Q2 2021 Kinaxis Inc Earnings Call

Good morning, ladies and gentlemen, welcome to the Codexis, Inc. Fiscal 2021 second quarter results Conference call.

At this time all participants are in a listen only mode.

Following the presentation, we will conduct a question and answer session and instructions will be provided at that time for you to queue up for questions.

To remind everyone that this call is being recorded today Friday August 6.2021.

I will now turn the call over to Rick Wadsworth, Vice President of Investor Relations.

Please go ahead Mr Wadsworth.

Thanks, operator, good morning, and welcome to the can access earnings call today, and we will be discussing our second quarter results, which we issued after close of market yesterday with me on the call are Jones card, our President and Chief Executive Officer, and Brian Fitzgerald, Our Chief Financial Officer, before we get started and I want to emphasize and some of the information discussed on this.

Call is based on information as of today August 6.2021 and <unk>.

These forward looking statements and 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 and the earnings press release as well as in hours and SEDAR filings.

During this call we will discuss <unk> results and non <unk> financial measures a reconciliation between the last price results and other.

From a financial measures is available and our earnings press release and in our MD&A both of which can be found on the IR section of our website can assets dot com and on SEDAR.

Participants are advised that the webcast is live and is also being recorded for playback purposes and archive of the webcast will be made available on the Investor Relations section of our website.

Neither this call and webcast archive may be rerecorded or otherwise reproduced or distributed in total.

Prior written permission from <unk>.

To begin our call John will discuss the highlights of our quarter as well as recent business developments, followed by Glenn who will review our financial results and outlook. Finally, John will make some closing statements before opening up the line for questions. We had a presentation to accompany today's call, which can be downloaded from the investor relations homepage on our website and taxes that.

We will let you know and change lives and I'll now turn the call over to Joe.

And thank you Rick and good morning, everyone. Thank you all for joining us today I'm going to start on slide 3 I'm pleased to report the progress <unk> made and the second quarter, including SaaS revenue growth of 18%.

$242.3 million total revenue of $60.1 million, and then and adjusted EBITDA margin of 12%. These.

These results keep us well on track towards our previously communicated guidance for the year.

Moving to slide 4 we continued to experience tremendous momentum and our business.

We won a record number of new customers for our second quarter.

And year to date, we have more than doubled and new wins compared to the same period last year.

<unk> half of new customers have adopted our rapid start our accelerated deployment package.

And the majority continuing to be partner influenced and <unk>.

Approximately half of our new customers came from the mid market segment that views rapid start is very appealing approach.

While we're seeing great contributions from all of our vertical markets life Sciences, and pharmaceuticals, and CPG have been notably strong so far this year.

And as always and the list of new customers. We welcomed during the quarter is humbling and includes companies like Subaru of America.

The World class automaker, Clarient, and a global specialty chemical manufacturer and Johnson outdoors, and innovator and top quality recreational products that inspire people to experience the great outdoors.

You would have also read and our recent announcements naming violent and advantest as can access customers.

Additionally, can access and our customer Bell Textron and 85 year old global aircraft manufacturer were recognized by supply and demand chain executive for delivering 1 of the top supply chain projects of 2021.

The awards, but spotlight successful and innovative transformation projects that deliver bottom line value to enterprises.

Our rapid response platform strategy continues to gain traction as we announced a new solution extension partnership with love of data.

Let the data supply risks and navigator will be integrated with rapid response to help companies assess the impact of supplier risk and provides mitigation recommendations and engaged suppliers to execute and updated plan valuable functionality and times marked by such disruption.

On to slide 5 with 3 consecutive quarters of strong results our confidence continues to gain momentum for a return to accelerated growth.

To further demonstrate a more accurate view into the health of our business. We are introducing a new metric annual recurring revenue or <unk> for short.

At the end of Q2.

L. A R. R reached the key milestone of 200 million up approximately 24% from Q2 last year.

And is the highest growth rate in any period, we've measured going as far back as 2018.

And this outstanding achievement drives our confidence and a return to accelerated SaaS revenue growth and 2022 and the mid term to the 23 and 25% range with potential to be even higher.

Blaine and will go into more details on how we calculate a R. R. Later.

We fully believe that we are now benefiting from the extra attention that has been brought to our market and general and to the new unique value can access brings to it in particular.

I'll now ask Blaine to discuss the results in more detail for Q2.

Thank you John and good morning, as a reminder, unless noted otherwise all figures reported on today's call are and U S dollars under IRS.

Moving on to slide 6.

Revenue and the second quarter was down 2% to $60.1 million as healthy growth and SaaS and professional services revenue was offset by normal cyclical a decrease and subscription term license revenue.

That is revenue grew 18% to $42.3 million, driven by new customer wins and the expansion of existing customer subscription.

So subscription term license revenue was zero point $6 million.

Down from $10 million from the comparable period.

This result was expected as fluctuations and this revenue items are tied to normal renewal cycle of our customer hosted software subscription and such renewals are at the low point of the cycle. This year.

Our professional services activity was strong again, resulting in $14 million and revenue or 13% growth over the corresponding quarter of 2020.

