Good morning, ladies and gentlemen. Welcome to the Kinaxis Incorporated Fiscal 2018 Second Quarter Conference Call. At this time, all participants 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, August 3, 2018. I would now like to turn the call over to Rick Wadsworth, Vice President of Investor Relations at Kinaxis Incorporated.
Please go ahead, Mr. Wadsworth.
Thanks, operator. Good morning and welcome to the Kinaxis earnings call. Today, we'll be discussing our second quarter results that we issued after the market closed last night. With me on the call are John Scard, 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, August 3, 2018, and contains forward looking statements that involve risks and uncertainties.
Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward looking statements disclosure in the earnings press release as well as in Kinaxis' SEDAR filings. During this call, we will discuss IFRS and non IFRS financial measures. A reconciliation between the 2 is available in our earnings press of our website, kinaxis.com and on SEDAR. Participants are advised that the webcast is live and is also being recorded for playback per An archive of the webcast will be made available on the Investor Relations section of our website.
Neither this call nor the web test archive 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 and recent developments, followed by Richard, who will review our financials for the quarter. Finally, John will make some closing statements before opening up the line for questions. I'll now turn the call
Q2 represented another strong quarter and delivered EBITDA 27 percent of revenue prior to adoption of the new accounting standards that we walked through in detail on our last call. Giving effect to these new standards, our total subscription revenue was $29,100,000 and adjusted EBITDA was $11,200,000 or 29% of revenue. We reported record which reaffirms our decision to invest We see even greater opportunity ahead of us as we expanded the European team and continue to engage with perspective accounts across all market verticals, but particularly consumer packaged goods, automotive, and life sciences. Part of our strength in Europe is attributed to some very recent wins, including Volvo Cars In Access will assist Volvo in the transformation of its global supply chain to better enable volume forecasting, production planning, and other processes within its automotive solution footprint. Thanks to our success at Volvo, Toyota, Nissan, Ford and others, Automotive is shaping up to be one of our recent win in Europe was Ipsen, a global biopharmaceutical company, which has selected Kinaxis to manage the company's global supply chain in support of its corporate growth initiatives.
Thanks to leading companies like Ipsen Life Sciences has been our largest market so far this year. During Q2, we announced our relationship with Extreme Networks adding another marquee name to our established base in high-tech and electronics. We also revealed that BASF, another key European brand, has been successfully using Kinaxis is an important customer of ours for many reasons. Not least of which is that they demonstrate rapid responses, effectiveness for process manufacturing businesses. There is no greater testament to the proven transformative value of our unique concurrent planning technique, but its ability to serve leaders like these across such different industries.
All from the same cloud based platform. Naturally we are continuing to invest in that platform During the second quarter, we launched our self healing supply chain application, which applies advanced machine learning algorithms to detect key supply chain design flaws and automatically take corrective action before the impact performance. We will be adding more machine learning With that, I'll turn the call over to Richard for an overview
As a reminder, all figures reported on today's call are in U. S. Dollars under IFRS. Kinaxis adopted IFRS 1516 or what I'll refer to as the new standards effective January 1, 2018. We have not restated our prior year financial results.
To enable comparison with Q2 2017 results, the information for Q2 2018 has been presented on a basis, both before and after the adoption of the new standards. Prior to the new standards, total This total is driven predominantly by our strong base of subscription 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 Q2 twenty eighteen was $39,000,000, and total subscription revenue for the period including both subscription services and subscription term licenses was $29,100,000 Second quarter professional services revenue, which is not affected by the new standards, grew by 15% to $9,600,000. Professional services revenue will vary quarter to quarter due to a number of factors, including the size, timing, and scheduling of customer engagements, Gross profit grew 20 percent to $27,500,000. This represents 69% of revenue compared to 70% in Q2 2017. The slight change in gross profit margin reflects investments in additional headcount and higher depreciation costs associated with significant expansion of our global data center capacity.
