Q2 2023 Kinaxis Inc Earnings Call
Okay.
Good morning, ladies and gentlemen, welcome to the can access incorporated fiscal 2023 second 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 for questions.
I'd like to remind everyone that this call is being recorded today.
Today August 10 2023.
I will now turn the call over to Rick Wadsworth, Vice President of Investor Relations at Codexis, Inc.
Please go ahead Mr Wadsworth.
Thanks, operator, good morning, and welcome to the can access earnings call today, we will be discussing our second quarter results, which we issued after close of markets yesterday with me on the call are John Sicard, Our President and Chief Executive Officer, and Blaine Fitzgerald, Our Chief Financial Officer before we get started I want to emphasize that some of the information.
Discussed in this call is based on information as of today August 10, 2023 and contains forward looking statements that involve risks and uncertainties.
<unk> results may differ materially from those set forth in such statements for a discussion of these risks and uncertainties you should review the forward looking statements disclosure in the earnings press release as well as in our SEDAR filings.
During this call, we will discuss <unk> results and non <unk> financial measures, including adjusted EBITDA.
Reconciliation between adjusted EBITDA and the corresponding <unk> results is available in our earnings press release and in our MD&A both of which can be found on the IR section of our website can access dot com and on SEDAR.
Participants are advised that the webcast is live and is also being recorded for playback purposes, an archive of the webcast will be made available on the Investor Relations section of our website. Neither this call nor the webcast archived may be rerecorded or otherwise reproduced or distributed without prior written permission from can access to begin our call John will discuss the highlights of our quarter as well.
Recent business developments, followed by Blaine 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 can be downloaded from the IR homepage of our website. We will let you know when to change slides I will now turn the call over to John .
Thank you Rick good morning, and thank and thank you all for joining US today I'm excited to share our Q2 results and developments with you today.
I'll begin with slide four.
In the second quarter, we achieved SaaS revenue growth of 25% total revenue growth of 31% and our adjusted EBITDA margin was 14%.
These results keep us on track towards our targets for the year moving to slide five.
We won a record number of new customers in Q2, surpassing the benchmark from last year, which demonstrates our ongoing momentum in the market.
Our win rate against the competition continues to increase and it was our best Q2 ever in terms of incremental subscription business one.
In June we had a record turnout at connections our annual customer conference where in person attendance grew by over 50%.
We also held more initial meetings with our prospective accounts in Q2 than any in any quarter of our history.
Further suggesting that the market is heating up.
While we need while we need to remain appropriately cautious about the global economy, we continue to see a persistent urgency around the need to transform supply chain governance and the demand environment for supply chain management solutions remains very strong.
Moving to slide six.
Thanks in part to the record number of wins in the second quarter can access now has over 300 customers.
We are leading with leaders and as always these companies represent some of the largest and most exciting brands in their sectors.
In our industrial segment, we're thrilled to add Exxonmobil, one of the largest publicly traded energy and petrochemical companies.
As well as oil and gas giant shell international in the same segment.
We welcomed West Lake and New York Stock Exchange listed company with roughly 16 billion in revenues last year.
And consumer goods, we added major fitness lifestyle company peloton.
As well as Brown Forman distillers and marketers of premium spirits like Jack Daniels, Finlandia vodka and Woodford reserve.
We also won water filtration leader Britta as well as Premier Foods, one of one of Uk's largest.
Food manufacturers with brands like OXXO, Ed Bird's custard.
Unsurprisingly given this success consumer goods remains one of our fastest growing segments.
And high Tech, we welcome Keith Kyocera Communications systems, the Japanese information systems company that is pioneering the communications of the future.
This is just a small sample of our wins in Q2 names that clearly demonstrate how global innovation leaders are starting to embrace meaningful supply chain transformation.
In total roughly half of the companies we won in Q2, our enterprise class.
And there are many more prospects of similar quality and size in our pipeline today.
To me there is no greater evidence that our opportunity remains in its early stages.
Now moving to slide seven.
Siloed approaches to supply chain management are giving way to fully concurrent supply chain orchestration from planning through execution.
Can access remains alone in its ability to deliver on that vision and.
And we recently announced several major innovations that set us apart in this space.
First enterprise scheduling.
Enterprise scheduling is the first and only scheduling tool that allows companies to orchestrate production across sites and creates a comprehensive feasible and efficient manufacturing schedule regardless of plant layout.
Okay.
Our new supply chain execution application.
A result of our <unk> acquisition.
<unk> Transportation management order management and returns management.
It empowers businesses to drive supply chain orchestration from plan through delivery across all time horizons.
Our sustainable supply chain offering allows companies to ensure environmental factors are a key part of supply chain decisions by embedding carbon emissions factors, including scope three emissions into rapid response scenarios.
If you read our our ESG report, you'll know that commitment to a sustainable socially responsible future is one of our core strategic pillars.
And.
<unk> demand dot AI will allow companies to better understand how both internal and external factors are influencing demand for their products.
And to take advantage of these changes quickly.
Harvey a giant in this strategic outsourcing for quick service restaurants, and other industries took the stage at connections to highlight its early adoption of this new capability.
