Good morning, ladies and gentlemen. Welcome to the Kinaxis Inc. Fiscal 2019 4th Quarter Conference Call. At this time, I'd like to remind everyone that this call is being recorded today, Wednesday, February 26 2020. I will now turn the call over to Rick Wadsworth, vice president of Relations at Kinaxis.
Please go ahead, Mr. Wadsworth.
Thanks, operator. Good morning and welcome to the Kinaxis earnings call. Today, we will be discussing our 4th quarter results, which we issued after close of markets yesterday. With me on the call are John Scard, our President and Executive Officer and Richard Monkman, our Chief Financial Officer. Before we get started, I want to emphasize that some of the information discussed on this call based on information as of today, February 26, 2020 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 our SEDAR filings. During this call, we will discuss IFRS results and non IFRS financial measures. A reconciliation between IFRS results and non IFRS financial measures is available in our earnings press release and in our MD and A, both of which can be found 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 purpose An archive of the webcast will be made available on the Investor Relations section of our website.
Neither of this call nor the webcast archives may be rerecorded or otherwise reproduced or distributed without prior written permission from Kinaxis. To begin our call, John will discuss the highlights of our quarter year, as well as recent business development, followed by Richard, who will review our financial results and outlook. Finally, John will make some closing remarks before opening up the line for more questions. I'll turn the call over to John.
Good morning. Thank you for joining us today. I'm pleased to report that our 4th quarter results were very strong across the board, including SaaS revenue growth of 26 percent to $32,000,000 total revenue growth of 47 percent to $56,300,000 and adjusted EBITDA of 32 percent of revenue. As a result, we met our annual guidance for all of these important metrics. Key accomplishments included growing full year SaaS revenue by 22 percent to $119,000,000 and achieving an adjusted EBITDA margin 30% for including the recently announced wins at Lundbeck, a leading European Pharmaceuticals company, Doctor.
Reddy's Laboratories, another leading pharma company and our first customer in India. Our success this past quarter is in large part the direct result of investments to significantly expand our sales and marketing teams across 2018 and throughout 2019. Given the strength of our markets, we will continue to increase expand strategy is also focused on extending and expanding our relationships with existing accounts. Last year, we continued this strategy through renewals with several major existing customers, including Unilever, Schneider Electric, and Mark. To support our renewal and expansion efforts and as previously communicated, we have built a dedicated sales team that is solely focused on serving the needs of also increasingly driven by our new wins for the year, but continued taking ever increasing roles in our deployments.
We now work with approximately 25 partners globally. Recently, we have announced relationships with St. Chronic in Denmark, Asian, consulting in Japan and Blue Cross in Belgium. Developing key partners around the globe continues to be a long term strategic investment that involves education, training and joint commitment on the sales and services side. We believe that our global alliances strategy is instrumental to scaling the business and we will continue our investments to strengthen these relationships through 2020.
Growth in our customer base and our alliance partners also needs to be supported by growth capabilities. I'm very pleased to announce that we have recently acquired a long time business partner, Prona Consulting. Running off is an India based rapid response consultancy with over 70 professionals, including a team in California. Over the past 15 years, they have supported and continue to support many successful customer deployments. Now we'll be instrumental in providing us the necessary scale in delivering services and customer care for our ever growing customer base in Europe and Asia.
We ended the year with an outstanding backlog of committed subscription business. Our multi year SaaS revenue backlog was up by 40% from just 1 year ago, which will help underpin our growth for 2020 and beyond. Our strategic investments are clearly paying off and we see market conditions that are continued to strengthen. As a result, we anticipate SaaS revenue growth in the 23% to 25% range for fiscal 2020 and foresee an ability to sustain this higher rate in the midterm. Let me share with you some of the reasons The market and our position in it is strengthening.
1st, events that are wildly disruptioning, disrupting supply chains globally continue to shine a light on the need for concurrent planning, from tariffs, Brexit to the recent coronavirus crisis. The need for planning in real time has never been more evident. We have seen opportunities emerge from some of these disruptions. Secondly, our market just like the investment community has never been more focused on the issue of sustainability. Rapid response is core to the elimination of all kinds of waste in the supply chain and customers and prospects are keen to understand the ways we can help them plan for less waste.
3rd, Kinaxis is laser focused on innovation. And we are hearing feedback that There is increasing acceptance that supply chains need to go through a digital transformation. As tested into that, in November 2019, Gartner held their first ever dedicated supply chain planning summit. Targeted at the planning leadership team, which is the main audience for our unique digital, digitally integrated and current planning approach. As a result of all these themes and our past strategic investments, we are seeing interest from our core vertical markets in geographies where we now have dedicated presence.
Prospects in new countries within Europe and Asia are starting to show up as potential opportunities. Remember that sales cycles are long, approximately 18 months so opportunities can take a while to come to fruition. But it is this reason for optimism. The time is right to continue to accelerate our investment in people and capabilities on a global basis and across all functions of the business. With that, I'll turn the call over to Richard to provide further commentary on this outlook and the financials for the quarter.
Thank you, John, and good morning.
As a reminder, unless noted otherwise, all figures reported on today's call are U. S. Dollars under IFRS. On a comparative basis, total revenue in the 4th quarter increased 47 percent to 56,300,000 driven primarily by SaaS revenue, which grew 26 percent to $32,000,000, and by the growth in subscription term license revenue. SaaS revenue growth results from contracts secured with new customers as well as the expansion of existing customer subscriptions.
