Good morning, ladies and gentlemen. Welcome to the Kinaxis Incorporated Fiscal 2018 First Quarter Conference Call. At this time, at that time for you to queue up for questions. I'd like to remind everyone that this call is being recorded today, Thursday, May 3 2018. I will now 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 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, May 3, 2018, and contains forward looking statements that involve risk and uncertainty 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 Connex's 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 release in our MD and A, both of which can be found in the Investor Relations 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 archives may be re recorded or otherwise reproduced or distributed without prior written permission from Kinaxis. To begin our call, John will discuss the highlights of our first quarter and our 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 over to John.
Good morning and thank you for joining us today. Q1 represented another quarter of strong execution by Kinaxis as we grew subscription services revenue by 24% and delivered EBITDA of 26 percent of revenue prior to the adoption of new accounting standards, which Richard will talk through momentarily. Under these new standards, our total subscription revenue was $30,500,000 and adjusted EBITDA was $12,500,000 or 34 percent of revenue. Since our last call, we have continued to show great progress in traditional markets, like the high-tech and electronics vertical with our win at power integration. As a leading innovator in the development and production of Semiconductor Technologies, power integration selected rapid response and its unique ability to provide end to end supply chain visibility.
They recognized the need to manage their supply chain from a global perspective on a unified platform through tight integration and alignment of all the planning functions. Even more encouraging than this success is our progress in markets that we have been targeting most recently. As we indicated on our last investor call, early in the first quarter, we added another automotive leader to our growing list of marquee brands that includes Toyota, Nissan, Ford and others. We are very pleased that our momentum in this market has continued and hope to be able to name our new customer soon. Recently, we also announced more headway in the consumer packaged goods space.
With Poole Mwan, South Korea's largest fresh food company, and the world's leading tofu manufacturer. Whole Muan is particularly sensitive to product freshness and the packaged foods business overall is very sensitive to rapid changes in consumer So creating a nimble supply chain that has end to end visibility and responsive real time management capabilities is key to their success. We look forward to working together with this exciting new customer. As we mentioned last call, we are addressing the increasing opportunities in Europe through significant expansion in the region. I am pleased to say that we have already completed our planning our planned hiring for the European sales team and we are well positioned to take advantage of the momentum and the opportunities in that geography.
Our success in this fertile region continues with yet another win in the pharmaceutical group based in Europe. And hope to be in a position to announce them publicly soon. Europe is not only our focus for growth Recently, we announced firm plans to launch 2 new data centers in Japan, one in Osaka and another in Tokyo. To support our These data centers will help us support large scale customers in Japan, including Toyota, Nissan, A6, Z10, and Olympus. With that, I'll turn the call over to Richard for an overview of the financials.
Thank you, John and good morning. As a reminder, all figures reported on today's call are in U. S. Dollars under IFRS. Readers will notice additional disclosures and commentary in our Q1 financial statements and MD and A.
This is due to the adoption of new IFRS standards effective January 2018. Many companies are reporting under these new standards for the first time. The relevant new standards for Kinaxis are 1st, IFRS 15, which provides new guidance regarding the timing of revenue, treatment of customer acquisition costs and disclosure of contract backlog. 2nd, IFRS 16, which deals with leases. Our business model focused on long term subscription arrangements and cash generation remains unchanged.
While these standards must be applied retroactively, which in Kinaxis case increased prior period earnings and our opening retained earnings by $23,800,000 after tax, we are not restating those prior periods. We are, however, providing a framework to explain the changes as well as provide additional disclosures to help readers better understand our progress on an apples to apples basis detailed analysis is provided in the financial statements and the MD and A. Let me take a few minutes to highlight some of the key changes. 1st, regarding the timing of revenue. While the vast majority of our subscription arrangements are on demand or cloud based, we do support some customers through on premise or customer hosted subscription arrangements.
Under IFRS 15, we are continuing to ratably recognize the subscription revenue for cloud arrangements over the full term of the agreement. Or the legacy maintenance and support services. However, for the on premise subscription arrangements, IFRS requires us to look beyond the subscription payment terms, which are generally annual prepayment, and allocate the total revenue stream to 2 elements. The first element is related This is now recognized as one amount on 1st month of the subscription term arrangement. This is recognized as subscription term license.
