Good morning, ladies and gentlemen. Welcome to the Kinaxis Inc. fiscal 2018 fourth quarter 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, Friday, March 1st, 2019. I will now turn the call over to Rick Wadsworth, Vice President of Investor Relations at Kinaxis Inc. Please go ahead, Mr. Wadsworth.
Thanks, operator. Good morning and welcome to the Kinaxis earnings call. Today, we will be discussing our fourth quarter and full year results that we issued after the market closed last night. With me on the call are John Sicard, our President and Chief 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 is based on information as of today, March 1st, 2019, 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 on our SEDAR filings. During this call, we will discuss IFRS and non-IFRS financial measures.
The reconciliation between the two is available in our earnings press release and in our MD&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 investor relations section of our website. Neither this call nor the webcast archive may be re-recorded or otherwise reproduced or distributed without written permission from Kinaxis. To begin our call, John will discuss the highlights of our quarter and year, as well as recent business developments, followed by Richard, who will review our financial results. Finally, John will make some closing statements before opening up the line for questions. I'll now turn the call over to John.
Thank you, Rick. Good morning, and thank you for joining us today. In 2018, we grew subscription revenue by 21% to $122 million and delivered Adjusted EBITDA of 26% of revenue, all prior to adoption of the new accounting standards. Reflecting the new standards, subscription services revenue was $107.9 million and Adjusted EBITDA was 28% of revenue, both at the upper end of the guidance we provided last quarter. As Richard will discuss, our total revenue for the year didn't fully meet our expectations due to fourth quarter professional services revenue falling below our projections. Total revenue for the year was $155 million prior to adoption of the new accounting standards, and $150.7 million reflecting the new standards. Overall, for 2018, I'm very pleased with our continued delivery of high growth and strong profitability that Kinaxis has become known for.
It's a reflection of the sustained strength in our business and the significant value we continue to deliver to our customers and the markets we serve. I am also happy to share that we successfully closed each of the delayed deals that we referenced on our last quarterly results call. While timing of customer wins can fluctuate for various reasons, they do not impact the long-term outlook for Kinaxis in any way. The management team and I will continue to focus on doing what's right for the long-term success of the business, as our investors have come to appreciate. Throughout the year, we executed on a number of strategic investments, including the expansion of our global sales team and key product innovations. These investments helped drive our strong financial performance in the fourth quarter and the year and will position Kinaxis for accelerated growth in 2019.
Our investments in Europe continue to yield significant business, most recently with Novartis, Unilever, and Dyson. For the full year, approximately 22% of our revenue came from Europe, compared to 13% last year. These important wins also highlight our growing strength in consumer packaged goods and the ongoing strength in our largest market, life sciences and pharmaceuticals. Our partner network continues to expand, as demonstrated by the recent announcement of a strategic partner with EY, where our initial focus will be joint activities in Europe and North America. Product innovation is in our DNA and remains a key enabler to the success at Kinaxis. In 2018, we added many notable features to great public acclaim.
We recently announced new data visualizations and analysis capabilities, including the formal launch of Live Lens, our mobile-first executive-level view into the supply chain health, dynamic supply chain network visualizations, new tools to personalize reporting so users are always looking at the most relevant information for their role. During the fourth quarter, our product was recognized by Nucleus Research, who ranked Kinaxis highest for usability out of 13 vendors in their Control Tower Technology Value Matrix. Similarly, Ventana Research recognized our unique Self-Healing Supply Chain capabilities with a Digital Innovation Award in the operations and supply chain category. We expect to accelerate our investments in product innovation even further in 2019.
Throughout the year, we continue to scale our global workforce and strengthen the management team, most recently adding Anne Robinson as Chief Strategy Officer. She has a world-class pedigree in supply chain, including spending the last seven years at Verizon as an executive director, Global Supply Chain Strategy, Analytics and Systems. She will be instrumental in helping to shape and deliver on our strategy towards accelerated innovation and growth. With that, I'll turn the call over to Richard for an overview of the financials for the quarter and the year.
Thank you, John, and good morning. As a reminder, all figures reported on today's call are in USD under IFRS. Kinaxis adopted IFRS 15 and 16 are what I will refer to as the new standards effective January 1, 2018. While we have not restated 2017 financial results to enable comparison with Q4 and fiscal 2017 results, we have presented current period financial information on a basis reflecting both before and after adoption of the new standards. Prior to the new standards, total revenue in the fourth quarter increased 15% to $39.5 million. This total is driven predominantly by subscription revenue, which increased 18% to $31.8 million due to contracts secured with new customers, as well as the expansion of existing customer subscriptions.
After giving effect to the new standards, total revenue in Q4 2018 was $38.3 million, and total subscription revenue for the period was $30.6 million, of which $28.2 million related to subscription services and $2.4 million related to subscription term licenses from on-premise or customer-hosted arrangements, which by their nature will vary quarter-over-quarter. Professional services revenue also varies quarterly, reflecting a number of factors, including the size, timing, and scheduling of customer engagement, as well as the level of partner-led engagement. Given the timing of some of our new customer wins in Q4 and the higher participation of partners in delivering engagement services, professional services revenue for the fourth quarter was lower than expected. With this modest PS growth of 3% to $7.4 million for the revenue for the quarter under both standards was just below our expectations.