Consistent with our guidance, we recorded $12,100,000 of subscription term license This was approximately 5 times the Q4 2018 level. As we have previously noted, subscription term license revenue very significantly quarter to quarter and year to year simply as a result of the timing of the individual underlying renewal dates for subscriptions hosted by our customers on their site. Our customer hosted subscription agreements are generally 3 year commitments to follow our renewal cycle whereby 2019 was at the peak and 2018 below. Given our current customer base, Professional services revenue grew by 20 percent to $8,900,000 compared to Q4 2018. Professional services revenue is driven by a number of factors, including the number, size and timing of customer projects underway, as well as the level of deployment
For the year,
for greater than 10% of total revenues. Gross profit grew 60 percent to 41,400,000 or 74% of revenue compared to 68% of revenue in Q4 2018. This increase results from the growth in SAS and subscription term license revenue, partially offset by an increase in cost of revenue. Profit grew by 168 percent during the quarter to $7,800,000 or $0.29 per diluted share compared to $0.11 per share in Q4 2018. Adjusted EBITDA for the 4th quarter grew 102% to $18,100,000 or 32 percent of revenue compared to 23% in Q4 of 2018.
These results were due to an increase including investments to support our long term strategic growth initiatives. Q4 cash from operating activities was up 21 percent to $8,000,000, largely due to higher profit, excluding non cash items, partially offset by fluctuations in operating asset and liabilities, including a larger increase in trade and other receivables compared to the same period in 2018. As of December 31, 2019, cash, cash equivalents and short term investments totaled 212,600,000 an increase of $31,100,000 from $181,500,000 as at December 31, 2018. Full year 29 results included total revenue of $191,500,000 up 27% from 2018. SaaS revenue of $118,900,000, up 22%.
Subscription term license revenue of $26,200,000, up 164%. Adjusted EBITDA margin of 30% compared to 28% in 2018. Our minimum contracted revenue backlog is strengthened considerably as noted by John. As of December 31, 2019, it was $339,400,000, as detailed in Note 13 to our financial. This amount includes $310,600,000 of SaaS revenue backlog.
The backlog will be recognized over the following periods. $137,800,000 will be recognized in 2020, of which $122,100,000 relates to SaaS business. 100.1 will be recognized in 20 21, of which $91,800,000 relates to SaaS business and $101,600,000 will be recognized in fiscal 'twenty 22 and thereafter, of which $96,700,000 relates to SaaS business. Total bookings in Q4 were 97,100,000 of which SaaS bookings were $95,700,000. We are very pleased with this continued strong performance driven by several new customer wins and a significant customer renewal activity.
As you know, given the nature of our large enterprise sales model, bookings will vary between periods depending in part upon the timing of new customer wins and customer renewal schedules. Based on this backlog, strengthening market conditions and for fiscal 2020. We expect that total revenues will be in the $211,000,000 to $215,000,000 range, As to the key components of total revenue, we expect SaaS revenue to grow approximately 23% to 25% above fiscal 29 levels. We expect professional services revenue due to both organic business growth and our Prada acquisition. To grow in the 20% range.
We further expect that our partners will continue to expand their deployment activity with Kinaxis As communicated last year, for 2020, we expect subscription term license revenue will be approximately half the level of 2019. Or in the $12,000,000 to $14,000,000 range. Regarding the timing of this revenue within 2020, We expect approximately 1 third will be recognized in Q1 at approximately 40% in Q2. Again, the anticipated fluctuation in this revenue is simply a result of the timing of the individual customer hosted renewals. Which follow a 3 year cycle.
We expect maintenance support revenues to be relatively stable and in line with the level of 2019 or in the $12,000,000 to $13,000,000 range. This revenue is almost entirely related to the residual portion of our customer hostess descriptions And because it relates to ongoing support, it is recognized ratably over the full customer subscription term. Regarding our investments for 2020, as John mentioned, we continue to be encouraged by a number of factors, including significant backlog greater capabilities of our expanded global team and general market conditions. Consequently, we are expanding our investments Globally in a number of areas and expect the following ranges expressed as a percent of revenue for fiscal 2020. Cost of revenue, representing professional services, data center and support operations to be in the 29% to 31%, which would support a gross margin between 69% 71%.
Sales and marketing expenses will be between 27% 29%. Research and development expense will be in the range of 19% to 21% and G and A will be in the range of 13% to 15%. Finally, we anticipate acquiring 14 expansion investments in our data centers to reflect the needs of our ever growing customer base as well as our expanded R and D team. Roughly 3 quarters of this amount will be invested in the first half of the year. Based on the above revenue growth and investments, we expect adjusted EBITDA for This guidance reflects 2 key factors: 1st, the lower subscription term license revenue, which has a dollar for dollar impact on adjusted EBITDA, and accounts for roughly 13,000,000 for 2020, which are focused on product innovation and sales and marketing.
Staying our SaaS revenue growth in the 23% to 25% range over the medium term. Further, while we will continue to invest in growth, we anticipate the total OpEx growth rate will be lower after 2020. Consequently, we expect adjusted EBITDA margin will return to levels similar to 2019 and fiscal 2022, Once we reach the anticipated peak of our 3 year subscription renewal license, Michael. To help you understand the accounting for our subscription term licenses, we have posted a hypothetical example of IRS 15 revenue reporting for a customer hosted subscription agreement in the financial sections of our IR pages of our webpage. As always, we will continue to assess conditions and we'll update our outlook as appropriate.
