FINAL TRANSCRIPT
Kinaxis Inc.
Fiscal 2015 Third Quarter Conference Call
Event Date/Time: October 29, 2015 — 8:30 a.m. E.T.
Length: 47 minutes
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FINAL TRANSCRIPT
October 29, 2015 — 8:30 a.m. E.T.
Kinaxis Inc. Fiscal 2015 Third Quarter Conference Call
CORPORATE PARTICIPANTS
Doug Colbeth
Kinaxis Inc. — Chief Executive Officer
Richard Monkman
Kinaxis Inc. — Chief Financial Officer and Vice President, Corporate Services
CONFERENCE CALL PARTICIPANTS
Robert Young
Canaccord Genuity — Analyst
Richard Tse
Cormark Securities — Analyst
Thanos Moschopoulos
BMO Capital Markets — Analyst
Todd Coupland
CIBC — Analyst
Paul Treiber
RBC Capital Markets — Analyst
Kris Thompson
National Bank — Analyst
"Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
is error-free. CNW Group will not be responsible for any direct, indirect, incidental, special, consequential, loss of profits or other damages or
liabilities which may arise out of or result from any use made of this transcript or any error contained therein."
« Bien que CNW Telbec ait fait tous les efforts possibles pour produire cet audioscript, la société ne peut affirmer ou garantir qu’il ne
contient aucune erreur. CNW Telbec ne peut être tenue responsable de pertes ou profits, responsabilités ou dommages causés par ou
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FINAL TRANSCRIPT
October 29, 2015 — 8:30 a.m. E.T.
Kinaxis Inc. Fiscal 2015 Third Quarter Conference Call
PRESENTATION
Operator
Welcome to the Kinaxis Inc. Fiscal 2015 Third Quarter Conference Call. At this time, all
participants are in a listen-only mode.
Following the presentation, we will conduct a question-and-answer session. Instructions will
be provided at that time for you to queue up for questions.
Before beginning its formal remarks, Kinaxis would like to remind its listeners that today's
discussion may contain forward-looking statements that reflect current views with respect to future
events. Any such statements are subject to risks and uncertainties that could cause actual results to
differ materially from those projected in these forward-looking statements. Kinaxis does not
undertake to update any forward-looking statements except as required.
I'd like to remind everyone that this call is being recorded today, Thursday, October 29,
2015.
I will now turn the call over to Doug Colbeth, Chief Executive Officer of Kinaxis Inc. Please
go ahead, Mr. Colbeth.
Doug Colbeth — Chief Executive Officer, Kinaxis Inc.
Good morning, and thank you for joining us today. After the close of markets last night, we
issued our fiscal 2015 third quarter financial results, a copy of which is on our website, kinaxis.com.
"Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
is error-free. CNW Group will not be responsible for any direct, indirect, incidental, special, consequential, loss of profits or other damages or
liabilities which may arise out of or result from any use made of this transcript or any error contained therein."
« Bien que CNW Telbec ait fait tous les efforts possibles pour produire cet audioscript, la société ne peut affirmer ou garantir qu’il ne
contient aucune erreur. CNW Telbec ne peut être tenue responsable de pertes ou profits, responsabilités ou dommages causés par ou
découlant directement, indirectement, accidentellement ou corrélativement à l’utilisation de ce texte ou toute erreur qu’il contiendrait. »
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FINAL TRANSCRIPT
October 29, 2015 — 8:30 a.m. E.T.
Kinaxis Inc. Fiscal 2015 Third Quarter Conference Call
With me today is our CFO, Richard Monkman. I'll address the key events from the quarter
and then Richard will review our financial results. I'll then close with a few comments on our growth
strategies and then open up the line for Q&A.
Looking at the results for the third quarter, we saw a strong growth in revenue as customers
continue to embrace our software. Total revenue increased by 34 percent, led by professional services
and subscription revenue, which increased by 68 percent and 24 percent respectively.
This strong increase in revenue coupled with our disciplined investment practices resulted
in Q3 2015 adjusted EBITDA increasing by 53 percent to 8 million or 34 percent of revenue. These
results demonstrate the earning power of our business model.
Also in the quarter we signed a strategic initiative with Accenture whereby our
RapidResponse platform will enable Accenture to offer leading-edge supply chain management
solutions to the largest companies in the world. This agreement builds upon the success of our
existing partnership with Accenture that we have developed over the past two years. This initiative
also represents a further investment in joint solutions development, business development, and
global deployments of RapidResponse solutions.
Given Accenture's reputation as a trusted industry advisor with unparalleled experience and
comprehensive capabilities across industries and business functions, we are delighted to evolve our
partnership and help support them as they offer leading-edge solutions to some of the largest
companies in the world.
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is error-free. CNW Group will not be responsible for any direct, indirect, incidental, special, consequential, loss of profits or other damages or
liabilities which may arise out of or result from any use made of this transcript or any error contained therein."