The level of sales activity in the quarter fully met our expectations. In particular, we are very pleased with the amount of new subscription bookings closed in Q4 from both securing new customers and landing expansions from existing customers. As a number of these multi-year subscription deals closed late in the quarter, their influence on Q4 revenue was limited. However, the value of these commitments is disclosed in our December 2018 backlog and is reflected in our guidance for fiscal 2019. Prior to the effect of the new standards, gross profit grew 9% to $27 million. This represents 68% of total revenue, compared to 72% in Q4 2017. The change in gross profit margin reflects investments in additional headcount with related compensation cost and higher depreciation cost associated with the expansion of data center capability.
In addition to expanding existing data centers, we also established new centers in Japan in 2018. We will continue to invest in our global infrastructure to support new and ongoing customer engagements. Under the new standards, gross profit for the fourth quarter was $25.9 million or 68% of revenue. Prior to the effect of the new standards, profit for the quarter was $3 million or $0.11 per diluted share, compared to $5.5 million or $0.21 per diluted share in Q4 2017. The change reflects an increase in operating expenses resulting from our expanding European and Asian operations, increased sales compensation, expansion of the product innovation team, together with other planned investments. Under the new standards, profit in the fourth quarter was $2.9 million or $0.11 per diluted share.
Prior to the effect of the new standards, Adjusted EBITDA for the fourth quarter was $8.7 million or 22% of revenue, compared to $11.2 million or 32% of revenue in the same quarter 2017. As previously noted, this change reflects an increase in operating expenses net of increases in revenue and gross profit. Under the new standards, Adjusted EBITDA for the fourth quarter was $9 million or 23% of revenue. Full year 2018 results included total revenue of $155 million prior to the new standards and $150.7 million after. Subscription revenue of $122 million prior to the new standards and $107.9 million thereafter. Subscription term licenses revenue of $9.9 million, or a total subscription revenue, together with the subscription services, of $117.8 million after applying the new standards. Adjusted EBITDA margin of 26% prior to applying the new standards and 28% after application.
The nature of our long-term subscription contracts provides us with a high level of visibility into future revenue. While the vast majority of our subscription arrangements are cloud or SaaS-based, where Kinaxis hosts the solution, we also support a limited number of customers through on-premise or hybrid arrangements where the customer hosts or has the opportunity to host RapidResponse in their environment for the term of the subscription arrangement. Under these customer premise arrangements, rather than recognizing the subscription revenue ratably over the multiple-year subscription term, the subscription revenue is split into two elements based on the economic value. The majority of this economic allocation being to subscription term licenses, which represents the right to use RapidResponse for the term of the subscription. This is fully recognized upon the commencement of the term. The remainder of the subscription fee is then allocated to maintenance and support provided over the subscription term.
This maintenance and support revenue is recognized ratably over the underlying subscription term. For fiscal 2018, we reported subscription services revenue of $107.9 million, which consisted of $97.2 million in SaaS subscription revenue and $10.7 million of subscription term license maintenance and support. To provide enhanced insight, we have begun separately disclosing these two recurring revenue elements. Currently, we separate the small amount of maintenance support related to our legacy perpetual license business, which contributes less than 1% of our revenue. Starting with 2019 reporting, we plan to combine this maintenance and support revenue stream with the subscription on-premise maintenance support stream into one single line item. To provide enhanced insight, we have begun to separately disclose the minimum contracted revenue backlog of these various revenue elements and will be providing 2019 guidance on this basis.
As detailed in Note 14 to our financials, as of December 31st, 2018, total minimum backlog was $237.5 million, of which the vast majority, or $222.3 million, related to SaaS subscriptions. The total $237.5 million of backlog will be recognized in the following periods. $109.9 million will be recognized in fiscal 2019, of which $100.4 million relates to this year's SaaS business. $65.5 million will be recognized in fiscal 2020, of which $62.1 million relates to the SaaS business, and the remaining $62.1 million, of which $59.8 million relates to SaaS business, will be recognized in fiscal 2021 and thereafter. Following the calculation we have used in previous quarters of 2018 for the blended subscription services, we booked $66.5 million of multi-period business in Q4 compared to $26.2 million in the third quarter. Virtually all these bookings were SaaS or cloud, with that amount being $65.6 million.
In summary, we believe our expanded disclosures will help you better understand the strength and growth of our core SaaS subscription business, as well as the dynamics of other aspects of our business. Last year was an IFRS transition year, given our adoption of both IFRS 15 and 16 on January 1st. To support that transition, we provided guidance and supplemental reporting on both a pre- and post-IFRS basis. IFRS only permits this expanded disclosure during the first transition year. Consequently, effective 2019, our guidance and reporting will be only on a post-basis reflecting the adoption of IFRS 15 and 16. We are pleased to provide the following guidance for 2019 on that basis and reflecting our expanded revenue disclosure. Note the following. Total revenue will be in the range of $183 million-$188 million.