Okay.
On slide eight not only are our customers are recognizing these innovations but in may for the ninth consecutive time can access was placed in the leaders category of Gartner Magic quadrant for supply chain planning solutions and became the first company ever.
To be simultaneously positioned furthest, both completeness of vision and ability to execute.
Hopefully you've seen this report by now.
But the amount of white space between can access and the next competitor in that quadrant speaks for itself and is a great Testament to what our customers CNS.
Simply stated we are the innovative and trusted leader that delivers on our promises.
With that I'll turn the call over to Blaine to review results of the quarter.
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 high for us.
Starting on slide nine total revenue in the second quarter was up 31% $205 $8 million.
Our SaaS revenue grew 25% to $64 1 million.
Ongoing momentum in our markets continues to drive this very healthy growth.
Subscription term license revenue was $7 $1 million versus <unk> 4 million in Q2 of 2022.
As you May remember.
This item largely follows that normal cadence of renewals among a small group of existing on premise customers or those that have the option to move their deployments on premise.
However, it's important to note that in Q2, one of our new customers that joined us will be accounted for as subscription term license revenue.
Given our typical experience we had initially forecast this and all other new wins to come in SaaS revenue.
Our professional services activity resulted in $30 million in revenue.
Our 18% growth over the second quarter of 2022.
Bookings for professional services were also very strong which will help support our total revenue outlook for the year.
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.
Revenue for the quarter was $4 6 million up 17%.
Second quarter gross profit increased by 28% to $663 7 million.
Due to the significant revenue growth I just discussed.
Gross margin in the quarter was 60% compared to 62% in Q2 of 2022.
Yeah.
Software gross margin decreased to 76% largely due to initial investments in our new public cloud arrangements.
We are ahead of plan with respect to the number of customers hosted on public cloud, which is positive but it doesn't mean that costs are also a little higher than expected.
As we move closer to a fully public cloud model, we expect software margins to return closer to 80%.
This will also be helped by a higher proportion of expand business in future years, I would like to highlight that in Q2 over 70% of new subscription business one wasn't the land phase of our.
For our business.
Professional services gross margin was healthy at 21%.
Slightly lower than in Q2 of 2022 due largely to investments made in additional head count to support new customer engagements and existing customer expansions.
We still foresee a total annual gross margin in the 60% to 62% range.
Adjusted EBITDA was up 47% to $52 2 million.
With a margin of 14% up one percentage point from the second quarter last year.
Our loss in the quarter was $2 5 million or <unk> <unk> per diluted share a penny improvement from last year.
Cash from operating activities was very strong at $13 9 million compared with $8 4 million in the prior year period.
The increase largely reflects normal periodic fluctuations imbalances of operating assets and liabilities as well as higher interest received on balances in Q2 2023.
At June 32023, cash cash equivalents and short term investments totaled $293 4 million.
Up from $225 8 million at the end of 2022.
Okay.
On slide 10, our annual recurring revenue or <unk> grew 22% over the second quarter of 2000 $22 million to $293 million, representing a healthy balance in growth rate given the economic backdrop.
There is plenty of opportunity for even faster growth, but the final stages of procurement are still taking longer in some cases.
Well documented phenomenon and enterprise class SaaS by now.
It is especially applicable when targeting new customer opportunities and over 70% of our AOR growth in the quarter was from new customers in short we have continued to grow well in this unusual environment, which highlights the ongoing urgency around supply chain transformation.
Yes.
Slide 11.
At quarter end, our remaining performance obligation or <unk> was $587 million.
Up 19% from Q2 2022.
Of that total 542 million relates to SaaS business up 18% year over year.
Of the SaaS amount roughly $127 million converts to revenue in the remainder of 2023.
I'll remind you that growth in RVO, various both with incremental business, one and renewals of existing subscription amounts. So it's best to focus on trends over the longer term.
Further details on our RPM can be found in the revenue note to our financials.
Yeah.
Turning to slide 12, we remain excited about 2023 and are pleased to be able to reiterate our outlook for the year.
By way of reminder, we expect total revenue of $425 million to $435 million.
25%, 27% SaaS revenue growth.
16% to $18 million in subscription term license revenue.
And an adjusted EBIT margin of 14% to 16%.
Now we mentioned that we won a new customer in the quarter that will be accounted for a subscription term licenses.
You'll recall the same thing happened in Q1, and we increased subscription term license and total revenue guidance at the time.
In both cases, we had anticipated the business coming in SaaS revenue and the combined impact of SaaS growth is roughly 1%.
As a result.
It will be more difficult to hit the top end of our SaaS revenue growth guidance, while our covenants in the elevated subscription term license outlook has grown.
Overall, we remain fully focused on finishing the year within all our target ratios.
We remain pleased with our balanced approach to SaaS revenue growth and profitability as we work towards another year of rule of 40 performance.
And with that I will turn the call back to John .
Thanks, Blaine as you know, we're working towards 30% plus SaaS revenue growth and 25% plus adjusted EBITDA margin in the mid term.
