Good morning, ladies and gentlemen. Welcome to the Kinaxis Incorporated Fiscal 20 2Q4 Conference Call. At this time, all participants are in a listen only mode. Following the presentation, we will conduct a question and answer session. 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, Thursday, March 4, 2021. I will now turn the call over to Rick Wadsworth, Vice President of Investor Relations at Connexus Incorporated. Please go ahead, Mr. Wadsworth.
Thanks, operator. Good morning, and welcome to the Kinaxis earnings call. Today, we will be discussing our 4th quarter and year end results, which we issued after close of markets yesterday. With me on the call are John Sicard, our President and Chief Executive Officer Richard Monkman, our Chief Financial Officer and Blaine Fitzgerald, our Executive Vice President of Finance. Before we get started, I want to emphasize that some of the information discussed in this call is based on information as of today, March 4, 2021, and contains forward looking statements that involve risks and uncertainties.
Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward looking statements disclosure in the earnings press release as well as in Kinaxis SEDAR filings. During this call, we will discuss IFRS results and non IFRS financial measures. A reconciliation between the two is available in our earnings press release and in our MD and A, both of which can be found on the Investor Relations section of our website, kinaxis.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 IR section To begin our call, John will discuss the highlights of our quarter as well as recent business developments, followed by Richard and Blaine, who will review our financial results and outlook. Finally, John will make some closing remarks before opening up the line for questions. We have a presentation to Today's call, which can be downloaded from the Investor Relations homepage of our website, kinaxis.com. We will let you know when to change slides. I'll now turn the call over to John.
Thank you, Rick. Good morning and thank you for joining us today. First, as always, I hope you and your families remain healthy. Nothing matters more. As vaccines are being rolled out And we head towards what we hope to be the ending stages of this pandemic.
We are mindful that there's still lots of work ahead. So I encourage everyone to keep doing their part. We remain forever grateful to the frontline workers everywhere and extend our sympathies to families that have been deeply affected. I continue to be amazed at the resilience of Kinaxis employees and their ability to remain efficient and effective during this prolonged work from home condition. As you can see on Slide 3, I'm very pleased to report that our quarterly results were once again very strong across the board, including SaaS revenue growth of 24% to $39,800,000 total revenue of $54,900,000 and an adjusted EBITDA margin of 11%.
Turning to Slide 4. We are also very pleased with our 2020 full year financial results. Compared to our initial guidance for the year, we came in at the high end of our SaaS revenue growth target and met or exceeded every other target, Achieving our goals during such an unusual and unpredictable year. As you will see on Slide 5 And as we've previously mentioned, COVID had an effect on our markets, most notably mid year in 2020 when we saw some Deal delays and in some cases more scrutiny on overall deal size and project scope. As always, the bigger impact of such delays is on revenue in future periods.
So the net effects have been factored into our 2021 guidance. Q4 on the other hand saw the return to very strong momentum With incremental business significantly higher than the Q4 of 2019 and in fact achieving the 2nd highest quarterly incremental bookings performance Ever. We also won a record number of new accounts in the quarter. This has reinforced our confidence for 2022 and the longer term. As you can see on Slide 6, during Q4 and since, We won a number of key customers, some of which I can name now.
In Life Sciences and Pharmaceuticals, MorphoSys Joined the Kinaxis family. In high-tech, we won Crestron Electronics, SCIENT and Marvell Technology Group. In the industrial market, we won ESCO and I'm absolutely thrilled to name Mars as a global customer. Our customers tell us that the key reason we earned their business is our entirely unique concurrent planning value proposition and the unmatched platform that delivers it, RapidResponse. Additionally, just last week, we were positioned furthest on the completeness of Vision Axis and in the leaders quadrant of the 2021 Gartner Magic Quadrant for Supply Chain Planning Solutions.
And we're also recognized for the ability to execute. This is the 7th consecutive time Kinaxis has been named a leader in the Gartner Magic Quadrant related to supply chain planning and we're thrilled with this recognition. Another reason for our recent success is the rapid growth in our sales team over the last 3 years. Today, almost half of our account executives have over 18 months experience, an important milestone As our typical sales cycles are 12 to 18 months. This seasoned group is ready to fully contribute.
Finally, we're seeing momentum around our Rapid Start program, our offering that takes full advantage of our knowledge Of industry best practices to set customers on the path to supply chain transformation in as little as 12 weeks. We're thrilled to have several recent customers take advantage of this program. COVID has made companies increasingly aware of the need For a rapid return on investment to de risk major purchase decisions. We believe that Rapid Start can accelerate new customer adoption And while initial deals may be smaller, they offer tremendous expansion upside as customers see value from RapidResponse. Assuming the continued recovery to a more normalized business environment, we expect our current momentum and positive outlook will support our target of 23% to 25% SaaS growth in the midterm, including 2022.