The remainder of the revenue is attributable to maintenance and support and is recognized over the in 2016 for a 3 year term, we have retroactively recognized the subscription term license revenue for the full 3 year term in 2016 now reflected in our opening retained earnings and would continually recognize the remainder attributed to ongoing maintenance and support as subscription services revenue until the end of the term. The total accelerated recognition for this on premise software component was just under 21,000,000 as at January 1, 2018. In Q1 of 2018, we recognized 4,500,000 subscription term license related to ongoing premise agreements renewing in Q1. Another change under IFRS 15 is that we are now required to capitalize customer acquisition cost and amortize them In our case, generally over a 6 year period. Prior to adopting IFRS 15, we fully expensed customer acquisition costs upon the commencement of the related contract arrangement.
The new IFRS treatment of customer acquisition costs resulted in Kinaxis capitalizing 11,500,000 of costs that we had previously expensed in prior periods. As these costs relate to customers acquired prior to 2018, the weighted average remaining life of these cost is approximately 3 1 third years. As we have not restated 2017 results for IFRS 1516, which going forward I'm going to call the standards. I'm going to reference the supplemental IFRS standard information when discussing comparative performance. Prior to IFRS standards, Total revenue in the first quarter increased 10 percent to $35,900,000.
This total is driven predominantly by our strong base of subscription revenue cured with new customers as well as the expansion of existing customer subscriptions. Under IFRS 15, total revenue was $36,900,000 and total subscription revenue including both subscription services and subscription term licenses was 30,500,000. As we've discussed on previous calls, our partners continue to assume a greater role in customer deployment activity. Professional services revenue will also vary quarter to quarter due to the size, timing point $1,000,000 from the same period in 2017. Prior to adoption of IFRS standards, gross profit grew 16% to $25,700,000 and gross profit margin grew to 72% from 68%.
This performance reflects the higher growth rate Under the IFRS standards, gross profit for the first quarter of 2018 was $26,700,000 or 72 percent of revenue. Prior to the adoption of IFRS standards, profit for the first quarter of 2018 was $3,200,000 or $0.13 per basic share and $0.12 per diluted share, which is approximately equivalent to the same period in 2017. Profit was also in line with 2017, primarily given our investments in headcount and business expansion. Under IFRS standards, profit was $4,600,000 or $0.18 per basic share and $0.17 per diluted share. Prior to the effect of the IFRS standards, adjusted EBITDA for the first quarter of 2018 grew 8% to 9,200,000 or 26% of revenue.
The increased depreciation primarily attributed to our increased data center investments and higher stock based compensation resulted in this higher adjusted EBITDA performance. Under IFRS standards, adjusted EBITDA was 12.5 $1,000,000 or 34 percent of revenue. Demonstrating the ongoing robustness of our business model Cash generated by operating activities was 10,500,000 We also adopted IFRS 16 effective January 1, 2018, which specifies how to recognize, measure, present, and disclose leases. As a result, Kinaxis has recognized an asset with corresponding short and long term liabilities relating to our major leases. On January 1, 2018, we recognized $10,800,000 in right of use assets and corresponding lease obligations for outstanding leases, primarily related to our office premises and data center facilities with terms greater than 1 year.
At March 31, 2018, the balance of right of use assets was 11,900,000 net of additions and accumulated depreciation. The balance of the related lease obligations net of deemed finance costs was 11,800,000 of which $2,600,000 is a current liability. The assets and liabilities increased compared to January 1, due to the additional data center leases entered into during the quarter. The nature of our long term contracts provides us with a high level of visibility in the future contracted subscription revenue. Effective this quarter, we are disclosing the minimum contract commitments As of March 31, 2018, the total backlog of subscription service commitments was $264,600,000 to $70,200,000 of this commitment will be recognized in the remaining 3 quarters of 2018 was $71,500,000 in fiscal 2019 and the remaining $50,900,000 for fiscal 2020 and thereafter.