« Bien que CNW Telbec ait fait tous les efforts possibles pour produire cet audioscript, la société ne peut affirmer ou garantir qu’il ne
contient aucune erreur. CNW Telbec ne peut être tenue responsable de pertes ou profits, responsabilités ou dommages causés par ou
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October 29, 2015 — 8:30 a.m. E.T.
Kinaxis Inc. Fiscal 2015 Third Quarter Conference Call
With that, I will pass the line to Richard to discuss our financial results in greater detail.
Richard Monkman — Chief Financial Officer and Vice President, Corporate Services, Kinaxis Inc.
Thank you, Doug, and good morning. I'd like to take a moment to remind our listeners that
all figures reported on today's call are in US dollars under IFRS.
Revenue in the third quarter increased 34 percent over Q3 2014 to 23.7 million. Our growth
continues to be driven by subscription revenues that expanded by over 24 percent to 16.5 million.
The growth in revenue was due to revenue from contracts secured with new customers during the
second half of 2014 and the first nine months of 2015.
Also a strong contributor to overall growth in the quarter was professional services revenue,
which increased 68 percent from Q3 2014 to 6.9 million. The increase was primarily driven by the
commencement of project engagements with new customers secured in the second half of 2014 and
the first half of 2015 as well as additional engagements with existing customers.
Net profit for the quarter was 3.8 million or $0.16 per basic and $0.15 per diluted share
compared to 2.5 million or $0.11 per basic and $0.10 per diluted share for the same period in 2014.
The increase in profit resulted from higher revenue in the period coupled with a favourable impact
on operating expenses from a weakened Canadian dollar compared to the US dollar.
Gross profit was 16.8 million in the third quarter compared to 12.8 million for the same
period in 2014. As percentage of revenue, gross profit was 71 percent versus 73 percent in the prior
period.
"Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
is error-free. CNW Group will not be responsible for any direct, indirect, incidental, special, consequential, loss of profits or other damages or
liabilities which may arise out of or result from any use made of this transcript or any error contained therein."
« Bien que CNW Telbec ait fait tous les efforts possibles pour produire cet audioscript, la société ne peut affirmer ou garantir qu’il ne
contient aucune erreur. CNW Telbec ne peut être tenue responsable de pertes ou profits, responsabilités ou dommages causés par ou
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October 29, 2015 — 8:30 a.m. E.T.
Kinaxis Inc. Fiscal 2015 Third Quarter Conference Call
The percentage change resulted from the increased cost of revenue in the third quarter of
2015 as a result of investments and additional headcount and data centre capacity.
Turning our attention to operating expenses, sales and marketing was 4.4 million or 18
percent of revenue compared to 3 million or 17 percent for the third quarter of 2014. Sales and
marketing costs increased due to higher headcount and related compensation costs, driven by our
accelerating investments and our knowledge services and our customer success organizations.
In addition, as we recently announced, we entered into a joint initiative with our strategic
partner, Accenture. The cost associated with this joint initiative commenced in the third quarter of
2015.
Gross R&D expenses increased to 4.2 million from 4 million in the prior-year quarter. This
change was driven by an increase in headcount we made to support ongoing programs designed to
further develop our RapidResponse offering for new and existing customers. As the R&D team is
Canadian-based, this increased investment was partially offset by the recent favourable impact of
foreign exchange rates on the Canada dollar.
G&A expenses were relatively flat, increasing to 2.2 million from 2.1 million in the third
quarter of 2014.
Adjusted EBITDA was 8 million or 34 percent of revenue in Q3 2015 compared to 5.2 million
or 29 percent of revenue in the same period last year. The strong adjusted EBITDA performance was
"Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
is error-free. CNW Group will not be responsible for any direct, indirect, incidental, special, consequential, loss of profits or other damages or
liabilities which may arise out of or result from any use made of this transcript or any error contained therein."
« Bien que CNW Telbec ait fait tous les efforts possibles pour produire cet audioscript, la société ne peut affirmer ou garantir qu’il ne
contient aucune erreur. CNW Telbec ne peut être tenue responsable de pertes ou profits, responsabilités ou dommages causés par ou
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FINAL TRANSCRIPT
October 29, 2015 — 8:30 a.m. E.T.
Kinaxis Inc. Fiscal 2015 Third Quarter Conference Call
achieved as our revenue increased at a higher rate than our cost as well as the impact of favourable
foreign exchange rates on our Canadian dollar operating expenses.
Total deferred revenue was 56.9 million as at September 30, 2015, an increase of 52 percent
compared to year-end 2014. The increase was due to new subscription arrangements, renewals, and
the receipt of prepayment of multi-year subscription of approximately $20 million in the first quarter
of 2015. Deferred revenue relating to the subscription term periods beyond one year totalled 12.9
million at September 30, 2015.
Cash generated by our operating activities in Q3 2015 was 5.8 million and was 6.3 million in
the same period of 2014. The decrease was due to a comparable increase in accounts receivable
balances, offset by a comparable increase in deferred revenue as well as higher 2015 noncash charges
for share-based compensation and income tax expense.
