Kinaxis Inc. (KXS) Earnings Call Transcript & Summary

Yes. Look, we have expansion opportunities with existing customers, and then we have a ton of net new logo opportunities as well. The way we go about servicing that market and covering that market is in a very disciplined, focused way. We play in 7 verticals. For each of those verticals, we've got specific use cases and templatized capabilities. We've got great reference bases. And we are seeing a lot of growth in the high-tech value chain, obviously, with the surge in the data center build-outs. And that is extending beyond high tech into like manufacturers of cooling units and energy and utility companies that are seeing a massive surge in demand. And so they've got much more complex supply chain needs and are becoming customers of ours. So organizations like NextEra in North America, Ansaldo Energia in Europe, they're customers of ours today, historically, we hadn't really targeted them, right? So that whole high-tech and the data center value chain is a great driver for growth. Aerospace and defense is another one. We're seeing a lot of demand and need for our capabilities in the aerospace and defense industry where there's a surge in demand and sort of the need. And they have very complex bill of materials. They've got fairly fixed capacity. And to add capacity, there's a long lead time and massive CapEx investments. So they are, for the first time, really trying to focus on understanding how to build out demand supply planning, sales and operations planning, integrated business planning capabilities, also getting more sophisticated with thinking about their inventory strategies, both for finished parts, but also in many cases, for service and repair parts, right? So aerospace and defense is a great vertical for us. We are working with the likes of Raytheon and Pratt & Whitney, L3, Bell Helicopter, Rolls-Royce Engine and Lockheed Martin and several others, right? In that sector specifically, we've also initiated our FedRAMP certification, which there's a lead time to that. But by the end of next year, that should be completed. And that will further expand our ability to service the aerospace and defense industry, and it also opens up the window for other federal and DoD sectors that we have historically never covered, right? So what doesn't keep me up at night is the addressable market or the net new logo opportunity. The more thoughtful element is how do we go about attacking that in a sensible, profitable way and in a way that we can continue to deliver successfully to our customers, not just sell to them, but to actually deliver the deployments because the problems we're solving are complex problems. They're not simple problems. And that's a good thing because it was very simple, somebody would vibe code it, right? And so we want to make sure as we scale up, we're able to continue with that strong track record of trust in delivering what we sell.

Maybe on that point, if we could pivot to the agentic products, kind of talk us through where customers are at, how the journey has gone and getting them into production. You have the FTE model. How has this played out?

Yes. It's a good question. And look, I'll divide up sort of the journey in 3 phases, right? The first phase was pretty -- like, I would say, pretty straightforward, but also table stakes now, which is we took standard LLMs. So we support Google Gemini, ChatGPT and Anthropic Cloud. And we built some RAGs around data sets and documents around these LLMs. We built some agent skills, and we provided a conversational interface to our application, right, to our platform. And that's available now. It's getting good usage. Frankly speaking, the customers almost expect that going forward. So that's in place. The second phase really was in being thoughtful about building agent skills. And now we have 6 packaged agents and creating within our Maestro platform, an agent studio that customers and partners could compose and build their own agents, having access to all the data and resources available in our Maestro platform. That's something that we initially worked in the beginning of this year with 7 early adopter customers. Since then, we've made them successful. Several of them actually presented at our Kinexions event in June. Now we've opened up the aperture. And as we disclosed in our last earnings call, about 10% of our customer base is in active paid trial mode or in full deployment mode with these Maestro agents. These Maestro agents are really designed for improving productivity with the usage of our platform, improving usability. There's all kinds of interesting use cases emerging on the demand side, supply side, risk side that we are continuing to support and see with our customers. So that's off the ground, and we're beginning to get some good traction with that. The third phase, which, in my view, is most likely the highest value-generating element for our customers and also as a result, could be the largest growth driver for us going forward is in really expanding into operational orchestration, right, where we are not just stopping at planning, we are extending beyond planning into interfacing with execution systems and really agentically orchestrating the realization of those plans and all the replanning that happens in that operational time frame. And there, we are just early in that journey. But frankly, is exciting because in my humble view, in enterprise software and definitely in the supply chain domain within enterprise software, the big value is not just going to come from using a conversational interface or a chatbot or in just shaving off 2 hours here, 6 hours there from a user. It's really going to come from transforming the ways of working, rethinking how decisioning is done, rethinking how orchestration is done. That's what's going to lead to business outcomes that our customers really care about because our big value proposition is not to go from someone -- a customer using our application having 200, 300, 500 planners down to 5, 10 planners. That's -- I mean there's value in that, but that's not going to be the primary driver. The primary driver really is in how we enable our customers to reduce hundreds of millions of dollars of -- billions of dollars of inventory, right? And that only happens when you're able to transform the ways of working, reengineer the processes and to identify a lot of those orchestration use cases.