This backlog, together with a strong pipeline of supports our ability to provide full year guidance. We are reaffirming the pre standards 2018 guidance we provided approximately 2 months ago. That is we expect annual revenue for fiscal 2018 to be in the range of 158 $163,000,000. We expect subscription revenue will continue to be the key growth driver and we expect it to grow between 23 and 26% compared to 2017. We still expect the sales and marketing expense will be in the range of 24 to 27% of revenue and that research and development expense will be in the range of 17% to 19% of revenue.
We still expect adjusted EBITDA We are now also providing guidance, reflecting the adoption of the IFRS standards. As previously discussed and disclosed, the adoption of the IFRS standards results in fully recognizing the subscription term license component of on premise arrangements for the full term upon the commencement of the arrangement. This, as I noted earlier, was nearly 21,000,000 retroactively recognized. The amount of the recognition of subscription term license in any period will fluctuate depending upon the number of arrangements, their size and the length Regarding customer acquisition costs, we will be including the amortization of $11,500,000 capitalized for prior periods. We will also no longer be fully expensing additional customer acquisition costs in 2018, but rather capitalizing these and then commence and then commencing amortization.
We have considered the timing of this revenue recognition and amortization in our post IFRS standard guidance. With the adoption of the IFRS standards, we expect total revenue for fiscal 2018 to be in the range of $150,000,000 $154,000,000 with subscription services revenue to be in the range of $109,000,111,000,000 and subscription term license revenue to be between $7,000,000 $8,000,000 for the year. We further expect that approximately 1 half of the remaining subscription term license revenue for fiscal 2018 will be recognized in the second quarter. Following adoption of the IFRS standards, we expect sales and marketing expense will be in the range of 24% to 27% of revenue and that net research and development expense will be in the range of 19% 21% of revenue. We expect annual adjusted EBITDA to be in the range I turn the call back over to John.
Thanks, Richard. With all the accounting changes this quarter, It would be easy to miss the fact that our underlying business hasn't changed one bit. And that is perfectly reflected. In our reaffirmation of the projected revenue and EBITDA guidance. We sell rapid response on a subscription basis to the Who's Who of customers across 6 We are a high growth saas company with all the predictability to our business that such a model entails.
We also distinguish ourselves amongst SaaS companies by being highly profitable and generating substantial cash quarter to quarter. We continue to win some important new customers, most notably in our emerging markets, adding to marquee brands in the automotive sector, and adding depth to our customer base in consumer packaged goods, life sciences, and high-tech remaining very strong for us. In fact, overall, I'm very pleased with the diversification of our revenue across all of our market segments. We continue to execute On behalf of Kinaxis, I would like to thank you for your support and as always for taking the time to join us. With that, I'll turn the line over to the operator for Q And A.
Ladies and gentlemen, we will Your first question today comes from the line of Richard Cee with National Bank Financial. Please go ahead.
Thank you. You guys have made a bunch of operational changes over the past few quarters. It certainly seems like it's helping in your pipeline. Are you pretty much where you want to be now going forward? Or should we expect some additional changes for the rest that you hear?
Good morning, Richard, and thank you for that question. You know, at this stage from a sales perspective, we are at plan, in terms of our investment. And and I can also say we, you know, in fact, we're kind of ahead of plan in terms of our investment and what we intended to do. And that is, certainly thanks to Paul Carreiro who came on, came on board on the executive team late last year. I don't anticipate any changes.
At this point, we are in full execution mode, and exercising the strategy that we set forth for the company.
Great, thanks. And then, we've been hearing in the marketplace that some of your competitors are using fairly aggressive price tactics. How are you responding to that? And has it changed the way you bid on these deals in any way?
So, yeah, of course, when you can't compete with products, you compete with price. And, and, that's quite common in the market, certainly in the software in the software market. And, it isn't uncommon for a competitor to attend to what I call poison the well, and try to, you know, get the prices down and repeat that way. Frankly, you know, our customers, are are selecting rapid response because they're in pain. You know, they're they're struggling with, with supply chain planning.