We anticipate that software SaaS revenue will grow in the range of 22%-24% over the $97.2 million base for 2018. We expect subscription term license revenue, which is that right-to-use portion of the long-term subscription term license revenue stream, will be between $20 million and $22 million for the full year, approximately one-third of this amount being recognized in Q1. We further expect approximately half of this amount will be recognized in Q4, with the remainder split between Q2 and Q3. This significant increase over 2018 reflects the timing, number, and term of these underlying subscription arrangements. We expect that maintenance and support revenue in total, combining the streams from both the subscription term licenses and legacy perpetual licenses, will be relatively in line with the $11.8 million total in 2018.
We expect the full-year gross margin will remain in the 70% range, again, with some variability depending upon the timing of the subscription term license. We expect full-year Adjusted EBITDA to be in the range of 23%-25% of revenue, which reflects accelerated growth of our engineering team to provide further product innovation and continued expansion of our global sales and marketing and other support organizations. Please note that as subscription term license is fully recognized in the quarter in which the customer renews or commences a new arrangement, quarterly gross profit and Adjusted EBITDA will vary correspondingly.
With respect to operating expense line items, we expect that sales and marketing expense will be between 23% and 25% of revenue, research and development expense will be in the range of 18%-20% of revenue, and G&A will be between 13% and 15% of revenue. Overall, we are very pleased to provide this guidance for fiscal 2019, reflecting accelerated revenue growth, accelerated investments in the business, and continued strong profitability. Thank you for your continued support of Kinaxis. With that, I will turn the call back over to John.
Given the strength of our backlog and pipeline, we are very confident in achieving accelerated revenue growth this year. We're also in the enviable position of making some very important investments for our future without compromising strong profitability and cash flow. Europe and Asia Pacific continue to show great potential for us, we will continue to invest in these regions to drive new business. In addition, we will continue to make significant investments in our product organization in order to deliver the platform capabilities necessary to succeed in penetrating new market verticals. Our sales funnel continues to grow in size, and more importantly, has maintained a very healthy distribution across each of the market verticals we serve, and across each geography in which we focus.
With our growing partner alliances and strengthened management team, we are well-prepared to support the accelerated growth we expect to realize in 2019. On behalf of Kinaxis, I would like to thank you for your support, and as always, for taking the time to join us on the call. With that, I'll turn the line over to the operator for Q&A.
If you would like to ask a question at this time, please press star, then 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Richard C. with National Bank Financial. Your line is open.
Thank you. With respect to the full-year guidance, I was wondering if there's a way of providing us a bit of color in terms of how that's going to scale through the year. Is it sort of back-half loaded? Just to kind of get directionally where that's going here.
The different elements, Richard, subscription, SaaS subscription in particular, we fully anticipate. Just as our past quarterly trends have continued to compound, we'll see that compounding. We anticipate that compounding carrying on. With regards to the subscription term license, that's the $20 million-$22 million, we anticipate about a third of it coming in the first quarter and 50% in Q4.
Okay, that's helpful. On the term licenses, I was going through the MD&A, and what I noted was that some of your existing customers are taking on term licenses, and I'm kind of wondering if you can provide some color, like is it a trend? Why is that happening? Just a bit of color would be appreciated.
Sure. By the way, these are just for, I think you understand, and just for the other listeners. For instance, if we had a three-year arrangement, the majority of that three-year revenue is going to be booked on day one of the subscription term. If we signed it or if the renewal was up on January 1st, in Q1, you'd have all that revenue, and then the residual would be taken over the next three years. It really is a function of the timing. The vast majority, as we've noted, and if you actually. If you can run some of the math, you'll see it's the 80% range of our subscription, long-term subscription arrangements are SaaS or the cloud-based. We go back to this model in 2005, and back in 2005, it was more common for companies back then to want to host.
Of late, it's a rarity. We don't anticipate that as really an area that's going to be growing anywhere close to what we have with regards to the SaaS side of things. We're very pleased, and a lot of this, our long-term customers that are renewing their customer-hosted arrangements, and it's really a function of the cycle in that, if it's a three-year or four-year period, what'll come up. This year, it's a higher amount, and going forward, we'll provide annual guidance as well as to the timing and our expectations of that revenue.
Okay, just one last one for me. With respect to 2018, you clearly made a bunch of investments on the channel side, sort of building out the sales org. Obviously, those things take some time to scale. Would you say from a sales channel perspective, you're kind of fully ramped now, or there's still some capacity to sort of get those investments fully up to scale?
Yeah, I would say we continue to invest, particularly in Asia and Europe, to meet the demand. As I mentioned, the pipeline itself continues to grow. It's a function, in fact, I look at it as a function of the investments we made in 2018, where we substantially grew the sales engine. Yes, I look at it now as quite a mature engine with a very mature and robust and large pipeline in front of it. Again, as we see potential, whether it's potential in the major markets we serve, I mentioned life sciences now, again, our largest, but it could be in other market verticals. We're going to continue to hire and ramp to make sure that we take advantage of the potential.
That's great. Thank you.
Your next question comes from Robert Young with Canaccord Genuity. Your line is open.