Thank you for your continued support of Kinaxis. With that, I turn the call back over to John.
Thank you, Richard. I'm pleased with our meaningful progress in 2019 and I'm confident in our ability to accelerate SaaS revenue for 2020. And sustain that rate over the midterm, all while maintaining healthy profitability. Our strategy to get there is largely the same, as well as brought us to such outstanding success to date. We are going to put innovation first through our own work and in collaboration with our alliance partners.
We believe we have the best solution available on the market today. But we are relentlessly working to prepare for tomorrow's needs. We're going to drive customer excellence by maximizing ongoing value throughout our customer relationships.
We believe this
will create opportunities for increased retention and expansion. We are going to evolve our amazing culture globally. The sense of pride that exists in our company today and our corporate goals will extend everywhere we have people as we continue to attract and retain world class talent globally. Lastly, we will diversify our growth strategies, entering new markets and tackling new use cases has been a cornerstone of our growth to date and we will continue to actively investigate ways to augment our revenue streams. Before closing I would like to extend a warm welcome to Betfley Rafael, who was appointed to our board of directors yesterday.
Betsy has over 30 years of executive financial experience in tech in the technology industry, including senior roles at Apple, Cisco, and Silicon Graphics to name a few. She currently sits on the board of Autodesk where Betsy is the Audit Committee Chair and also and has also been a director at several other innovative technology companies. We are thrilled to have her experience and pedigree added to our team. On behalf of Kinaxis, I would like to thank you for your support. And as always, for taking the time to join us on this call.
With that, I'll turn the line over to the operator Q and
first question comes from Richard Cee with National Bank.
Yes, thank you. Given your backlog here, which is incredibly strong. It looks like you guys are being quite conservative here with the guidance. Is that a fair characterization?
Well, thank you, Richard. I think you're referring to sort of our general practice when we provide guidance of having approximately 80% of that 12 month forward view in our subscription backlog And, based upon that midpoint of the guidance, yes, that sort of calculates to sort of the, about 82%, 84%. So, it is a little bit above, but I like to say it's in the 80% range. And so given market conditions, given where we are in the year, just given the nature of the enterprise sales and the timing, we feel this guidance is appropriate.
Okay. And John, you talked about
a number of reasons why some of your prospects are looking at Rapid Response. Could you maybe give us some examples of how Rapid Response is help some of those customers against this current virus outbreak?
Yes, so much of it has to do with what I'll say material movement and, sourcing scarce, raw materials. And, while Conaxis, isn't currently doing business in China. We certainly have customers that have significant operations in China. And, under conditions like this, like we saw, under the disruptions of tariffs, you know, our customers are looking to to run frequent, simulations and course corrections based on understanding where they will have supply risk. And so that's where we're predominantly seeing the interest and the activity.
And as I stated earlier, any disruption, quite frankly, in supply chain, the velocity of disruption in supply chain calls for frequent concurrent, you know, end to end concurrent planning in real time in order to, navigate conditions that,
that our customers find themselves in.
Okay, great. And just one last one for me. You guys had a strong professional service this quarter and then now you're acquiring one of your former partners. It kind of seems a little bit inconsistent with your former strategies or offload some of that service revenue to your partners. So why are you making that move today?
Is that so busy or doing a lot of evaluations that you need that extra manpower?
Yes, well, that's exactly it. Good, it was a good timing for both parties. You know, our success in Europe and Asia is driving the need to scale up customer care, and services, you know, at a rapid pace. And, and so we see, you know, we've been working with Prana for the last 15 years. We know them well.
Their practice has been entirely focused on, on rapid response. And so, you know, in essence, we are procuring instant scale. And again, in light of our growing business in Europe and Asia, and, you know, them being largely located in India, it made a lot of sense, in preparing for, for, for 2020 and beyond. The other thing I will tell you is, based on the skill set that we see at Prana, we see a broader use of you will, of, of that function. So I don't look at it as buying a professional services arm so much as I say, I see it as buying you know, 70 individuals with a significant experience in Kinaxis and Rapid Response that could be used at a much broader level, which, again, earlier mentioned, the notion of customer care and support, being one of those functions.
That's great. Thank you.
Next question comes from Thanos Moschopoulos with BMO Capital.
Good morning. John, on the topic of the virus, I mean, as you mentioned, I'm sure it clearly highlights the need for software like yours. But on the flip side, if customers are busy putting out fires might that delay some sales cycles in the short term? And have you seen any instances of that or not yet?
Well, certainly as, you know, as we see these kind of macro level, disruptions that I mentioned to others, whether it's Brexit or, or, or tariffs or someone, yes, that can sometimes, disrupt sales cycles as people, turn to, to, you know, absorb that particular disruption. We have not seen that in our in our current sales cycles, today, but certainly it's possible. You know, we've, you know, we've certainly taken that into consideration as part of our guidance. But again, you know, based on, the activity that we're seeing in the field is, which is augmented quite frankly, we have not seen that negative, effect.
Great. And then just on the overall demand environment, I was struck by Genpact's recent commentary. They said that they've seen a threefold increase in their supply chain management pipeline over the past year. And I believe they're your largest partner among the largest partners. You might not be prepared to share any qualitative metrics in the pipeline, but just broadly speaking, is that consistent to what you're seeing?