And, they're looking for an end to end, concurrent planning solution, which I believe can't be found anywhere else. And so, you know, with a compromise in price comes a significant compromise in product. And it is not uncommon, frankly, for us to maintain our price, our pricing model As I like to say, we respect our shareholders. We respect the employees who produce the software. We know it works.
And, you know, I don't anticipate it changing our model going forward.
Okay. And just one last one for me. I'm not sure it's for you or Richard, but if you look at the reported numbers, let's say, on a pre standard basis, zoning in on subscription services, specifically. That was a pretty good number here this quarter, certainly a little bit better than our expectations. But why is it that you guys are not taking up your sort of pre standard guidance for the year in light of that?
Well, our standard is to provide just the annual guidance. I mean, we're feeling very strong. You know, what we're dealing with, as John says, is quite unique. And sometimes, you know, deals may, slip a month or 2. And so what we're doing is while we're actively tracking them, our goal is to look at the longer term and closure that deal.
And so that bodes very well for the out years, but as you can appreciate, if a deal would slip a month or 2 that can have some short term impacts. So we're very bullish on the year, but we're were not changing things. And second of all, the guidance that we did provide was thoughtful and was just just within 2 months. So, we'll continue to monitor situations and as appropriate, provide guidance and at the end of our Q2.
Your next question comes from the line of Thanos Moschopoulos with BMO Capital Markets. Please go ahead.
Hi, good morning. Richard, can you provide some guidance on the or some color at least on the anticipated impact that the new accounting standards might have on 2019 revenue and EBITDA. And I realize you're away from providing us with 2019 guidance, but any color as far as the potential magnitude of the impact or just the direction of the impact for 2019 would be helpful.
Well, Thanos, thank you for that question. And we're fortunate in that with this long term visibility and with a long history of customers. And in many cases, the on premise customers, we have a very, very long legacy and, and, and, and, and, in many cases, these are customers that actually we can, we're, we're existing prior to 2005, and, in many cases, converted to an on demand subscription. Our practice is just to provide that annual guidance. And it's important to understand as, as I noted in my comments, in a script is that the, the impact of the the timing of that subscription term license component will vary depending upon the term.
So for instance, if a renewal term was just 1 year, the total revenue of that subscription agreement would be taken in the full year. So you would just have that increase in the initial quarter of the term. And then it would, soften itself out through the rest. If the term was 3 years, Well, then you're going to have a higher level of subscription revenue with that acceleration upfront. And then the revenue lower in the out years.
So, what we need to do is gain further insight into the actual length of that term. So we're very comfortable with the, and as I noted, with a very strong backlog with the continued growth of the business, but It's not appropriate at this point in time to provide guidance beyond 2018.
Fair enough. Can you clarify how large the term license component typically tends to be as a percentage of total contract value?
Well, again, that will vary depending upon the, the term. If it's a 1 year term, then, you know, the term, the maintenance and support element is typically in line with industries, which is typically sort of an 18% to 22% range. Where it becomes mathematically interesting is when you try to allocate that over a 3 year term, it's not it's not linear in the sense that you have to associate the, the total value. And, and I'm sure people on the call right now need a lot of coffee to to understand some of that math, but it's, it, you know, ultimately what's happening is, you know, that's the same subscription revenue. The customers are still doing the annual prepayment over the 3 years.
That cash is coming in over those 3 years. We just need to, to adjust the timing of that revenue. So, and, you know, as we noted, the vast majority of our subscription arrangements are cloud based. And so, You know, we are going to have this, this element. I've quantified that.
We expect that to be 7.5, 7 to $8,000,000 in this year, of which $4,500,000 has already been recognized. So, it's quite a very panel.
And then finally, as we look at your contract acquisition costs, for modeling purposes, can you provide color as to, how large those tend to be as a percentage of total contract value?
Well, again, they'll vary depending upon the nature of the arrangement and whether you know, and to the, to the way in which a partner is involved in the partner deals. And so, you know, we are going to be continuing to disclose the, total, customer acquisition costs, but again, they will vary on a number of factors. Where I think it's best is to take a look at the guidance that we provided with regards to sales and marketing. So the, continuation of our pre IFRS standard, you know, we noted the 24% to 27%. So that reflects a combination of the the significant ramp in our our sales personnel globally in particular in Europe as well as the expected customer acquisition costs on a traditional basis where we fully expense.