This revenue varies from quarter to quarter based on the number and size and timing of customer projects underway as well as the proportion of work assumed by partners.

Maintenance and support revenue for the quarter was $3.1 million largely in line with the results and Q2.2020.

We continue to be pleased with the diversity and strength of our total revenue base.

For the quarter, our 10 largest customers accounted for 27% of our total revenue.

No individual customer accounting for greater than 10 percentage of total revenues.

Gross profit decreased by 12% to $43 million.

Representing a gross margin of 67% compared to 75% and Q2.2020.

The change and margin largely reflects a couple of items.

First the significantly lower proportion of subscription term license revenue in Q2, 2021, which contributes nearly 100% gross margin.

And second significant investments and head count and Datacenters made last year and to date this year, which are helping can access and support our ever increasing base of customers.

Adjusted EBITDA was $7.1 million from a margin of 12% compared to 37% and the second quarter last year.

Again, this reflects the impact and not the natural cycle of subscription term license revenue and important.

Investments and all of our operating teams across the organization globally.

Notably throughout 2020.

These investment initiatives are helping to create a scalable base to support much higher revenue per can access and the future.

We recorded a profit of $3.1 million and the quarter compared to $9 million and Q2, 2020.

During Q2, <unk> received $7.9 million and nonrefundable government grants related to the pandemic of which $1.9 million was applied against cost of revenues and benefited gross margin by 3 percentage points.

The remaining $6 million was applied against operating expenses.

The amounts were excluded from our adjusted EBITDA calculation.

Q2 cash flow from operating activities was $15 million compared to $38 million from the second quarter of 2020.

At June 32020, cash cash equivalents and short term investments totaled $232.9 million compared to $213.1 million at the end of 2020.

We remain pleased with our outstanding track record of cash generation.

Yeah.

Looking at slide 7 and our backlog or what we're now referring to as remaining performance obligation or RPE O remains very strong.

Grew to $381 million up 14% from June 30 of 2020.

This amount includes $358.9 million of SaaS revenue or P L which.

Which represents a 19% increase from the comparable period.

$94 million of R. R. P O will be recognized as revenue and 2021 hour to $86.3 million relates to SaaS business.

Further details can be found on the revenue note to our financials.

From the change and RP over the period and adjusting for revenue recognize you can calculate that total bookings and Q2 were $43.1 million.

Of which status bookings were $40.4 million.

Going forward, we won't be discussing the bookings figure, though it is easily calculated from our disclosures.

The bookings amount has limited value as an indicator of business momentum as it includes both bookings of new business that generates future revenue growth and renewals of existing business that and simply maintain the revenue base.

In other words, a quarter with very high bookings may not be as exciting as it seems if it's predominantly comprised zero growth for girls.

As an example, and Q2 the vast majority of our bookings were incremental.

And renewals were very low.

Yeah.

On slide 8.

You can see we are introducing a much more useful kpis for you to follow annual recurring revenue.

Or a R.

<unk> provides a more timely view and to growth and our subscription run rate and as such is a very strong indicator of momentum and our business.

We define <unk> as a total annualized value of recurring and subscription amounts for all subscription contracts at a point and time, whether the software is delivered from our cloud as is the case and the vast majority of our customers.

Or hosted by customers on their premises.

Ultimately these subscription amounts are recognized as SaaS and subscription term licenses and maintenance and support revenue, but are normalized for the varying revenue recognized from treatments under IRS.

Annualized subscription amounts are determined solely by reference to the underlying contracts and excludes 1 time fees such as the nonrecurring professional services.

Given the stickiness of rapid response, and our installed base.

Assume that customers will renew the contractual commitments on a periodic basis as those commitments come up for renewal.

Unless specs renewal is known to be unlikely.

For the second quarter, our AR et cetera to $200 million.

Or 24% higher and in Q2, 2020, which is the highest growth rate and any period, we measured are going back to 2018.

We see this result, and the recent trend and air is a good indicator of the strong momentum we're experiencing currently.

A couple of things to consider.

We fully expect that our growth will fluctuate between quarters. So we caution you not to read too much into small periodic changes.

Growth is tied to the timing of booking new business, which doesn't always follow a predictable Qatar. We encourage you to focus on longer term trends.

We will only be disclosing total air representing all of our contracts.

But <unk> growth is higher than for a relatively small group of on premise customers and also higher than growth and total air.

We expect that to remain the case ahead.

Looking at slide 9.

Based on our track performance so far this year.

<unk> outstanding recent momentum and <unk> and healthy outlook for our business and the market in general we continue to have full confidence and our guidance for fiscal 2021.

To reiterate we expect.

Total revenue for 2021 to be and the range of $242.247 million.

2021, SaaS revenue growth to be between 17 and 20%.

Subscription term license revenue to be between 3 and $5 million in 2020.1.

And and adjusted EBITDA margin of 11% to 14% for 2020.1.

We're also very confident that deposit trends and our air and supports our assertion that 23% to 25% SaaS revenue growth is a sustainable target over the midterm, including for 2022.

