity in Q4 and the conversion of that strong funnel that we have, and that’s why Richard it’s — that’s why we’re — our cadence has always been to provide guidance at the same time when we report the results. So that it’s clear to everybody when they can see that backlog and they can see the results. And as John said, we remain confident in the broader market conditions. It’s not without it’s challenges, but that’s our history of execution.

Operator

Next question comes from Thanos Moschopoulos with BMO Capital Markets.

Thanos Moschopoulos

In terms of the nonrenewals, can you clarify and talking about sort of with a handful of customers or there would be something more than that? And then in some cases, maybe a question where the customer wants to keep using the software, but it’s tied up with procurment, and they might actually renew at some point in the future. Or in these cases, does it seem more likely looking that they maybe switching off to the software indefinitely?

John Sicard

Well, Thanos, thanks for that question. In fact, that’s a very interesting question. And we’re very pleased to have welcome back customers after they departed and there’s a number of reasons why customers may have left everything from their business climate to other factors. But yes, we for greater clarity, we have welcome back clients after we had a separation, if you will. When I do talk about the overwhelming majority, so yes, it is a relatively small number. We would love to keep every customer. And in fact, what we have done and we will continue to do is to invest in our customer success programs and this starts off from helping them through to training, through ongoing health checks with them, to helping them understand features that they mean that we can see that they’re not utilizing.

We have a dedicated team in this regard. We have a sales team that is also now just focused on working with customers. And we’re seeing that success. But there comes times when regardless of what we do, the situation is just such that we have to part ways. But it’s gain and we remain confident in our ability to work with customers. But we can’t project. I mean, we have lost customers, for instance, through acquisition or through insolvency. So I can’t predict what’s going to happen in the longer term. But those are the actions that we’re taking to continue to strengthen our rapport and relationships with our customers.

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Thanos Moschopoulos

And do the nonrenewals have any impact on your capitalized contract acquisition costs through quarter?

John Sicard

I’m sorry. I missed that…

Thanos Moschopoulos

Actually, did nonrenewals have an impact on your capitalized contract acquisition costs in the quarter?

John Sicard

No.

Thanos Moschopoulos

And then, finally, John, if you could comment on the competitive environments just with COVID and everything going on. Has there been any change in the landscape? Has it caused customers for example to become more appreciative of adaptive concurrency? How are you seeing your competitors respond in this environment relative with the dynamic like pre-COVID?

John Sicard

That’s a great question. And we’re seeing — while the large incumbents continue to be ever threatening. I will say that the openness to altering technique, well, frankly, in the conversations, I’ve had, A, I’ve never had more conversations about it with C level executives in a single quarter than I have in this past quarter. There’s a deep interest and understanding, can I be managing — governing supply chain planning differently, and achieve better results? And so that gives me confidence that there’s a trend towards transformation.

And people ask me, what’s the likelihood that supply chains are going to digitize and transform. The answer to that question is 100%, there’s a 100% chance that companies will transform and digitize at some point in time, the question is about timing. And so while I wouldn’t necessarily declare we are at some inflection point, I will say that this pandemic has called into question the legacy approaches to governing supply chain planning and the lethargy that comes with it. Most of — the conversations I’m having with supply chain practitioners, I’m hearing one common thread. The things that I could trust to be true yesterday are no longer trustworthy. And so they’re starting to recognize that the agility muscle, if you will. The atrophy and agility is what’s causing a lot of the pain they’re experiencing today. So as it relates to competition, I would say, we’re seeing less, I’d say, product threat from competitors that they cannot come close to showing any confirmed planning capability. And frankly, in the 27 years I’ve been serving this market, I’ve yet to see a technology come close to what we do.

Operator

Next question comes from Stephanie Price with CIBC.

Stephanie Price

I wonder if you could a comment a bit on the conversion of the pipeline. Can you talk a bit about the comments around deferred deals and expanded approval processes? Has that accelerated since last quarter and are they specific to certain verticals, or geographies or more broad based?