Our 2020 year end sales pipeline grew by more than 40% from 2019 As manufacturers continue to recognize the urgency in driving hyper agility in their supply chain, we made several key strategic investments in 2020, Both organically and by acquisitions, which will better enable us to execute on this growing pipeline, accelerate our product innovation and exceed the needs of our growing customer base. I'm confident that Kinaxis has quite simply never been more relevant We're in a better position than we are today. I'll make a few more comments about that at the end of the call. But for now, I'll ask Richard and Blaine to discuss results for Q4 and the year as well as our outlook for 2021.
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 IFRS. Looking at Slide 7, total revenue in the 4th quarter was down 2% to 54,900,000 A strong growth in both SaaS and professional services revenue was offset by the expected cyclical decrease in subscription term license Revenue.
SaaS revenue grew 24% to 39,800,000 driven by new customer wins as well as the expansion of existing customer subscriptions. Subscription term license revenue was $1,900,000 down 84% from the comparable period, but slightly ahead of our expectations for the quarter. This revenue item is linked to the normal renewal cycle of our customer hosted software subscriptions. Our professional services activity was strong again, resulting in $11,300,000 in revenue or 27% growth over the corresponding quarter of 2019. As previously noted, this revenue will vary from quarter to quarter based on the number, size and timing of customer projects underway as well as proportion of work assumed by our partners.
Maintenance and support revenue for the quarter was $1,800,000 a decrease from the same period in 2019. The decrease was solely due to a onetime adjustment to revenue allocated The maintenance support component of an existing customer's subscription contract. Supported by a backlog of more than $12,000,000 For 2021, we expect future maintenance support revenue to be just over $3,000,000 per quarter. We continue to be pleased with the diversity and strength of our total revenue base. For the year, our 10 largest customers accounted for 20 7% of total revenues with no individual customer accounting for greater than 10% of total revenues.
Gross profit decreased 16 percent to $34,800,000 representing a gross margin of 63% compared to 74 percent in Q4 of 2019. The change reflects a few items. First, the significantly lower level of subscription term license revenue, which carries nearly 100% gross margin. We also made important strategic investments In our cost of revenue, including professional services, customer support and SaaS delivery capabilities throughout 2020, Organically as well as through acquisition. These investments will help Kinaxis support our ever expanding base of customers.
Adjusted EBITDA margin in Q4 was 11% compared to 32% in the 4th quarter last year. In addition to the impact from the lower portion of subscription term license revenue, we made major investments in our product development team in 2020 as well as grew our operating teams across the organization globally. Overall, including 2 acquisitions and our organic hiring, We grew the Kinaxis team by roughly 50% in 2020. These investment initiatives are designed to further scale our operations To support anticipated revenue growth, we had a loss of $1,600,000 in the quarter compared to $7,800,000 profit in Q4 'nineteen, largely due to the factors I've just reviewed. Q4 cash from operating activities was $3,200,000 compared to $8,000,000 in the 4th $1,000,000 compared to $212,600,000 at the end of 2019.
During the year, we used approximately $62,000,000 of our cash to fund our acquisition of RivaCloud and Prana during the year. Moving to Slide 8. Full year 2020 results included total revenue of $224,200,000 up 17% from 20 19, SaaS revenue of $148,900,000 up 25 percent subscription term license revenue of $17,900,000 A decrease of 32%, which as we previously advised is simply a reflection of 2019 being the high point Of the normal 3 year cycle of customer hosted subscription renewals, adjusted EBITDA margin of 24% compared to 30% in 2019. Profit of $13,700,000 compared to 23,300,000 And cash flow from operations of $59,500,000 up 62% from 2019. As noted on Slide 9, our minimum contracted revenue backlog remains very strong.
As of December 31, 2020, it grew by 12% to $381,300,000 as detailed in Note 16 to our financials. This amount includes $353,000,000 of SaaS revenue backlog, which represents a 14% increase December 31, 2019, since December 30, 2018, backlog has grown at a CAGR of 27%. Our 2020 year end backlog will be recognized over the following periods: $158,900,000 will be recognized in 2021, of which $144,500,000 relates to SaaS Business $113,200,000 will be recognized in 2022, of which $104,900,000 relates to SaaS Business $109,200,000 will be recognized in fiscal 'twenty three and thereafter, which $104,100,000 relates to SaaS Business. Total bookings in Q4 were $61,500,000 of which SaaS revenue bookings were $58,400,000 As we announced yesterday, I will be retiring August 1, at which time Blaine Fitzgerald, our Executive EVP, We'll transition into the CFO role. It has been an absolute privilege to help Kinaxis and the success in becoming innovative, high growth, Profitable public company.
While it's been a pleasure working in Hy Tech for the last 40 years, the past 15 years with Kinaxis The most rewarding and challenging by far. While Kinaxis has amazing technology and customers, its people have made the difference. Blaine has been an outstanding contributor since we recruited him 1 year ago. As part of that transition plan, Blaine We'll be joining Rick and I to support a number of investor meetings in the months ahead. As you will have the opportunity to meet Blaine, I know you will also be impressed by his proven understanding of our business, personal integrity and strong financial skills.