The guidance that we provided post IFRS standards is also in the 24% to 27% range, but that picks up the amortization of this $11,500,000, which we had to recapitalize as well as then don't forget it does impact going forward that we won't be taking the full expense, and then advertising that new amount. So It is, again, a bit of a timing difference. Certainly, that 115 is a non cash charge, but, I think it's best to provide that that range of sales and marketing expenses guidance.
Your next question comes from the line of Stephanie Price with CIBC. Please go ahead.
Just following up on the IFRS questions, can you talk about the 34% IFRS margin in the quarter and the one time adjustments that could be in there?
Sure, Stephanie. Good question. So, you know, again, the with 4,500,000 of subscription term license, That, as you can appreciate, essentially drops to the bottom line right straight down to the, to EBITDA. So that, was really the key delta between the 26 percent on us, on a, you know, the prior accounting basis, adjusted EBIT performance and the new. So again, with the timing of, subscription term license amounts, that, that will vary.
Clearly, cash flow remained the same for the quarter under both methods So just again, because of the timing of these, adjustments, you're going to see some, some movement in the, EBITDA. So again, that's why it was very important for us to provide this framework so that we can provide the readers with that apples to apples basis, and in this case here, we're providing 23% to 26% guidance for the full year. On the pre operated standard for EBITDA performance.
Okay, thanks. In terms of the expansion of the European sales team, now that it's completed, can you talk a little bit about the pipeline in that region and how quickly you think the team could ramp up?
Sure, Stephanie. We, with the added Salesforce or some call it feet on the street, In Europe, we are seeing some expansion in the pipeline in that region. Across all the market verticals quite frankly. In terms of a ramp and our, our, our sales cycles, as we've intonated in the past, still tend to be in that 9 to 18 month range. So in terms of getting closure of activity through that pipeline, that's That's kind of the measure that we're looking at at the moment, but I can say that the pipeline in general in that region is, extremely healthy.
Great. Thank you very much.
Thank you.
Your next question today comes from the line of Robert Young with Canaccord. Please go ahead. Hi, good morning. I mean, one simple question for me
on the IFRS changes, if you could, the difference on the top line, it looks like to $9,000,000 of revenue lower in under the new rules. Can you just draw a simple bridge between those 2? It looks like it's mostly in the recurring piece I know you've explained this at nausea, but if you could simplify that, that would be helpful.
Sure, Rob. No, and I understand this is you know, something new for not only the analysts, but just for our broader investor base. And so more than pleased to help continue to provide insight. So it's one that we, and the range is, as you can see in the in the $7,000,000 to $8,000,000, total, and it is predominantly related to the timing of that subscription term license component. And I must, you know, come back to that retroactive, almost $21,000,000 of subscription term license that we had to put in our opening statements, which in effect really means you will not see that recorded as revenue in any of our statements because again, it was done retroactively.
So that really represents revenue that is related and under pre IFRS standards, which would have been recognized this year and in the next depending upon the term, the next few years. One thing that is important is those payments of those subscription terms will continue and their contract models will continue to be subscription based. And what that has resulted in, and that's why I touched on a few of the other balance sheet items, you'll see that there's an increase in what's termed unbilled receivables. So obviously to balance when you retroactively recognize that revenue, which is payment stream coming in a future period, you need to set that up on the balance sheet. So that provides a little insight into some of the timing differences.
So it really is just a matter of of how we would have unwound that 21,000,000 in this period and in future periods. Now that does draw down. But again, that is why we thought it was very important to provide this apples to apples basis so that the readers can see the continued growth in the business, the continued profitability and the continued well, in both cases, the cash is the same. So the cash generation
Okay. So it's basically just the upfront recognition of the on premise that would have been recognized in 2018. It's been pushed back to 2016, 2017. That's basically the difference. Yes.
Yes.
Yes, depending on the difference.
Okay. The top 10 customers 42%. That's lower than previous. And so could you talk about whether that's a function of the IFRS changes or if that should be taken as a sign that the average contract value might be, declining.
