Kinaxis Inc. Q1 2023 Earnings Call
Ladies and gentlemen, thank you for standing by today's conference will begin in approximately five minutes to allow as many participants as possible to join until that time. Your lines will again be placed on music hold thank you for your patience.
[music].
Yeah.
[music].
Yeah.
[music].
Good morning, ladies and gentlemen, and thank you for standing by welcome to the can access Inc. Fiscal 2023 first quarter results Conference call. Currently all participants are in a listen only mode. Following the presentation. We will conduct a question and answer session and instructions will be provided at that time for you to.
Queue up.
I'd like to remind everyone that this call is being recorded today Thursday may 4th 2023, I will now turn the call over to Rick Wadsworth, Vice President of Investor Relations I can access Inc. Please go ahead Mr. Wadsworth.
Thanks, operator.
Good morning, and welcome to the taxes earnings call today, we'll be discussing our first quarter results, which we issued after close of market yesterday.
With me on the call are Jones card, our president and CEO and Blaine Fitzgerald, our CFO .
Before we get started I want to emphasize that suddenly information discussed on this call is based on information as of today may four 2023.
Contains forward looking statements that involve risks and uncertainties actual results may differ from those set forth in such statements for a discussion of these risks and uncertainties.
Should review the forward looking statements disclosure in the earnings press release as well as in Codexis as SEDAR filings.
During this call we will discuss <unk> results and non <unk> financial measures, including adjusted EBITDA, a reconciliation between adjusted EBITDA and the corresponding <unk> result is available in our earnings press release and in our MD&A both of which can be found on the Investor Relations section of our website at Codexis com and on SEDAR.
Participants are advised that the webcast is live and is also being recorded for playback purposes.
The webcast will be made available on the Investor Relations section of our website.
Neither this call nor the webcast archive may be rerecorded or otherwise reproduced or distributed without prior written permission from Codexis do we get our call John will discuss the highlights of our quarter as well as recent business developments, followed by Blaine, who will review our financial results and outlook finally, John will make some closing statements before opening the line for questions.
We have a presentation to accompany today's call, which you can download from the Investor Relations homepage of our website. We will let you know when to change slides I'll now turn the call over to John .
Thank you Rick good morning, everyone and thank you for joining us today I'll be starting with slide four.
We're pleased to report first quarter results supporting our strong and improving outlook for the year, we achieved SaaS revenue growth of 28% in the first quarter, a solid start towards our overall goal of 25% to 27% growth for the year.
Similarly, we posted an adjusted EBITDA margin of 17%.
Which puts us on track towards our new and higher target of 14% to 16% for the year.
As strong as these numbers are the most significant aspect of the quarter was the quality and type of new named accounts, we continue to win.
We have spoken about our focused entry into the retail market for some time now and today I am pleased to share that we now have made significant progress in this regard.
You would have seen our recent announcement of our recent win with Harvey a leading global supply chain company, serving the unique needs of the very largest quick service restaurants or <unk> in the industry.
For those of you aren't familiar with Harvey I I would encourage you to do a little research.
Avi will be using rapid response, including our new demand dot AI module to help their customers enable advanced predictive and prescriptive analytics using machine learning and artificial intelligence.
Provide end to end supply chain visibility and powerful what if scenario planning.
I can't overstate, how excited I am to have Harvey as a customer.
And to help improve the supply chains of the World class <unk> brands. They work with every single day.
During Q1, we also won another iconic <unk> brand, which unfortunately, we can't name at this time, but a true leader in their category.
Together with Xavi this win gives us important cornerstone.
And the massive <unk> segment of the retail market.
We will continue our focused approach to retail and work to leverage these successes and similar opportunities.
We also welcomed one of the oldest best loved snacking powerhouses in the World are true household name.
As always I am humbled when such globally recognized brands placed their trust and can access.
I'm, particularly encouraged by our progress during these uncertain economic times.
Our win rates remain very robust even as prospects continue to exercise extra care and rigor in their purchasing processes, which is temporarily extended some sales cycles.
As our recent customer additions demonstrate however market leaders continue to prioritize supply chain management transformations in their budgets and our sales activity continues to operate at all time highs.
Today can access has seven of the top 25 companies in the Fortune 511 companies named by Gartner either in their top 25 supply chains or Masters category gardeners highest classification.
These figures represent both amazing accomplishments to date and huge opportunities ahead.
Yes.
Also noteworthy in Q1.
Our annual recurring revenue grew by 23%.
Continue to see good mix of new business between enterprise class and mid market accounts.
Our value added resellers or Vars also contributed some wins with smaller companies in the first quarter.