John Sicard

Yes, I think, I mentioned earlier, there’s a lot more scrutiny in investment. I think households are applying a lot more scrutiny in how they’re spending, which I think is only responsible. And so I would say that the last earnings call we talked about that seeing protracted and heavier, if you will, procedures around approvals, often requiring Board approval to proceed on projects like this. And so we’re continuing to see that in a broader sense, as the pandemic sort of settles in and people realize that, this is going to be around a little longer than perhaps they thought three or six months ago. So I would say that the protracted procedures for approval are starting to broaden across the verticals and the geographies that we serve.

Stephanie Price

And in terms of professional services revenue, obviously, strong again this quarter. Just wondering if you can talk a bit about implementation time lines in the current environment and how you see kind of this growth rate trending going forward?

John Sicard

We’ve been extremely impressed by our expanding professional services team, both again the organic growth as well as with the product team, and how they’ve been able to engage. In fact, arguably, significantly higher productivity, because they don’t have to spend time on travel and so on. But it’s not just simply that higher level of productivity and higher level engagement across customers. It’s that we’ve expanded our capabilities beyond just deployment to include what we call sustained services. In that what we do is we continue to engage with our customers and provide ongoing support throughout their journey with Kinaxis. So this is bringing in additional revenue for us. So it’s not just something with deployment, or the initial deployment, the expansion, but it’s the ongoing level of engagement. So it’s a combination then of a stronger, broader team and at a greater menu of capabilities.

Stephanie Price

And then just finally, for me, maybe a related question around partner execution in the quarter. Just when we’ve seen through COVID in terms of partner engagements and execution, and maybe a bit on a new solution extension partners as well. I noticed that one of them was a premier sponsor Kinexions last week?

Richard Monkman

Well, I’ll be able to comment from a deal perspective, and I’ll let John comment further on. He didn’t note with regard to some of the platform enablement activity that’s going on. But the majority of deals continue to be new name deals, continue to be partner influence. So we’re very pleased with that. The partner universe continues to expand the number of certified individuals, as well as their level of certification continues to execute. And so we’re very, very pleased with the takeout and the broadening of that knowledge globally. In terms of the some of the partner enablement expansions…

John Sicard

Absolutely, one of the things that we have seen as a result of the pandemic, and it’s really what I would say is that the phenomenon coming from our own customers. This disruption has caused, I would say, a lot of the automation and optimization approaches to fail, because the assumptive parameters driving automation can no longer be trusted. And as a result, human intervention and agility, agility through human intervention is the path to success. It’s not unlike an aircraft that hits turbulence all of a sudden. The first thing pilot does is turn on autopilot and grab the yoke. And so this is happening all over the world.

And as a result, our customers themselves have come to us asking for what they call sustainment services. Do you have skilled individuals that can help us absorb all the volatility, because our team quite frankly, isn’t large enough to absorb. There aren’t enough hands and minds to absorb the volatility they’re dealing with. And so I think that’s one of the areas that’s caused professional services for us to remain high, as well as partners. They’re leaning on partners heavily on sustainment services to help them absorb the volatility. So projects remain very, very active.

The other thing I will say, as a side effect is there’s no, what I would call, timezone fatigue. In a time where professional services often happens on premises, where consultants and employees and partners are made to travel across time zones and deal with that. Well, that’s not happening. And so we’re seeing even more efficiency in the delivery of projects. Lastly, I’d say customers are looking to accelerate milestones more than ever. They know the benefits that will come with concurrency and so they’re looking to hit those milestones faster than originally anticipated.

Operator

Next question comes from Robert Young with Canaccord Genuity.

Robert Young

I was hoping to put a little bit of precision around some of your statements around these renewal delays. Are you talking about cancellations of service happening currently, or are you talking about renewal delays, so uncertain potential for cancellation of certain service?

John Sicard

So Rob, our contracts are fixed and determinable. And so these are essentially at the end of the term customers feel that it would be those customers not renewing. Now in some instances arrangements may have a ramp. For instance, we use our strong balance sheet, I sort of jokingly call them the Bank of Kinaxis whereby as customers continue to see a stronger ROI as they broaden their usage to rapid response, we may provide a bit of a shift in terms of the actual payments but our agreements are fixed and determinable So basically they’ve chosen not to exercise their renewal rates at the end of the term.