Internally, we are hyper focused on our path to crossing $1 billion in revenue.
To help achieve these goals. We recently made some exciting changes to our leadership team first we appointed a new chief product Officer, Andrew Bell will lead the product roadmap and oversee its execution, including our continued excellence in AI and machine learning.
Andrew has been with can access for more than a decade, most recently, leading the product management group.
We've also created a new chief operations officer role and appointed former Chief HR Officer, Megan Patterson.
Megan will have responsibility for our cloud services operations corporate corporate.
Corporate strategy, HR and global real estate.
We've named Amber paid as chief Human Resource Officer.
For almost three years <unk> has worked closely with Megan as Vice President and the HR team and has previously led the.
The entire HR resource function for other companies.
Finally, we recently announced Margaret Franco as our Chief marketing Officer.
Based in London, Margaret has extensive experience shaping global tech brands, and helping companies scale well beyond $1 billion and she has previously held positions as CMO, Ed Fenestra held senior marketing global roles at Dell During a 13 year tenure and was named to the list of top 25.
Five women in financial technology.
Our continued strong financial performance alongside a growing list of World class enterprise customers innovative new product capabilities.
And an exceptional leadership team positions us well for our next stage of growth.
It is a privilege to lead a company that powers the worlds supply chain, while preserving the planet's resource.
And all to ultimately enrich the human experience.
I want to thank our amazing team around the world, our customers and partners and our shareholders for your continued support and commitment to can access.
With that I'll turn the line over to the operator for Q&A.
Okay.
At this time I'd like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad.
Pause just for a moment to compile the Q&A roster.
Our first question comes from the line of Daniel Chan from TD Cowen Daniel Your line is open.
Hey, good morning.
Good to see the strong SaaS bookings in the quarter, if I look at the <unk> added in the quarter relative to the SaaS bookings it seems like our growth isn't quite as strong as what the SaaS bookings would suggest.
Due to longer contract durations.
The larger bookings or is there something else to point out.
I'll take this one great great observation and so one of the things we've been noticing.
Adjusted deposition, that's happening right now with companies.
Number one they are realizing that they have these constraints on budgets number two.
Realize they need to have a solution for the supply chain issues that theyre going through the demand is through the roof.
Taylor Swift Heights, and so what we're starting to get is.
Situation, where we need to get them in the door and so the opening footprint a footprint that we initially get is smaller than we've seen over the past couple of years.
<unk>.
We've seen our pipeline move throughout the quarters, but the biggest thing is getting them in the door and you've seen what our retention rates are our retentions are is extremely sticky and we expect that these people will be here for a long time. So I'll give you a couple of examples our biggest.
Customer coming on and the biggest contract that we had come on.
They are at an extremely big ramp they go from I'll say, a onex in the initial contract and by 2025 that contract is a three X and that's where our number one largest customer that we landed the <unk>.
<unk> is already lined up for a significant expansion that they have early in this year and so we're getting them in the doors.
We're showing them what we can do we know that we're going to stay with us for the long term because of retention rates and we expect to see the expansion so were we.
We're kind of sticking taking that sticking to the script, which is we are in that land base.
A lot of new named accounts that are coming on board, we're getting them in the door and we're expanding from there. So we're really happy with sticking to the plan right now.
That's very helpful. Thanks for that.
As part of that expense I did some of your public cloud investments can you just elaborate on what those investments are and how long you expect those to continue.
Sure so the the biggest investment as well.
But I will say two main partners that we're dealing with right now one of which we are in the process of.
Moving.
The majority of our customers over to you.
We will expect that will phase out to the double cost that we're going through right now with our private cloud as well as public cloud should be eliminated by the end of 2024.
We are Luckily ahead of schedule for the business.
For finances.
Not always great to have an extra cost.
I'm incorrect.
But there's a high amount of demand to get onboard with the public cloud environment.
We expect by 2025 that will be back to the <unk>.
One cost hitting us.
I might just add.
R.
I'm just going to use the word delight.
To the speed at which we've been able to adopt not only the the Microsoft Azure.
Platform, but the Google cloud platform as well working both with their teams they have been.
Hyper focused on us, which is great it's awesome to get the attention.
I think they realize and recognize the same thing that we do that the world of supply chain is going to undergo this massive transformation over the next five to 10 years.
And so obviously both want to be a major part of that.
As you can appreciate we started.
What I would call public cloud many many many years ago and it's translating our footprint into those public cloud environments, we had some assumptions around what the technology.
<unk> would be and any engineering investments and what they would be and thankfully and of course, sometimes that has some impact on finance.
We're thrilled to see the speed at which we can we can migrate and start new customers on those public cloud environments.
Thanks ill pass the line.
Our next call comes from Sandoz Marcia pools.
Yes.
<unk> capital markets. Your line is open.
Hi, good morning.
Just looking at the <unk> growth.
Obviously, it will have to reaccelerate as.
As longer term in order for you to get to your 30% SaaS revenue target.
So how do we think about that dynamic.
<unk> be driven as a function of some of these expansion opportunities kicking in.