Well, we're certainly really, happy with, both the, you know, the size of the pipeline and, and equally, if not more so, the quality. Of the pipeline. And the activity that we're seeing, in comparison to the same time last year, quite frankly. And We've been, we've been telegraphing this, obviously, that we are investing heavily in sales and marketing, I mean, the team, our sales engine has more than doubled since January of 2019. And it will continue to grow.
That is a direct reflection of of not only the size and shape and health of the pipeline, but frankly the activity that we're seeing in the pipeline.
Great. A couple for Richard. Would you be able to disclose Prana's trailing revenue?
No, we haven't disclosed that.
Fair enough. And then should we assume that term licenses in 2021 will be similar to 2020 levels if I look back at the historical pattern?
Yeah. So what, what we had indicated was that, they'll they'll be at a lower level in 2021 than 20. So basically 2021 would be in line with 2018. Again, this is assuming renewals and and without expansion sort of just at the at the at the run rate. And then again, you know, returning to the levels.
So that's for the peak in 2022.
Great. Thanks. I'll pass the line.
Next question comes from Daniel Chan with TD Securities.
Thanks for taking my questions. Just to ask another question on this term license, at the beginning of 2019, said it was going to be half of, 2020 term license is going to be half of 2019. And that time, that would have implied around 10,000,000 to 11,000,000 for 20. So does your current 2020 term license guidance, which is above $10,000,000 to $11,000,000, does that include assumptions for expansions when they renew?
Well, it's, it's, Dan, it's really just his ongoing reflection of level of activity. And so when we were forecasting that 2 years ago or sort of the year and a half ago, it was sort of an indication where we thought 2020 was going to be and we've just updated that based upon current condition. So it's about it is about the half range. So that's why the $12,000,000 to $14,000,000 range. And then again, I noted a significant portion would be this quarter.
Okay, thanks.
And then for the current quarter, if we assume term license revenue is nearly 100% EBITDA margin, that implies the rest of the business is generating EBITDA margin of about 14% this quarter. And that's down from the low 20s that we saw in Q1 Q3. So just wondering if there are any one time expenses this quarter, if there was some sort of seasonality that we should see in Q4 of every year?
Well, there is a little bit of seasonality. Just moving the subscription term license element away, there is a little bit of seasonality in that So for instance, we hold our very large customer, that connections in Q4 and some other key marketing activity. So, you know, marketing expenses tend to be higher in Q4. In Q1, often what's happening is budgets for customers are just being finalized. And so therefore, you know, sometimes the professional service level is a little bit lower.
You know, the impact of new payroll taxes hits for the harder Q1 and so on. So there's some some some variability. That's why we we tend to focus on the overall annual And, you know, that level we're talking about gross, you know, given the 29% to 31% that we noted for the overall cost of revenue for the full year. So this includes the expansion of the data centers and so on that we also talked to in that approximately 70% gross profit line With respect to your specific question on subscription term license, because that is really the construct where we have to allocate revenue over the 3 year terms to that right to use component. And yet we're spreading our support over the 3 years.
Yes, you know, the, you know, the, that, that notion of that day 1, component, it's approximately 60% on a 3 year arrangement. The full 3 year term is, is 100%, you know, from a county perspective, really 100% margin. And so that's why you also saw the strong, strong margin in, in, in Q4 with the with a $12,000,000 level of subscription term license. So as we hit those numbers, you're going to see that variability in the gross profit. But again, you know, we take this longer term view ahead of minimum on an annual basis and and what we're trying to do down is help people understand some of that variability from that accounting change, but from the business operations side, you'll see it's quite consistent in a subscription SaaS revenue is, you know, just is growing and continues to grow quarter over quarter.
But you'll also see that those ongoing expense investments in product and sales and marketing. So we hope that, that provides And our goal here today was just to help give a bit of visibility through to the, to the dimensions and, of our overall P and L for 2022 so that people could see that sort of 3 year cycle and range is how it impacts adjusted EBITDA.
Yes, that's helpful. Thank you. And just final question for me, if I look at your SaaS backlog, it kind of dips to 91.8 in 2021, but then you have it ramping up again in 96.7 in 2022. So Just wondering if you can help me understand why you have it kind of a backlog that kind of ramps up because you move up to about a year. Do you have expansion agreements that are already booked for the next couple of years?
It's actually 2022 and thereafter. Well, we have, you know, I would say on average, our subscription agreements are 3 years. So, you know, we do support customers with 5 year commitments. This is, again, a minimum level so that customers with expansion privileges, unless they've committed contractually to that. We don't include that in backlog.
So this is the minimum contracted amount. And because some deals are greater than 3 years, you know, we break it into thereafter. So that's our practices. Try to provide that mid term and unwind, if you will, and as well as the overall confidence in the total backlog.
Next question comes from
Pronic acquisition announcement. Can you talk a bit about India as a region for Kinaxis? And should we expect further investments in the region?
Well, life sciences, as I've said in the past has been, you know, probably the warmest and continues to be. And in fact, you know, there was a moment in which they outpaced high-tech electronics. And I can tell you, it it has continued to outpace, high-tech electronics even today. And so as we expand our, footprint in that market segment, it made a lot of sense to to target some of the largest farm typical companies, in, in India. And as you know, you know, we have, very, very strong alliance partners that have a global footprint.
