Kinaxis Inc. (KXS) Earnings Call Transcript & Summary

Sure. So we do have a strong team clearly now with the addition of close to 80 people, a much deeper, deeper bench between the Ottawa and the Toronto teams. But maybe I could come back to my earlier comment about Kinaxis RapidResponse really being a brain. So it's always on. And what allows companies to do and what sort of the natural is that it has the design state, if you will. And so these are the thousands and thousands of assumptions that are made in designing a supply chain, so everything from yield to economic order quantity and so on. But it also, because it's always on, understands the experience, what is the actual current state. And so part of really the machine learning is an ability to compare the design state with the current state and identify those misalignments. So not only are you going to be able to plan more intelligently, but you're going to understand some of the fallacies that are going on to either you create stock out or overstock capability. So for instance, you may have an assumption that was put in when the design was done years ago that you need 15 days to order this component. But in the summer, it actually is a 10-day order lead time, and in the winter, it's 20 days. And so just that alone can cause production issues and, as I said, inventory issues. And so yes, it doesn't sound overly glamorous. But to a supply chain professional, that capability to go down to that level and really have the machine, if you will, you're taking the robot out of the person, allows them to focus on higher function elements of your supply chain. So it's at that level. In the case now with Rubikloud, we're bringing in really continual learning and monitoring to help planners make far more precise, down to the SKU level even, assumptions on yield and promotion. And so it's -- we're very, very excited about integrating these capabilities and just again strengthening the overall RapidResponse platform.

I just wanted to go back to one of your earlier comments on the impact of COVID. I mean overall, I feel like COVID has been a net positive for driving more, I guess, awareness for companies to address supply chain challenges. And potentially also, you guys -- you're benefiting from that. But I think one of the things that came out of the Q3 call was the comment about customer churn. Could you speak about customer churn from a historical context and compare what you saw Q3 relative to what you've seen historically with customer churn?

Sure. So quite frankly, obviously, we'd like to retain every single customer. But the reality is that that's -- for different reasons, that's not always possible. However, we do -- and right from our IPO back in 2014, one of the key metrics that we've shared is that we have over 100% net revenue retention, which means that block of revenue that's coming from your existing customers is there in the next year. We -- this year, again, we note that the overwhelming majority of renewals, both in terms of the number of renewals and then the dollar level of renewals, are renewed. The -- what was different this time with regards to Q3 was really twofold. And this is why we commented on it. First, I think it's -- it would be expected that the impact of COVID has been so dramatic on the financials of certain companies that they've had to make major, major changes and, in some instances, have indicated that they're not in a position to renew. Now I will note that in some cases, we've had this previously, and the customers have come back to the full -- not all cases obviously. And so there was a little bit more, I would say, headwinds and -- from that perspective. And of course, we're going to work with customers, but in some cases, they just had to change their business processes so much that they're not in a position to renew. The second reason we flagged this, quite frankly, is that the way we count for contracts and the way we -- because again, they're multiyear and we will defer revenue and so on. When -- what we had to do was move revenue from future periods into Q3 because of the nonrenewal. And what that did was that was one of the drivers that helped us achieve a 26% year-over-year year-to-date growth and -- which is above our strong guidance, which was at the time 23% to 25%. And we took the opportunity because we were very, very confident and, we reiterated, in fact, tightened that 24% to 25%. And what we didn't want people to do is -- because without explaining some of that revenue acceleration related to this, I didn't want people to get ahead of themselves and say, "Oh, you're going to be 26%, 27%." And when we come out with that strong -- when we achieved our guidance, I didn't want to have a disconnect. So things are different. But I wouldn't say they're radically different. Again, we're still renewing the overwhelming majority of customers, and the net revenue retentions is above. And we're going to -- in fact, our usage of -- or sorry, our customers' usage of RapidResponse is -- continues to grow. So it's something that we're going to continue to monitor, continue to respond, but it did impact our financial guidance.

That's really helpful. The -- another, I guess, way to look at it is by looking at pricing and also ROI. And so I think if usage is up, this probably points to that ROI is higher. Have any customers -- maybe if they're not using or not getting the same ROI for whatever reason, have they started discussions on pricing and asking for pricing concessions? And what's your strategy on that?

Yes. So our contracts, so we are SaaS, but it's not based upon usage. It's based upon a fixed determinable configuration, which includes a number of elements, I guess you could argue, are usage such as user counts, the number of sites. So a site is a node in the supply chain, so it could be a manufacturing site or distribution center. Depends upon the number of activities and some other activities, but they're fixed determinable. And so as you noted, when customers are driving additional usage out, their ROI increases. So I think people understand that. I mean these are well-established contracts. So we really haven't seen that type of discussion. In our case, what our goal is -- in fact, we have a team dedicated to customer success. Our goal is to continue to communicate the innovations, all the extra features that we're providing, and some of them are extra revenue, but some of them are core to RapidResponse, help you understand from a knowledge network the way you could better utilize RapidResponse and help you to calibrate it better. And so our goal is really to help you leverage that investment and just continue to drive your ROI. And well, you've done a number of customer reference calls yourself and participated in our customer conferences. You've heard firsthand how they have commented about it, very, very significant and an ongoing return on investment. So -- and yes, I know some of them will note we're pricey, but it's still a very, very significant ROI.