And then maybe kind of a related question from the macro would you say, it's consistent what you've seen in recent quarters are directionally getting any any softer.
No great question.
<unk> Dennis.
We do see that the expansion part of our business will be accelerating I think I mentioned in the last call that we have for the first time added in a team that's dedicated to expansion revenue.
And building up the footprint that our customers have.
We obviously have a lot more observation into our pipeline right now, especially what the upsell opportunities our lake and.
I can say quite confidently the.
The next two quarters there were some significant upsells that we have in place right now so.
We think that area is going to get to us get us to a position to get to that 30%.
Mid term SaaS revenue growth that we have in place.
I'll, let John add any color that he wants to have on us because I think it's it's something that we've been we've been very focused at let's get those new named accounts in we were able to say that we Havent. These records coming in place and we had a record incremental bookings also for Q2, which is nice but we also wanted to do exactly what you would everyone else is hoping for is get the <unk>.
Revenue in the door and were seeing that path right now we're in the early stages of growing that fast.
Everything that you note that you notice panels, we noticed first.
So when.
When we looked at this phenomenon.
There's a couple of things that really surfaced for me really really really exciting things first.
I can say for the first time in the history of selling enterprise class software and supply chain space, our sales cycle time fell under a year overall.
That's pretty exciting. This this is like an acceleration and I would say the market. The market's clearly seeing that we've got to we've got to rethink our supply chain governance model. So that's exciting.
Now the other thing we're seeing is.
I would say a remarkable.
Serge in the SMB space. So obviously those deals much smaller companies I think I mentioned this in the past we've closed business was the business with a company that does less than $100 million in revenue is phenomenal for a lot of reasons one it proves that the financial the financial Formula works for both parties.
At that scale and also the technology.
The technology complexity works for both right that this can be absorbed by companies of that of that magnitude, which is quite exciting enterprise class. One of the trends that we're seeing is yes sales cycles are shrinking which is very exciting but initial deals are.
Blaine noted initial deals are starting smaller and ramping up some of those ramps are outside of the.
Range, but they are baked into the contract.
So the baked into year, two three and sometimes beyond those those points and so we will see a natural what I might call a natural escalation occur because they're contracted and theyre sitting at just outside just beyond that one year horizon and then lastly.
Clearing 300 customers and continuing to see.
Record logo growth.
Which is unbelievably exciting for us to me that.
You know that is creating a it's creating its own little mini market. If you will as we produce new products and sell back into it.
We expect to start seeing.
Perhaps a more balanced.
The ratio between subscription from the base versus subscription from landing net new now.
Current state of the pipeline and I look at the current state.
And I think about pipeline years ago might've been the size of an orange now it's more like a watermelon just growing.
It's quite exciting different mix, but I think we're going to continue to be able to say.
Net net new logos are going to be the story for a while here is as we start seeing more and more adoption.
I appreciate the color.
And then just on the term license guidance given that you had an unexpected.
Term license win.
Why are you not raising the full year term license clients and there may be a term license renewal that is now going to transition to a cloud or what's the dynamic.
Okay.
Yes.
As a term license.
Customer that has come in.
I will.
Use the word that.
How the contract was constructed.
The recognition of revenue may be dependent upon certain clauses in that contract and so.
It doesn't mean that I would just say this.
Yes.
Could that revenue will come in its a matter of when and so I haven't I haven't figured out which peer to skip coming right.
Okay that makes sense I'll pass the line.
Thanks.
Our next call comes from Paul Treiber from RBC capital markets. Your line is open.
Thanks, very much and good morning, I just wanted to quickly clarify Jon's last comment just on <unk> in the calculation there.
You mentioned that the expansion in year, two and three is outside of IRR.
Walk through the IRR calculation and then is there a risk any risk of the space expansion may not occur.
And if it's not contracted can you just walk through.
How do you think about the future expansion.
Yes, Sir.
The example that John spoke about its committed.
Hi.
Sure.
In our <unk> right now.
And it will come through so there's two are contractually obligated to pay that amount. So I have no concerns.
The way it works in our calculation is if we have a ramping deal and I'm going to throw that random numbers, so say in year one.
They are committed to pay based on certain modules certain amount of users.
Say its $100000.
Which would be low.
If that came with that amount thats, what we would recognize a for that first year. If say in year. Two is now ramped up to 300000, we wouldn't start recognizing that <unk> until we've gone over the cliff obviously within 12 months that we expect to recognize a certain amount of revenue that's recurring.
So we're in a period, where we're more in the 100000 rain.
<unk> versus the 300000 range for that particular customer.
Okay. Thank you that's helpful.
Just in terms of customer wins it sounds like the momentum has been much stronger than you would've expected at the start of the year is there any way to quantify how customer wins have been tracking versus your expectations.
Well, there's a couple of things one we obviously track overall sales cycle and.
And it's been over the past I want to say.
Two three years, it's been slowly coming down.
Compressing I'd say and then this quarter we measure this religiously this quarter first time ever less the 365 basis is a pretty big milestone for us less than a year. This has all kinds of implications in terms of how we how we ramp up net new sales when we look at the pipeline.