Cash and cash equivalents totalled 90.6 million as at the end of the third quarter as
compared to 56.7 million as at December 31, 2014. The increase is primarily due to the already
mentioned prepayment of a multi-year subscription of approximately $20 million together with other
prepaid subscription arrangements.
Before turning the call back over to Doug, I would like to review our full year 2015 guidance
in light of the results for the first nine months of 2015.
Overall, we are reaffirming our expectation to grow annual subscription revenue to between
26 and 28 percent for the full year and for full year professional services revenue to be between 22
"Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
is error-free. CNW Group will not be responsible for any direct, indirect, incidental, special, consequential, loss of profits or other damages or
liabilities which may arise out of or result from any use made of this transcript or any error contained therein."
« Bien que CNW Telbec ait fait tous les efforts possibles pour produire cet audioscript, la société ne peut affirmer ou garantir qu’il ne
contient aucune erreur. CNW Telbec ne peut être tenue responsable de pertes ou profits, responsabilités ou dommages causés par ou
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FINAL TRANSCRIPT
October 29, 2015 — 8:30 a.m. E.T.
Kinaxis Inc. Fiscal 2015 Third Quarter Conference Call
million and 23 million. Given the continued growth of the business, and after factoring in planned key
investments for the remainder of the year, we expect that adjusted EBITDA performance for fiscal
2015 will be between 28 and 32 percent of total revenues.
With that, I will turn it back over to Doug.
Doug Colbeth
Thanks, Richard. Last night we also announced that effective January 1, 2016, John Sicard
will be taking over as CEO of Kinaxis. I would like to take a few minutes to discuss the transition.
Since joining the firm in early 1994, John has been a key contributor to the architecture and
development of our supply chain management solutions in addition to holding a number of senior
management roles in development, professional services, consulting, marketing, and customer
support. In his current role, John oversees all aspects of the product, including the RapidResponse
platform, applications, product management, and quality assurance.
With John's extensive experience, the Board and I are confident he is the right person to
ensure the continuity of our growth strategy. In fact, John has been a major contributor to our
strategy all along the way. The Board and I have worked closely to implement this succession plan,
and I'm looking forward to executing a smooth leadership transition.
Following this, I will remain with the Company in my role as Chairman of the Board and will
also continue as the executive sponsor with the Accenture joint initiative.
"Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
is error-free. CNW Group will not be responsible for any direct, indirect, incidental, special, consequential, loss of profits or other damages or
liabilities which may arise out of or result from any use made of this transcript or any error contained therein."
« Bien que CNW Telbec ait fait tous les efforts possibles pour produire cet audioscript, la société ne peut affirmer ou garantir qu’il ne
contient aucune erreur. CNW Telbec ne peut être tenue responsable de pertes ou profits, responsabilités ou dommages causés par ou
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October 29, 2015 — 8:30 a.m. E.T.
Kinaxis Inc. Fiscal 2015 Third Quarter Conference Call
To summarize, we continue to see strong demand from the world's largest companies for
our innovative supply chain management solutions. We are thrilled to support Accenture as they
enable large enterprises across multiple industries to efficiently and profitably manage their end-toend value chains. We have the right people on board to continue to drive Kinaxis' long- term growth
strategies.
As this is scheduled to be my last time leading these quarterly calls, I would like to thank all
of you for your support, and as always, taking the time to join us on these calls.
With that, I'll turn the line over to the Operator for Q&A.
Q&A
Operator
If you would like to ask a question at this time, please press *, 1 on your telephone keypad.
Your first question comes from the line of Robert Young with Canaccord Genuity. Your line is open.
Robert Young — Canaccord Genuity
Hi. Good morning. Can you hear me okay?
Richard Monkman
Yes.
Doug Colbeth
Yes.
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is error-free. CNW Group will not be responsible for any direct, indirect, incidental, special, consequential, loss of profits or other damages or
liabilities which may arise out of or result from any use made of this transcript or any error contained therein."
« Bien que CNW Telbec ait fait tous les efforts possibles pour produire cet audioscript, la société ne peut affirmer ou garantir qu’il ne
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October 29, 2015 — 8:30 a.m. E.T.
Kinaxis Inc. Fiscal 2015 Third Quarter Conference Call
Robert Young
Yeah. I wanted to dig in a little bit into your subscription revenue guidance for the quarter.
Twenty-four percent is a little lower growth than we've seen in recent quarters, and I was hoping you
could give a little bit of context around what might be behind that. Is that seasonality? Is it currency?
Is it just timing? Maybe some more colour there.
And then the second part of that question is to get to the subscription revenue growth
guidance that you've provided of 26 to 28 percent, if you just back out what Q4 would be at the
midpoint, it's around 21 percent. And so are you expecting subscription revenue growth to decline
again in Q4?
So those are the two questions I'd like to start off with.