This expansion includes new data centers in Europe and Japan supporting new and ongoing customer engagements. Under the new standards, gross profit for the 2nd quarter was $26,500,000 or 68 percent of revenue. Prior to the effect of the new standards, profit for the quarter was $4,400,000 or $0.17 per diluted share, compared to $5,600,000 The slightly lower profit reflects the increase in operating expenses made to invest and support our global expansion and ongoing product innovation at a level above the increases in revenue and gross profit. Under new standards, profit in the 2nd quarter was $4,300,000 or $0.16 per diluted share. Prior to the effect of new standards, adjusted EBITDA for the second quarter grew 12% to 10,700,000 or 27 percent of revenue which reflects the growth in revenue and gross profit in the period.
Under the new standards, adjusted EBITDA for the 2nd quarter was $11,200,000 or 29 percent of revenue. Demonstrating the ongoing strength of our business model, cash generated by activities was $9,300,000 for the 2nd quarter, up 23%. Our cash balances grew to $174,600,000 at June 30, 2018, compared to $158,400,000 at December 31, 2017. The nature of our long term contracts provides us with a high post standards. As of June 30, 2018, the total backlog of subscription services commitments was 100 and $198,700,000, up from $192,600,000 in the first quarter.
Of the current period amount, $50,300,000 will be recognized in the remaining 2 quarters of 2018, $79,700,000 will be recognized in fiscal 2019 and the remaining $68,800,000 in fiscal 2020 and thereafter. Our subscription bookings will vary each quarter based on a number of factors including the timing of a closing of new business, customer expansions and renewals as well as the length of the minimum subscription term of these commitments. I am pleased to report that this quarter we closed an additional $32,700,000 of subscription bookings. Our backlog together with a strong pipeline On a pre standards basis, we are reaffirming our guidance for continued strong fiscal 2018 subscription revenue growth, and slightly increasing our guidance regarding adjusted EBITDA performance. Will be in the range of $158,000,000 $163,000,000.
Subscription services revenue will grow between 23% 26% over fiscal 2017 levels. Sales and marketing expense will be between 24% 27% of revenue. Net research and development expense will be in the range of 17% to 19% of revenue and adjusted EBITDA for 2018 will be between 24% 27% of revenue. Giving effect to the new standards, we have increased our expectations for certain key $2,156,000,000, subscription revenue will be in the range of $109,000,000 to $111,000,000, Subscription term licenses will be between $8,000,000 $9,000,000. Sales and marketing expense will be between 22% 25% of revenue.
Net research and development expense will be in the range of 19% to 21% of revenue and adjusted EBITDA will be between 25 and 28% of revenue. With that, I will turn the call back over to John.
Thanks, Richard. I am very pleased with our results this quarter. We grew subscription revenue by 24%, delivered very strong profits and continue to generate significant cash. We are also on track to hit annual What drives my unwavering confidence, however, is that I see direct ahead of us with global leaders such as DASF Volvo, Qualcomm, Toyota, ICON, electronics, and so many other marquee customers enjoying the benefits of our unique planning technique, I believe the market shift towards concurrent planning is well underway. And this is and the health of our funnel and our ability to capitalize on it.
As you would have seen from our announcement yesterday, I'm pleased to welcome Kelly Thomas and Hamela Passman to our Board of Directors. Kelly joins the Kinaxis Board as a 30 year veteran in supply chain management. He has served as the Chief Product Officer of JDA Software and the Senior Vice President of Product Strategy at I2 Technologies prior tootz acquisition by JDA. He is currently CEO of World Locity, a research and advisory firm, specializing in supply chain management software. Pamela culminated a 15 year career at Microsoft Corporate Vice President And Deputy General Counsel.
She advised the board and led the company's regulatory compliance in over 100 countries addressing a range of privacy, security and other issues related to cloud Computing and its corporate philanthropic and citizenship work. Pamela is currently the vice chair of the Ethosphere Institute and President of the Center for responsible enterprise and trade, organizations that work with global companies to advance risk management internally and with their supply chains. Kelly and Pamela will both be critical in guiding Kinaxis as we continue to expand our geographic focus, vertical market focus, and product functionality, and as we scale the organization to the next level. And finally, I'd like to thank Ron Metricaria and Douglas Colbeth, who have recently retired from the Kinaxis Board after many years of excellent service On behalf of Kinaxis, I would like to thank you for your support 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 And A.
Our first question comes from the line of Richard Cee from National Bank Financial. Please go ahead.
Yes, thank you. I was wondering if you could give us
a bit of color in terms of how the partner channel is developing. And I guess, I'm obviously curious to know, how do you engage those partners when some of them actually also partner with your competitors?