How we ramp up sales executives and worked with partners. So that's one of the key one of the key areas that we focus on the other obviously, we're studying net new wins across the segments that we serve.
And this size companies that we serve.
And as I stated in the script about half the customers were in the SMB space and half were in the enterprise enterprise space. So I think that that trend continues I think over time, obviously, the Tam of SMB versus Tam and enterprise enterprise deals will be larger in general.
<unk>. They may they may have ramps, we're happy to do those very very common for extremely large enterprises to bake in a three to five year contract, where they know what theyre going to do they just don't want to pay the full freight on year one.
Possible too.
To cover every every country every theater every product family.
In a short timeframe like that so it's very common to have that ramp and.
And in the case of SMB, we in some cases still have ramps because they don't they don't choose every module right away and they start with what is most urgent.
And then and then grow it from there.
So far in all looking at looking at the pipeline and current activity and current state as I said I think we're going to we're going to be talking about this net new logo.
Uh huh.
Serge.
For some time.
I'll, just maybe add in on that.
There is.
So.
It's a good thing to you to touch on which is the number of new named accounts that we are seeing at any particular quarter and is that within our expectations.
John touched on the SMB side, and we Havent talked about value added resellers, but I'm sure someone will ask a question at some point during this call or during today and we had a obviously you had a conservative outlook as to how this would grow.
We're seeing where the pipeline is right now and it is a lot bigger than what we expected at this stage and so that will also contribute to the amount of.
New named accounts, we come in place, but we're very happy with where that that pipeline is and that will help contribute with the.
The beats that were seeing on new named accounts.
Okay.
Just one last question for me just on land and expand.
Can you speak.
What's the typical expansion rate historically or just general thoughts around that and then can.
Can you give us a sense for the magnitude of how thats changed here.
Yes.
In past.
The conversations we've talked about looking at the whole cohort.
We're subscription would on average see sort of a three X over a three year, sorry, a two X over a three year period that would be.
Typical over the over past.
Over past segments now with.
In cases like that that was when we were dealing with enterprise we had no SMB space. It's a little early now to look at the sum of both in fact.
I would expect to see those two cohorts, having deferring ratios looking at SMB versus.
Versus enterprise I haven't seen anything to suggest that.
That.
The ramping if you will the subscription ramping would be any different but I will admit that we havent been monitoring it's been a little earlier too early to say, whether the SMB market will be yielding different ratios. We just don't have the years of history.
To be confident with the number.
Thanks for taking the questions.
Our next question comes from Richard Tse from National Bank Financial Your line is open.
Yes. Thank you, it's nice to see the growing but I think you said 300 customers plus.
Today can you maybe share the mix of SMB versus enterprise in terms of that wins and then I guess related to that is the cost to acquire and serve those SMB customers. The same on a relative basis as large enterprise.
Sure.
So on the call we mentioned that our <unk>.
Enterprise versus Midmarket and SMB around 50 50.
Don't split out the SMB versus.
Mid market.
Cost of acquisition I'll say for mid market.
Is quite similar to enterprise once you get to SMB, especially because of the relationship with the value added resellers that are mainly.
Concentrated on that area the cost of acquisition is higher but as you can imagine there is a or sorry the cost of.
The gross margin that we have at the initial deal is smaller for those smbs, but as you can imagine we don't have the sales and we don't some of the support and some of the PFS issues that we have with our own business. So the contracted margins we have with that.
Overall.
We are continuing to evaluate and I think what John mentioned on the expansion piece of the business.
As we expect a higher percentage of expansion with those smbs, that's going to contribute to larger gross margins over the lifetime of the.
Of the contracts, but as of early days the the margins are thinner for Smbs.
Okay, Thanks, and John and I appreciate your comments about sort of this $1 billion revenue target and 25% margins.
But if you kind of look ahead, let's say on the next three years like what's your kind of vision for the company from almost May I guess product perspective.
And moving potentially beyond service supply chain planning, we were certainly glimmers of that in your recent user conference but.
Maybe help us kind of understand what the company will look like from a platform product perspectives.
Yes, absolutely.
There's a few things that are.
Perhaps quite unique about can access that are noteworthy one we.
We have exactly one code base, we do not believe in custom coding in fact, when I meet with prospects.
<unk>.
I often educate them if anyone ever tells you that they can do anything they need to be done with enough time and their money.
Ron.
This isn't the path to excellence and so.
When you look at can access being able to support some of the largest <unk>.
CPG companies some of the largest life science automotive aerospace and defense.
Now the oil and gas sector, you start seeing quite unique.
Supply chain is being supported by this platform, it's unbelievably exciting and certainly gives me great confidence in our.
In our journey towards a $1 billion and well beyond frankly.
So when I think about the next three years, we're going to continue along that path.
I think about.
For lack of a better analogy being the salesforce of supply chain.
Being the ubiquitous golden standard regardless of industry and regardless of size.
And so some of the things that excites me.
While it might not be wildly financially.
<unk>.
A huge part of our business when you close when you close the deal under $100 million. It tells you that the economics work for both parties. That's a momentous thing is just momentum.