We look forward to giving specific guidance ahead.

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

Thank you Blayne.

We're pleased with our progress to date and remain firmly on track for the year more importantly, we're excited to see significant momentum return to our business and to provide you with increased visibility into those trends.

As always thank you for taking the time to join us on the call and with that I'll turn the line over to the operator for Q&A.

Thank you well now begin the question and answer session.

Asking question you made a start on 1 on you touched on so.

You're using a speaker phone we ask that you. Please pickup your handset and also touch on the keys.

And your all your questions and discuss bother them.

Sure.

Today's first question comes from Richard Tse with National Bank financial and so on that.

Yes, Thank you and thanks for sharing those are new metrics on those actually really helpful.

In terms of the rapid start I just wanted to sort of ask and you know last year you had a number of notable wins there understandably.

Kind of curious to know how many of those wins from last year have sort of converted into what would a full deployment.

And our response.

Well the intention rapid start and.

<unk> rapid start was born from you know understanding the implications of Covid, where many of our customers said to US look we need to we need to find some cure to what ails us inside of a very short window here and so.

And a rapid start was intended to provide that and go live state from project start to go live inside of a 3 month window.

And then extend from there so I will say that we have.

Have experienced very successful rapid starts inside of that window with existing accounts that were closed.

And prior periods and have seen already extensions begin from from those starting points. So you're essentially at a live state with concurrency inside of a 3 months window and extending from that point from that point forward. So it's working exactly as intended.

Other thing that rapid start.

Has done has done for us.

And while they tend to start smaller and faster.

We're seeing I would say a return to more normalized.

Land and expand type of percentage.

No contribution to subscription growth you know when we when we went public we were close to 50, 50% subscription.

Growth through net new wins and 50%.

Subscription growth through expansions.

We're closer to that we're closer to that now than we were you know and previous years, which is extremely healthy and exactly what we intended.

So it's great to see rapid start and the strategy that we've taken with rapid start work. This way you know 1 it is driving record number of net new wins and.

And 2 we're seeing exactly what we expected to see which is a return to a more normalized.

Percentage breakdown.

Between net new wins and customer expansion and hopefully that answered your question Richard Yeah, No. That's helpful. Thanks.

And sort of switching gears, a little bit you know you're just over a year pass through the cloud can you maybe give us a sense of you know how that's been integrated and and can access and how they're contributing to the rapid response platform.

So we have you know if you recall the 3 main pillars for Aruba cloud the acquisition around and look at cloud first and foremost was that they had solved use cases that we could resell into markets that we currently serve predominantly the CPG space to some extent life Sciences and.

And so we have been successful in achieving.

You know achieving success in that and that particular pillar selling selling their value into the CPG customers that we that we have existing and the SEC.

Element was their bench strength and machine learning and so they essentially more than doubled the size of our machine learning bench and and so we are actively working this year at.

You know and merging the technologies so that so that we have exactly 1 machine learning platform and that is going exceptionally well.

Third pillar was their entry they're successful entry into the retail space and so today, we have retail customers. In fact, we had retail customers speaking at 1 of our.

<unk> recently.

And so I'd say their contribution is still early in the segment here early in the and the cycle of that investment, but everything that motivated us to acquire them.

And it's manifesting itself quite well, okay, and just last 1 quick 1 here.

In terms of Opex, you know I totally understand what you're doing in terms of setting up for growth. So as we move into 2020 do you think that those investments will start to level off as you kind of harvest and so that growth from the current and round of investment.

Yeah.

Yes, a good question and we we definitely see that.

The investments, we've made will level off a little bit as.

As we've told you before we've invested heavily in data centers, we would.

Vested and your head count to ensure that we were able to scale appropriately with the increase and customers that we are seeing.

And if you had asked me 3 quarters ago, where are you expecting to just keep on saying, we're going to have a record customers record customers right and customers. Every single time, we get on these calls I don't think I believe and this confidence.

And now now seeing where the numbers are up so we're pretty happy with the investments we've made but you're absolutely right. This will level off but we have talked about is that on an adjusted EBITDA margin perspective in the mid term, we will be back to that 20% range in the mid term.

Okay, great. Thanks, guys.

And our next question today comes from Sandoz Metropolis with BMO capital markets. Please go ahead.

Hi, Good morning, John just in terms of attraction and the mid market can you clarify on the go to market. There do you have and overlay sales force or is it the same sales force targeting mid market enterprise and.

Are you seeing with mark and traction across all verticals and geographies or are there something in particular that you would call out when factories more pronounced.

Yes, great question.

We have actually been and the mid market for quite some time I'd say, perhaps.

It was by accident, you know people would come to us from the mid market and of course.

And in the and the verticals that we serve we would we would gladly accept them. It's different now because I would say it's.

Tackling mid market on purpose rapid start as a key.

Element to that it's extremely.

You know something extremely.

Positive from mid market customers, when they can engage with us and and see.

Time to value inside of a 3 month window.

And we have in fact.

Applied mid market specific sales force to tackle this.

To tackle this market. So so that is underway and it's.