Hi, good morning. I was hoping you could give me a little more context into how you set the guidance. When I look at the SaaS guidance of 22%-24%, just on the math from the '97 report, that would give a range of $118.5-$120. The backlog for SaaS that you're reporting as of December 31st is $100.5, that's a significant component. When you look at the backlog today, could you potentially share the coverage of that guidance that you have now and maybe just revisit how you set the guidance?
Sure. Thank you, Rob, for that question. As we've noted in the past, one of the strengths is this forward visibility and the consistency. What we have talked about, and now you are seeing it firsthand, is that when we look to set the annual guidance, we take a look at what is the minimum committed, minimum contracted amount, in our backlog. We tend to base that guidance on about an 80% level. As you noted, what we currently have, the $100.5 million, does represent actually just over 80% of that extrapolation that you presented. With our view, that remaining 20% to meet that level of expectation for the full year will be derived from renewals.
For instance, if we had a customer that was up for renewal on July 1st, there's only six months of contracted revenue and backlog as of this time. It'd be renewals, it would be new name wins, and it will also be expansion from existing customers. That has been our trend for the last while, that's the math behind the equation.
Okay. I got a few questions.
Sure
the term license, the $20 million-$22 million that you're expecting. Could you break out how much of that would be new customers and how much of that is renewals?
It is predominantly related to really existing customers and renewals, some of which, as I noted earlier, go back to 2005 or even pre-2005. The market from both Kinaxis' focus and quite frankly from our customers' perspective, is very much cloud-orientated. They understand the value of that. They understand how we can continually monitor the environment, how we can scale it for them rather than them investing. The vast majority of current arrangements cumulatively are, as you can see from a revenue perspective, are SaaS. It's not really anticipated that we'd have those types of arrangements, the customer-hosted on-premise. It's not something that we'd actually would forecast at this juncture. Should that change, then we would reflect it in a future quarter guidance.
Okay, that's consistent with the way you do the guidance for the SaaS business. You wouldn't include a prospect customer that's in the pipeline until they're signed in that guidance for the term license component, correct?
Correct.
Okay. It'd be helpful to understand where you think the professional services business will go over 2019. I think we could get to it by math just by subtracting the pieces of the guidance, but it's been flat for the last couple of years. Do you expect it to grow? Do you see growth over the next couple of years, or is that a line of business that we should expect to stay flat or maybe decline a little bit as you move that over into the channel?
Yes, absolutely. It was relatively flat last year, and that, as we noted, really reflects a couple of things. Predominantly, it's really related to the level of partners that are coming in, and the majority of our new name customer wins have been partner-influenced, and so it's natural for the partners, especially now given the very strong base of certified partners, to take up that activity. We are, though, with regards to 2019, we are anticipating growth, and our expectation is that's going to be in the mid-teens. It will be stronger this year based upon activity related to new business, but it's not going to be growing at the high growth rate of the SaaS side.
Okay, last question from me. You've announced a lot of deals, some of them with big companies. One, if you could talk about the size of average deal. Is that continuing to grow? If you could help us understand whether any of those announced deals would not be in the backlog that you reported. I think in the financial statements, it was as of December 31st, but if you could clarify if any of those announced deals were not in the backlog you've reported today, that would be helpful. I'll pass the line.
Yeah. Obviously, we're quite humbled with the recent announcements. We're thrilled at the pickup in Europe. As you know, Rob, part of our DNA is to land and expand, and there's really no difference with those large deals. We're anticipating, obviously, there's potential for future expansion in every case. In terms of actual numbers and average sizes and things like that, it's not something that we disclose. As you know, we'll have customers that pay us five digits and some customers pay us six digits a month. It varies depending on the vertical, varies depending on the size of the company, it varies depending on the scope of the deployment. We're obviously very thrilled with the pickup, particularly in Europe.
I think you said you closed the deals, all the deals were delayed, but were there any deals that would've fallen into Q1 that wouldn't be in the backlog that you reported today?
Absolutely. We continue to close business. What the statements reflect are our transactions commitments from customers that were closed prior to December 31st. Now it is not uncommon for just the nature of the business that deals will close late in the quarter, but deals do close throughout the quarter. That's about the color we can provide at this stage. Any activity that, as we move through the year, it would be appropriate as to update the guidance as we move through those transactions. What we have noted also in the case of Q4, that pattern did prevail, and so that's why there was relatively little revenue from some of these arrangements in Q4 because, again, these are SaaS arrangements, so they're ratable over their three, four, whatever year term.
Because of that was also what was below our expectation was the level of professional services activity related to that deployment, that will be coming this year.
Okay. Maybe I have to try one last time, some of the deals that you announced were in the beginning of 2019, you did add a lot of backlog in Q4, I'm just trying to avoid misunderstanding around where some of those deals might have fallen. Should we assume that those deals you announced, should we assume that they would've been closed in Q4? I'll pass the line.
Well, again, as John noted, we don't talk about customer-specific arrangements. We can tell you again that we were very pleased with the level of business activity. We have noted before that there was continued disruption in the supply chain, and last year in particular with market conditions, with trade and so on, that did, we believe, result in delays of some arrangements. We're pleased to see that the value of concurrent planning, the value of the Self-Healing Supply Chain, these companies came to the realization that that is the type of value they need to deal with this disruption. They closed, Rob, we will continue to close arrangements throughout the quarter. Again, as appropriate, we will update the guidance.