Richard Monkman
All right, Rob. Well, thanks for those questions. So first off I want to reaffirm in our guidance,
and it is an annual guidance, is the 26 to 28 percent, and we're confident of that. I mean, one of the
strengths of our multi-year subscription model is that long-term visibility, but at the same point of
time don't forget we are a deep enterprise offering and as such the sales cycle is 9 to 18 months. So
we really do take that long-term view.
Booking results will vary quarter to quarter, but the nice thing is we do have that visibility,
and that visibility we're holding to that 26 to 28 percent for the full year. And that's really the model
that we have, Rob.
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is error-free. CNW Group will not be responsible for any direct, indirect, incidental, special, consequential, loss of profits or other damages or
liabilities which may arise out of or result from any use made of this transcript or any error contained therein."
« Bien que CNW Telbec ait fait tous les efforts possibles pour produire cet audioscript, la société ne peut affirmer ou garantir qu’il ne
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October 29, 2015 — 8:30 a.m. E.T.
Kinaxis Inc. Fiscal 2015 Third Quarter Conference Call
Robert Young
Okay. And are there any reasons for the lower level of subscription revenue growth this
quarter?
Richard Monkman
Well, you saw very high growth at the beginning of the year. Again, it’s an annual model that
we focus on. We think that the 26 to 28 percent full year is strong, and I don't really—I mean we don't
take a quarter-end quarter view. We will be updating our guidance for 2016 in the Q4 call, and we are
confident in the business. But we're not going to comment on individual quarters, Rob.
Robert Young
Okay. And maybe I'll ask one last little piece. Is there any seasonality we should expect in
subscription revenue in a typical Q4?
Richard Monkman
No, not really because again, typical subscription arrangement is two to five years, and with
our success on renewals, that's an ongoing revenue curve.
Robert Young
Okay. And then the second question, I’ll just—this is quicker. The pro services revenue
around 7 million; I think last quarter you'd said that you’d expected the level to be somewhere around
5.5 million plus or minus 20 percent. And so you're above that again this quarter, and I was wondering
if you could talk about why pro services is the second quarter it's been significantly above your
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is error-free. CNW Group will not be responsible for any direct, indirect, incidental, special, consequential, loss of profits or other damages or
liabilities which may arise out of or result from any use made of this transcript or any error contained therein."
« Bien que CNW Telbec ait fait tous les efforts possibles pour produire cet audioscript, la société ne peut affirmer ou garantir qu’il ne
contient aucune erreur. CNW Telbec ne peut être tenue responsable de pertes ou profits, responsabilités ou dommages causés par ou
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October 29, 2015 — 8:30 a.m. E.T.
Kinaxis Inc. Fiscal 2015 Third Quarter Conference Call
expectations. And I was wondering if you could talk about why and maybe talk about the level of
capacity that you have in that pro services component of the business. And then I'll pass the line.
Richard Monkman
In terms of capacity, we clearly have the capacity. I mean we really, first and foremost, have
built our team to be subscription enablement focused so we do have that bench strength, and you
could see that in the costs and revenue structure.
The professional services predominantly time of material, and it does have seasonality.
Hence that's why I'm glad you remembered the 5.5 plus or minus 20 percent. It really depends upon
the nature of the stage of the deployment. It can also vary depending upon the corporate model.
Sometimes in the summer, things have been lower. Certainly there's often December closures, so
we're going to still hold to that plus or minus model, but we are holding also to that 22 million to 23
million subscription revenue.
It's a combination of just deeper deployment of the tool and new deployments.
Robert Young
Okay. Thank you.
Operator
Your next question comes from the line of Richard Tse with Cormark Securities. Your line is
open.
Richard Tse — Cormark Securities
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October 29, 2015 — 8:30 a.m. E.T.
Kinaxis Inc. Fiscal 2015 Third Quarter Conference Call
Yes. Thanks. On the Accenture partnership, I was wondering if you could maybe give us a bit
of colour in terms of that go-to-market strategy. Are there certain verticals that they're going to be
strong in, that they're going to be focusing in on?
Doug Colbeth
Yes. This is Doug. Currently, the joint initiative focuses on two operating units or business
groups that Accenture serves. One is what they call products, and products includes a very large
market. It includes life sciences and it includes CPG.
The other business unit is called CMT, and that's really all the high tech electronics, what
they call communications, media, and technology, and that would also include what I call the wireless
service providers and infrastructure people.
So it's two of the larger divisions of Accenture, and we expect to expand the JI in the future
to other vertical markets. So that's really the way it's structured. So there's representatives of those
two business groups in the joint initiative, and I will tell you that those align well with the markets
that we’re strong in and the ones that we want to obviously have further penetration.
As I’ve mentioned in the past, Accenture has a lot of attributes that complement us, or you
could look at it as attributes we don’t have. They have tremendous privilege in C-level suites, and it
takes us much longer to gain those privileges, obviously, than it takes for Accenture.
The other thing that we’re starting to see, which is exciting and something we envisioned
years ago, is some companies, we believe, are going to want Accenture to deliver a complete turnkey
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is error-free. CNW Group will not be responsible for any direct, indirect, incidental, special, consequential, loss of profits or other damages or
liabilities which may arise out of or result from any use made of this transcript or any error contained therein."