And again in combination with with rapid starts that that's essentially what we're leading with.

And I'd say, roughly 50% of our net new wins and this past quarter, where as a result of that strategy.

And so I fully expect to see the continuation if you will.

And that land to expand.

Percentage split continue as we as we rollout to that Tam.

As we rollout roll forward with the strategy as it relates to Tam across our 7.

You know verticals, it's quite meaningful.

And this is to say this this is and and strategy.

We're by no means you know.

Stepping away from large enterprise accounts.

And I relate with companies like Subaru of America.

And so by no means are we stepping back from that but but again, it's just a it's and and strategy, where we're applying energy investment.

Product packaging to tackle mid market on.

On purpose and and and so this is definitely having a.

And the impact on on the momentum that we're experiencing today and what we're seeing obviously as you know weather whether companies are $1 billion and revenue or 75 billion and revenue they are being impacted by this global pandemic in precisely the same ways. You know they are hurting and precisely the same way.

And so it's wonderful to see.

And it's wonderful to see that that rapid start is having the desired effect and look there's something else I Havent mentioned, but.

We've been monitoring this very very closely and it is the overall sales cycle.

As long as you've noticed Dinos you know.

It's a measure that I've been looking at and and so there were there is a part of me that said when we exercise this strategy rapid start and we tack on the mid market will we see some reduction in overall sales cycle.

And while it is early it's early I you know we are.

We have seen we have definitely seen.

Net new wins and sales cycles that are significantly lower than that 18 month type of threshold. We've been talking about and fact that was 1 that was measured in weeks not.

Not months weeks and so again very early it's super early to say, yeah, that's going to be a trend, but you know I.

And I sort of think about it this way panels, it's the thesis behind our investments into rapid start and tackling the mid market and by the way and some cases.

And these are these are benefiting very large enterprise accounts also I also don't want people to think that rapid start as a mid market strategy not at all.

And we've been very successful with that strategy with extremely large enterprise accounts as well and they're just looking to say look I want to be a hero and 3 months, we need to be alive, and 3 months I need to feel better and 3 months and then we will extend from that point.

And so I would you know again just.

Close off the question I'd say, it's had a pretty meaningful impact to our overall pipeline and our pipeline is larger now than it was 3 months ago.

Thanks, Tom and and sales cycle questions with you. My next question and stuff. So thank you grants from that.

[laughter] I've got a quick on for Blayne.

I know the sales commissions were lower this quarter and display.

Despite the very strong net new bookings and say I need to call out there and he changed the commission structure or is that just a timing issue or a sparkling ice.

Yes, it's a timing issue.

And there's a good reason why we gave a R.

When I went back and I first got on this call I think 3 quarters ago I said the <unk>.

Health of the business and never been stronger and we just talked about where our pipeline was over 40%.

And we're doing quite quite well with bringing on new customers and <unk> was really kind of thing.

And my in my mind, saying why don't people understand this because once they understand this they'll know exactly what our future is going to look like.

And when you look at our commissions and.

That figure and it has so many different.

I guess factors that could change that number 1 we changed the way that we look at on commissions on an annual basis that can change on an annual on your.

Yes.

And then the other thing is that.

We have certain contracts and will fall off because they've been on on the.

On the balance sheet at certain point and time and so it will change as well and.

When we think about where it is today and I look at it and I would make sure that it's following high for us.

But at the same time as far as where I'm thinking about the growth of the company.

What I'm going to be looking at because it's it's showing us a pretty clear vision of.

And really Greenfield for us right now.

Great. Thanks, a lot that's why.

And our next question today comes from Daniel Chan with TD Securities. Please go ahead.

Yeah, Thanks, good morning, and.

Thanks for the here, our metrics and I do.

And recognize that bookings is not the perfect and went out there, but I did want to dig into that a little bit.

<unk> seen strong bookings out of many large enterprise software players recently.

But your SaaS book to Bill this quarter. It came in under 100% just wondering if you believe the low book to Bill is just the results and timing around the renewals that you mentioned order flow if there's something else.

And that's exactly it.

And I have a different chart.

And so so and your but it shows like the incremental and it shows the renewables and what we have for total bookings and.

It's almost this this quarter is the first quarter I've ever seen where incremental bookings almost fills up the full gross bookings and on the renewals are a very small amount and.

It just happens that Q2 of 2021 is not a big renewal quarter for us.

Once we once we have a bigger a bigger contract coming up for renewal or number of contracts come up for renewal.

And will help that gross bookings number but.

Again and incremental bookings are were phenomenal, they're the vast majority of what youre seeing and that figure we've shown you.

Renewals are a very small amount in Q2.2021.

Okay, that's good to hear.

And then Capex was also higher this quarter, what was that going to.

Okay.

So the biggest item we have is and we're very very excited we have our new headquarter that we can actually see from our building that we're in right. Now I was we were looking at the at the building are outside of our window and it's looking fantastic at this stage so.

And the large amount of went into and went into that.

Okay and then.

Final 1 from me talent continues to be a constraint on growth for many software companies is there something youre seeing and do you anticipate any kind of wage inflation to creep up.