No. Actually, you should take it as a positive sign, and it's driven by 2 elements. First, it's driven by the number of additional marquee names that we continue to attract and grow. And so as a result, we're just dealing with larger customer bases. 2nd of all, with our partners taking an increased role in the deployment, the revenue from a number of our top 10 customers is really just the subscription.
In the past, it would have been subscription as well as professional services revenue. So, and the 3rd element is just really broader diversification. I mean, we are very excited by the growth that's happening. And again, this comes back to my first comment about marquee names in automotive, in life sciences, and continues in high-tech, electronics and consumer packaged goods. So it's really, in our view, reflective of of the health and the diversity of our growing customer base.
Okay, great. And then in in the quarter, the professional services revenue was lower than I expected. And so I was hoping that you could talk about the overall activity that's happening. So if you consider the activity in the channel and the activity that you have reported in your revenue in the professional service line, while what you've reported is down, would you could you talk about the amount of activity that's happening? Is that increased year over year?
Yes. Absolutely. The activity has increased. The number of certified partners continues to increase. In fact, the number of certified customers, which is great to see, where professionals at our customers are certifying themselves.
As growing. Now, you also have to understand that, you know, depending upon, the quarter, you know, some companies, they they don't finalize their budget till later in the first quarter. So that can have an impact. One of the key items that we do is we do an annual pulling our partners, as well as all our employees together for what we call a connect ad event. So we're actually taking them out of the field.
That's very important just to keep them understanding the developments in the industry, developments and rapid response. So, yes, absolutely, it's lower, but, you know, we are very pleased to see the level of activity, the level of increased activity with our partners. And, the guidance that we've provided, does, you know, when you run the numbers, you'll see that we do anticipate that you'll, you'll continue to see, to growth in, and basically all areas of the business.
And Rob, I'll just add to what Richard describe there that we are 1st and foremost a SaaS company. We focus, our growth on subscription revenue And we have long stated that, Kinaxis and their success in in getting through an inflection point will be directly related to the speed at which we can light up the partner ecosystem. And the investments we've made over the last 2 years in certification and these are all online extremely some very extremely difficult exams to pass. All of these investments have been targeted to preparing the partners to do exactly what they're doing. We are, you know, this is the professional services performance that you're seeing is by design, quite frankly, we want partners to pick this up.
And I've said this before, the worst thing We could do as a high growth SaaS company is to stick our hands into the pockets of our partners. We won't do it. That would be short term thinking. And that's just not who we are. We're building a giant and our strategies are designed around succeeding in that endeavor.
If I draw that back to dollars, I guess, assuming you didn't have a channel, if you didn't have partners, would the professional services In dollar terms, would that have been up year over year?
Yes.
Okay. And then one last question for me is just related to the South Korea wind, grats on that. Could you talk about that as a new vertical? I know it's part of CPG, but, you know, it's a different flavor, pardon the pun. In the food, area.
Just talk about that. And then if you could talk about the Korea footprint, you've made some investments there. It's good to see a Korea win. And, you know, what's the future for South Korea? And I'll pass the line.
Sure. I, you know, I've said this before, we're in business in South Korea. And, you know, we have a great team We're really proud of what they've done. You know, this is a South Korean win, born from the South Korean team. And So we're certainly excited that it is in the food and beverage industry.
And you're right to point that out. The CPG space is a collection of segments white goods, etcetera. And, this is the first time we've publicly announced a food and beverage type of a win, not our first win in that segment, by the way, but certainly the first public one and it's very exciting for us. As we penetrate the consumer packaged goods segment, so we're going to continue to harvest there. You know, we think it's fertile and this is just one sign of one sign of that belief.
Do you think of this as
spending the total addressable market or is that included in the numbers you've shared in the past?
That's included in the numbers that we've shared in the past for the geographies that we're serving. Yes.
Great. Thanks.
Your next question comes from the line of Paul Traver with RBC Capital Markets. Please go ahead.
First question, just on the IFRS 15, the seasonality in term license revenue this year, is that typical or, would it vary depending on the year?