One of the points of -- that came out of the user conference, the virtual user conference, is that the attendance was at a record high. And also on the Q3 call, you commented that the pipeline has grown or expanded relative to Q3 -- or sorry, Q2. Could you speak to, overall, when you take into account the customer churn, like this year, when you look at your business momentum, do you feel like it's stronger now than it was at the beginning of the year?

It's absolutely stronger and stronger in a number of dimensions, though. Yes. So first off, the funnel continues to grow, and it's growing in the core markets we serve globally. It's growing in different verticals. It's growing in absolute size. So that is a clear sense of momentum. With COVID, our user event is -- we just were so, so pleased and actually humbled in some regards by the level of participation. I mean the team has been working diligently and very creatively. And it's always great to see key customers step forward and put their hand up to present, such as Dell or Clorox and others. But with over 3,000 registrants representing over 500 companies and the majority being prospective companies, that was unique. In terms of our capabilities, that's also continued to grow. I mean I talked about over a 50% increase in head count, and that's across the board. It's a very large investment obviously with the acquisition of Rubikloud and product. But we've dramatically strengthened our professional services or deployment or sustainment services. These are other revenue that are noted as professional services with the acquisition at the beginning of the year with our long-term partner, Prana, and adding a very capable team in India and North America with that. Over the last 2, 2.5 years, we've quadrupled the sales team. So our capability of executing on that funnel and conversion is much higher. The productivity, John noted that on our earnings call, is that -- and now I mean just as we are doing this virtual, product demonstrations are virtual. And what it means is that we're actually doing a higher number of those and, in many cases, with a higher participation because people don't have to fly into the sort of presentation room and so on. So it's a number of elements, but we are about momentum, and we're very excited about that momentum. And being a CFO, I also have to do a little bit of tempering here, I apologize, but this is not a quarter-over-quarter company. I mean this is very deep into working with supply chains for leading household name enterprises. So it's a journey. And we've always focused on the longer term. I think we've been -- we've achieved what we talked about in 2014, on our IPO, about -- we are a company that is going to continue to drive consistent revenue growth and EBITDA performance. And so these momentum, these changes is very, very encouraging, but it's not necessarily going to be Q1 of 2021.

I just -- there's a question from the audience and actually dovetails into my next question. But could you speak on competition? Who do you see most frequently? And why do you typically win against them?

Well, quite frankly, the competition in many cases is the incumbent. And so it's the ERP vendor because traditionally, companies have taken an ERP view of their supply chain. So in other words, it's quite a -- more of an internal view rather than bringing in other factors such as the broader supply chain. And so to that point, it's essentially JDA and SAP we continue to see as the -- as main competitors. And quite frankly, it's actually spreadsheets because they're not getting this functionality. And so that comes back to the rip and replace whereby we'll go in and we'll very, I'd say, very quickly resonate with the business owner, the person in the supply chain, dealing with all these disruptions, dealing with the changing buyer behavior and so on. But because again, it's a platform where we pull in all the data, we have to go to IT. And IT will often be coached by the incumbent to, "I want to protect my investment." And so that's sort of a bit of the play. Now we're also seeing other new entrants into the market, which is -- we actually view as positive because it just shows another recommend -- a recognition of the growth of the overall business. Now they will generally fall more on the conventional model themselves. So we haven't seen anybody offer concurrent planning. This is unique to us. And often what they'll try to do is they will actually go down the path of customization. They'll say, "Paul, what you do is so unique in the world, we can take other -- some objects that we have together and couple them or we'll do some more professional services and build you just what you need." And that's just for your current state. So if your plans change, you're challenged. So companies such as o9 or OM Partners, depending upon where we are, maybe more on the demand side or on the scheduling. So how we compete with them is just again through innovation. So we are going to continue with our message that it's all about agility. It's all about resilience. It's all about leveraging the people in the organization. It is about now using those best practices, coupled with again -- through your partner or with us, the platform to bring in those additional analytics. And we think that the supply chains of tomorrow are going to be quite different than they are today. And so you need to have a system that will support you and your people in that journey. And so that's the path we're following.

Okay. Well, I think we're basically out of time. So I think we should wrap it up there. I want to thank you, Richard, for joining me today, and I would like to thank everyone on the call for listening or watching the fireside chat with Kinaxis. So thanks a lot.

Great. Well, thank you so much again for your support, and have a great day, everybody.