I know I'm leaving Kinaxis in great hands. And with that, I'll turn the call over to Blaine to discuss our guidance for 2021.
Thanks, Richard. It's been an exciting year and it's been invaluable to work so closely with you throughout. I look forward to continuing your record of success At Kinaxis, I also look forward to getting to know all the shareholders, analysts and investors on this call over the coming months. If you move to Slide 10, as John explained, the COVID related delays we experienced in the middle of 2020 have a bigger impact on 2021 SaaS revenue than in 2020. That is simply the nature of a subscription business model and long sales cycles.
Given that fact, the backlog Richard just outlined and our current outlook, we are introducing guidance for 2021. We expect 2021 SaaS revenue growth to be between 17% 20%, still a very healthy outlook given the circumstances. As we previously communicated, based on the normal cycle of customer hosted subscription renewals, we expect subscription term license revenue to be between 3 and $5,000,000 in 2021. The underlying base of subscription business from these customers remains materially unchanged from 2020 and recent years. We expect total annual revenue for 2021 to be in the range of $242,000,000 to $247,000,000 We expect an 11% to 14% adjusted EBITDA margin for 2021.
This estimate is primarily a reflection of COVID related incremental subscription booking delays in 2020. The lower proportion of subscription term license revenue in 2021, which compared to 2020 drives an approximate $14,000,000 reduction in adjusted EBITDA on its own and The strong level of strategic investments we undertook in 2020, which is setting us up very well for future growth and scale. Looking at other financial targets for 2021, we expect a gross margin in the 63% to 65% range. Sales and marketing to be approximately 24% to 26% of revenue. R and D to be roughly 24% to 26% and G and A to be in the 16% to 18% range.
Finally, CapEx will be between 33 $38,000,000 This amount is roughly equally split between significant expansions to our data center capacity to support our growing customer base and investments in our new Kinaxis headquarters. When the building is ready in early 2022, we will be excited to bring the team back together to a new Safe state of the art facility that will help us attract world class talent. Moving on to Slide 11, Consistent with the strong bookings momentum we started to experience in Q4 and our elevated end of year pipeline, we anticipate that 2021 will be a much Better year for signing incremental business and winning new customers. At this time last year, before the pandemic, We stated our belief that 23% to 25% SaaS revenue growth was sustainable over the midterm. We delivered that performance in 2020, largely off the support of strong bookings in fiscal 2019.
While the COVID related delays from last year forced a slight deceleration in SaaS growth in 2021, We continue to believe that 23% to 25% SaaS growth is achievable again in 2022. In 2022, we will also hit the peak of our renewal cycle for on premise customers. So subscription term license revenue should grow to $24,000,000 to $26,000,000 in that year and gross margins to expand to the high 60s. Our operating expense growth rate will also temp over the next couple of years. So we would expect adjusted EBITDA margin to be in the 20% range for 2022.
Naturally, We will provide specific guidance on our usual schedule. We see room for improvement in SaaS growth, gross margin and adjusted EBITDA margin in the longer term. As always, we are building for the long term and will make investment decisions based on what we deem to be in the long term interest of the company at that time. Thank you for your continued support of Kinaxis. With that, I will turn the call back over to John.
Thank you, Blaine. Turning to Slide 12. As I mentioned earlier, I'm very confident that Kinaxis has never been in a better position in our markets. I'd like to briefly touch on some further elements of our strategy that are key to supporting our growth ahead. Our pace of innovation has accelerated and we remain fully focused on product dominance in our field.
Our sales team can already offer our customers and prospects more value than ever before. And we're releasing even more revenue generating product later this year, like our AI enabled command and control center. We will also continue to remain open to Product enriching acquisitions. We will continue to significantly expand our data centers to ensure an ongoing premium level of service delivery to our customers. We are also continuing to grow the programs and points of engagement with our existing customers, including up to the most senior level executives.
To ensure that we're consistently exceeding their expectations, we're getting greater support at each step The customer engagement process by a rapidly expanding group of partners. We recently signed 5 new system integrator partners who will take on professional services engagements to help our global customer base digitally transform their supply chains. We also brought on 5 new referral partners, both consultancies and solution providers who are equipped to recognize The fit between prospects business needs and rapid response capabilities. We expect to release details of these new relationships soon. And finally, our brand new solution extension partners are helping Kinaxis expand RapidResponse's capabilities For enhanced customer value, greater stickiness and entirely new revenue opportunities, you can expect us to add more new partners across every category in 2021.
All of these developments would be impossible Without our amazing team and our people matter here culture that we support and create every day. On that note, I would like to say a personal thank you to Richard. He's been an invaluable partner to me and the full Kinaxis family throughout his long tenure. He has helped Kinaxis grow, been a diligent corporate steward, Taken us public and dedicated himself to making sure that the investment community understands our performance and future opportunities. Truly, the company wouldn't be in the excellent position it is in today without his very significant contributions.