It does vary depending upon the year, Paul. I mean, we have now been writing subscriptions for, you know, a dozen years. And so, unlike sort of some traditional malls, where they're focused on, that lump sum perpetual, it does go through the, through the year. And it really depends upon the renewal cycle. I mean, it's Traditionally, we've signed contracts in the 2 to 5 year range.
Generally around the 3 year mark seems to be be about the natural. So, but it's you're going to see a little seasonality But what our job is going to do is, as we continue to provide guidance, our plan would be that, when we do introduce them that, that guidance for 2019, we'll provide some insight into the timing of that subscription term license amount. But again, and I think you fully appreciate this. The actual underlying business is not changing those long term customers. They're going to continue to do the annual prepay and the cash is going to come in, you know, along the lines that it has traditionally.
And at this point, from a business point of view, are you considering any changes to the contracts in terms of the term to better manage that revenue?
I don't we don't really we don't necessarily view it as a management issue in the sense that first, the vast majority of our arrangements are on the cloud basis. In fact, a number of the customers that go way back prior to 5 when we 2005 when we made this conversion first went to, you know, continue their on premise arrangement through subscription and then understood the value of having the full Kinaxis hosted, if you will, environment and we anticipate that they're going to, the other customers that will move to that. But there's also going to be some very, you know, we have deep relationships that, for a number of reasons, the customer may just wish to continue, hosting. And, but they do want to drive that longer term benefit from rapid response and so we'll engage in subscription and we'll, we'll do that. But it really is a minority.
And I think what's happening is were being as evident in Japan, for instance, Japan was, one of the last areas that at least we support that had moved to, to on premise, sorry to move to the cloud. They're very, very comfortable. And And now that we, in particular, have a global distribution of data centers, you know, we can respond to local geographies as well as, you know, provide that global support. We we just don't see this as a as an issue. And so what we're 1st and foremost focused on is supporting, landing, growing with customers and maintaining that long term visibility and, and, cash generation.
And then looking at longer term, just with the decreasing mix of professional services relative to subscription and also with the the increasing participation in the partners. Is it reasonable to assume that gross margins and EBITDA margins would expand over time or there offsets that we should be aware of?
Yes. Mathematically, you will see expansion. And in fact, what we have talked about in the past is sort of aspirational goals. Where we see an eightytwenty mix, 80% on the subscription, 20% on professional services. You will have I mean, just this quarter alone, we've seen expansion in gross profit.
But it also by the way, that expansion reflects the investments that we've made most recently, and not only expanding the North America footprint, but, building out the, Japan footprint. And on a same year basis, having the, the, European days center in. So you'll see that we still drive up very strong, gross profit. And so Yes, longer term, it's, we anticipate that this will be an expansion, even with that level of, investment.
And just one last one for me. Just on the data center side, what's the rationale for the 2 data centers, the 2 separate data centers in Japan as opposed to a single one? It seems a little, counterintuitive from an economy is a scale point of view. Thanks very much.
Yeah, you know, our customers, look at rapid response as being mission critical. And part of being a mission critical service, subscription service is a pretty significant, SLA. And you know, having 2 data centers, in fact, is quite common for disaster recovery. And, and so that that is that is the primary purpose, for it. In some cases, you know, it can be intercontinental, but in this case, it really didn't make sense.
It was more economical to just choose 2 distinctly different cities, in Japan. You know, one is, one is a backup. That's, it's that simple.
But it is a network in in that from a global basis. So, there is some very sophisticated technology, very, very low latency with regards And so, you know, we, we are really putting multiple levels of redundancy, in, in, in place and, But as John noted that, you know, that level of investment, made sense to us, at this time.
Thanks very much. I'll pass on.
Your next question comes from the line of Paul Steep with Scotia Capital. Please go ahead.
Thanks. John, could you talk
maybe a little bit about what you've seen on the trending around partner influence sales and their efforts maybe over the last couple of quarters and some of the changes that Paul had been implementing on that side? Thanks.