To realize that the economics work for both because now you can start thinking about what kind of impact could you have on the planet. If you could serve every manufacturer that does $50 billion or higher.
The incredible thing.
Again using this you have this company that does less than $100 million in revenue using the same technology as a company doing 150 billion using exactly the same software. So that's exciting I think about the next three years I think we're going to continue down that that penetration that land.
Land route.
Leveraging rapid response, when I think about it.
Innovation can access can never be the bottleneck for innovation and so we've been focused a lot a lot of our energy is focused on building out rapid response, as a platform and allowing.
Partners to create their own intellectual property on top of that platform, that's just going to accelerate innovation.
For a growing market.
And not only growing market a market that is desperately in need of transformation. So that to me are the sort of key ingredients to fuel the confidence behind a $1 billion and beyond.
That's how I think about it obviously machine learning.
We have more patents and machine learning.
It is so concentrated you have no idea how many people are focused on this.
Focused on leveraging machine learning for the purpose of automating the obvious.
For the purpose of demand sensing absorbing.
You know what I'd say is unstructured.
Sentiment in signal data that we've never been able to process before it's unbelievable whats happening there I think all of those things are going to be fueling our continued.
A continued surge in our business.
Okay. Thank you I'll pass the line. Thank you.
Our next question comes from Robert Young of Canaccord Genuity. Your line is open.
Hi, Good morning, I'm, just trying to understand the professional services.
The amount of growth here in the quarter relative.
All of the new wins.
So high level new logos.
A function of smaller wedge contracts that are easier to deploy.
Or is there some other.
Dynamic at play.
Sure.
I'll start and John Kennedy is adding some color if he wants to as well.
Im.
Okay.
So when we think about our professional services growth, we've been doing our best to.
<unk>.
To make sure our partners are involved.
We'd like to make sure that our prior is a partner first type of organization, where we want them to be focus on growing their footprint and they point to us as being the solution that they think should be used going forward.
So part of the growth that Youre seeing there is on that now.
We like we talked about record sometimes talk about records just gets boring and we don't talk about all the records and we had a record bookings number for professional services in Q2, which we had mentioned before.
And.
We are extremely excited with the fact that we have a long runway in terms of where we think that revenue is going but ultimately what we're trying to do is move that that revenue stream as much as possible into the hands of our solution integration partners that are out there.
Okay, that's great to hear.
And then the win rates being strong and sales cycle decreasing.
The high level of new logos and how does this change your outlook on the sales head count is efficiency.
Increasing or like do you have to expand to keep capitalizing on all of this top of funnel activity and I'll pass the line.
Sure Yeah, our sales efficiency has come down a little bit from.
Crazy high numbers, which.
Say crazy it means I think we're missing out on opportunities Ive mentioned this before.
I think they are at the levels that are now what I would tell you just best in class and Theyre not crazy anywhere so best in classes.
Getting us to a position where we're pretty comfortable with the.
Continued growth at sales marketing at a reasonable level rather than bring on as many as we had now what you would see from our sales and marketing team is that we have a large cohort of.
<unk> of sales folks that are still early in their tenure at connections and Nathan.
Productivity or the efficiency they get doesn't take place until.
Closer to the sales cycle times that we just mentioned so we are in early days of getting that new cohort ready to go and accelerate and expand our our wins even more in the future.
I'm excited to see that when they get past that 12 month Mark because.
We might see another acceleration.
Okay, great. Thanks.
Right.
The next question comes from Mark Chapelle from loop capital markets Mark Your line is open.
Hi, Good morning, Thank you for taking my question.
John .
Stepping back a little bit here at a higher level could you just speak to the changes that youre seeing with respect to executive sponsorship for supply chain software over the last say six months or so.
No absolutely I will tell you.
Chief supply chain officers are being invited to every board meeting not just once a year.
People are realizing.
Supply chain done well as a weapon.
And so coming out of out of the pandemic. Many have realized well I'll say first many boards are asking their Ceos. What are you going to do next time.
Of course, Ceos aren't necessarily supply chain practitioner, so they swivel and ask the chief supply chain officer, what are we going to do next time on Oh by the way.
<unk> also taking governance responsibility for ESG Theres no discipline on this planet that consumes the Earth natural resources more than supply chain. So so boards are saying can you be more resilient, which basically means can you absorb volatility faster can you absorb or avoid hardship faster and oh by the way.
Do less harm and so those two narratives are colliding, which is what I believe is causing this surge is causing what I often describe as a supply chain Renaissance.
Rebirth people are rethinking.
And look every 30 years do you think about this right that 30 years ago, where we with technology.
Three years ago, where we with technology.
These.
These types of periods caused you to rethink and adopt new ways new techniques.
Our giant leaps forward.
So conversations have been really really fascinating.
Theres nothing that I enjoy more.
And then spending time with practitioners and learning the new language they use to describe the pain there they are experiencing.
So if.
If you were to if I could.
To answer the question how is the narrative changing.
Well first I would say.
This realization that the pain, they're feeling is not a failure and technology, it's a failure in technique.