Yes, it's a great question. So, as with previous quarters, the vast majority of our our new name business activity is being influenced by our existing customer base. We have I want to say doubled, if you will, the number of partner support team, if you will, since the beginning of this calendar year. And we're now seeing a pretty healthy pipeline of new partners that we expect to announce in the second half of this year. So it continues to be, extremely healthy for us.
Our largest, as you would know, all have both Kinaxis practices along with SAP practices and customers only have one spot to go to. They have one source to be looking at for concurrent planning. So they still This still comes Kinaxis.
Okay. And then as you look forward, is there some optimal mix of revenue that you think you want to be at or is it sort of just free flowing depending on how the business evolves?
Well, Richard, our focus continues to be the long term, predictable subscription revenue. And so our goal would be even on post IFRS adoption is to have upwards of 80% of that revenue long term target. From a subscription base. Now it is important and our customers do they appreciate the growing knowledge and capabilities of the partners, but some customers also want to work directly with us. And so it's important to continue to have a strong professional services organization.
So we will continue to work directly with customers as well as in tandem with partners. But I think we're comfortable in that 80% mark.
Okay. And just one last one for me. In terms of the sales and marketing organization, no doubt been some changes over the past year and it's obviously led to some great success here. Could you maybe share with us some examples of where changes were made and what's sort of really driving, let's say the accelerated pace of activity at Kinaxis?
Yes. I'd say overwhelmingly, the focus is it has been on Europe and Asia. And, you know, I mean, the team, the team that was formed in the first half of the year, is in full swing right now. And, I would tell you that the size and shape of the pipeline as it relates to Europe, has followed suit exactly as we would have expected with the growth of the sales team there. And so that's where I would see the I would tell you the largest shift has been.
It's not to say at all that other parts of the world, are slowing. It it literally is, the growth of the market in those market segments, that we're seeing the biggest change.
That's great. Thank you for the insight.
Your next question comes from the line of Thanos Moschopoulos from BMO Capital Markets. Please go ahead.
Good morning. John, can you speak to the maturity of the partner relationships and level of partner involvement in Europe Is there a lot more work you need to do to educate partners in the region with respect to how to best work with you and promote your solution or have many of them already gotten up the curve in that regard?
It's a great question, Thanos. In fact, you may have noted that professional services delivered quite strong revenues in this quarter and the vast amount, vast majority of that revenue came from outside of North America, with a heavy amount out of Europe. And part of that is, is us ramping up the partner ecosystem in that region. We have certainly signed partners in the region we announced MSE, not long ago and continue to work with Barkawi and others in that region. However, it's, I would say it is not as mature as as North America.
And so obviously, we continue our certification practice. We're seeing a pretty sharp increase in number of certified practitioners outside of Kinaxis, consultants outside of Kinaxis. We're just seeing a bit of a lagging, if you will, in Europe. And that is to be expected.
And in terms of the pipeline in Europe, you said that CPG automotive and life sciences are leading the way. Do those deals look very much like the types of deals you would see in North America, or are there any regional nuances you to call out with respect to the size and scope of contract or the type of customer needs that needs to be addressed or anything else?
No, not at all. In fact, they're quite I would say they're quite typical of the engagements that we see, both in Asia and and in North America. Very, very typical. The only, stark difference, if you will, is the, is the speed and size of the funnel of the pipeline in Europe over the last 6 months has been, has been tremendous.
Well, on the team.
Well, along with the team, as I said, it's It has followed suit with our investment with the sales engine in Europe. The pipeline has followed suit.
Great. And then finally, on the back of the BASF announcement and their success in using RapidResponse. Can you update us on how the pipeline is looking with respect process industries, is it still relatively early days in that front or is that becoming a meaningful part of the pipeline?
Yes. So as you know about Kinaxis, we were we're obviously very cautious about formally announcing, new, new verticals. And, our approach has always been the same for as long as I've been here anyway, we find a bellwether account. We prove ourselves, successful in that engagement before formally targeting it with their sales engine and formally announcing it. Rapid response today, as you know, or in 6 verticals, all with a single platform, no custom code.