I'm grateful to Richard for ensuring that the transition of his role will be entirely seamless and I look forward to continuing to work side by side With such a great talent as Blaine. Finally, as always, thank you all for taking the time to join us on the call today. With that, I'll turn the line over to the operator for Q and A.
And your first question comes from Richard Tse with National Bank Finance.
Yes, thank you. Just first off, I wanted to say congratulations To both Richard and Blaine for your respective retirement and promotion here. John, it's nice to see the backlog trending up here. When it comes to your prospects in general, what have been the conditions that they've been waiting for to really make decisions to move ahead? And You think that's pretty much behind us now and how we look at this going forward?
Thanks.
It's a very great question, Richard. And the easy answer is time to value. Under COVID, the customers and prospects that we're talking to today are looking for extremely rapid healing, if you will. Every manufacturer that we talk to is in a state of pain. And so they're looking for their own inoculation.
This is the start of a transition. This is a start of their transformation. But as I said in the opening remarks, the Rapid Start Program is gaining speed and it's because our prospects and the pipeline that we're looking for, They're looking for value within the 3 to 5 month timeframe. They're looking to feel better fast. And that's the I'd say the prominent change in terms of the discussions we're having with prospects.
Okay, great. And then you showed a chart in the deck on that sort of the Gartner landscape here. So when you look at the bids that you're involved in today and certainly the pipeline, are you seeing kind of the same level or fewer competitors in the market today?
We're still seeing the same level traditionally and it continues to be the case. The large ERP providers such as SAP tend to be the incumbents and that remains to be consistent. We certainly see others in the mix as well. It's a competitive landscape as Gartner has described. But I wouldn't say there's a significant shift in who we typically see.
I will say that this notion Of driving hyper agility has become incredibly Our customers are incredible and prospects are incredibly aware of that. Every supply chain has found itself in the same condition, right? I'd say the pure math based models are in a state of flux. They're in a state of shock. And A lot of our prospects are learning what it feels like to have an agility muscle that has atrophied.
And that's why they're turning around thinking, okay, incrementalism is dead. We need a giant breakthrough here. And they're turning to end to end concurrency as a base model.
That's great. Thanks. I'll pass the line and get back in the queue.
And your next question comes from Stephanie Price with CIBC.
Good morning. Congrats Richard on your retirement and welcome Blaine. I just I had a question around the 2021 subscription guidance. And I was just curious if it was impacted by any additional non renewals. If you could talk a little bit about the customer churn rate here.
Thank you, Stephanie, for Your best wishes and a very good question. We continue to have over 100% subscription renewal Sorry, net sorry, 100 percent net revenue retention. And no, it has not been. We noted The main implication really has been those headwinds that we experienced. And earlier in the year, we've now continued to build Not only the funnel, but also the sales team.
And so we're very confident with the guidance that we provided both for 2021 as well as in the midterm.
Okay, great. And maybe on that sales pipeline and congrats on that Q4 bookings momentum. Are you seeing the sales process start to normalize here? It sounds like maybe that's the commentary that you're giving. Just wanted to confirm that.
Yes. Definitely, you can see that I'd say the middle of 2020 is when we felt I'd say the COVID related headwinds and coming out of Q4, We saw the momentum with the 2nd best bookings performance in our history. And we started Q1 very strong. So obviously, we're optimistic that We're out of the COVID headwinds here. But as you can appreciate, we can't necessarily see all the things in our future.
But all things remaining the same in terms of the recovery, the business conditions recovery, we feel like The momentum will continue.
Great. Thank you very much.
Your next question comes from Paul Steep with Scotiabank.
Great morning. Congrats Richard on the Retirement and welcome Blaine. If we circle in on the level of investment that you're continuing in the business in 2021, What are the key metrics as a team you're watching that give you confidence on sustaining that level of investment? And what would you look to maybe either temper or increase or decrease that volume? Thanks.
Yes. I'll start and maybe pass that on to Richard and Blaine, but first, it's the growth in the funnel. We have a very rigorous process in terms of how we scrub and how we validate Anything that enters into it. We've been it's just the way we are. We don't know another way to be.
And When we saw the and it was expected. I mean, supply chain transformation and supply chain excellence are in the lips of everyone. Teenagers know what it is now. And so as you would imagine and as Transpired throughout the year, the pipeline grew by 40%. We know that there's some length to sales cycles.
These are not simple decisions That these manufacturers are making. They're making a generational shift in what governs their supply chain, But we do not want to be crushed by that success. And so we're investing ahead of that pipeline. So that is 1st and foremost The driver for how we budget our expenses and our investments. Richard, maybe I'll ask you.
Yes. And Paul, As you can appreciate, there are certain expenses, which I would sort of really equate as a step function. So during the year and primarily with The acquisition of the Rubic Cloud team, we had an opportunity to do a significant increase into our R and D capabilities and strengthen Our AI as well as support for CPG and retail. So when we grab that opportunity, We're going to see not a significant increase in R and D this year, but it was key to do that. Similarly, what we've done is we've Increased our investment and basically our capabilities of supporting customers throughout the world.