Yes, it's it's I think it's an obvious challenge that a lot of people are you are facing with the you know sort of the work from anywhere on.

<unk> I can access we have a phenomenal phenomenal culture that we are that we nourish every single day anchored on 3 simple words people matter here and we continue to.

You know to experience.

And I'd say normal.

You know acceptance rate of new hires we continue to be hiring.

You know, we we ended the second quarter with over 1000 full time equivalents, but that does not tell the whole story and we have an extremely extremely healthy co op program and and so you know the number is significantly higher than that as we include the co op team.

And we continue to hire and so it is something that we monitor.

But our attrition rates and our acceptance rates of our you know.

Of offer at the moment continues to be as healthy as it was.

And prior periods and we're obviously going to continue to monitor that and.

And we are extending our I'd say our R&D.

Footprint through that acquisition of Aruba cloud. So we now have a pool of talent and the Toronto area as well as in Ottawa.

And then again the culture and everything we do.

And I focus a lot of attention on making can access a magnet and make it making it a destination for them.

For new grads and fresh talent and.

And so we're and like everyone else, we're going to compete.

You know based on our on our merits.

Yeah.

Okay. Thank you. Our next question today comes from Robert Young of Canaccord Genuity. Please go ahead.

Hi, good morning, I'm through the beginning of the pandemic you talked about user activity on the platform surging and a lot of your customers finding new ways to use rapid response and that maybe now.

Revisiting that and have you seen engagements are remain higher or has it gone down and then a second part to that would be.

And that the mix shift back towards 50% and new.

New and expansion is that some of that at some older customers, who would come back on and platform through the pandemic looking for rapid response already installed and running to sort of solve the problems.

And so so as it relates to activity.

You know that continues to be steady you know.

Through through the pandemic, we we definitely saw a lot more scenarios being run and we continue to see that trend and.

And of course, you know.

As Blaine just said this is the third quarter of record record net new customer wins.

3 quarters in a row record number of net new customer wins, and so you know obviously that drives the activity and our data centers.

As well as you know, especially with rapid start theyre looking to apply the value and the benefits of concurrent planning.

And a very very swift manner, and as you know.

And our lives setting and production settings. So we're continuing to see that.

Very healthy numbers there.

And the second half of your question can you repeat that again sorry.

And just curious to see if some of your older.

Have any of your OEM customers.

Come back more engaged and in the past.

Yeah, it's a really come on a combination of both.

But again when you think about rapid start being go live within 3 months, essentially 1 quarter and a 3.

And 3 quarters of record level net new accounts.

And you combine that with a statement of sort of a return to roughly 50.50.

You can see that the blend is obviously.

You know a function of both right, it's a function of net new customers.

And expanding inside of a very.

A very tight window.

And it's also a combination of existing customers that continue to expand some of which we have been.

We've been working with for many years.

And I think I mentioned this during the last earnings call and you know.

When we when we talk about March is a net.

Net new customer and that didn't start as.

A giant enterprise end to end kind.

Kind of a project, but that's where it ended right. So that's that's where that's where we're at now and so that expansion is an example of you know our past customer.

And catching up and expanding well beyond their starting point.

Okay, Great and then I think you said just a couple of minutes ago that the pipeline was bigger quarter on quarter on and make sure I heard that and any other color on the pipeline relative to the different end markets different geos.

Yeah and help you can provide volume.

Alright and.

I look at the pipeline.

Every 24 hours every 24 hours I receive.

And I receive a pretty detailed report on what we're staring at and yes, I did say and it is factually correct that.

And the pipeline is larger today than it was 3 months ago today.

And it continues to be very healthy and in.

And all of the geographies I don't see a concentration issue.

And I'll add this is potentially some added color.

We continue to see.

And the warmest areas being life Sciences no surprise.

And you know, we're hopeful to be able to announce some exciting names there.

And then not too distant future.

And the CPG space.

You know I'd say second and area that we haven't really talked about for a while.

That is seeing some.

<unk> added.

Excitement and I'd say and the pipeline is aerospace and defense.

And so you know those are the 3 areas I might draw attention to and that and that sequence.

Okay, and maybe last little quick Sneaky, 1 would be just an update on the product roadmap. I mean, there was a lot of new stuff coming out this year and maybe just sort of give us a sense of the way.

And can control is the user experience all of that has that all rolled out on plant and El Paso line.

Yeah.

Excited about.

No about command and control about.

The new user experience.

You know mobile first user experience kind of investments.

Investments that were making and all those things continue to be on track and and development and we're also focused as I mentioned earlier and the integration and unification of our cloud platform for machine learning and AI, which is the combination of the ruble.

<unk> technologies and combination with.

You can access technologies, we're also working.

You know quite a bit on the demand sensing side the platform side, we're really excited with our solution expansion investments and and.

Rapid responses as a platform. We now have 6 announced solution extension providers I would tell you you know, we anticipate having tens of them and the years to come you know this is the force dot com for sales force kind of strategy right and I think about rapid response as a platform. It's a similar.