They're in every country that matters in in manufacturing, especially in, in, in life sciences. And so, it isn't, you know, it isn't uncommon to get that kind of influence from partners to help us expand in life sciences beyond sort of the target, geographies that we talk about most often. Certainly, the Prana acquisition helps with customer care and support and, and, and service opportunities as well, being in region and, you know, local time zones and, and, you know, with the language issues and such. So, you know, I wouldn't, I wouldn't say that we are proactively targeting accounts outside of the geographies that we have, traditionally talked about North America, Europe and Asia Pacific, portions of Asia Pacific. We are nowhere near saturated in any vertical in any geography.
And so we feel like that's where we will continue to target, but certainly be opportunistic when we see, very, you know, reasonable deals in markets where we should be winning those accounts with the assistance of, you know, the wind of our alliance partners at our backs.
That's helpful. And then in terms of the Prana acquisition, does it signal more of a focus on M and A here and are there other areas of the business that you would you are looking at building out through acquisitions?
Yes, we, you know, we've, I mean, obviously, the current condition of the business has been the result of focus rigor, you know, responsible operation of the business and organic growth. And so, you know, when I think about acquisitions, you know, I'm, I'm forever, you know, I'm forever thinking about making sure we don't poison the soup, you know, with every acquisition, every every, you know, these are new ingredients into the, into the organization. And And, frankly, we have a wonderful business continuing to grow, organically. Obviously, with Prada, personally myself have been friends and has have known BJ for, you know, 15 plus years. And they've been working with us for quite some time.
So culturally, this was a, an extremely natural fit and the timing was exceptionally good for us given our growth in in Europe and, and Asia. It it it was just a, you know, it was just very, very obvious thing for us to do given conditions of the business. As it relates to the broader question of, of M and A, Certainly, we are, you know, we're, we have our ear to the ground for things that might push, be what I call technically accretive, you know, things that, you know, opportunities for us to fill white space, you know, to support our customers and prospects beyond where we currently are. I will tell you that, you know, we do these, evaluations with extreme rigor knowing that can access, as a company has grown and developed to be just an absolutely valuable asset as an organic growing company. So I guess that's the best way I could describe our current condition of on M and A.
I wouldn't call it a, a significant growth strategy for us. It's it's more, you know, we'll be opportunistic when we see technology that can help us expand use cases for our customers and prospects.
Great. Thank you very much.
Next question comes from Paul Treiber with RBC Capital Markets.
Thanks very much and good morning. Just in regards to bookings in the quarter you speak to the magnitude of bookings for new customer wins as opposed to renewals?
Good morning, Paul. We, so yes, the backlog reflects both the new name wins as well as renewals and related expansion for their customers. We don't break that out from a backlog perspective. But our our our trend of from an incremental revenue perspective of 2 thirds being driven by new name wins and 1 third by expansions, has continued. We have the sales team as part of the expansion of the sales team has actually been a team dedicated to just working with existing customers and expansions.
So we're very pleased to see that level of activity also continue to increase But with the overall expansion that John noted to the sales, so there's and the activity, there's still a lot of additional capabilities now just focused on new name wins. And so, those 2 just basically continue to be working in tandem and that sort of 2 thirds, 1 third, is continuing.
Okay. And then thinking through EBITDA margins, when you look at back at 2019, you did see the guidance you provided at the beginning of the year by about 600 basis points at the midpoint. And I think some of that was on higher term license revenue. Can you speak to just the moving parts there? And then also when you look forward to 2020, what do you see as potential side or downside drivers versus your guidance?
Yes. So you're correct. We significantly exceeded overall guidance, especially from an adjusted EBITDA from, especially from the initial gains that we provided last year. You know, at that point in time, we had, anticipated a lower level of a subscription term license. As it turned out, not only did we have a very, very strong absolute renewal rate, but, with some meaningful expansions with those same, customer hosted arrangements and such the subscription term license revenue was higher.
In fact, it represented about 13% of our overall total revenue. And as we talked to briefly earlier in the call that essentially implies straight down to the bottom line. So with the nature of the cycle and the revenue, declining, this year, the subscription, the midpoint, the subscription license revenue is sort of in the 6%. So you can sort of see that 13% to 6% delta, 7%, all things being equal would flow through to the adjusted EBITDA percentage. So Paul, we're going to, we've provided you and the market with our view as to that, not only cycle, but the level of subscription term license that we're currently anticipating, should that change, we will continue to update update you.
But, you know, yes, if we, we do have a higher level of subscription term license or specifically expansion therein, that will have a positive impact on adjusted EBITDA.
Okay. Thank you for taking my questions.
Next question comes from Gus Papageorgiou with PI Financial.
Thanks for taking the question. So congrats on a great quarter. I mean, the results are fantastic. You have really good growth and very high profitability. But if I look at your business, I guess the only metric that stands out is being kind of poor would be the return on equity.
You're kind of high single digits to low double digits. And the key reason is because of the huge cash position. So if you look at that cash and can you tell me what to do with it Can you talk about how you think about 3 things? 1, perhaps being more aggressive on M And A secondly, perhaps being more aggressive in investing in the business and sales channels and thirdly, issuing a dividend, because I think given that you continue to pile up cash and it's just sitting there that there's probably more effective use for it?
Well, thank you guys. And particular for noting are very strong cash and we continue with that very strong cash generation. And With regards to aggressively investing in the business, first off, we believe we are. I mean, we have, more than double our sales capacity, in fact, aren't well on track to extend beyond that one. We've significantly increased our marketing profile.