Everyone leverages the same object code. So Do I believe that rapid response will fit process industries like BASF? Absolutely. Can I tell you that this is a broad area of focus for our sales engine and strong, element of our funnel? I would tell you it's emerging.
It's, I wouldn't be ready necessarily to declare it.
Fair enough. Thanks, John. I'll pass the line.
Your next question comes from the line of Paul Steep from Scotia Capital. Please go ahead.
Great morning. John, I mean, we talked already and touched on Europe. Could you talk a little bit about the thought as we start thinking already maybe about 2019? Paul and you and the sales team are thinking about maybe going back and maybe increasing overall module adoption in existing accounts in addition to a lot of the new name work you've already talked about that seems to be bearing fruit?
Yes, absolutely. Paul has established a, as the sales team has grown, he's established a team focused on new named accounts as well as a team focused on, expanding, if you will, our current accounts worldwide. Whereas in previous years, a sales rep would focus on both. So absolutely, as we scale the sales organization and as our customer base scales, Paul has seen it as an obvious move to have 2 teams focus on either side of the business. And we continue to see, our land and expand, model for sales as being extremely successful.
Our approaches and to, sell everything on day 1. As you know, we We currently monitor this measure very rigorously. The speed at which a brand new customer will double subscription. And again, we're not seeing a huge difference there. As a cohort, it still is in that 3 year timeframe where a new customer would end up seeing we would end up penetrating through and seeing a doubling effect on average of those accounts.
So I'd say it's still very healthy. I would tell you that the sales team now, is bifurcated across both of those elements of the business
Okay, great. And you sort of led towards where I was hoping we'd go with and you've talked about, I guess, since late last fall and we touched on it a bit. Do we think the self healing product when it launches? Is one of those potential products that could maybe accelerate that timeframe? Or what's been the feedback already clearly with the beta customers and your advisory panel?
I am absolutely thrilled with, the machine learning technology that we put together, the beta, the beta customers that we have tested this on in a production environment, the results have been nothing short of staggering. I can't stress that enough. The techniques are very potent. They've never been used in this way. On top of a concurrent engine.
You'll hear a lot about machine learning as it, affects demand or supply or capacity In our world, machine learning sits on top of a concurrent engine. And so it has that end to end insight and all of the data in between the chain links, if you will, to analyze. So we're extremely happy with the early results of beta tests We'll be sharing more of that at our user conference, coming up here at the end of the year. And certainly, I think, you know, as it relates to, to penetrating deep as a, deeper into our existing accounts, absolutely. It's a new sellable module for us.
Great. Thanks, guys.
Your next question comes from the line of Robert Young from Canaccord Genuity. Please go ahead.
Hi, good morning. First question for me, I thought it extends Thanos question on the towards process, industries. I know you've had a bit of a starting food and beverage. You've got the win in Korea. And so I was wondering if, you know, the the shift towards process industries, I think CPG has been focused on web manufacturing So does that open up a larger opportunity inside of CPG?
Most definitely. Most definitely it does. And And, of course, pull them on, the largest tofu manufacturer in the world, I want to say they own all the vast majority of the entire demand of the planet's demand for tofu. Is, is quite exciting for us as is BASF. And it's testing our engine in new ways and proving proving out, if you will, the validity of rapid response outside of the traditional discrete manufacturing processes that you know about us already.
So we're quite happy with our performance in, in those sectors. And, absolutely, I believe this just augments our potential in the CPG space.
Okay. Second question for me would be around the EBITDA guidance. You've had strong EBITDA for the first half of the year. And the guidance seems at 1st blush a little bit conservative. And so I was trying to pull apart the pieces there.
Is that because you're expecting a higher contribution from Pro Services in the second half? Or is it because of gross margins and just like what would be the margin headwind in the second half that you'd call out there?
Yes. So Rob, I wouldn't call it a margin headwind. So There are, just at a very high level, there's a couple of key factors. So on a post standards basis, so we have to take a look at the timing of subscription term license. And as you know, that will vary quarter to quarter.
And so from our guidance perspective, you'll see that the majority of the full year subscription term license component has already been reflected. And so that's why it's a timing issue there on a post standards basis. And then on a pre standard basis, we're going to continue with our model of a fully, expensing customer acquisition cost. Upon the commencement of the deal. So for instance, a deal that would start in December, we would actually fully expense that on a pre standard basis.