So that includes a combination of data centers. And so we're continuing to Best capital and people in those data center capabilities. The global customer care organization, which is so critical To continue the connection with customers, we have regionalized that to a much larger degree. And We've strengthened our capabilities in marketing as recognized and You did attend the virtual connections and other activities. So there was a number of initiatives that we did, and that really resulted in that 50% Or more increase in people this year.
Again, now that we've made those key investments, it's a matter of looking towards our return on those investments. And so it's a matter of really the timing of that subscription revenue growth in the out years aligning. So I think we probably are at a higher level of from an operating margin perspective, R and D, G and A marketing this year. But That's again, as Arkadence will provide guidance for 2022 next year.
Okay. Just to follow-up on that. Can we talk a little bit about the velocity of new product development, namely Rubicloud? And are those products That you're investing and ramping on this year, are those fully factored into the F 'twenty two guidance in terms of the return to the sort of 23% plus range or is that incremental that we should think about it? Thanks.
Yes. So
from my perspective, I think 2020 was a year where we produced more innovations than Any that I can recall, at least in immediate timeframe, it was a great year for innovation. And anyone who attended the connections The Virtual Connections conference, which we had just unbelievable, 3,000 people registered. Witness, there was some amazing innovations and those are slotted to be in generally available State as part of 2021 on the roadmap. And so yes, we have factored all of that Not only our 2021 guidance, but as well as 2022. As it relates to Rubicloud, the thesis behind it, As mentioned in previous calls, was the fact that they had filled white space in market segments that we already serve, Predominantly CPG and to some extent Life Sciences and I'm pleased to say that that thesis has Come to fruition through 2021.
The other key thesis was the strength of their machine learning bench and essentially doubling our own. And that integration has gone exceptionally well. And the 4th being their attraction in the retail space. And so we're going to continue the integration step. I'd say the 3rd element of that thesis It's the biggest lift of them all.
We're integrating their technology stack along with ours and that's been factored into our investment in 2021 as well as the predicted Return on that investment in 2022 and beyond.
Thank you.
Your next question comes from Paul Treiber with RBC.
Thanks very much and good morning and congratulations to Richard and Blaine. Just in regards to the disclosure on incremental bookings, which I think is very helpful. When you look at the year in its entirety, it still looks like there was obviously a headwind from COVID in the middle of the year And as a result, the year looks down a little bit. How much bookings do you think have shifted To the right as a result of delays around COVID. And do you expect those to close in the next several quarters and sort of get back on track?
Well, thanks, Paul. And so the short answer is yes. You could see from the results that we published how strong Q4 was. And as John noted, we have been Continue to close business in this quarter, which we'll be sharing with you when we provide the Q1 numbers obviously. But there's another trend that has been very interesting and that is the expansion component of our business.
So these are customers Signing up for broader use of RapidResponse, some of the new innovative services and applications that John has discussed. We're seeing an increase in that weighting. And so while the time we went out as a public company, it was about fifty-fifty and it sort of morphed With the focus on some very, very large new name customers down to the sort of twothree, onethree, twothree being with new name customers, Over the last couple of years, it's returned to more of a sixty-forty weighting and even a bit higher, maybe in the 55% For new names. So and that is a combination of not only those services, but also the focus, the dedicated sales team now just working with Our growing base of customers and so the dynamic is, yes, those we have some of the headwind issues that we talked about earlier For new name customers, but we've got a very strong base of existing customers that we continue to expand into. And so those I think are reflected in some of those dynamics.
Thanks. That's helpful. And then just secondly, I was hoping, could you touch on the patent dispute that came up this quarter to the extent that you can Directly speak about it or maybe just indirectly, what's been the impact or not on either bookings or just discussions with customers?
Well, it's certainly not something that we're going to discuss in this venue, given the nature of the issue. And when there is meaningful development, we'll certainly share that. We'll let our news releases do the talking For us, but I will say that we look forward to fighting fairly with Blue Yonder in the marketplace as we continue our journey here.
But John, I don't think we've had any customer from a sales perspective impact so.
No.
Your next question comes from Thanos Moschopoulos with BMO Capital Markets.
Hi, good morning. I'll echo the congratulations to Richard and Ghislain. In terms of the guidance, if I take your SaaS revenue For Q4 and I annualize it, that gets me to 90% of your 2021 SaaS guidance. And that's a higher coverage ratio than we've seen in prior years. So I guess my question is, is there some reason or explanation for that?
Does that imply maybe some incremental conservatism on your part or And any reason to count that out? Thanks.
Thanks Thanos, and I'm looking forward to getting to know you better throughout. So the way that we look at our guidance and we are pretty happy with The guidance that we provided, we look at it more as in terms of the opening backlog at a point in time. So our opening backlog at the beginning of 2020, for example, worked out to both 83% of our ending SaaS revenue. And so if we take that same proportion going forward in that same ratio, Our guidance for 2021 and going forward is going to be exactly on par with what we saw historically.