1 of our Achilles heels, as you know, I have chatted previously has been our awareness. And that is changing and it's changing for a number of factors. 1, it's just the marquee names that we've been able to have the privilege of working with and that association. And then the general recognition of ongoing, disruption in the market and the importance of planning. So those things are positive.
And so we are now moving into that high-twenty percent range of sales and marketing versus the mid percentage point. We continue to stay in a very strong investment and product and in fact, are increasing that. We're very fortunate to to have a number of strong individuals. We are expanding our capability on the service side only with our general expansion, but with the significant step up of the prana capabilities to provide ongoing sustained services. With regards to M And A, we, we are actually taking a more, I would say thoughtful approach in that with, strength in management team strength in our product management capabilities, strength in our thought leadership.
We are now aware of additional opportunities and we're going to continue to review that. And so it is very much from a product roadmap perspective, is it a buy or a build? But as we've stressed before, rapid response is a single product. And it is, the team is so focused on growth opportunities. We need to ensure that whatever IP that we do bring in if it were by way of acquisition is going to be immediately accretive.
This is going to be highly scalable. And quite frankly, that has been a challenge. We are continuing to pursue and review opportunities, but we're not a company where we're going to be buying at least at this juncture buying a revenue stream. So it really is product focus. And then your last question on a dividend, companies that have, you know, there's a number of tech companies with high growth that have strong business models that have started dividends.
We're not aware of any SaaS company though that at, certainly at our growth level that has initiated dividend. And you know, the consensus from our key investors at this point in time is continue to execute as you have to continue to direct your cash resources to that investment. So that's something that at a later time, there might be some consideration, but at this time, there is no, there is no consideration on the dividend.
Okay. Thank you.
Next question comes from Deepak Kaushal with Stifel GMP.
Hey, good morning guys. Got a couple of questions. First one on the margins. I'm trying to parse out, in your guidance and your outlook, what's changing in terms of structural margin versus cyclical. It doesn't seem like the swing through the cycle and margins in the last cycle was as big as the one we're expecting going forward.
Certainly, as you expand internationally, you have to add more data centers and now you're adding a dedicated sales team for existing customers. Does this structurally change your margins the long term?
Well, we do have significant leverage in our business model. And the, so let me, when you say margin, I'm going to 1st sort of first focus on the gross profit. So, you know, general gross margin, if you will. And that, yes, we are investing in data centers and we continue to expand that. We do so for 2 reasons.
One is not only to support our expanded customer, requirement but also by way of showing and demonstrating our commitment to, to our different theaters. So that's the reason for data centers that were brought on in the last couple of years and in Japan as well as in Europe. And the significantly expanded capabilities in North America. We're going to continue to invest there. The other big operation, another cost is global support.
And we have consciously also pushed out, global support into our theatres so that we have people not only in the same time zone, but in, you know, the same language capabilities and so on. But now these are bit of step functions And so, there's going to be, we anticipate higher yield over time, but it's important to make sure that we demonstrate our commitment and support to those customers. And the last component is professional services, the professional services, the capabilities tend to move in line with the underlying revenue. The other margin going down to, and this is where sales marketing expense would be down to the adjusted EBIT, if you will. And again, we've commented there how we are continuing to to accelerate our investment in sales and marketing just because we feel it's so important to gain on a global basis, have has capabilities, to work with our expanding mix of customers.
So, I think you'll see over, over a period of time that, those those margins are are relatively in line but what you will still see is that, you know, from a court to court basis, there there is some, there is some variability. Hope that helps.
Yes, that helps. So when you expect to get back to normal margins in 2022, If we assume that that's a 30 percent EBITDA margin, what would your gross margin level be at that time? Are you expecting it back at the mid-seventy percent range or stay in the kind of location?
Well, of course, I do not mean to be arrogant in whatsoever, but I think that 30% margin is is, is quite exceptional and they're probably not normal. I mean, what we're talking about is moving to an EBITDA range of 20% to 23%, which is still from a peer perspective, very, very strong. And yes, you'll see you know, over that 3 year cycle, some, you know, some variability on on that just again primarily as a con, as an artifact, of the, subscription, term term license, revenue. But, you know, when you look at over the 3 year cycle, it's still, you know, continue to be very strong performance. The, the point I was trying to make earlier on with regards to leverage is that you know, I think it's probably a reasonable assumption over time that our growth rate in revenue, certainly, in, SaaS revenue, will probably be at a at a higher rate than, you know, for instance, G And A.
And so, you know, you'll see that, you know, over time that that leverage manifests itself and our operating results. We, however, you know, we, we, we, we, and I would say our investor community feels very important to continue our sustained focus on sales and marketing. So That is where there's cash or part of a P and L metric perspective. We're, we're investing heavily.
Okay, thanks. And just my last question, just going back to the Prana acquisition, In terms of need, I know you mentioned that you need to support growing, customer deployment But, I mean, how much of this was driven by a need for local presence? Because you only have one customer in India. And are you getting a margin pickup on services through kind of an offshoring effect by by adding the Prana team versus versus organically supporting, services through through Canada.
Yeah. So the first thing, you know, the, you know, having worked with, with this organization
for
about 15 years, I can tell you that, you know, their focus of support and services has not been in India.
You
know, they they they've established a team in India and a field center in India. But they have supported our customers globally, including, in Europe and Asia Pacific. So March 3, I would say it's, you know, given their location and time zone, you know, we'll be very helpful in in supporting our our business as we grow Europe and Asia. That's predominantly where we're focused.