Those deal costs, whereas post standards now, we're going to be amortizing that over the customer life So there are those are sort of 2 of the key, changes. I think what we're trying to stress is that We are continuing to deliver very, very strong top line growth and consistent EBITDA performance. And that trend together with the cash generation is going to continue.
Okay. Maybe I'll just pick on gross margins, Vic, is a little bit lower than I expected this quarter. Is how should we model that going forward? Do you expect it to bounce back or is this investment data center and headcount going to sort of be holding gross margins below 70% for the rest of the year?
Yes. So we're comfortable being in that range of 70%, 68% to 70% is strong margin. And as you highlighted, very much driven by the expansion of the data centers. We feel strongly that we want to get ahead of fully prepared to execute on this sustained expansion. And again, on a conservative basis, we're going to start fully amortizing or expensing those costs.
We have been you have seen the strong professional services revenue. And one of the key things is we are pulling people in ahead of the curve and also training them. So it's really one of of dealing with, building for that continued execution as opposed to any softening in the performance metrics.
Okay. And then data center, you've got 1 in Canada, 1 in Europe, 1 in, 2, I think, are being built in Japan, 1 in Korea. Is that is that a good summary? And then is what where would the next place you'd expand? And then I'll pass the line.
Well, that's pretty good global footprint to begin. We actually have, we actually have 2 in Canada. One in Europe, one in the U. S. And then as you noted, a total of actually 4 in the Asia theatre.
Okay, thanks. Excellent.
Your next question comes from the line of Nick Agostino from Laurentian Bank Securities. Please go ahead.
Yes, good morning. I guess just to change the gears a little bit on some of the Q and A. Obviously, there's a lot of news around Terra Forest on a global scale. And I'm just wondering what's been the reaction, the feedback you're getting from your clients as they maybe have to look at adjusting their supply chains are you seeing that driving adoption of rapid response amongst your existing users? At the same time, are you maybe seeing some more inbound activity or inquiries from potential new customers, just given the potential disruptions that the tariff wars could cause to their supply chains?
It's a very wise question actually. It's, in fact, you know, the adoption of a technology like rapid response is all about absorbing volatility. And these types of trade wars and trade barriers, etcetera, they just augment that volatility, and, and give cause for, the need for, for this type of concurrent planning and, agility in supply chain. I wouldn't say that there has been any specific account pointing to to tariff wars is the number one reason that they're leveraging, rapid response, but I would tell you that having rapid response in a world where this type of volatility exists is why Kinaxis has been so, relevant at these at these global players where manufacturing is global. Subassembly parts come from all over the world and, taxation can change from 1 quarter to the next, which can affect margin.
And, and the like. So it is simply made us even more relevant.
Okay, great. And then just second question, on the competitive side of things, you talk in your MD and A about increasing competitive landscape and maybe pricing pressures or pricing wars from your own customers. Has that changed? And if so, how now that you're going into the European market, and certainly trying to get more and more into the CPG market?
Yes. So I wouldn't necessarily call it pricing wars. What's happening is We continue to win on function. I think what we're doing is we're also demonstrating the markets And when you do that, you actually increase your competition as other players come in because they may not have the same functionality, there there is fewer leverages, levers for them to to impact. But, so yes, we are seeing, other entrants we are very comfortable because we're not aware of anyone else that has this capability of concurrent planning.
Self healing, supply chain, and so on. And again, we're going to go into a relationship with a long term view. So we'll go in and we know that as we continue to drive value, we'll expand. So Nick, We noted as a factor, but it's not at a management level, a one of concern. Okay, perfect.
Thank you.
Your next question comes from the line of Gus Papageorgiou from Macquarie. Please go ahead.
Just continuing on the competitive theme, I know historically one of your biggest competitors has been SAP's marketing and sales are gonna rather than actual products, but it looks like they're pushing BPI pretty aggressively and they are claiming some wins. Can you discussed maybe has that competitive threat increased in the last, call it, year, or do you still see it as basically sales and marketing efforts And then just a second follow-up question. Given that your success, the success of hiring more people in Europe is becoming quite evident, have you thought of increasing your sales and marketing capacity sales teams in Asia? Thanks. Yes.