And that is what is fueling great resurgence in this space, it's not just hey, I need to keep doing what I'm doing only a little bit better.
They are having conversations about doing things completely different it's like the birth of the internet were not going to write each other letters anymore and lick stamps.
Absurd Theres no breakthrough in that right, even if you get a stamp.
Stamp licking machine, well, that's still not going to make communications faster right. So this is what we're seeing now and why.
Well so.
Mike tell him a little excited about the state of the business and obviously.
The state of the craft of supply chain, it's fascinating to hear the narrative.
That's helpful. Thank you.
The next question comes from Kieran.
Sure Dan.
From eight capital your line is open.
Hey, good morning, guys. Thanks for taking my question I'll, just start here with the NPL being rebranded and fully integrated are you approaching certain end markets differently, maybe if your thoughts on how your changes to the <unk>.
The branding strategy, given the new CMO as well.
Yes, absolutely I think I might have said this during the last the last earnings call that.
While I certainly have said it publicly.
There may be a day people will no longer use the term supply chain planning is just one side of a two sided coin and so.
With our acquisition of MTO, we're able to satisfy the needs of supply chain execution. So the sum of the two at least the terminology being used by practitioners is orchestration supply chain orchestration is the fusing together of planning a thing and executing on that plan and course correct.
When invariably the planned never happens right.
It's one thing to plan things, it's another to actually.
Executing in an environment, that's forever shifting and so that's one area that.
Of the narrative that we're seeing.
<unk> and obviously with our acquisition of NPL puts us in a very advantageous.
<unk> to be able to fuse together those two those two elements of supply chain.
Thanks Anthony.
Second here looking to unpack, how youll AI ml solutions are positioned today.
The competitive landscape changed with regards to any other innovative AI features youre seeing also how crowded as the.
Pointed solutions marketing axiom and I'll leave it there thanks.
Well, it's a great question and as a software engineer.
Myself I'm always.
Enthusiastically researching these types of technologies and like anything techniques informed technology is not the other way around there's a lot of interesting technologies that have no value.
Value is always in the eye of the benefactor in our case the benefactors, the chief supply chain officer, So I have.
Many conversations with data scientists in our Phds in machines machine learning here. It can access as I do with practitioners and work.
To really tie the needs of the practitioners with the abilities of the science now I will say there are a lot of competitors out there that are less.
Leveraging machine learning and AI to improve a specific function of supply chain I think that's incrementally.
Better.
There is no breakthrough in it.
Incrementalism.
And so it can access we think about leveraging machine learning and AI.
Above a concurrent environment. When you can start automating decisions that have implications across a vast number of processes in supply chain, that's where the breakthrough comes in.
And so so that's where we have been working very very closely.
Innovators like hobby.
Other innovators in the CPG space that are dealing with enormous datasets, where signals can dramatically impact.
Their demand at a moment's notice and that needs to be absorbed all the way through right through to distribution. So our machine learning AI posture in all of the patents were working on is around that the other area.
There are many machine learning technologists out there I'd say, it's just a really smart black box you should just do what it says and of course humans don't trust, what they don't understand and so explain ability is everything explain ability is everything, especially now we're dealing with a lot of very smart practitioners out there that's saying, okay I see the <unk>.
Answer, but I don't understand it and so a lot of our patents and a lot of our investments are.
Going towards explain ability, which is actually a technology when you unpack what machine learning and artificial intelligence are surfacing for you. It's understanding why did your surface that for me.
And so this is where we are spending our energy and I think thats, where the breakthroughs are going to come from.
Yes.
Thanks, Tom.
Our next question comes from Martin Taylor from ATB capital markets. Your line is open.
Hey, guys Martin Toner here.
Congrats on another good quarter.
Connections were a tremendous number of new initiatives announced.
Very impressive.
What's the Opex impact would you see the Opex impact.
Of how busy you are there and when should we expect EBITDA margins to start to improve.
Sure.
Obviously.
I'll answer this Martin toner.
The Opex is.
Usually in the past at this stage so the R&D impact that we had was.
Something that we put through our P&L.
P&L already for the most part that's why we've talked about where we are in the progress of those initiatives.
There is like phase II phase III phase, four and where those products could go I think.
Supply that AI is a good example, we have two main use cases that it.
That is focused on they're going to be more use cases in the future. We're seeing a high amount of demand already for those first two.
Demand out AI is.
I am just blown.
Blown away by some of the results, we're seeing with our early.
Early adoption and how much better the forecast are getting.
On the demand surge and demand planning side of those customers. So.
That's another area that we'll continue to focus but.
It's going to be natural R&D investment that we're going to have in there over time I think the the <unk>.
Sales and marketing will be the main driver of Opex as we continue to move forward as we try and make sure we have a good balance of where our sales efficiencies.
But overall, we've talked about where we want our our midterm targets for adjusted EBITDA and Thats about 25% in the next two to four years, we are absolutely focused on getting to that position and I have no no worries that were going to get there.
That's great. Thank you.
Bulk and I apologize I apologize if I missed this earlier, but.
You talked a little bit about customer caution and can you just.
Tell us.