We are in the very early stages of this strategy, but we are pleased to see initial proof points of its effectiveness.
Okay.
Looking further out growth in our 12 months Rolling pipeline continues to indicate that the positive demand trend for concurrent planning capabilities will continue for some time.
And as you know can access is investing appropriately to fully capitalize on this very constructive environment.
As part of that investment I am pleased to announce that we have live customers in both Microsoft Azure and Google cloud platform or <unk>.
As we've mentioned in previously we've mentioned previously the focus is initially on hosting new customers in these public cloud environments, rather than migrating existing customers.
We are extremely pleased with both the performance and economics of these arrangements.
Rapid response is also now available in the Microsoft Azure Azure marketplace, which raises our profile in this community.
Now more companies will be able to take advantage of the supply chain agility can access delivers by accelerating buying cycles and using rapid response to help contribute towards their Microsoft Azure consumption commitments.
As one final note.
I'm, absolutely thrilled to inform you that the latest Gartner magic quadrant for supply chain management was published by Gartner yesterday.
With their tremendously deep and objective inspection of our space. This important publication may just be the definitive guide for practitioners looking for a path towards digitizing and driving breakthrough in supply chain management performance.
If you are a practitioner of supply chain.
You care about those companies like can access those of us supporting the craft I would encourage you to seek it out through the gardener subscription.
In keeping with and respecting gardeners communications policies, we will be releasing a complimentary copy of this report in the coming days.
Watch our news, our social channels and.
And the website for more details.
This one is not to be missed.
With that I'll turn the call over to Blaine to review results for the quarter and our improved outlook for the year.
Thank you John and good morning.
As a reminder, unless noted otherwise all figures reported on today's call are in U S dollars under <unk>.
While constant currency figures for all key metrics would have demonstrated even better results, we won't be sharing them for Q1 as.
As the impact of foreign exchange fluctuations on year over year comparisons has been waiting.
However, if that changes we will consider reinstating such disclosures if doing so would significantly help with the interpretation of our underlying business performance.
Starting on slide five total revenue in the first quarter was up 3% to $101 1 million.
The slower growth simply reflects the extremely high level of subscription term licenses in the comparative period, which as you know naturally fluctuate cyclically.
Right.
Our key SaaS revenue results grew 28% to $63 1 million.
As you would expect recent strengthened our annual recurring revenue growth has been flowing through to higher SaaS revenue growth.
Subscription term license revenue was $7 million versus $23 5 million in Q1 2022.
This item largely follows the normal cadence of renewals among our small group of on premise customers.
Are those that have the option to move their deployments on premise.
We also added a new customer in the quarter that has the option to move their deployment on premise and expanded our deployment with an existing on premise customer.
I'll speak to the impact of those events on our outlook shortly.
Our professional services activity resulted in $26 6 million in revenue or.
Or 24% growth over the first quarter of 2022.
Generally this revenue item varies from quarter to quarter based on the number size and timing of customer projects underway as well as the proportion of work assumed by partners.
Maintenance and support revenue for the quarter was $4 4 million up 14%.
First quarter gross profit decreased by 12% to $61 million.
Gross margin in the quarter was 60% compared to 71% in Q1 2022.
These changes are also largely a reflection of the extremely high level of high margin subscription term licenses in the comparative period.
Additionally, our recent incremental investments and related teams impacted margins.
Most notably in professional services.
We expect the professional services component of gross margin to improve in future quarters.
As a result, we still foresee an annual gross margin in the 60% to 62% range.
Adjusted EBITDA was down 48% to $17 1 million with a margin of 17% compared to 34% in the first quarter last year.
Again, this was driven by the subscription term license revenue cycle, and recent incremental strategic investments and the future growth of can access.
Okay.
Our profit in the quarter was $1 2 million or <unk> <unk> per diluted share compared to $12 5 million in Q1 2022.
Okay.
Cash flow from operating activities was very strong at $38 9 million compared with $22 million in the prior year period.
The increase largely reflects normal periodic fluctuations imbalances of operating assets and liabilities.
Most notably receivables, including Unbilled receivables payables and deferred revenue.
At March 31, 2023, cash cash equivalents and short term investments totaled $272 7 million.
Up from $225 8 million at the end of 2022.
Overall it was a good start to what we anticipate being another year of accelerating SaaS revenue growth.
Balanced with solid profitability.
Okay.
On to slide six.
Our annual recurring revenue or <unk> grew 23% over the first quarter of 2000 $22 million to $285 million.
This is a slightly lower growth rate than in the last couple of quarters.
As John mentioned, given the macroeconomic backdrop certain prospects continued to exercise extra rigor in their purchasing processes.