Robert Young

And then remind us on the seasonality of renewals and then Q4, is that a seasonally strong quarter for renewals or would you say Q1 would be the stronger quarter?

John Sicard

Well, the subscription arrangements are typically in sort of the three year band, in and some cases, they’re longer. And we’ve been now in our 15th year of subscription. So over time, there was a little bit more seasonality. But as we’ve expanded the customer base and I would say there really isn’t that level of seasonality. There is, with regards to very long term customers, some that were actually converted that were prior to 2005, those are the ones that I have to seem to talk about every earnings call with regards to subscription term license. So yes, there is some baked in on that minority of customers’ cycle. But the broader level, I would — I wouldn’t say there’s that marked seasonality. Now, don’t forget our customers that we very much have a land and expand model. So we what is not uncommon is then to expand. But those expenses are predominantly on a coterminous basis. So you’ll see that pick up as we go through.

Robert Young

And then it sounds as though you’ve got an expanding group of prospects, if I read the comments earlier correctly, maybe even broadened further by Kinexions. So are you putting in place more aggressive qualification? And do you think that sales need to get more efficient here to handle a higher level of prospect volume or do you think you need to expand sales, because these are high quality, high probability prospects?

John Sicard

One thing that, again, is a side effect, a positive side effect, if you will, of this work from home condition, is that we’ve been made to perfect the virtual sale and the virtual demo. And I’d say our pre sales consultants, their efficiency, I would say, has nearly gone up 3x. When you think about how demonstrations used to happen, you’d get on a plane and you’d fly somewhere different timezone have dinner, wake up, get up the next day, go to do a two, three hour demo, then fly back, you get the picture. And now you can do three times the number of demonstrations in the same period without increasing that function. And that’s been really positive for us. So we’re doing a lot more online, frankly, a lot more online. And the other thing is our employees obviously, feel it’s unsafe to get on airplanes and fly and in some cases, countries don’t want you visiting either. And prospects don’t care to have you visit them as well. So this online phenomenon is really taking hold.

Robert Young

So sales has gotten more efficient?

John Sicard

Yes.

Operator

And next question comes from Paul Treiber with RBC.

Paul Treiber

Just another question on the nonrenewals. Could you confirm or quantify the pull forward, the amount of pull forward of revenue from Q4 to Q3? And then also I assume there to be no impact to backlog, because these are just non renewals. But could you confirm that?

Richard Monkman

With regards to backlog. Yes, there is no impact. I mean, our renewal advanced to the tenant that it’s minimum contracted amount gets added then to backlog. In this instance — so we’re not really, we can’t really — we don’t talk about individual customers. So I’ll just say that, as I think, I did intimated earlier, this is pulling revenue from Q4 into Q3. We’re holding, in fact, we’re tightening our total full year subscription growth in the 24% to 25% range. And when you run that math, you’ll see either potentially, while a slight decrease or in line with Q4 revenue being in line with Q3, depending upon the expansion and new name activity within the quarter. So that’s the range that bounced back. So again, it did not impact our ability to shift to the upper end of our full year to guidance.

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Paul Treiber

And then thinking about the business itself and I imagine these customers, was it a surprise to you that these customers didn’t renew? I assume you can see some customer usage, like where these customers under utilizing the product. And then are there other customers that similarly maybe underutilize in rapid response, and do you see a risk of potential non-renewal as our customers haven’t notified?

Richard Monkman

Well, again, and it’s a fair — it’s a broad based situation. Sometimes, as I noted that, it could be an acquisition. So at the end of their term, they’re not going to renew, because maybe they’re already and that the parent company then is a customer of Kinaxis. In some cases, we’ve eliminated cases we’ve had, insolvencies that have precluded that. In other cases, we’ve had highly engaged customers that are driving value. And this is — but just because of — I’d almost would call it a triage type of situation whereby, while they’re driving value, they have been — there is such a financial situation that they’re not able to necessarily renew. In some cases, you’re right. It is a matter of utilization. But again, that’s where we have this customer success team that is engaged and working with them to try to help them.