<unk> is what Salesforce did when they announced force dot com.

To allow a third party.

To implement their own intellectual property on top of rapid response.

That's the strategy and it's and it's a you know it's working exactly as we had planned it to.

Thanks for taking all the questions.

Thanks, Rob.

And our next question today comes from Christian Squirrel with 8 capital. Please go on that.

Hey, good morning, Thanks for taking my questions.

First 1 might be for Blaine and its to help us better understand the AOR metric.

And if there's a potential maybe not that she had been the future for term license revenue and you got.

And you'd encourage us to look at L. A R and R. P. All at the same time or is there any other color you got there on.

How much SaaS comprises and how term license bookings backlog and affect the air on that right.

Good question, and I am happy assets and cases anyway and confusion on it.

On the way that we've defined our weighted.

<unk> normalized <unk>.

<unk>, so a normalized the contracts there as subscription term license that we would recognize it over the term of the contract rather than what <unk> requires us to recognize the amount upfront and there should be no different.

And there are and.

And I'm not gonna pointed out, but there are companies that will sometimes choose 1.

Sure.

Net.

And picks the SaaS amount and doesn't include the subscription term license for whatever reason and you can kind of bake your number a little bit because of that by switching the buckets of where theyre going to fall on your revenue.

For us what we've done and we've tried to make it as simple as possible. If we were to start recognizing revenue over the contract that we have in place thats, what youre going and get for IRR and so.

And hopefully as simple and it makes the most sense to most people that if you have a subscription term license, where we would usually recognized 60% of it upfront and it's over 3 years, we've said less back that up we're going to recognize it over the full 3 years for the purpose of how we recognize they are and so we shouldnt see any spikes over over time and it should be a very.

Smoothed smooth and we should see.

Awesome I'm glad to hear that you guys and can see a chunky and nuances for this 1.

So it shouldn't be too too lumpy as it grows and the other question more on the business on rapid start.

And more and more popular.

I was just wondering if there's a way to think of the gross margin or operating margin and pockets of broth and start, let's say ops and venue expansion.

And what does it require less head count and labor sales too to sell and deploy.

Would you characterize maybe the margin impact and is neutral or today.

Ship margins, 1 way or the other.

Yes, so when we think about.

Rapid start and.

And when we started looking at.

What this could look like over the long term, we realize obviously, we would have in the near future we would have extra.

And extra costs, but on lower gross margin and the early beginnings of rapid start because we will get used to scaling up and making sure we understood how to make it as efficient as possible, but on the lifetime value of that customer we expect that that will be something we're going to get.

A couple of extra points on the operating margin and gross margin.

As it becomes something more that we have like a template and something that we can create very very efficient.

And our processes to repeat and rents and <unk>.

We think that that gross margin will be a stronger gross margin and we will see it and the long term than we would have had for a for what we had and passed with rapid response.

Great. Thanks for taking my questions.

And our next question today comes from Stephanie price at CIBC. Please go ahead.

Good morning, Thank you.

John and I was hoping you could talk a little bit about what you're seeing from your traditional enterprise sales cycle.

And when you drink it.

And if I feel free call things normalize from.

And I would say the last.

3 quarters.

And some of this is related to rapid start as an average we are seeing some I would say positive.

Movement there.

And as I mentioned, you know I'd say that overall, especially as it relates to rapid start deals they tend to be.

And closed at a faster rate than I'd say the larger.

You know global end to end transformation projects and the past.

And as I mentioned, 1 of 1 of the rapid start.

You know 1 of them was measured in weeks.

And shockingly, but you know again.

And I think it's early to suggest that this is going to be.

And on a sustainable trend.

And that we watch very carefully.

And you know as I as I like to tell the board I've got red glasses, but not rose colored lenses. So I I don't want to suggest that this will be systemic although you know the thesis would suggest that.

Lower lower entry cost much faster return on investment return on investment side of 12 weeks and that's you know, it's very very appealing and so the thesis so far is holding.

I believe that the result, as we as we extend rapid start through.

And the quarters ahead of us that we'll see some some improvement and the overall sales cycle.

Okay. Thanks, and then interest good partner execution, and the quarter and you could comment on that and also on whether you've seen any outside partner and we shouldn't.

And part of an RFP come from.

So you know.

And the answer to your second question is absolutely and as you know.

The beauty of our solution extension and rapid responses as a platform and <unk>.

And some cases, the intellectual property being produced by our partner is the lead into an account and in other words.

That's the prerequisite value as the solution extension.

And IP that leaves us into an account, which is again extremely exciting and.

And I and I do believe that.

That trend will will ultimately continue as it relates to our partner influence it continues to be.

You know at par with previous quarters.

We signed that and you know many many new new partners and this last quarter and.

And.

And they continue to be influencing the vast majority of the net new wins.

You know that we're that we're that we're closing I'd say the big story, though.

At least in my mind, the Big story is around the solution extension partners and the intellectual property that theyre, bringing to the table and the fact that in some cases their intellectual property, where the catalyst of us closing net new business.

That's great to hear and net.