Got it. Maybe that leads me into my next question of the ROI you've seen delivered by some of these agentic products, I think has been kind of a theme debate at the conference. When you look at the most kind of tangible proof points that you've seen maybe from your leading-edge customers, what does that look like?

Yes. Look, I think organizations are early in that journey in my view, right? The low-hanging fruit has been in just productivity, right? So what could -- what would take 5 days can be done in a few hours, right? And there's value in that, and that impacts headcount and sizing. And of course, our customers are taking advantage of that, and there's plenty of good examples of that happening. But frankly, it's not the biggest revenue driver, right, or value driver for our customers. right? Because our customers, like in the planning and decisioning use cases, they don't have tens of thousands of people and that they can reduce the workforce, right? We're not in the project management space, for example. That's the case in a different domain. However, in our domain, customers have -- across our customer base, there's over $500 billion of inventory in their supply chains that we are helping plan, right? If we impact that by 5%, 10%, 15%, that's a massive unlock. Customers care about what is the cost to serve from a supply chain perspective. What are the operating costs stuck in the supply chain. Those are in hundreds of millions, billions of dollars as well, right, in many organizations. Or they care about how can I improve my service levels, my on-time and full service levels to our customers, so they can increase their revenue. That is of tangible value to them, right? So the business outcomes that our customers are focused on from a supply chain perspective are really around cost, cash, service level and risk. And that's where this journey we're on with identifying the planning plus execution life cycle with operational orchestration is going to be the big prize at the end of the day. But to do that and to achieve that, it's not just a technology change. They've also got to make changes to their operating models to their underlying processes. And it's truly transforming the organization, and that takes time, right? And I think enterprises are early in that journey.

Right. I think in addition to time, it seems like it also takes resources like I'm thinking of the FTE model that you guys recently announced. Maybe if you could walk us through what exactly is the scope of an FTE when they go into a customer? Is there a teach them to fish dynamic where once you're up and running on a couple of agents now, they can start to run on their own? How is that working in practice?

Yes. Look, so the FTE engagement doesn't start with a capability or a feature or teaching them about how to fish. It starts with really understanding what is the pain point and the opportunity or value unlock for the customers, right? And so if I'm a large pharmaceutical company with $3 billion, $4 billion, $5 billion of inventory in my supply chain. And I want to reduce that by 5%, 10%, 15%, understanding the picture on where the inventory is stuck in terms of finished products in my distribution network, work in progress in my manufacturing network or inbound materials in terms of raw materials, right? And then understanding how do you segment that? So the FTEs are really doing the discovery first. And then based on that discovery, identifying how to prioritize the use cases and the tie-in to the outcomes and then using the different components of our platform, being able to build the solution for our customers to really be able to operationalize and realize those business outcomes. In terms of the actual skill sets of the FTEs, really, they are structured in pods. And there are 3 broad skill sets that typically get mobilized. It's a combination of a supply chain process architect, someone who really can understand the domain and get into the guts and the details of the underlying operational elements of the supply chain, typically a data engineering lead because the data is sitting in all kinds of fragmented systems and then also somebody who can really figure out how to bring the system -- the data, not just in terms of the data transfer, but also in architecting the right semantic and ontology layer. So data engineering becomes a very important skill set. And third skill set is typically data science because you are typically tuning or feature engineering algorithms, could be optimization algorithms, could be machine learning algorithms, could be heuristics or a combination thereof, right? And in many cases, all of those working in concert with the LLMs. So we've got a lot of interesting research happening with Google DeepMind right now, where it's an ensemble of these techniques being used to apply to the supply chain use cases that we enable. So those are the pods that we've mobilized now in North America, Europe and in India. Over time, we'll take it to other parts of the world as well like Japan. But it's these 3 skill sets of supply chain process architects, data engineers and data science coming together and co-building with the customers using our platform.