So, thanks, Gus. On your first question, naturally, the vast majority of our accounts, already run SAP as a backbone. And, and, and so and I've said this before, we actually don't exist without SAP, in many ways. We, we linked to them and to the extent that they have supply chain solutions, I can tell you they, as Richard just said, they they, do not as far as we understand today offer a concurrent planning type of a technique. And so we often start our conversations new named accounts, not by talking about technology whatsoever.
We're talking about the technique of concurrent planning. And that when you win that, when you win that philosophy discussion, it leads to, the technology that supports it. And we do fundamentally believe there is no other technology on the planet that provides, the necessary technology to support concurrent planning. And to that end, we could we do not see SAP's products as a competitive threat. Certainly, they, and we still provide friction to our sales campaigns.
But I would tell you that we would not necessarily see them as a competitive threat from a product at this time. And your second question, around hiring and strengthening our sales and marketing engine, in both, Asia and Europe. And in fact, we have, in both, both of those regions, a significant, higher rate than we have in North America. So obviously, Europe more so, we're harvesting and selling into Europe very aggressively at the moment and it's going exceptionally well. We've been in Asia for quite some time.
However, with the announcement of Toyota, Nissan and others, in Japan, we're seeing a terrific amount of activity there. Well. So we've been hiring in both regions pretty aggressively.
Your next question comes from the line of Paul Treiber from RBC Capital Markets. Please go ahead.
Thanks very much and good morning. Just in regards to backlog, since now that you're providing it, how should we think about the variability in quarterly backlog going forward? Is this quarter fairly typical or could we see greater fluctuation up and down?
Thank you, Paul. Yes, there will be some fluctuation. And there really are 3 elements to the change in backlog under the subscription model. The first is new customer wins. And those terms typically are a 2 to a 5 year contract often around the 3 year mark.
And so what we'll do there is with regards to the minimum contract commitment, that will be taken as backlog. Then there is also the expansion of customers. So again, the expansion of any existing contract and it's typically done on a co terminous basis. So it would be expanded through to the end of their term. And then, we also have the renewals coming in.
So, what will happen is depending upon the renewal cycle, some quarters, maybe higher than others. And then similarly, new name customers, it is a an extended sales process as we go through. It's very critical for customers to be very comfortable with their supply chain. That typically involves proof of concept other activity. So the cadence, if you will, of new name wins will vary.
And so you will see that, that lumpiness persist. However, the main objective really of the backlog disclosure and the way we were doing it, providing it at this point in time is for you and others to see that the strength of that, of that subscription model and the forward visibility and why we have confidence. And in our guidance.
The second question from me is just based on the M and A, it does look like you opened an office in London. I just wonder what's the nature of that? Is that primarily sales and marketing or is it support or maybe even an R and D? And then, what's the reason why you felt like you needed a presence in London as opposed to other parts of Europe?
Yeah. So we, yeah, we, part of our push into Europe, led us to hiring some pretty significant talent in the UK. And that's been, part of the rationale for, establishing a bit of a base there. It's quite honestly as simple as a single flight from Ottawa definitely helps helps quite a bit. And, some of you may, may note that Paul Carrero himself who in a previous life led a very, very large organization in Europe, home base for him was also London.
So to some extent, is, leveraging his experience and connections in the region to find the appropriate talent to help us scale.
Okay. Thank you. I'll pass the line.
Your next question comes from the line of Blair Abernissi from Industrial Alliance Securities. Please go ahead.
Thanks very much. John, just wondering if you can, reflect a bit, on the automotive vertical as to sort of what stage of adoption you're at there now? I mean, if you sort of look at the electronics vertical where a number of years ago, you guys sort of reached critical mass there. Are we approaching, that adoption inflection point at this stage now, what sort of evidence do you have that you're getting there?
Well, for sure, as I noted, in my opening remarks, you know, having, having names like Volvo, Toyota, Nissan, and Ford and others You know, they give me great confidence that this technique of concurrency and end to end planning is resonating in the automotive space. We can, we can guess, if you will, as to what is causing that. I have my own opinions. I think the automotive industry, which has manufactured cars very much the same way for, for tens tens of years are now seeing a dramatic shift. There's a lot more electronics in a car than there are mechanical devices.