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October 29, 2015 — 8:30 a.m. E.T.
Kinaxis Inc. Fiscal 2015 Third Quarter Conference Call
solution or what we call managed services. And they’re able to do that because they have the process
consulting. They have the deployment experience. They have a lot of what I call product integration
experience. They integrate RapidResponse to other products that they represent. So they can build
what I call a turnkey managed service. And we’ve always felt that supply chain management in general
should migrate to that type of business model. So that’s exciting, and we’re already starting to see
some opportunities that would fall under that category.
I think in the short run, over the next two or three years, you’re going to see a lot of what I
call traditional software and deployment sales. One of the great things about Accenture is they have
reach into markets that we’re not in. So whether it be South America; whether it be certain parts of
Asia or Eastern Europe; so they bring a lot of things to the table that are really exciting.
The reason they wanted to do a joint initiative I think is important for all of you to
understand. There are a few reasons why they wanted to do it. Number one is they want to deliver
innovative or what they call bought-leader solutions to their customers. And they started to see us
penetrate some of the biggest brand names in the world, and they were not receiving the deployment
or consulting revenues or ecosystem revenues around our large, large sales. And so they obviously
wanted to take advantage of those penetrations that we have.
They also received a lot of feedback from these marquee accounts about how strategic
RapidResponse was going to become for those companies. And as you know, we do very large
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is error-free. CNW Group will not be responsible for any direct, indirect, incidental, special, consequential, loss of profits or other damages or
liabilities which may arise out of or result from any use made of this transcript or any error contained therein."
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October 29, 2015 — 8:30 a.m. E.T.
Kinaxis Inc. Fiscal 2015 Third Quarter Conference Call
transactions. I think we average maybe the greatest SaaS revenues per month of any SaaS vendor
when it comes to an individual count. So that fits right into the wheelhouse of Accenture.
And they also saw us filling important supply chain management gaps that the Oracles, the
SAPs and the JDAs of the world were not providing. And they also saw the advantage of what we call
the one-to-many, where the way we deliver solutions it’s a single platform, single user interface, just
like Salesforce, where people can get completely integrated supply chain management solutions on
one platform.
So those were some of the key reasons that they wanted to co-invest with us on this joint
initiative. I think this is just the beginning quite frankly, and we have a vision for the joint initiative to
go to other verticals, expand the solution set, and then of course grow our business.
Richard Tse
You think it’s a bit too early to sort of talk about the potential contribution as a percentage
of your overall revenue; what you guys are maybe targeting for the next year or two? Or that’s
something we could wait on?
Doug Colbeth
Yeah. So what we don’t know yet is will they have any impact on the speed of our sales
cycles. As we mentioned many times, our direct sales cycles are 9 to 18 months. It’s too early right
now to say if they’ll speed those up.
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liabilities which may arise out of or result from any use made of this transcript or any error contained therein."
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October 29, 2015 — 8:30 a.m. E.T.
Kinaxis Inc. Fiscal 2015 Third Quarter Conference Call
The second thing that we’re obviously interested in is the volume of new customers and
how much they will help us in that realm. Remember this JI’s only been around what 90 days or so.
So it’s a little early to talk about what percentage of revenues. I will say this though, that I’ve not seen
a software company get to a billion dollars in revenue without multiple partners fully embracing and
adding value to those solutions. So I think now, when you look at these mature software companies
that are larger than Kinaxis or significantly larger, a very large portion of their business is driven
through partners. So we think this is a major potential, what I call growth vector for Kinaxis, but it’s
just early to give you any percentages or talk about the attribute or profile of these new sales.
Richard Tse
Okay. That’s great. Thank you.
Operator
Your next question comes from the line of Thanos Moschopoulos with BMO Capital Markets.
Your line is open.
Thanos Moschopoulos — BMO Capital Markets
Hi. Good morning. Doug, aside for the comments you just made on Accenture, can you talk
qualitatively about how the pipeline has evolved over the past quarter? Is it consistent with the trends
you’ve talked about previously? Or has there been any particular change worth noting in terms of the
growth rate, the cadence of sales cycles, or the vertical or geographic mix?
Doug Colbeth
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October 29, 2015 — 8:30 a.m. E.T.
Kinaxis Inc. Fiscal 2015 Third Quarter Conference Call
Yes. I look at the long-range sales cycle. I look at that out 18 months. And I will say that that
continues to inch up. So if you look back at our IPO 15 months or so, that long-term funnel is up about
30 percent, and there’s, I think, a whole bunch of factors as to why that’s the case.
I will say that Accenture is a small part already of that increase. So these aren’t closed yet,
so we can’t go around claiming any victories, but I will say that they’ve made a contribution to that
30 percent increase just by their quick reach into these large companies. Now we have to go ahead
and close these sales with them, and in cases like this now with the joint initiative, we are in there
together in these new account opportunities.