Got it. Herb, maybe we can bring you in here just in terms of as you start to scale up this FTE model, how much incremental investment is required versus maybe reallocation of resources? Any margin implications we should think through?

Right now, George, we're -- we don't see any degradation to our margins at all. We are investing prudently behind this effort, making sure that the investments are synchronized between the platform being ready, the FTEs being ready, making sure that customer demand is there. So we are not in a mode of build it and they will come, right? The operational orchestration platform was announced at Kinexions. And when we announced it and before we announced it, this was through dialogue with customers knowing that there's a demand there, there's a real business problem to be solved, having the internal expertise on people who have, in fact, led FTE motions, okay? So yes, we're making investments there, but these are all prudent, well thought through investments, and we don't see any near-term degradation to margin from this effort.

Got it. Makes sense. Maybe I'll quickly pause if there's any questions from the audience for Razat or Herb. Okay. Maybe if we could touch on kind of the near-term demand situation. Kinaxis has had good momentum in recent results, kind of beating, steadily raising the outlook. When you think about your initial guide from the start of the year, how do you frame what has gone better than that initial framework?

Well, I think as you point out, George, we've -- we had a very strong first half of the year with roughly approximately 20% growth on SaaS, 20% growth on roughly ARR, better than 20% on a constant currency basis. The guide that we gave for the full year or the updated guide, we did raise guidance. But I would say it's a prudent guide that reflects a few things. One is just we've been in an environment where we have had volatility in FX, and our guide is not on a constant currency basis. There is volatility just on the overall macro environment. And then the third thing is that because we do, do very large transactions with large enterprises and enterprise, there's always this you can have a swing factor in terms of timing of deals, okay? So the guide reflects that. But we continue to see strong demand. The demand signals are strong, whether that's for new logos and/or expansion. We have a lot of success in cross-selling a lot of the newer applications that we've introduced, things like optimization, demand forecasting and so on. So I think the way to read our updated guide is that there's a degree of conservatism built in, but one that we think is prudent, but there are upside levers. Continue to land the new logos, continue to expand our direct selling motion. All of you can look at what our productivity metrics have been if you look at it on a magic number basis. That continues to be strong. So sustaining that and then seeing the benefits of the investments that we're making in partner enablement, right, to extend our reach. So there's -- we see upside as well.

Yes. And look, I think in the first half, if you think about our growth, like Herb outlined of 20% in SaaS revenue year-over-year growth, roughly 20% in ARR growth on a constant currency basis, even higher. That's about 500 basis points higher than 12 to 18 months ago. So that's a significant acceleration, right? Now personally, I'm not an expert in stock markets, but I don't think we're getting the credit for it given what's happened with the whole market sentiment towards software companies. But there's a dissonance between that concern in the investor market versus what our customers are telling us, not just verbally, but in the substance of what they're transacting with and how they're trading with us, right? So we're seeing growth and acceleration. And part of what we're working on right now is how to sustain that over a long period of time as we scale up and grow the business, right? And we have a high degree of confidence that we can hit the revised increased guidance we provided, but it's pretty exciting with the momentum we have. We just want to make sure that as we take on more business, we can continue to deliver successfully to our customers with our organization and with our broader partner ecosystem as well.

Got it. Maybe just with our final minute, any closing thoughts on what gets you most excited about the future for Kinaxis?

Look, I think we're on this journey to reimagine and sort of reshape the future of supply chain planning, decisioning and orchestration, right? And I've been in this space for 28 years now. And I've never seen a time like this to innovate. And that's super exciting for a product person like me. And I'm excited about the impact we can have in terms of business outcomes with our customers. Of course, as we pursue that opportunity as we innovate. We're not just innovating or delivering by ourselves. We've got a thriving partner ecosystem. And the partner ecosystem includes hyperscalers like Google and Microsoft, but also includes technology -- deep technology relationships with the likes of Databricks and NVIDIA and others like that. And then we have a delivery ecosystem made up of the largest consulting firms, SI firms, strategy management consulting firms that play a really important role in our ability to scale up and deliver in a predictable way. So that's the journey we're on, and I'm excited to be scaling the business up and having massively greater impact going forward.

Great. I think we'll leave it there. Thank you all for joining. Thank you both.

Thank you.