Just for further color, when we announce anything, especially the larger the company is, there's often a very significant delay in getting all of those words approved through comms. So the actual announcements we make don't necessarily reflect the actual close of that deal. It's sometimes weeks or months in between.
Okay. Thanks a lot-
Thank you, Rob.
for taking all my questions. Good luck in 2019.
Your next question comes from Thanos Moschopoulos with BMO Capital Markets. Your line is open.
Thanks. Just a couple of follow-ups on the term licenses. Might you be able to comment on whether the base of on-premise contracts coming up for renewal will be higher or lower in 2020 as compared to 2019?
We only provide guidance for 2019, Thanos, one of the earlier questions was, are we going to be closing any new customers on this basis? This juncture, that's not determined, this is obviously a higher level of just the way the cycles of those multi-year arrangements compound. Just the renewal is higher. In some cases, as we do with our SaaS customers, there is a lot of expand. Some of our guidance does reflect expansion of these customers, that gets included. We're not in a position right now to comment on 2020 or 2021. These arrangements, I will expand that they're generally not reflected in backlog as the subscription term component, again, is recognized at the very start of that arrangement.
Unless it was an arrangement that we signed on, renewed again on December 31st with a renewal in January 1, for instance, you wouldn't see the subscription term component in backlog. In other words, it's going to happen right away. By the way, you won't see the deferred revenue because of the way we have to accelerate that portion of revenue, there's no deferred revenue on the balance sheet. You will, though, as we have disclosed in the financial statements, you will see the recurring subscription term license related to those deals, that's the revenue that we said that we will anticipate being substantially in line with 2018.
Just to clarify, I wasn't looking for 2020 guidance per se, rather, an understanding of what the expiry timing looks like of the current contracts. Maybe to ask a different question, in terms of the current on-premise base, you mentioned some of them are expanding. Is the opposite also happening, where some of them are moving to cloud, or are you not seeing that trend?
We have. Absolutely. We have converted a number of customers. We had a number of customers, several years ago, move to the cloud. In some cases, whether it's because of their industry, or whether it's just because of their own significant investments in data centers, they prefer to remain as customer-hosted. In our case, I know, obviously, we've got this revenue element. Underlying this is the ongoing cash. If it's a three-year deal, they typically are paying us over those three years. We are engaged. We have that broader visibility with them. That's really our focus is, we want to be a win-win with the customer. Absolutely, we do, and we are open to looking at converting customers, as it makes sense for both parties, to the cloud.
Okay. On a different topic, can you update us on your thoughts regarding future operating leverage? Clearly, you're guarding for some margin compression this year due to higher investment. As a general principle, should we expect operating leverage over the next two, three years? Given the very large market opportunity and your competitive position, are operating leverage and margin expansion just going to take a back seat and be far less of a priority relative to positioning the business for strong revenue growth?
Yeah. Ever since we went public in 2014, our focus has been, and our message has been, one of growth. We do view ourselves as really a growth. We do view it with the long term. As you know, Thanos, arrangements often take 18 months or so to close, just because what we do is so unique in the market, and people want to work through that process with us. At the same point in time, this model, as we've seen in other quarters, has significant leverage potential. In fact, we have, just this past year, a 28% EBIT of performance with the growth that we had is, we believe, a very powerful investor view, but it's opportunity. It is very much one of long-term growth.
As John noted, we've been extremely pleased with the return on our investment in the sales and operations team expansion in Europe. In fact, if you take a look at the segmented information, you'll see a growth, even when 2017 is the pre-IFRS. You'll see growth in Europe and Asia. We are very excited about the innovations that our teams continue to develop, such as the Self-Healing Supply Chain. With now not only the addition of Andrew and Anne to the innovation and product team, but the expansion of our engineering base, we believe that now is the time to continue to drive that innovation. Yes, we're going to do an increase in those areas. We don't view it as a compression of the operating. Obviously, it manifests itself as less than the 28% or 30% EBIT of performance.
I think people do see the potential that we have, and quite frankly, having these long-term subscription agreements and where we are in terms of not only our backlog, but our view of the funnel, allows us to continue to make these investments with confidence, knowing that we will be driving out these long-term sustainable returns for the company.
Clearly, you've demonstrated that with the recent European wins. I guess I was just wondering more from a longer-term modeling perspective. Finally, one last one for me. If I look in the financials, it seems like your U.S. full-year revenue was flat year-over-year. I'd imagine that that's just an apples to oranges comparison due to the IFRS transition, or is there any other dynamic there?
Absolutely, it is. If you recall, we had to basically, as of January 1st, 2018, forward advance approximately $21 million of revenue. This is $21 million of revenue that will not be recognized in 2018 or in the future years. We had to, for those subscription term arrangements that had commenced, the renewal terms had commenced prior to January 1st, 2018. We had to basically put in the rear view mirror. I shared with you that a lot of this was related to longer-term customers who were predominantly U.S.-based. It really was focused on that segment of information. It's absolutely apples to oranges. We continue to grow in North America. We're not at a different growth rate than Europe. Europe, as you'll see, as being very strong, as well as Asia.