On the mix side, we continue to see life sciences now. If you look at new opportunities, life
sciences and CPG are a large part of the funnel, and high tech electronics is what I call consistent. But
these new markets are becoming very significant to us. And we’re excited about that because years
ago, CPG and life sciences, they weren’t all that attentive to their problems inside supply chain. And
now, because of all the M&A activity and they’ve turned their focus to earnings, we’ve been able to
benefit from that.
Thanos Moschopoulos
Great. And in terms of partners aside from Accenture, anything worth calling out on that
front?
Doug Colbeth
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liabilities which may arise out of or result from any use made of this transcript or any error contained therein."
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October 29, 2015 — 8:30 a.m. E.T.
Kinaxis Inc. Fiscal 2015 Third Quarter Conference Call
Well, I think the only thing worth calling out is once you’ve signed something like that, the
other ones call you immediately, and they have an interest in showing you that they can help you
penetrate accounts. These approaches are very recent, but you’ll see a couple of those at our
Connections conference next week in Las Vegas.
Thanos Moschopoulos
Great. Just one last one for Richard. Obviously, your OpEx margins have been very strong in
recent quarters. Can you remind us of your longer-term margin targets? And I know it’s probably
premature to talk about 2016, but is it reasonable to think that we might see some EBITDA margin
compression as you continue to grow your level of investment in some key areas?
Richard Monkman
Yes. We are going to be increasing the investments, particularly in sales and marketing, with
these various initiatives; not just simply with the partners, but with the knowledge services and then
the customer success organization. So I think that’ll sort of near term probably moving in to really the
22 to maybe 24 percent of total revenue for sales and marketing.
There is also some ongoing investments on the product side as well as content for the
knowledge services, so I think there might be a slight—I would anticipate a slight uptick for the R&D
to 20, 21 percent range.
Thanos Moschopoulos
Great. Thanks. I’ll pass the line.
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FINAL TRANSCRIPT
October 29, 2015 — 8:30 a.m. E.T.
Kinaxis Inc. Fiscal 2015 Third Quarter Conference Call
Operator
Your next question comes from the line of Todd Coupland with CIBC. Your line is open.
Todd Coupland — CIBC
Yeah. Good morning, everyone. I wanted to just ask you about scaling up your growth rate,
you’ve seen professional services at higher than 30 percent for two quarters in a row. I understand
it’s lumpy, but seems to me that’s a leading indicator to actually affirm the Company’s goal of scaling
up the growth from the mid 20s. Can you just talk about that?
Richard Monkman
Sure. Todd, it’s a couple of functions. One; it is certainly an indicator of the success of the
Company, but it’s also, I think, illustrative of the depth that we go into with regards to some of these
accounts. And so we are securing larger deals, and the larger deals, in turn, have higher professional
services deployment elements.
We also are going through a cycle where even longer-term customers are—this is part of
that land expand, that model that we have—are implementing additional elements of their existing
subscription. So we see it as a positive element. Our mid-term, longer-term view is to see professional
services still in the sort of one quarter of overall revenue range, maybe a little bit higher than that,
but one quarter. Because our focus really is that long-term subscription revenue growth.
Todd Coupland
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FINAL TRANSCRIPT
October 29, 2015 — 8:30 a.m. E.T.
Kinaxis Inc. Fiscal 2015 Third Quarter Conference Call
Okay. That’s helpful. And then just an adoption question, if I could. The pure cloud
companies, not necessarily in supply chain, continue to have very robust growth rates. How much is
that is contributing to the mindset of opening up supply chain to cloud? Are you having to do any
heavy lifting in that area, so it’s just selling the solution? Just talk about any changing attitudes as well
in terms of the decision makers that you’re talking to.
Richard Monkman
Well, as you know, when we went to this model in 2005, we were a pioneer arguably,
certainly in the supply chain space. And what we have noticed is that additionally we went to a
subscription model. That was what our goal was, was to get that long term visibility. So we said
whether it’s an on-premise subscription or a Cloud-based customer, the fees, the structure,
everything was the same.
There was, in the sort of 2005 to ’10 or ’11, it was more, I would say, comfortable for some
companies to move to a subscription on premise. But certainly in the last few years, as you noted,
that comfort with the cloud and particularly knowing the high availability, the ongoing access, how
security is being addressed, I would say it’s always now into a cloud.
We do hold a number of security standards, and we’re continuing to provide a more robust
offering on the cloud. So I think there’s just a general comfort.
Doug, if you would comment further.
Doug Colbeth
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FINAL TRANSCRIPT
October 29, 2015 — 8:30 a.m. E.T.
Kinaxis Inc. Fiscal 2015 Third Quarter Conference Call
Yeah. Todd, I'm not quite sure you were looking for this, but I think it’s an interesting topic.