Okay. Thanks for taking my questions.
Next question comes from Robert Young with Canaccord Genuity. Please go ahead.
Hi. Good morning. Is that work, starting on the new building in the background there?
Yeah, pretty good. We're, we're trying to get them to stop.
I thought the building wasn't going to be built for a while yet. So I wanted to ask you a couple of questions on the backlog. Maybe continuing some of Paul's question and maybe asking it a different way. The
growth in
the backlog in Q4, you added a lot to backlog. You only announced 2 new wins. You had 3, renewals. And so I guess the natural question there is, I mean, given that you said 2 thirds of the growth is driven by new logos, but it appears in Q4 that a lot of that growth was driven by the renewals versus new wins. Is that correct or were there wins that just weren't announced and we wouldn't have known about?
Well, there there are a number of of wins that were not announced and and you know, we, you know, we work with our customers, and and and a number of businesses. We have their support to announce. Quite frankly, what will happen is that generally it will take about 3 months. So an announcement that, we may say in December, it it very well may have been with regards to a Q3 sale. You know, and I would say in the majority of new Nate Wins, we're, currently not, making an announcement, but that will vary.
You know, quarter to quarter. The, with regards to the term, you know, some of our terms are are 3 years summer 5 years. And so from a contract, this is minimum contract backlog, all things being equal, a 5 year deal is going to be significantly more than a 3 years. So the backlog reflects both the volume of business activity and the term. And you know, it is it is a pattern of of not only the new wins, but then, you know, the renewals and the expansions they're in right from day 1, it's being a land and expand type of model.
So, you know, what we're trying to do is provide the best view in terms of of that, and that expansion of revenue between the two areas.
Okay. Second question for me would be about the funnel. John, you said that you'd see the opportunity to sustainable growth in the SaaS business. You've clearly added lots of backlog, like I said. And so when you look at the funnel, Is the funnel do you see large deals in the funnel that will support wins in the future?
And I think you said that you saw a lot of it, growth in Asia and, Europe. And so when you look at the top of the funnel, would you say that it's growing faster than the middle of the funnel?
Yes. So as it relates to to the activity, you know, it's not just size and and location. You know, I look at the quality as well and, and the actual activity and velocity, quite frankly. So, you know, we have been investing heavily in sales over the last 24 months as mentioned and and and more than doubled the sales engine since January of last year. And we're continuing to push hard on that, accelerate our investments, if you will, in that function.
And it's a reflection of the activity we're seeing, you know, in the in the pipeline. What I can tell you is, you know, certainly life sciences continues to be strong. CPG continues to be strong. I see, I don't see any, challenges as it as it relates to concentration, whether it's concentration in market verticals or concentrations in geography. I would tell you that we've seen an acceleration in in, quality and and health of of pipeline in Europe, and that's a reflection of our of our investments there.
You know, and our successes there, you've seen some of the names, you've seen some of the names that we've recently post. We can't post every customer name. That's for sure. As much as we would love to. But we are definitely seeing activity in the pipeline and health in the pipeline that would, that would drive our continued investments in both sales and marketing.
Okay. And then just on that, the range that Richard provided 27% to 29% is a little bit higher. Is that an acceleration in sales headcount or marketing spend? Or is that a function of the top line just a little lower growth because of the gap on the subterm, in 2020.
Yes. It's it's it's it's a combination of both. So it is it is increasing, but, because it is a percentage of total revenue and and you know, with the, the lower level of, subscription term license, it does have a bit of an amplification impact, but, It is also very much real dollar significant investment initiatives as you will,
as your model will show.
Any regions to call out where that investment would fall? And then do the ranges include prana? And then I'll just pass the line.
Well, prana is, primarily because it is, it is, professional support people as well. Sustained support. Those costs are predominantly in the cost of revenue line. So they do not and they're not characterized in sales and marketing. So the sales and marketing is the continued expansion of of the teams globally.
We significantly increased the European team. Starting 2 years ago, that has continued to grow. Asia, in new areas and team has expanded as well as then just the core North American team. So It is a, it is a global expansion of the, of the of the personnel. And it's not only in quota carrying individuals, if you will, But because of the nature of the team sale, the enterprise sale and the continuing to sort of 18 months sales cycle, is really the sales community.
So it is the industry professionals. It's the technical, professionals that work with them. And then, significant expansion in our marketing capabilities as well. So those are the, those are the increased capabilities that we've invested in.
Okay. And then Pron is in the gross margin guide you gave then pass the line?
Yes. It is both in the revenue range as well as in the
Next question comes from Susan Sukumar with 8 Capital.
Hey guys, good morning and thanks for squeezing me in. You guys you guys talked about seeing an acceleration in pipeline in Europe. Can you touch on the level of maturity involvement you're seeing with partners in both markets overall? Are these relationships and their contribution progressing as planned better or do you see an opportunity to accelerate further?
Yeah, certainly, Europe as a percentage of activity and opportunity for us, reflective of our investments there and growing team. We put a data center, in Amsterdam to to host, to host our European customers quite frankly, we're really pleased with the growth and the expansion of the pipeline and the health of the pipeline. In that region. We don't generally comment on, overall size as a percentage, but I will say, you know, Europe, is an area we see a continued contribution in our growth for 2020 and beyond.
Okay, great. And you guys also touched on seeing a focus on outpacing competition on innovation. What are you seeing broadly from industry and competitive response to your recent product release? And what's been the partner contribution to innovation to date?