Which is move some opportunities into future quarters.
Okay.
Both our initial and updated guidance for 2023 anticipated. This could happen early in the year. So we remain comfortable with our SaaS revenue outlook.
Our win rates remain very high and our pipeline continues to grow quickly.
Overall, we remain thrilled with demand conditions in our markets are.
Our leading competitive position and with the opportunities that incremental investments in our sales team will create.
Moving to slide seven at quarter end, our remaining performance obligation or <unk> was $568 million up 18% from Q1 2022.
Of that total 528 million relates to SaaS business up 19% year over year.
Of the SaaS amount roughly $180 million converts to revenue in 2023.
This amount together with earned SaaS revenue in Q1 represents roughly 91% coverage of the midpoint of SaaS revenue guidance for the year, which bolsters confidence in our outlook.
I'll remind you that growth in RPI, various both with incremental business one.
And renewals of existing subscription amount.
Q1, 2023 was a light renewal period as is every Q1 in general.
For example, Youll notice that our SaaS arpaio dipped in Q1 2022 as well.
Further details on our <unk> can be found in the revenue note to our financials.
Okay.
Turning to slide eight we remain very excited about 2023 and are pleased to be able to update guidance for the year.
We continue to expect 2023, SaaS revenue to grow between 25 and 27% over our 2022 level.
This implies a midpoint of approximately $269 million in SaaS revenue.
One reason for the <unk> view is that a major new customer we had expected would meet the requirements for SaaS revenue accounting wanted an option in their contract to migrate their private cloud deployment to an on premise environment.
As you know, especially option triggers subscription term license accounting despite their current cloud based deployment.
As a result, we are increasing our subscription term license revenue outlook for the year to $16 million to $18 million.
Majority of that $4 million increase will be recognized in Q3.
Naturally our maintenance and support revenue for the year will inch up as well.
Accordingly, we are increasing our total revenue outlook for 2023 to be between $425 and $435 million.
As a result of these changes and stronger than expected profitability. In Q1, we are now targeting an adjusted EBIT margin of 14% to 16% for the year.
We remain pleased with our balanced approach to SaaS revenue growth and profitability as we work towards another year of rule of 40 performance.
With that I will turn the call back to John Thank.
Thank you Blayne I think of can access one word often comes to mind resilience. It's.
Its what we deliver to our customers when they are forced to navigate the often unpredictable conditions of their supply chains.
Resiliency is a key strength of our own business. During these turbulent times and a direct reflection of the many dedicated to simply use that make it possible I wish to thank them all for their commitment to our mission.
On behalf of the can access team I am very pleased to have both delivered a solid first quarter and to be working towards an improved and exciting outlook for the year with that I'll turn the line over to the operator for Q&A.
Yeah.
Thank you we will now begin the question and answer session. If you have a question. Please press star one on your telephone keypad, if you wish to remove yourself from the queue. Please press star one again.
One moment. Please for your first question.
Your first question comes from the line of Thanos Masker La Paz.
Okay.
With BMO capital markets. Please go ahead.
Hey, good morning, John .
With respect to the macro I think what youre, saying.
There's been some incremental extension in sales cycles in some cases.
Over the past 90 days.
We saw strong demand environment given price outlook.
Can you just comment in terms of what specifically changed.
Okay.
Last quarter.
Yes, I think.
The main I would say the main issue is really in the very trailing.
Section of AR.
Our sales cycle in the I'd say the final step where final approvals are being.
Collected and often.
Go straight up to board level.
And so we're seeing.
I'd say right now.
We're seeing a little bit of an uptick as a result of the activities. In Q1, certainly deals are not evaporating, they're just taking a little bit longer to get through that final.
We are going to evolve our process and we're doing that right now as we just brought on a new leader for our corporate development team.
Wouldn't necessarily say that we're seeing any difference in how we go to market.
Ill just jump into Europe , because pipeline is growing really really well.
Here.
Shared last quarter I'm, just wondering if there's been any update or change on the outlook there.
Yes, absolutely a midyear targets still are midterm targets still are still.
<unk>.
We are I think 30% revenue growth in the midterm as our SaaS revenue growth and mid term is something that we're going after and 25% adjusted EBIT is something that we're going after.
So no no change on that.
Mid term.
Excellent that's great. Thanks for taking my questions and congrats again on the quarter.
Thanks I appreciate it.
Your next question comes from the line of Nick Agostino with Laurentian Bank Securities. Please go ahead.
Yes, good morning.
I guess two quick questions for me first going back to the I.
I guess some of that caution you are seeing from some of the prospects can you just.
Quantify whether there's a particular sector or group of sectors, where you're seeing that caution or is there a geography that you can point to where you're seeing that caution.