Paul Treiber

And I guess lastly, just to summarize this. To what extent is non-renewals normal course in the business, and to what extent has there been a change, because of the pandemic or whatever factors?

John Sicard

So as mentioned, we continue to have net revenue retention North of 100%. And as Richard said, it would be abnormal to keep virtually 100% of our customers over a 15 year period, because of insolvency in some cases through acquisition where one of our customers buys another one of our customers. And so one absorbs the other, if you will, and that’s happened. I will say that we have a very active, what I’d call value assessment and performance and adoption assessment that’s ongoing for every one of our customers. But I would say, we shouldn’t be surprised under COVID that cash preservation becomes the most important thing above all other things.

And so I would certainly — obviously, losing customers never a positive thing. As Richard said, as we go through COVID, there may be other conditions that this occurs. At the same time, our pipeline of net new activity continues to grow larger now than it was three months ago. We have hundreds of prospects that were just in our home at Kinexions, learning and listening to what our customers are doing to absorb this unprecedented time in history. And so we’re going to obviously be working those accounts very diligently.

Our sales team has become far more efficient than it’s ever been. So we’re not sitting back thinking, oh, my goodness, there’s — this is some kind of a systemic problem. No, I think what the systemic problem is, is the lack of agility in supply chain and the need to address it through transformation. And so we’re feeling pretty positive about the state of the pipeline and the sales activities going on this quarter.

Operator

Next question comes from Daniel Chan with TD Securities.

Daniel Chan

Just had a question on the EBITDA margin guidance. If we back into the Q4 implied EBITDA margin at the high end, it’s about 11%, which is lower than we’ve ever seen. Just wondering if there’s anything going on in Q4 that would cause that lower EBITDA margin, whether it’s higher expenses, or something else that we’re not thinking about here?

John Sicard

I mean, obviously, the very simple level of revenue less cost of sales and OpEx, we’re going to continue to — we provided the full year range of revenue, the 2023. So you can model on that. We’re very — continue to be very pleased with our professional services. The subscription term licensed will not be in a significant level in Q4. And then we’ve talked about sort of the range bound for the SaaS level. So by the time we’ve noted the significant expansion of our team’s capabilities, both organically, because we’ve been hiring aggressively through this pandemic, as well as then with the acquisition. Adding to that, it is not uncommon for sales and marketing in particular to be higher in Q4, given the level of events, even on a virtual basis. So I think all I can do is reinforce. We’re very, very positive by the productivity of the business, the level of profit and very pleased to increase the guidance for the full year to that range.

Daniel Chan

Are you expecting to accelerate hiring through the end of the year and possibly into 2021?

John Sicard

Well, we are a growing organization and we’re not a quarter-over-quarter focus. We’ve significantly, and I think we’ve noted before, from a few years back and now, for instance, quadrupled our sales quota carrying capabilities. We dramatically, as I noted in my prepared comments, most recently with the acquisition of Rubikloud increased our capabilities and the product R&D team. We’re expanding our global customer care. We’re investing in the data centers. This is all part of that longer term, because what we want to do is make sure that we’re in a capable situation to execute upon this growth. And so yes, we are going to be increasing that. I don’t know — we’ve dramatically increased over 50% this year in terms of people. I don’t think that’s going to be sustained. But again what we’ll do is when we provide guidance into our operating plan for 2021, we’ll give you those ranges.

Daniel Chan

And I just wanted to dig into the Coty signing with Rubikloud. This came about pretty soon after you acquired Rubikloud. Can you talk about how the cross sell happened so quickly? You also mentioned in the press release that you’re making progress with cross selling Rubikloud into other customers in your CPG base. So just wondering if you could shed some light on how many trials are going on and if we should expect those to be just as fast as the Coty deal? Thanks.

John Sicard

As it relates to that particular deal, I will say — while we don’t comment specifically on one deal versus the other, closing that particular opportunity happens significantly faster than other opportunities, almost 50% faster as a result. So the fact that we had a relationship already in place and the value proposition being so potent for consumer products, I think really helps. So of course with our strengthened consumer products, we are actively engaged right now, describing and demonstrating, and selling the value proposition that came with that acquisition with other CP customers.