What does the pipeline look like today compared to when you.
Announced last quarter's results.
Well recently, we saw another I'd.
I would say tip over a record in terms of that pipeline. The shape of it is shifting a little bit as I said as a result of.
Our investments.
In the SMB space and our investment with Vars, that's starting to contribute.
Obviously, the var contribution is huge right now, but it's it's essentially where we expected it to be.
We're investing quite a bit of energy right now in training and preparing the var community.
To sell on our behalf.
Not only sell but to deploy on our behalf.
And so that's the commentary I wouldn't say there's any.
Huge shift.
In terms of the market verticals that we serve I think I mentioned.
Earlier that CPG.
That is definitely one of the larger segments for us we've done exceptionally well there.
<unk>.
And some of the names that we announced.
During the call.
Or just an example, and so we're seeing.
Seeing some continued.
Pipeline interest from that particular segment.
I will also say maybe just.
To make sure this gets.
<unk> mentioned as it not only relates to the pipeline, but relates to two deals that are closing or we had mentioned that.
When we're cautious because of some delays in getting ink to dry meaning signatures done.
I've been studying that very very deliberately.
That's mostly in the enterprise class for one thing that's one thing that we've noticed and it's mostly with the very very largest deals that we will see that in fact, one of the well definitely one of the top three deals that we were working on slipped just outside the quarter because of such a thing.
Very large in the automotive space, where it just slipped outside by days.
And again.
We continue to see a little bit of that prolonging of Sig.
Signatures during that.
Process, sometimes goes it goes back to the board and so on so we're not.
We remain confident at that stage, the ink will drive and in some cases there were.
Seeing little slips.
That are that are elongated there ultimately I think the pipeline is strong and gives us confidence in the year Guy.
Guidance gives us confidence in our ultimate.
Midterm goals.
We talked we have little code words here can access to talk about that path to $1 billion and beyond that.
That keep us razor razor focused we all have a flagpole we hang on to.
That's great color. Thank you very much I'll pass the line.
Yeah.
Our next question comes from Suzanne <unk>. Your line is open.
Good morning, Gents and thanks for taking my question.
Yes.
First question I wanted to ask on what's on planning that AI. It sounds like there will be progress has been encouraging here can you provide an update on.
Some of the early results and engagement you're seeing with initial customers then and when do you expect to.
Make a full commercial rollout so I'm just wondering what the factors there might be.
Yes, well, it's first of all it is commercially available make no mistake.
For those that attended.
Connections.
Would have seen some great.
Demonstrations of which and some great sessions around our machine learning and AI.
Thanks.
Posture, so I would say.
In terms of results, maybe I'll add this color because in some cases, we are replacing competitive products.
Always exciting for me.
There's only one thing I enjoy more than replacing a competitive product is when you get proof positive that you are forecasts are two X better and.
In some cases more.
More than that faster, so your faster and better.
Which is very very exciting. So obviously, we're leveraging that success with real life customer Examples and trust me in the world of demand sensing and ingesting sentiment data and weather data and promotion data.
Huge huge volumes and.
And when you are able to prove that your results are not only see.
<unk> better than something that had been being in place for decades.
Decades of mathematicians working on this we step in giant leaps forward in accuracy.
And a huge improvement in speed, it's super exciting. So obviously, we're working.
To leverage that and and I think we're going to continue to see that penetrate through through the customer base and through prospects.
Great.
Thanks for the color.
I wanted to touch on our supply chain execution next can you talk a little bit about how much of a role is having execution now with capability. You know how is that helping with with new customer discussions and your win rates there.
Yes, it's a great great question.
This is something that we cant coming out of.
The pandemic.
Many people realize that material.
Material in motion was one of the biggest areas of risk you couldnt find a container to save your life and even if you could find one the cost of said container was in some cases.
510, X 20 X more to get to get that capacity and so.
That is ultimately what caused the urgent and fusing together the two I would say fusing.
Our supply chain execution and planning has been a topic talked about for decades. So it's not like that's new but being able to actually produce and end to end concurrent system that actually does it that's been relatively now it's early days for can axis.
Certainly, we just absorbed the acquisition of MPLX going exceptionally well.
Martin who led that organization has a very very senior role here with us he is.
Not only academically incredibly bright, but he understands a tremendous about about business and is definitely the smartest.
Matt in the world of supply chain execution. So he is already infusing his intellect into into our product management.
Into our product management function.
Function. So in terms of the impact it has on sales in some cases it got us in the door.
And in some cases, it's an opportunity for us too.
Expand with our own.
With their own customers.
And being able to offer up a supply chain execution attachment. If you will to rapid response, so very early days, but let me tell you the use cases unbelievably natural.
Thank you.
Helpful.
Yeah.
There are no further questions at this time I turn the call back over to you Mr. Wadsworth.
Thanks, operator, and thank you for participating on today's call everyone. We appreciate your questions and your ongoing interest and support of can access.
We look forward to speaking with you again, when we report our third quarter results I pronounced.
Yes.
This concludes today's conference call you may now disconnect.
Please wait the conference will begin shortly.
Yes.
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