Well first it's absolutely a subset that we're seeing it.
Nick.
I can honestly say that.
There is sufficient numbers to suggest it's one geography or one sector.
So it isn't what I would call broad.
So broad as to suggest theres some theres some characteristic there.
So I know that's kind of a short answer but I don't see anything that would suggest there is some characteristic.
Based on either size of account based on vertical or based on geography.
Okay and.
Really my next questions I think I'll just answer than you just confirm but when you look at if you try to compare the level of caution you are seeing now given that just the subset and if compare that caution to say back to the beginning of the pandemic or if we if we could even try to go as far back as I say 2008, the last major.
Recession.
What would you how would you click our rates on a scale of 1% to 10% level of caution you are seeing compared to those two prior events.
I've never really thought about the problem in those in that in that context.
I might say that.
This isn't something that I would measure in months.
When we're looking at this.
This rigor of this extra rigor we're seeing during the final stages of.
Of our sales cycles, it's something that I would measure in weeks.
And.
That's why I wanted to make sure in a previous question.
I mentioned that we're not seeing anywhere close to the types of sales cycles, we were seeing.
Prior to the pandemic, we've actually seen since the start of the pandemic and acceleration in overall.
<unk>.
The sales cycle.
And I was saying it was closer to the sort of the 12 to 13 or 14 months maybe.
During the pandemic and so I wouldn't say, we're close to the to where we were prior to the pandemic and I think it's.
Just a function of.
Some of the current economic fears that are out there and.
The extra rigor that boards are asking their their corporations too.
To go through.
Okay, No I appreciate that color.
I'd also say sorry, Nick I would also say just just to reinforce all of this.
<unk> is built into.
The strength of our guidance and so.
Despite these challenges and like I said the deals arent evaporating.
We're just being forced to adhere to the processes and more so the timelines often associated with board meeting schedules.
That's what we're seeing.
Okay.
I appreciate that.
And my last question you mentioned earlier.
When it comes to the small medium sized customers and making those economics work.
Or would you compare the.
The margin contribution from those transactions compared to say the larger deals youre doing on the enterprise side would you say there are similar.
Well I think Theres, a three category isn't talked about users enterprise, which.
We've always historically done really well with their margin profile.
Mid market, where we're doing extremely well with disrupting the mid market right now and having more and more customers come onboard at the mid market level.
Again their margins are actually showing up very close to what we have on the.
To the enterprise customers when.
When we get to SMB.
A lot of it being driven by value added resellers and we have a much smaller cohort of customers in that group at this stage and for US SMB. Just so everyone's aware is anything below $500 million of revenue per year.
But.
What we're expecting is to have a little bit of <unk>.
Later margins on the smaller.
Our customers, especially in the early years.
Over time I think this is something with rapid start being in place with optimization of our cloud position that we'll get those margins higher towards what we would expect on the mid market enterprise.
But I am expecting that they will have smaller tighter margins.
In the early years.
Okay I appreciate that color thanks, guys.
Thanks.
Your next question comes from the line of Kevin Kushner, Anthony <unk> of Scotia Bank. Please go ahead.
Hey, there good morning, gentlemen, just one quick one from me on NPL I think we have a deal of what that business may have been last year single digit million revenue I'm wondering if you could talk about.
I know, it's small but.
The way you think the profile of that might look during the year I know the sales cycle. There I think is shorter.
Got your connector now up and running just wondering if you can maybe talk about how you see that that piece of the business.
Sort of evolving over the coming quarters here.
Yes.
Try and give as much information that Ken.
We would say they were single digits.
In 2022, I expect double digits in 2023.
I still expect them to be.
Profitable or very close to profitable at this stage.
I think the what we're seeing is some.
Great upside from the connector that we're building in the current customer base that we have in place so.
Everything leading for us to believe that was a good acquisition still.
And that connector was completed in Q1.
Phase one was completed and so we're already in process of some potential new customers coming on board through.
Maybe the <unk> side first but.
<unk> two is just about to finish and phase III will be at the end of the year, but I will say customers are already lining up our current can access a rapid response customers already lineup too.
To see if they can if it makes sense for them.
Okay, great. That's it from Neal pipeline. Thank you.
Yes.
And there are no further questions at this time I will turn the call to Mr. Watchman.
Thanks, operator, and thank you everyone for participating on today's call. We appreciate your questions as always and your ongoing interest and support of <unk>.
Forward to speaking with you again, when we report our second quarter results, Thanks and Goodbye.
This concludes today's conference call you may now disconnect your lines.
We look forward to speaking with you again, when we report our second quarter results.