Operator

[Operator Instructions] Next question comes from Paul Steep with Scotia Capital.

Paul Steep

Richard, can you just confirm that the 50% year on year, was at the end of the quarter? Thanks, folks — for headcount, that is.

Richard Monkman

It’s over 50% from the start of this year.

John Sicard

And we’d made that point in earlier earnings calls that we were projecting to be potentially north of 40% and we’re north of 40%, closer to 50%, perhaps slightly above 50% at this stage.

Operator

Next question comes from Deepak Kaushal with Stifel GMP.

Deepak Kaushal

So I’ll keep it to one then. Gross margins. They took a dip in the quarter, Richard, probably the lowest I’ve gone on record. I wonder if you can tell us how much of that headwind is organic versus inorganic, and maybe some color on the cash versus non-cash portion and what portion of that is sustainable versus acquired amortization. Thank you.

Richard Monkman

With regards to gross profit, it’s highly influenced by the timing of subscription term licensed revenue. So it does vary. And in some quarters it’s over 70%, some quarters it’s under 70%. And then in terms of the COGS, there is three fundamentals. There is the professional services team. There is the data center and a whole infrastructure for the cloud support. And then there’s the customer support organization, those are three key areas. All areas have been growing and accelerating. Now the margin on professional service revenue is lower than the margin on SaaS. And so that gross profit is really a function of, therefore the cost, the timing of subscription term license in the mix of PS. And so we still think that’s very, very strong. It’s obviously lead to strong EBITDA performance, in fact, the point whereby we increased our overall adjusted EBITDA performance for the year.

Operator

Next question comes from Suthan Sukumar with Eight Capital.

Suthan Sukumar

Just a question on around some of the recent deals that you’ve signed. Can you just speak on some of the trends that you’ve seen on buying behavior? Are there particular solutions and modules or even seat that are being purchased more now upfront versus before? And what the impact has been on your kind of average contract values versus the historical periods?

John Sicard

I will say that it really depends on how customers being affected by this pandemic. In some cases, customers have seen demand for their products go through the ceiling. And so they’re working very, very diligently to absorb and capture and ship — improve their on time and full measurements to capture all of that. Demand, in some cases, customers are seeing their demands go through the floor. And so they’re working really hard to preserve cash. Cash preservation is a key element, lowering inventory becoming hyper, hyper efficient, to absorb the volatility. And so a lot depends on the type of condition that that prospect finds themselves in.

Operator

Next question comes from Nick Agostino with Laurentian Bank Securities.

Nick Agostino

John, just wondering now that we’re about more than eight months into this pandemic? Are there any clients you spoke earlier about a prolonged contract approval process? Are there any clients that maybe you’re anticipating to come in late Q1, early Q2 or sometimes during Q2 that has come in, in Q3 or even in early Q4 that are part of your backlog that maybe you can speak to? There’s a prolongment on the contract process, but you are seeing those customers come in? Thanks.

John Sicard

Yeah, the answer is yes. We’ve been successful in getting contracts closed in October that might have been anticipated earlier. We’ve had contract negotiations completed in their entirety, only to see potentially six or longer weeks waiting for board meetings to occur to get final approval. So I mean that’s the, I’d say the phenomenon and we didn’t necessarily see in the past. And so, obviously, there’s engagements and activity going on — ongoing as we speak, throughout Q4 and we’re just drawing attention to this new phenomenon. Every company is implementing these protracted, what I would say, more detailed approval processes differently. So we’re obviously monitoring this very, very closely, forecasting our activities very closely as a result of this, as a result of what we’re seeing and obviously, that’s reflected in our guidance.

Operator

And at this time, I will turn the call over to Mr. Wadsworth.

Rick Wadsworth

Thanks, operator and thanks everyone for your questions. Apologies to have to limit questions at the end, but we’re running into some time constraints here. So please reach out to me and we can chat after the call. As always, we do appreciate your questions and your interest and support of Kinaxis. We’ll speak with you again when we report our Q4 results. So bye for now.

Operator

This concludes today’s conference call. You may now disconnect.



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