We anticipate continued growth based upon where we are with regards to deals in the funnel across all segments.
Great. Thanks. I'll pass the line.
Your next question comes from Paul Steep with Scotia Capital. Your line is open.
Good morning. John, could you maybe talk just a little bit about how we're thinking about selling back into the base and in terms of new module uptake from those existing clients? It's been a while since we've chatted about that. Thanks.
Absolutely, things like Live Lens and Self-Healing Supply Chain, those types of things, those types of investments, are geared precisely for that. Our customers are constantly looking for innovations and expansion of the platform. That's what's driving that particular investment. We don't comment on the exact penetration of new modules like that. I will say that, in both cases, we're seeing some success, and we're pleased with it. I mentioned in the earlier part of this call that we continue to make investments in the platform. What we're seeing, and I've made these comments in the past, that creating a platform-like strategy where we have partners engaged in potentially expanding RapidResponse and assisting us in expanding RapidResponse to serve new markets is also a very important investment for us.
You know us to be in six verticals, I have said in the past that we are in other verticals other than those six today. We haven't necessarily announced exactly where and how we're progressing, I would tell you that it's very likely you'll hear that we're entering new markets, obviously, those are very purposeful. Our investments in R&D will continue to be focused on new modules, as you've heard, obviously, we're thrilled in both cases on the Control Tower and Self-Healing Supply Chain to be recognized for those investments. You'll hear more and more this investment towards platform, just basically allowing our partners to assist in expanding new modules and expanding into new market verticals.
Great. Can you also maybe comment a little bit? Obviously, there's a big jump implied in the HR and the number of staff you're going to bring on in 2019. You gave us a good little description at the beginning and in the release about what functions they'd be in. How should we think about what geographies you're going to add that staffing to? Maybe the other twist to that is, has there been thought of doing a small tuck-under acquisition to actually help accelerate you achieving those headcount goals? Thanks, guys.
Great question, Paul. Thanks. Yes, we are investing across the line. The investment in support and sales in particular, though, is going to be predominantly weighted to Europe and Asia. We have strong teams in place already in North America, it's been in the last couple of years that we've really further strengthened those theaters. That would be a key focus there. Yes, there'll still be growth in North America, more so in those theaters. R&D, we have, as John noted, we view it as a platform. It is one product, currently one team, and that is based in Ottawa. We're going to be continuing to expand the R&D team in Ottawa. That's where that weighting will proceed. Part two of the question and-
Yeah, in terms of the acquisition strategy, obviously, we are an organic growth company. We're growth first. Every day we think about it, we think about how we accelerate that growth. As it relates to tuck-ins and things of that nature, we're always looking for things that are technically accretive. Could something out there bring us into a market vertical or provide for a solution that is white space for us? It's really important to be, what I call, SaaS-able, okay? There's a lot of technologies out there that, frankly, are not. Non-SaaS type products are poisonous for us. We're going to be razor-focused on making sure we don't inflict any pain by accident. We are looking at various-
Opportunities
yeah, opportunities. I wouldn't project anything in the imminent future here. Again, we're hyper-cautious about things like that and focused on organic growth. If something were to manifest itself that passes those gates, we'd certainly look at it.
Perfect. Thank you.
Your next question comes from Stephanie Price with CIBC. Your line is open.
Thanks.
On the back of the Unilever announcement, I was wondering if you could update us on the pipeline in the consumer goods industry and maybe what stage of adoption you're at right now.
Yeah. When I look at the pipeline right now, as I said, it continues to grow. What I'm really excited about is there's no signs of concentration. It is very well distributed across all six. Even looking at aerospace and defense, we're seeing some growth there that we hadn't seen in previous years. More importantly, we're seeing some great growth in the, I'll call the newer verticals of focus, right? The CPG space continues to be a great area of focus for us. Obviously, winning some great logos in that space is certainly driving what I might call trust by association. We're quite excited about it. We continue to see strength in life sciences and high tech electronics. Those two tend to be our largest, with life sciences, again, overtaking as the number 1 vertical for us.
The ones that are accelerating the fastest right now, when we look at acceleration in the pipeline, it tends to be CPG and automotive. Those are the two that we're seeing acceleration in terms of opportunities.
Great. Thanks. Hoping you could touch on the competitive environment that you're seeing, and if you're seeing any change to the cost to sign customers out there.
Yeah. We continue to focus on what I call a unique technique, a breakthrough technique in how we solve these problems. To be frank, we're not seeing a competitive threat as it relates to that technique. I guess that I would tell you that some of these marquee wins, these are enormous corporations that can buy whatever they'd like to buy. I look at it this way, if they could find a solution with their incumbent ERP system, they would. Part of the reason why we've been successful is they simply cannot. They have to find the solution elsewhere. At the same time, I'm not going to tell you that we are without competition. Competitors out there find all kinds of ways to cause delay and stall. I'd say that's one of the primary tactics that we see, okay?
If you can't win on product, you try to delay or poison the opportunity. We're used to that, obviously, and we're used to seeing those tactics. In terms of competitive threat, again, I'd say we're not experiencing it so much from, I'll call it the main ERPs.
Great. Thank you very much.