I guess my thought on that was that the opening backlog doesn't take into account anticipated renewals, Which you probably know are coming. Whereas looking at Q4 annualized that might take those future renewals into account. But At any rate, I'll move on to a different question. If I look at the sorry, go ahead.
Well, I was going to say, Thanos, and you did pick up that very good point in your research in that absolutely That extra 20 odd percent, 18%, 20% is going to be driven by renewals, by new name wins and So absolutely, it depends upon the timing of those renewals in the year. We are We do have some lumpiness, and what's really critical is within the current year It's the timing of when we secure a new name win. So obviously, if we close a customer on July 1, a new name customer, There's 6 months of revenue. But assuming a 3 year term, it's 100% impact in the out years. And so when we look at the as Blaine noted, we look at a number of measures and one of them being the minimum committed backlog.
But it's also looking at the funnel and the turnover and just sort of allowing for where we think those timing of the deals will occur. And as is our practice, what we'll do is we'll update you and the rest of the market each quarter As we move through this journey on new name wins. So there's at this juncture of the year, the best guidance really is to So use our rule of thumbs with regards to the backlog.
Okay. I appreciate that color. And then next, if I look at the backlog, it suggests that you have $12,000,000 of term license Revenue and backlog for 2021, you're guiding for only $3,000,000,000 to $5,000,000,000 Can you help us understand the dynamic?
Well, there's 2 elements. So just a very, very brief refresher. For customer hosted subscriptions, That same 3 year commitment that we'll get from a customer, but they want to host it and we're supporting them hosting it, we have to take That and split into 2 components, the right to use component, which is the subscription term license and then the maintenance support, which is the residual. So the maintenance support is taken ratably, but the subscription term, as you know, is taken upfront. And so what's noted, the $12,000,000 in the backlog is That maintenance support, so that is that really covers that whole space.
And we noted about it's a 3 year cycle whereby 2022 will be a return to the peak level of that from those existing customer renewal. But the maintenance support is pretty level. And so that one element where we've guided to just over $3,000,000 a quarter, you can see that Well, it's all in backlog as of this time. And that backlog will increase as we close The as we close the anticipated level of activity for those customers this year, but that is at the low point of the 3 year cycle. And that the right to use component is the $3,000,000 to $5,000,000 subscription term license that we're guiding to.
So does that help? We're at a low point, but it's going to fill up the backlog for the main support component, but it's going to be at the low point for the
Okay. No, that helps.
I had just left the disclosure, the $12,000,000 was
going to make a fall into the term license, but you clarified that.
No, no. That's the way you can support.
Right. Okay. All right. Thanks for that one.
We do have sorry, by the
way, sorry, by the way, sorry to interrupt, We do have, as you can see, also, call it $2,200,000 secured of that $3,000,000 to $5,000,000 number that we discussed.
Okay, great.
Your next question comes from Deepak Kauthal with Stifel GMP.
Hi, guys. Good morning. Thanks for taking my questions. I've got follow-up congratulations and follow-up questions to everyone else. John, we talked about or you mentioned competition earlier in the call in terms of incumbents versus Kinaxis.
I was wondering if you could comment on the level of competition you're seeing in terms of the pace of innovation. And Is there a shift in your view on profitability versus accelerating the pace of innovation here in the market?
Well, I think I'd answer it this way in the conversations that I'm having and I've had a lot of them in the last 6 months. I spend an awful lot of time with the most senior leaders of some of the largest customers and obviously prospects. And what I'm hearing, as I mentioned, is this notion that incrementalism is dead. That these practitioners, these leaders are looking for a step function. They're looking for a generational shift.
They're recognizing that the past 30 years We followed the governance models that have been used to implement supply chains are failing. And perhaps COVID has accelerated the need for this level of transformation. So I might say that innovation is everything. They're looking to these practitioners, these Chief Supply Chain Officers Are looking to leave it better than they got it. They're looking to set the next generation on a positive path.
And they recognize that Moving from a cascaded pure math based solution, accuracy without agility, This isn't the path, right? They're looking for a situation where accuracy and agility can live in perfect harmony. And This is where innovation matters quite honestly. And why I'm as confident as I am, Knowing that the last 25 years at Kinaxis has been about driving high profitability for companies That needed. And arguably, we've never been in a state with more volatility.
There's a lot going on and not only with regulations and there's a lot of people wondering what will the future regulations be. Is there going to be some on Shoring regulation, there's a lot at stake here. And so agility becomes a critical competency, I will say. So perhaps a long winded but passionate statement about why I believe innovation is so critical Set these companies on a successful course for the next 30 years.
Got it. But just to ask in a different way, For the next 3 to 5 years, do you think you'll have to spend more as a percentage of your revenue to maintain your innovation lead in the market? Or can you Get back to the 30% margins in the past and still maintain that innovation lead?