And really for me in terms of M&A, just curious about what you're thinking here, Ben and allows and philosophy opposition on so you've got a good cash position.

So yes, we're continuing to add.

Exercise that muscle, so to speak and and being a lot more thoughtful about our M&A strategy.

And we are constantly look.

Evaluating I'd say buy versus build.

And as it relates to as it relates to our roadmap and.

Carrie Liu who was the CEO of Aruba cloud is is running that program.

For me and and so I'd say you know there may be some potential and the and the quarters ahead.

For some tuck in opportunity.

I wouldn't say I wouldn't classify our M&A strategy could be.

Looking for large I'd say on acquisitions at this time, but we are evaluating opportunities against our near and midterm roadmap and looking to accelerate value.

You know through through potential acquisitions.

Great. Thanks for the color.

And on that.

Income from Nick Agostino with Laurentian Bank Securities. Please go ahead.

Hello, and thank you. Your line is open and so are you on mute perhaps.

Sorry about that.

Good morning, and John <unk> questions here.

First when we think about the value proposition that that rapid response, and now rapid start as well and they're supposed to deliver to customers.

Think about David that the headwinds that youre dealing with.

And what resistance of adoption, if there were any before the pandemic and at the start of the pandemic can you speak about maybe how.

It starts and how the pandemic.

And it continues to play out here, how maybe some of those resistance is.

Have you been able to take down those walls and and convert somebody on.

The way I'm thinking to tomorrow.

Way of thinking when it comes to adoption and your value proposition.

Yes, it's a great question, Nick first I would say.

I would categorize if you will.

The events at the start of this pandemic is being less.

A.

Less so.

The state where people werent adopting the new technique. It was more you know companies turning inward for survival.

And so you had nothing.

And I do not believe it I need to do with the.

The beliefs that concurrent planning and and changing their protocols.

Was the viable option again, it was much more turning inward cash preservation and survival and understanding the new World Order you know, how and how do we survive.

The 1 thing I've had about 60 or 65, 1 on 1 conversations now with chief supply chain officers over the last 12 months and Theres 1 thing Ive heard almost consistently okay and it is that things that you could trust absolute trust and your supply chain from 1 day to day next you know and.

The things that you could trust could no longer be trusted and lines were low transportation lanes would open 1 on 1 day and close to the next.

And so.

That's how I would categorize the state of affairs, when I look back at Q2 and Q3 of 2020.

I'd say today.

There is a recognition that what governs supply chains for the past 30 years won't survive. The next 3.

That is another narrative that I'm hearing what governs supply chains for the last 30 years will not survive. The next 3 every board is asking every CEO what will you do next time.

And and so this if anything is driving.

And the desire to rethink.

The governance model and and I always say this right it's far less about technology, it's all about technique.

Technique informs technology, not the other way around and so.

So it is drawing a lot more conversation around the technique of concurrency as being the the model of the future and of course that leads to well what technologies enable concurrency.

While we invented it so and so it does bring us to the table.

But the conversations I have I've always been and will continue to be about technique first and.

And so I do think what happened with.

This global pandemic, if I were to describe it without talking about technology.

And just about every supply chain learned what it felt like to have and.

Agility muscle atrophy, and that's the way I think about it if you had no agility. This is what it would feel like and.

And so obviously our value proposition around concurrent planning is all about bringing bringing forward hyper agility.

2 supply chains and so so the technique today and this dialogue this narrative around optimizing time, Inc.

Speed to detect leading to speed to correct. All of these types of narratives are really really relevant now more than ever.

Thank you for that and Blaine and a couple of questions for you when I look at your EBITDA margin guidance, you're maintaining that 11, 14% Roe.

<unk>.

And I believe on the last Paul There was it was mentioned that your expectation that first half margins will be greater than and the second half and I think and the first half net numbers are at 14% and then just looking at the comments earlier about how as we go into 2022 do you expect I guess.

Lending to kind of start to level off here. So I'm, just wondering where the second half of this year should we still expect say day margin and therefore.

And then 2 to increase versus the first half.

Should we start to expect more of a tapering and maybe look at second half margins to be more in line.

Yeah. So on.

So, yes, you're absolutely right and we came in at 13, 7% for the first half of the year for adjusted EBITDA.

Which is normal for us and in the first half of the year, where it's generally a bit stronger.

We think that we will still end up and the 11% to 14% for the year.

Back half of the year.

And very comfortably and there.

Obviously, a big thing that that depends on that and that's going to help change what we're going to look at and 2022 is subscription term license. So if we landed some large subscription term licenses anytime in the back half of the year that will change what our adjusted EBITDA margin would look like and then when you think about that and you think about 2012.

2 we know that 2022 is expected to be a very strong year for subscription term licenses. So you should expect as a result, we're going to have some some points that are going to start adding up on top of the day.

The numbers, we have right now to get us closer to that 20% now the other factor that we've talked about obviously is that we have slowed down the.

And the hiring because we we hired in advance of this kind of rushing of extra new customers and we think were and are pretty good space, where we're at right now with respect to.

And with respect to head count. So I think that will all help kind of gradually get us back to that 20% number in 2022, but.