Next question comes from Gus Papageorgiou with Macquarie. Your line is open.
Hi. Thanks for taking the question. I'm just going to follow on with Stephanie's line of questioning. You announced Unilever in the quarter. By my estimation, you have probably the top two consumer packaged good companies in the world. In life sciences, you probably have two of the top five. How important is winning these key customers within a vertical? Once you announce Unilever, the call activity within consumer package vertical, does it increase or do other companies just not care? I guess the question is, how much of a catalyst is winning these big names and penetrating further into these verticals?
Well, it's absolutely a catalyst, obviously, for many reasons. One, it's a, I'll call it a statement in confidence that we are able to drive value in those verticals. Secondly, it's a statement of confidence that we're able to do it at scale. That's critical. This is not uncommon for us. I think we might have talked about this in the past, but how we enter new verticals, we find bellwether accounts. We find really world-leading corporations in a space, whether it was life sciences or whether it was in automotive, and we prove ourselves out, and then we push forward with that account into the vertical. Obviously, very critical to us. We've done exceptionally well in CPG. The names that you might know are a clear subset. Not everybody is allowing us to use their name, but it's a clear subset, and we're thrilled.
As I said, the CPG space continues to be one of two that are accelerating for us, and we're thrilled.
If you look forward, let's say two or three years, life sciences has surpassed technology. Do you think CPG and auto could rival those two other life sciences and technology? Do you think that life science and technology will always be your biggest verticals?
Well, yeah. Gus, currently, it really is almost back to back in the quarters as to life sciences and high tech. High tech was absolutely our initial focus many years ago because these were the companies that had to change their supply chains. We're now seeing that, as John noted, in not only CPG, consumer packaged goods, and automotive, but other areas. Absolutely, we do anticipate seeing those markets continue to take up a bigger share. Right now, high tech and life sciences are about 30% each. Mathematically, our expectation would be, yes, they will diminish, still grow in absolute, but as a relative mix, diminish with expansion in CPG, and it's got to add up to 100%, so CPG and automotive. Not only we're excited about that balance. As you know, we believe we do not have customer concentration.
We have this nice balance across the verticals, which we anticipate will grow, as well as in theaters. It's on purpose, if you will, how we're
really targeting to not only grow the business, but to grow it in a sustainable pattern.
Great. Thanks for taking my questions.
Your next question comes from Deepak Kochhar with GMP Securities. Your line is open.
Hi, guys. Good morning. Thanks for taking my questions. First one I got on sales. Then I'll come back to follow up on another question. John, I would've expected with increased partner influence sales that you'd be getting some operating leverage on your sales force. You continue to invest. Can you help us interpret that and maybe how you're building your sales team differently now that you got partners involved?
Absolutely. We continue to see anywhere from 12-18-month sales cycles. We're still going to invest in our sales function, whether it's to break open a new vertical or break open into a new geography. As last year, you saw us making pretty substantial investment in sales. We said it's heavily weighted towards Europe. Obviously, it's yielded for us. We're thrilled to see the uptake, great names, great business, it's definitely yielding. I would tell you, as I said earlier, we're growth first. When we see opportunities to grow, we're going to invest. As it relates to sales, we are going to continue to invest, perhaps not at the same rate as we did last year. That is reflective of partner influence. In 2018, the vast majority of net new name wins were partner influenced.
That remains today a core tenet, a core process for us. That does not mean, however, that our sales teams are not engaged with those partners. It's not a situation where partners are off necessarily without our assistance selling direct. They still need access to our talent, they still need access to the environments, and so on. It's very much a collaboration. Obviously, we get great leverage through that partner alliance. We're going to continue to invest in sales and marketing as the opportunities present themselves.
Okay. Just to follow up on that, are you able to characterize your wins with large customers as a mix of top-down versus bottom-up types of sales? Are you at the stage where now the majority of your new customer wins are sales to the CEO or CTO level and are being driven down through the organization, or are they still at a division level and have to be sold up into the management?
They have actually been predominantly, I'd say, top-down or middle up and down types of sales. Our solution becomes mission-critical for these corporations. We become part of their business fabric. This is one of the reasons why sales cycles tend to be in the 12-18 month timeframe. These are very, very serious and long-term decisions that these corporations are making. I would tell you, in fact, I simply cannot recall a sales cycle where either myself or Paul Carreiro wasn't in direct conversation with the Chief Supply Chain Officer or the CEO or the CIO of these corporations. They're quite significant investments on their part, not just financial investments. These are significant process investments for them. I would tell you the vast majority of these opportunities will have direct interaction with the C-suite.
Okay. Excellent. Thank you. That's very helpful. Last quick one. Richard, can you guys give an update on the number of customers you guys have at this stage, given you have year-end?
We're not disclosing that. It is over 100, but we're going to just keep it in that range right now, Deepak.
Okay.
We are growing the customer base, but.
It's been over 100 for the last couple of years. Can you say that it's meaningfully changed in the last couple of years, or is it kind of the same?