I think that we can get Back to that, we've always said it aspirationally. We've always said thirty-thirty, and that's been aspirational. And we do believe that the future in the future we'll get back to closer to that range.
Got it. And then just one last question for Richard before he moves off to his next chapter. Gross margins are below 70% now. Is there a structural change here now that you have a higher mix of costs related to your data centers? And likewise, is there a structural mix in the cash versus non cash portion of cost of goods sold?
Any color you can help you can give there would be helpful. Thanks.
Yes, sure. So absolutely, we're making investments. In fact, we're making investments in all three components of the cost of revenue, which are, In our case, our professional services, the broader customer success organization and then the data center. And now a lot of the data center costs are on a P and L basis are amortization. So they do not impact adjusted EBITDA.
But in terms of your structural question, it really is because of the weighting of the subscription term license revenue. And at this juncture, About 2 thirds of our revenue is SaaS. And a lesser amount is related obviously to the subscription term licenses, starting out of 8% or so. And but the subscription term licenses on that 3 year cycle have been really with long term customers. And so As we continue to grow our SaaS business, and that is a higher margin business, We're going to see a higher weighting and mix of that in the overall revenue line.
It's going to have less of impact as we continue to expand our revenue, this subscription term license. And so as John said, I see No reason why we couldn't move back towards that sort of 70% level. So we're going to continue to absolutely invest. But as the weighting Of the subscription term license sorry, as the weighting of the SaaS revenue continues to grow, That is going to drive that's probably the biggest driver for gross profit.
Got it. Thanks again.
Your next question comes from Suthan Sukumar with 8 Capital.
Good morning, gents, and congrats, Richard, and great to meet you, Blaine. Looking forward to working together. First question I had was on new customer wins. When
considering some of
the newer product capabilities like Google Cloud and Rapid Response platform that you as a company have introduced recently. What are you seeing differently around the scope of solution being purchased today with some
of your newer client wins? Yes.
I think in large part, a couple of things that we're seeing with net new. 1, the most expensive decisions I'd say the most expensive mistakes that happen in supply chain happen on the demand side. If you get your demand wrong, If you're unable to respond to conditions of demand, it has massive downstream Pain downstream impacts. And so we're definitely seeing that as the primary motivator towards transformations. But as I noted earlier, I'm also we're also seeing the importance of speed Back to this rapid start program where people are saying, hey, can you make me feel better, okay, in 3 to 5 months?
I recognize that wholesome transformations can take significant amounts of time for large corporations, Large Global Corporations, but make me feel better in 3 months or less in that kind of timeframe. And so we're seeing those Those are the 2, I'd say, elements now where the speed to go live, okay, Becomes a critical factor and it is typically focused on the demand side. The thing that we're seeing And again, it's quite natural. You would see as a result of COVID. In some cases, demand is going through the roof for some and demand is falling under the floor for others.
And that disruption regardless requires a lot of agility to Either maximize the opportunity and make sure that you leave no order Unfulfilled or that you can slow the supply chain down and make sure you don't end up with ballooning inventories.
Great. That's helpful.
And it sounds
like the Ruby Cloud integration is progressing well. Any update here on your thoughts on M and A going forward? Do you see potential for more transactions this year as part of your overall growth strategy?
So thank you for that question. Indeed, as I mentioned earlier, the thesis behind the Rubicloud acquisition sort of had Three prongs to it. And the first two and the people side of things despite being under these isolation Type conditions have been successful. We're thrilled with the talent and the management team And the intellect that comes along with that acquisition. And we're also happy to have added some customers Based on the technology that they brought with them, I will say that the integration of the technology stacks as it relates to entering the retail market is a heavier lift.
It requires some R and D, some continued R and D, which will We're obviously investing in through 2021. We've said this and I said it earlier as well. Yes, we are being A lot more thoughtful about accelerating customer value through acquisitions. And we're going to continue to be thoughtful through 2021 and beyond.
Okay. Thank you.
Your next question comes from Robert Young with Canaccord Genuity.
Hi, good morning. Congratulations, Richard. It's been a lot of fun working with you the last several years and it's good to meet you, Blayne. I'll ask both questions at the same time, speed is along. First one, the middle of the year, it sounds like you're Telling investors that the primary issue was customers that wanted immediate returns.
They weren't able to get it and so they Our delayed planned deployments of Kinaxis and so that suggests there's a bit of pent up demand. Would you say that that is correct and that's maybe that's reflected in the 40% pipeline growth? And then the second part of the question would be around maybe continuation of Thanos' question around the way that you calculate your guidance. It's purely mathematical based on the backlog At that time, and so that pent up demand or any kind of demand that wasn't able to convert in the middle of the year despite high level of demand, That would not be included in the guidance if I understand the way you described it or correct that if you could and then I'll pass the line.