And so you're starting to see a shift in manufacturing process and a shift in planning. And certainly 2008 had its effect on that industry and how it is able to drive its supplier base. It's certainly much more collaborative now than perhaps it had been prior to 2008. So we're certainly pleased with our progress in that space. It is a space where the data volumes for planning are extremely heavy,
which is where we shine. We do
exceptionally well in highly complex environments. You sort of cut our teeth, if you will, on the aerospace And Defense industry, which has very common elements. And so, do I see an absolute inflection? I hate to declare those in terms of, yeah, we saw when it started Monday. I think it's one of those things that is just this trend, if you will, or momentum.
I would call it a momentum in the space. We're seeing that the use cases and the value proposition of concurrency is resonating very, very well. In that space when we talk to practitioners about what we do versus how they've been doing it for 30 years. So we're, we're quite pleased and I think we'll continue to see momentum.
That that's great. Thank you. And then just, on the auto, sorry, on the arrow and defense vertical, you haven't talked much about it on the call. Any anything to update, there.
So they continue to be an active vertical for us. Obviously, I wouldn't call it as large a market segment as automotive and its suppliers, and certainly not as vibrant as CPG or life sciences.
Okay, great. Thanks very much.
Thank you.
Your next question comes from the line of Edson Lai from GMP Securities. Please go ahead.
Good morning. Thanks for taking my questions. So you talked about Europe being a growing presence If we're looking 3 or 5 years down the road, what would how should we think about the relative waiting for the different regions such as Asia, North America, Europe? Thanks.
Well, yes, you can see actually from our financial statements, not only the message we've been providing, but you can see there's maybe an increase in Europe. The nice thing is, we really do view, you know, global expansion. I think What John has touched on is we are also expanding the North American team. As to waiting, I think it would, they would it's going to probably long term just follow broader industry trends. So, you know, would that be maybe, closer to a third of our business from Europe, pushing a third from Asia Theatre and and then in the rest being North America.
One thing that we're very excited about is a lot of our global customers have significant footprint in Southeast Asia. And we see that and as well as quite frankly, India, continuing to grow and becoming more sophisticated in their supply chains. And so we see that as a meaningful market for more for the midterm. So I think that's going to, in a long term basis, look to impact the balance in a positive way.
Perfect. Thank you. And then I guess a follow-up question to that. Do you see similarities that you see in Southeast Asia compared to Latin America or even South America in that case?
Well, we're not active in the Latin America theatre at this point in time. We do have partners that are very active in the Latin America market. And so it would probably be something, just given the unique characteristics of the different countries, in, and, well, South Latin America, that, we'd probably work, I would expect we'd probably work more closely with partners, and that, and that theatre then go direct.
Perfect. Thanks again. I'll pass the line.
Your next question comes from the line of Gal Munda from Berenberg. Please go ahead.
Yeah, hi. This is Josh on for Gail. Just maybe continuing on Europe for a bit. Can we get a little bit more color on the investment in the region more for direct sales? Are you guys going to be going with partners there?
Yes. Certainly, we're investing in direct sales and, professional services, the heaviest. I will tell you that, we've also begun to invest in, hosting center operations as well as, as, having Europe, having a central, area for support customer support and customer care. So we're looking at Europe as a full operations center notwithstanding R And D obviously, but full operations center.
Okay. And then maybe just on the center operation, is that in direct response to demand you're already seeing or is that in anticipation of future demand?
Sorry, it's a little bit of both in that. Our message has always been that we are not, Europe in particular, we as John talked about, established strong operations and will continue, including the customer support. We just feel that, it shows the commitment our customers are really looking to that long term relationship. And there are some very, very capable, especially in the Amsterdam area. Data center capacity.
And so it's really a combination of our commitment to Europe as well as having a very diversified operation base, you know, similar to, you know, the most recent 2 data centers in Japan. So it's a commitment as well as a, a facilitation.
All right. Thanks.
And there are no further questions at this time. I will now turn the call back over to Mr. Wadsworth for closing remarks.
Thank you, operator, and thank you, everyone, for participating on today's call. We appreciate your questions and your ongoing interest in supported Conaxis. We look forward to speaking with you again in November when we report our Q3 results. Bye for now.
This concludes today's conference call. You may now disconnect.