I used to say that supply chain software market was one of the worst in the world. I don’t think it’s
the worst anymore, but it’s still difficult. And I think, unlike HRM, financial management, CRM, those
decisions are made faster, and the implementations are obviously quicker. Companies and CIOs have
obviously welcomed those implementations more so than supply chain based on they had some bad
experiences in the ‘90s. And they’re more complex. A supply chain management implementation is
more complex; why you see this content in 25 to 30 percent of our revenues.
I will say there’s almost total acceptance now of being on demand. Where companies in Asia
and Europe in the past wanted nothing to do with it, we seem to have no push back on that. So really
the big thing in front of us now is to grow that subscription line. And our goal is to grow it a lot more
than what it is today. I really think that we need to get inside of what I’d call managed services that
would be offered by the big boys, and I think that CEOs and so forth need to push for these kinds of
supply chain management projects.
And you can tell by our financials that we are lucky in that we have tremendous pricing
strength because of the uniqueness of our solution. But we are seeing more activity, which is great,
but I can see why some of these other SaaS companies may have 40, 50 percent growth rates. And
we want to get there. We’re not there yet, but I will tell you we have delivered tremendous EBITDA.
So when you combine the EBITDA with subscription growth—I call it the SaaS performance index—I
think we’re best in class.
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October 29, 2015 — 8:30 a.m. E.T.
Kinaxis Inc. Fiscal 2015 Third Quarter Conference Call
Todd Moschopoulos
No. That’s great. That’s exactly what I was after. Thanks for the colour.
One last question if I could. So you’re seeing increased interest in life sciences and consumer
products. Is the interest in terms of specific modules that they’re adopting? Is that following patterns
from high tech? Or is there interest initially in other modules? Could you just give us a little colour on
that? Thanks very much.
Doug Colbeth
Yeah. I will tell you the one module that has become extremely popular over the last few
years is sales and operations planning. And you have to remember we enable companies to integrate
that seamlessly with what we call real-time demand supply balancing in the supply chain. So that’s
why we’re so successful selling it.
Sales and operations planning in a lot of these companies is not viewed as supply chain. It’s
viewed as a completely separate category. We look at it as very related to supply chain. But that’s the
one, probably 50 percent of the time, that is the point of entry for us is sales and operations planning.
Obviously what’s unique with these guys is they’re taking a lot of retail data on the demand
side, and they obviously need to sync that up with their ability to supply a large number of stores or
inventory sites, et cetera. So it’s a little different profile than we see in some of these other places.
On the life science side, you know the M&A business that went on, that’s been going on for
the last decade. They’re finally turning their attention to supply chain performance, and the number
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FINAL TRANSCRIPT
October 29, 2015 — 8:30 a.m. E.T.
Kinaxis Inc. Fiscal 2015 Third Quarter Conference Call
of blockbuster drugs out there has not been as fertile for them. So they’re turning their attention to
the supply chain. So it’s encouraging.
Richard Monkman
Thanks, Todd.
Todd Moschopoulos
That’s great, gentlemen. Thanks very much.
Operator
You next question comes from the line of Paul Treiber with RBC Capital Markets. Your line
is open.
Paul Treiber — RBC Capital Markets
Thanks, and good morning. You’ve talked a few times in this call about going deeper into
existing deployments. Can you just help quantify the opportunity for that? And specifically, if you
could estimate what you think your penetration rate in terms of dollars is at existing customers. And
then have you had the opportunity to expand predominantly in more modules? Or is it more modules
plus more geographies and business units on top of that?
Doug Colbeth
Yeah. So this has obviously improved over the years, where our average revenue per
customer has gone up. So our belief is, within a 36-month period, which is a typical subscription, over
that period there will be incremental sales that get added to the subscriptions, and our goal is to 2X
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October 29, 2015 — 8:30 a.m. E.T.
Kinaxis Inc. Fiscal 2015 Third Quarter Conference Call
where they start. We may feel we’re less than 50 percent penetrated when we enter an account. And
then the way to grow inside an account is moving beyond say one product line, moving beyond say
one geography, and by the way these are leavers inside our revenue model.
And then there’s what we call sites, users, and applications/solutions. And that's one reason
we're obviously interested in new solutions like sales and operations planning. But our target is to
double the amount of subscription revenues within a 36-month period. That may sound not really
high to you versus other SaaS players, but it really is high because we started at a much higher starting
point than most SaaS players due to the nature of the supply chain market. So we feel there’s a lot of
opportunity within our accounts, and we obviously want that balance of land and expand and not just
landing new accounts.
Paul Treiber
And can you speak what's needed from an organizational point of view to achieve that? I
mean recently you brought on Ed Shepherdson. Is there other people on the sales force that you need
to help drive more share in existing customers?
Doug Colbeth
Yes. So Ed's group recently hired what we call customer support managers. Now, they have
two functions. One is obviously customer satisfaction, and they also have basically quotas or goals for
additional revenue inside.
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October 29, 2015 — 8:30 a.m. E.T.