Just kind of answer your question, we should be and the 11% to 14%. There is always a chance that something like a subscription term license that could always throw that off and we might be a little bit higher.

And then 1 other question, which is in part tied to the to the <unk>.

When we when I look at your professional services kind of but I think it was a record this quarter $14 million and part of that growth highest 2 expanded service offerings, which you guys have talked about in the past.

My question is is there a sustainable run rates when you look at those expanded services and is there a predictable run rate.

You can speak to that.

And that maybe you also include part of your HR and I'll leave it there. Thanks.

Yes, so I think what you're touching on is on professional services, we now kind of almost 2 different.

Revenue streams that come in and 1 of them being Sustainment, which we just talked about steam it can be sometimes.

Sometimes looked at as a SaaS type of business, we are not considering that.

And that would not be included in our air So anything that you have and areas only come from SaaS and subscription term license and maintenance and support.

And the Sustainment business day.

Could be a recurring revenue to a certain expenses that's within professional services.

Is not and that we're considering at this stage.

Perhaps in the future we may consider that but at this stage we're not.

Okay, great. Thank you.

Yeah.

And our next question today comes from Martin told her with a P. D capital markets. Please go ahead.

Hey, guys. Thanks for taking my question a quick follow up on.

Gross margin discussion of members and customers and you talked a bit about gross margin impact.

And there are similar impact on the operating margin or EBITDA emerging and Laurie for those mid market customers at scale.

No I think what you're going to see is the gross margin is going to flow down to the operating margin and overall.

R R.

Our sales and marketing is still going to be the same day.

1 thing that we might see though a little bit differently is that.

I think that for mid market and especially rapid start we're going to see a lot of partners and we're gonna be very very interested in.

Getting involved with those types of deals because it is a very similar.

I guess product that there'll be selling that they can.

Again rent.

Rinse and repeat over and over again and it.

We'll make them very very efficient along the way so.

Overall, I think the operating margin will be.

<unk> be fairly similar I think we will have a couple of points there will be.

Nice, but that will come from the gross margin side.

Great. Thanks, very much that's it from me.

And our next question comes from Paul steep Scotia Bank. Please go ahead.

Good morning, John.

Just quickly could you reconcile a little bit lots of talk of new customers, new wins, and maybe to shift somewhat to mid market.

How should we think about the cadence on.

On ramping on those customers I guess over time, given given the mix that you're talking about shifting within the business is at.

Significant or are we going to see this over the next year or so in terms of that cadence and I'm just trying to align that with some of the comments around growth.

Yeah, Paul it's a lot of that has to do with the.

And the size of the enterprise itself.

Ramping a global concurrent transformation governance model for $40 billion.

Enterprise that's in every geography that matters will take longer than.

You know ramping that same footprint for a company and fewer geographies doing 1.

$1 billion and revenue.

And the intent here I would say that the life the lifetime lifetime value of a customer regardless of their you know their size and complexity.

We don't believe that rapid start will diminish that that number whatsoever.

At all so so that's the way I would categorize it you know what I am.

And I suggested earlier was that I.

I do believe we will continue to see a healthy.

Mix between land and expand revenue harvested from existing.

Existing customers versus revenue harvested from net new.

And in the past.

And that number had been skewed mostly.

Towards the end the.

And net new and.

So I do think a rapid start 1 of the side effects of rapid start is seeing a much healthier mix between those 2 and I think that trend is absolutely going to continue.

Right 3.3 quick hits for line.

First 1 just on <unk> just to confirm the point and time that's referenced in the definition here I'm, assuming the point in time and the end of the period such that if we think about this metric as if you've never did anything else for the rest of the year.

E R. R would effectively be what fault felt like excluding the.

Sort of more variable items second would be just what the Capex left to do the headquarters is for this year and that was it.

Sure so per.

Point in time and Youre right at the end of the period. So if you think about it we make a decision at that point.

Based on any incremental bookings have come in as well as any.

Any contracts that are <unk>.

Currently active.

As to whether or not they should be considered and annual recurring revenue.

We'll also at that same point and time.

And take a look at any of our contracts.

Are there any other in jeopardy for non recurring and so we do.

On a quarterly basis take some out at that time. So at June 30 was the last time that we provided where you hit the $200 million and era.

With respect to Capex, we expect that will be.

I guess I'd ask.

In the day.

New location, starting February Middle February right now and so we expect net capex to continue to come in until until that period, but it should be in line with the guidance and we provided at the very beginning of the year.

And the right of use should already start.

Moving up since it sounds like it's you're already on for 2021, even though you said February and correct.

Yeah, So I would say get look get ready for that in Q3 Q4.

Perfect. Thank you.

And ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to the management team and for any final remarks.

Great. Thanks, operator, thank you everyone for participating on today's call. We appreciate your questions as always and your ongoing interest in and supported Maximus and we look forward to speaking with you again next time on Eagle for Q3, 2021 and results bye for now.

Thank you. This concludes today's conference call and thank you all for attending today's presentation. You may now disconnect your lines.