Thanks, Rob. I'll answer the first half of that question and pass it off to Blayne for the second half. On the pipeline Question. You're correct in that I'd say the trough occurred sort of mid year. And While I can only theorize what was the cause of that trough, I can imagine and in fact in speaking to Chief Supply Chain Officers, many of them were just absorbing the condition that they were in, right, recognizing that they had never ever experienced as I mean, humanity, the current planet has never experienced a global pandemic.
It's been over 100 years. So I would say that Middle of the year, many organizations were taking a pause in trying to figure out how to absorb the condition they found themselves in. And that caused the delay, I think, in terms of deal flow. And If I look at Q4, I might believe that those delays are behind us and we're seeing some momentum now. And looking at the start of Q3, I might feel the same way.
Obviously, I'm cautiously optimistic in that I can't predict what else will happen with COVID and COVID variance And the like. I do think that organizations now, they're well past sort of The main event of COVID and recognizing that, okay, I get it, we need a transformation and they're now exploring their options. And I think that Every boardroom, I've had this conversation with a lot of chief supply chain officers and they've agreed. Every board Is asking their CEOs, what will you do next time? And that's what's fueling this desire to transform, right?
This need To look at what governs supply chains differently. And so I think that is fueling the pipeline For us and the 40% growth that we've seen, I'd say the second half of the year we saw more acceleration. But I'll turn it over to Blaine to comment on your question about guidance.
Yes. So if you go back to this conversation on SaaS guidance, There's really 2 main components that we look at beyond the opening backlog. And one of those is renewals and it depends on the renewal cycle that we have at any point in time. 2021 is going to be a lighter renewal cycle than we see in most years. So that isn't as Big factor in how we come up with our guidance.
The other factor obviously is exactly what you talked about, which is pipeline and pipeline conversion throughout the year. Now When we consider it, we obviously don't look at just the annual pipeline. We look at it from where the pipeline is looking to land for each quarter. And the Q3 and Q4 conversions that we're expecting to have will have a much smaller impact on 2021 Revenue guidance going forward. So we think that what we have right now is the appropriate guidance for 2021.
The start of the year is we were very happy with where it started out. It's exactly on par with what we've expected. And so we're expecting to hit that guidance and continue on. Great.
Thanks. Maybe just a clarification on the first one with John. Like did customers that wanted to deploy Kinaxis, did they turn to other solutions they could roll out more quickly? Or are they waiting for the right time to roll out Kinaxis? Maybe the underlying question there.
No, I think it was more of a pause, not that they were looking for alternatives. I think uniformly Many organizations had to absorb understand and absorb the condition they found themselves This is just a surreal situation for supply chains. And in conversations I was talking that I had, I was hearing things like Trusted lanes that you had for years were open one day, closed the next, open the next day. Things that you knew to be certain and trusted were no longer And so many of them found themselves just working to absorb the condition, let alone try to figure out how to establish future transformation. And so, of course, I'm pleased to see many of those customers that had taken pause or many of those prospects Taking pause become customers, right.
So that's the way I would describe the circumstance.
Okay. Thanks. That's helpful.
All right. And your last question comes from Daniel Chan with TD Securities.
Thanks and congratulations Richard, good to meet you, Blayne. I had some questions about what's built into the guidance, Specifically for 2022, with the bookings accelerating near the end of the year and given the Let's call it a relatively easier year over year compared with 2021. What is the opportunity for the SaaS revenue in 20 22 to accelerate beyond that 23%, 25%, especially if bookings really accelerate throughout this year?
Yes, I think thanks for the question. The 23% to 25% is right now our That's judgment on where we think 2022 will land. However, we will provide updated guidance as we go through the year. The bookings that we're expecting to see, the incremental bookings that we're expecting to see in 2021 should Put us right in that range. But again, if we see Q3 and Q4 especially starting to come in higher than we expect, We will provide updated guidance towards the end of the year.
At this point, we are thinking 2022. We're pretty excited. With Richard transitioning out, I've been put in a fortunate position to have a business that's never been in a better position To monetize off of some of the opportunities that we have in front of us. So with the Gartner MQ coming out and having us positioned where we are With our mature sales staff, with a product investment that we're investing quite heavily in the current year, I think we are going to be set up for a really great 2022 and beyond. So it's exciting for me.
Okay, that's helpful. And then maybe I'll ask Rob's question a different way, second question a different way. So you kind of looking at You used your opening backlog and you kind of say that's 80% of your next year's revenue. With the bookings momentum that you have, is there opportunity That the current backlog makes up less than 80% of the 2021 revenue if the bookings really accelerate, especially As you're exiting this year, maybe in the first half of the year bookings coming stronger, is that an opportunity?
That's not what we see in the forecast at this stage. There's always an opportunity that bookings can far outweigh what we
And there are no more questions at this time.
Great. Thank you everyone for participating on today's call. We appreciate your questions and as always your ongoing interest In support of Kinaxis, we look forward to speaking with you again when we report our Q1 'twenty one results. Bye for now.