Kinaxis Inc. Fiscal 2015 Third Quarter Conference Call
Now that additional revenue can come in multiple form. It's not just software. It can also be
additional premium services. We have some customers that use us as a mission critical system. It's
more than a planning tool, so to speak. So Ed's group is chartered with creating some additional
customer success services as well as helping penetrate accounts.
Our direct sales force may be involved in some of the software sales elements if they’re
significant transactions, but his group is in there helping in what we call user adoption.
Now Sarah Sedgman’s group is also chartered with increasing what we call our knowledge
service revenues, and we've already seen some progress there but an awful lot more work to do. And
she will use Ed's channel of CSMs. She will use the direct sales force channel to build significant
training revenues over the coming years.
That's significant for a few reasons. One is not just training but getting greater user adoption.
We have to train partners. We obviously charge money to train partners. And then she's also hired an
executive to help in the certification of those partners.
So we expect Ed and Sarah—as Richard mentioned, these are two significant areas of
investment along with partners. Those three legs of the stool we think are very, very important to the
long term success of Kinaxis.
Paul Treiber
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October 29, 2015 — 8:30 a.m. E.T.
Kinaxis Inc. Fiscal 2015 Third Quarter Conference Call
I just want to shift gears to capacity. With a higher level of organic growth that you've seen
in 2015 and going into '16, how should we think about the utilization of your data centre and available
capacity? And then in regards to CapEx, should we assume CapEx remains stable at these run rates?
Richard Monkman
It's a good question, Paul. One of the things again, with the long-term visibilities, we invest
in advance in the data centres. And so we will continue to do that. CapEx; we're not providing
guidance for '16 on this call, but I would expect a slight uptick but not overly, just a slight uptick in
some CapEx as we continue to build the business next year.
Paul Treiber
Okay. Thanks. Good to understand. I'll pass the line.
Operator
Your next question comes from the line of Kris Thompson with National Bank. Your line is
open.
Kris Thompson — National Bank
Great. Thanks. Doug, just a little bit more detail on the Accenture partnership; how are you
guys incentivizing them to drive deals? What does the revenue share look like?
Doug Colbeth
Yeah. So, obviously, because of the size of these opportunities and the different shapes that
they take, we have guidelines in the joint initiative. And I want to stress, these are guidelines. And the
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October 29, 2015 — 8:30 a.m. E.T.
Kinaxis Inc. Fiscal 2015 Third Quarter Conference Call
first caveat is we look at each individual opportunity separately. So we have the flexibility in the joint
initiative for them to have the ability to be a reseller, and they have an organization that they use
internally for that.
The commissions they can earn on that can be 5, 10, and if they did a tremendous amount
of the heavy lifting on a sales cycle, it could be as high as 20 percent. What they really want and what
is the ecosystem revenues around a massive supply chain management implementation, so you take
a very large account for Kinaxis, and there's typically a lot of strategic consulting before they make a
decision to transform a supply chain. Then there’s process engineering consulting. Hopefully, we'll
see more and more of these managed services types of opportunities where they actually will be
having planners and functions that you used to see inside the end customer. So they'll get revenues
from that. And what they've said to us is quite often that can be 5 to 10X the software component
when they look at those ecosystem revenues for themselves.
The other is global deployments. We are now starting to see deployments that are
extremely significant in multiple areas of the world, and that's the type of deployments that they
want to get involved in. So we're going through the training process now. One of the functions of the
joint initiative is to train what they call their global deployment services so they see a lot of revenue
opportunity there.
I should point out, they've been under assault, all these guys have been under assault, by
the Indian firms and things like IT outsourcing, so they look at this as high margin business for them
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October 29, 2015 — 8:30 a.m. E.T.
Kinaxis Inc. Fiscal 2015 Third Quarter Conference Call
and going up what they call the value stack. So I think those are the main motivators. We've done
work with them, and we will continue to do work with them where there is no fee to them on the
software.
Kris Thompson
So your software is on their sales folks' price list, and they're going to get bonus on selling
Kinaxis?
Doug Colbeth
Yeah. I don't know the exact formula they use internally, but they are paid on the revenue
that goes into their accounts. So they have these CALs, called client account leads, and they get paid
on software, and they get pain on any kind of revenue that would go into say a MIRK (phon). They
would get paid on that.
What really turns them on is the entire revenue stream of a supply chain transformation.
That's what really gets the CALs going and interested, but yes; they do get compensated on the
software component. And like I said, hopefully more and more of those, it won't be software, it'll be
a component of a managed service and they actually, I think, get compensated better on those
because those are higher margin deals for Accenture.
Operator
There are no further questions at this time. I will turn the call back over to our presenters.
Richard Monkman
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FINAL TRANSCRIPT
October 29, 2015 — 8:30 a.m. E.T.
Kinaxis Inc. Fiscal 2015 Third Quarter Conference Call
Thank you for participating on today's call. We appreciate your questions as well as your
ongoing interest in and support of Kinaxis. We look forward to speaking to you again in February when
we report on our Q4 2015 results. Good bye.
Operator
This concludes today's conference call. You may now disconnect.
*****
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