Yes. So we continue to believe that, there really isn't anyone competing with us on concurrent planning. This, you know, what I describe as the technique of solving supply chain problems more so than the technology. This notion of, end to end inextricably connected concurrent planning, is the technique that that, you know, I would say the market is realizing, is superior to the legacy of approach of, you know, cascaded planning. And, and so there was, you know, we're certainly seeing that in our growth.
We're seeing that in the pipeline and the activity and the maturity of, of prospects coming to see us about concurrent planning. We continue to see, you know, SAP is predominant incumbent. Most of our customers, the vast majority of our customers and prospects are on a SAP platform. And again, we don't compete with SAP on their quote unquote platform or or, or ERP system, but certainly we work in lockstep with it. And so we continue to outpace, I believe, their efforts.
And, as it relates to how we work with partners, what we, we announced last year, our investments in Rapid Response as a platform. We announced that our, you know, record breaking, connections conference you know, the Rapid Response platform. We have, what I would call some privileged, privileged alliance partners that are very close to us working, with us in, in a beta program with that platform. And basically building building intellectual property on top of rapid response. We're also seeing customers in fact engage with us.
Very sophisticated customers engage in extending rapid response using the platform as well. So it's early days, in terms of, predicting the monetization of, of, of that platform, but we're really pleased to see the uptake and interest from both partners and customers, frankly, we're seeing it from both sides.
Great. Thank you for taking my questions guys.
Thank you.
We have a question from Nick Agostino with Laurentian Bank Securities.
Yes, good morning. Thanks for taking my questions. I guess 2 things. First, just going back to product innovation, think late last year, you guys introduced the self healing supply chain or at least brought it to the market and you spoke about the initial customer feedback and reaction. I just wonder if you can get an update there as far as what the take up is on those on that module and what the interest level is looking like?
Yeah, we're, we're, we're very excited obviously with our, investments in machine learning and and what we call automated intelligence, that team has been the fastest growing team, quite frankly, in our R and D, R and D facility. And The notion of self healing, is very well, received by senior level practitioners. They recognize supply chains as being a machine, a machine that is designed by humans and and, and yet the notion of self healing is to continuously monitor that machine that machine's behavior in the real world. And so self healing, you know, the way we describe it, you know, is having that supply chain, adjust, and self tune based on the conditions of the road. Think of it that way.
We've we've expanded our capabilities, you know, this in this calendar year and, you know, so far the beta programs are being extremely well received. It's very, very powerful. You know, the self healing technology runs, you know, continuously in the background 20 fourseven. It's continuously monitoring as demonstrated against as designed and, and predicting adjustments based on that. So, we're going to continue to invest heavily obviously in that in that function, but that's not the only area of innovation.
Rapid response as a platform, as I described, is, is really key, to to our long term growth strategy. And our entry into new markets, you know, partners being able to build their own intellectual property similar to what force.com did for Salesforce, quite frankly, that's the way I look at it. And so, you know, we're we're pretty excited, there. We're anticipating another, you know, another connections event with some significant, innovations to, to announce. So, yeah, we're pretty excited about what we're doing today and what's in the pipeline for tomorrow.
Okay. And then second question, just maybe going back to the Prana acquisition and the timing on it. I believe a couple of quarters ago, think you had about 80 job openings that you guys were highlighting. When I look at your website now, I see about at least 40 on the site right now. So I'm just wondering, is this a case of you guys maybe adding positions or bodies and specifically within Europe and Asia, maybe is going a little bit slower than what you were hoping for.
And so the question really is, did you guys go out from a buy versus build, do you guys go out and seek Prana as an acquisition or did they maybe approach you? So just trying to understand how that the whole deal came about.
Yes. So again, you know, having known Prana and their founder for many, many years, you know, and and and I described this earlier on the call, the timing was really good for both parties. You know, our our our growth trajectories, and need for talent, frankly, was, was a key element or a motivator for the acquisition. And I can't stress this enough when we were, you know, when we talk about investing in the business. You know, even overall as a as a company, you know, we're we're expecting to see, you know, nearing 40% growth in headcount year over year.
I mean, this is across, you know, broadly across the business. And that that is the reflection of our confidence in what is happening in the pipeline, what is happening with activity, and and just making sure that we're prepared for success. We certainly want to be one of those anecdotes where success is upon us and we're crushed by it. I, you know, so we're, we're investing, across the board to make that we're well prepared. And again, the timing was just right for us, especially as it relates to growth in those two regions and their location and their skill, the cultural fit, it was just an obvious thing to do.
Okay. Can we assume that you may consider similar prana transactions in the future?
As I mentioned on M And A, and growth our growth strategy is not to acquire revenue. It's not how we think. We think about organic growth. We think about filling technical white space that is accretive to our markets, accretive to the customer base we have, and, and certainly accretive prospects. So that's the way I would, I would, characterize our M and A strategy.
We have certainly been active in looking and evaluating things But again, I will say we're we're we do so with extreme rigor, extreme rigor. And, and so I that's the way I would categorize it. That's the color commentary is is really things that are technically accretive we will certainly continue to look at.
Okay, okay, great. Thank you.
At this time, I will turn the call over to Mr. Wadsworth for closing remarks.
Thank you everyone for participating on today's call. We appreciate your questions as always and your ongoing interest in and support of Kinaxis. We'll speak to you again when we report our Q1 results. Bye for now.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.