We're not going to comment further. As John noted, the reason why, we're not trying to be overly coy, it's just that we could sign a multimillion-dollar arrangement initially with a customer. We could sign something that's maybe sub 1 million. We believe right now, given the nature of our customer base, given the nature of the competitive landscape, we're focused more on the absolute revenue growth as opposed to that level of disclosure. At some point in time, we will provide that number. It's a growing base, and we're very pleased and continue to welcome marquee names across the globe and across the verticals.
Okay. Great. Well, thank you for taking my question.
Your next question comes from Paul Treiber with RBC Capital Markets. Your line is open.
Thanks very much for taking my questions. Just in light of 2019 guidance that you can't give under the old accounting, could you help provide maybe what the SaaS revenue growth was in 2018, just to help with comparability?
Well, the short answer is, Paul, we cannot. We cannot because of the IFRS. These are audited. These are our numbers. At a management level, we're very pleased with that sustained growth, but we can't publicly disclose a number. You will, as you've seen here, that when you look back, you'll see that 80% range, the vast majority of the subscription revenue when we revert back is SaaS or the cloud-based. We've indicated that as this juncture, our expectation of growth of 22%-24% per year. This is a part of our long-term sustained growth. We're not in a position, and why we purposely provided this level of additional insight is to help you and others model that compound base going forward.
Okay. That's fair. In terms of term license revenue, there's a number of questions, obviously, where you mentioned that 2019 is towards the high end of the range. How would you characterize 2018? Is that at the low end of the range, or is it more towards an average type of year?
Again, IFRS is a new construct, you have to decouple. I think you can gain some insight in that, as of January 1st, we had to, again, push back into the rear view just over $21 million of revenue, that is predominantly related to the equivalency of that subscription term license that would have occurred in years prior to January 1st. I think you understand that most of our arrangements sort of center around a three-year mark. As I had noted on the call, we do also expand on renewal in some cases. Unfortunately, it's going to be back and forth lumpy, but we're going to provide this guidance, not only for the full year, but as we have here on a quarterly basis.
Okay, one last one from me. Just to sort of eliminate all the noise around the accounting and IFRS, in the past, you've given sort of long-term growth aspirations, I think in between the 25% and maybe the 30% range. How do you see that, either if it's subscription or SaaS, how do you see those long-term growth aspirations?
I think we're still very comfortable with a mid-20% growth for the SaaS component. That's why we now, really on a laser beam basis, provided that information. I think that while professional services is a key part of the business, just given the support and uptake of partners, we're going to see that at a lower growth rate, and that's what we indicated, sort of in the mid-teens this year. The on-premise customer-hosted, if you will, maintenance support component, that is the ratable component of those longer-term subscription arrangements. I think that is going to be relatively stable. It really will be a function of our success on renewing those customers over the years ahead, as well as if there is a mutual agreement to subscribe with that customer on that basis.
I think what I'm saying is listeners should focus on the SaaS engine, and our goal is absolutely in the mid-20% range. Ultimately with partners to further accelerate it beyond. As John noted, it's a 12, 18-month sales cycle, so you have to sort of factor that out as we factor in those longer-term growth rates.
Thanks for taking my questions.
Your next question comes from Suthan Sukumar with Eight Capital. Your line is open. Suthan, your line is open.
Good morning, guys. Just a quick question from me, just kind of on your product, on the increased investments on the product side of the business. Can you kind of speak to where your current focus is for your mid to long-term product roadmap, and how that might change given these recent investments, and if that direction is being influenced by customers and partner input?
Yeah. Obviously, it wouldn't be appropriate for us to share product roadmap information in any great detail. I will tell you, as I said, we continue to invest in new capabilities that we're getting feedback from our own customer base as part of our expansion opportunity. Some of the things that we've announced, like Live Lens and what we call network visibility, supply chain network visibility and visualization, the Self-Healing Supply Chain, those are all things that we've announced, and they're sort of driven from practitioners who were driving our initiatives. As previously stated, this year and in past years, we've been very focused on the platform. Obviously, the more flexible RapidResponse is, the more likely we'll be successful in entering new markets and having our partners drive new capabilities on our behalf.
In terms of, I'd say, strategic direction, that's where we're going to see some investment.
Okay, great. Thank you for that color, guys. That's it for me.
Okay. We have a question from Chris Martino with Laurentian Bank Securities. Your line is open.
Thanks for taking my question. With the Genpact acquisition of Barkawi, I was just wondering, do you have any insight into how that integration is coming along? Is that translating into a potentially more significant channel for you than it was in the past? Are you seeing any interest from Barkawi's clients in the solution?
Yeah. Barkawi has been a partner of ours for many years. They're very mature. They're a great partner of ours, I've personally met with Genpact's CEO. I've been involved in, I'd say at a high level, the relationship building there. Genpact, I think as they highlighted in their own earnings call recently, has a real focus on supply chain. We're obviously thrilled to be working with Genpact, and the fact that they've seeded their practice with Barkawi, I think it's going to be beneficial.
Okay, thanks for the color.
We do not have any questions at this time. I will turn the call over to Mr. Wadsworth.
Thank you very much. Thank you, everyone, for participating on today's call. We truly appreciate your questions and your ongoing interest and support of Kinaxis. We look forward to speaking with you again when we report our Q1 2019 results. Bye for now.
This concludes today's conference call. You may now disconnect.