Sure. Obviously, the longer the longer the program, this has been in existence, the more mature those relationships get And, the more competent, quite frankly, the partner, the partners get in, in not only deploying rapid response, but in selling it And I've said this on the last earnings call and frankly, the trend is As it's always been, at least for the last 12 months, the vast majority of new name sales activities are coming through partner influence. They have privilege, which would be difficult for us to have. You know, they have entry points into some of the largest corporations and trusts quite frankly. They have trusted relationships already in place that we wouldn't ordinarily have.
And so that leverage for us is extremely important. And and frankly important for the partners as well. This notion of what we call revolutionizing the planning function and providing concurrent planning just In my opinion, just isn't available anywhere else in the world. So when these large firms are looking, large manufacturing firms are looking to transform their supply chain practice.
They go partners first
in general. They go to their trusted advisors first. And, and so, you know, one area of expansion that Paul has introduced When we say he's expanded, you know, the sales function significantly, That includes the partner managers, not just, you know, not just adding account executives and presales and industry principles, The partner management layer of, of Kinaxis has also increased since Paul's, entry to the management team.
Great. And then I guess maybe the other one, it sounds like you're agnostic in terms of selling these on premise deals. Is that the right way to think about it. And then, Richard, on the minority, you know, I'm assuming this is just falling off over time that you're not proactively seeking to sell on prem term licenses? Thanks.
That's a great question, Paul. Thank you. Actually, we do have a very strong bias to focus on the cloud base. This is the best way we believe we can drive value for our customers. And so it is absolutely, you know, the 1st in lead.
It's actually an unusual situation now. I say, a very unusual situation where there's a discussion about on premise. And quite frankly, even when that arises is one of education, because it's not just simply the capabilities of concurrent planning and unique capabilities of rapid response, it's the rest of the package is our ability to directly host and and and our data centers monitor the performance relieve the customer of of that sort of service management and, just engage directly. And so either when it does come up, we move into, we move really into, an education mode. Our our sales team is is is very capable in this regard.
And overall, they they just understand that it is just a better delivery platform. So, it it It is absolutely. That's why as we've noted multiple times, the vast majority are, on the
cloud basis. And I would say, quite frankly, we we have a bias for business. You know, that's our bias. And we're revolutionizing planning. And, I for one refused to disqualify a prospect that's in need because they may have policies that restrict you know, that restrict their, you know, their data center activities.
And Aerospace And Defense is a perfect example. Whether you make missile systems or fighter jets. You know, if someone is in need of concurrent planning and transforming their supply chain, we're going to serve So those, as Richard said, are definitely fewer and far between, in our market segments, Some of these have been, you know, as again, dated pre 2005. You know, but I would say rather than suggesting we have a bias, towards one or another. We have a bias for good business and And on occasion, this may occur, but it's quite rare.
But the the underlying business model continue to be one of subscription. Yep. Annual prepayment, long term visibility. Your
next question comes the line of Deepak Kaushal with GMP Securities. Please go ahead.
I've got thousands of them, none related to accounting, but I'll ask only 3. Thanks. First off, John, you mentioned earlier you want a new major automotive customer. I know you're not disclosing who that is. Could you help us understand what geographic region it's in?
I know you've made some inroads in Japan. You're already in North America. How's Korea and Europe doing?
So, you know, I can tell you that this, this large automotive, manufacturers in Europe
That's European.
And so, you know, again, we're obviously very excited by it and we're hoping be able to disclose that, you know, in the near future here.
That's good to know. And I appreciate the extra color on that. Second question, at your recent Investor Day, one of your partners, said that they're seeing, bake offs now reduced to 1 or 2 out of the gate, 1 or 2, bidders rather than the usual 4 or 5. Can you can you say what you're seeing on a competitive front in terms of Oracle and in for? I know Oracle recently is pushing to the cloud.
Are you seeing these guys less? Is it just specifically geographic? Any kind of color on a competitive change?
Sure. It's, you know, I struggle to point to any competitor other than SAP. Certainly, we do, encounter others, but SAP is very often the incumbent And you're right. It's often, you know, down to a couple of us are very small, subset which has changed over the last 5 plus years. I would tell you that often the
competition is less about
product and more about technique You know, it's about describing, you know, the the the benefits of any extricably connected plant processes that you get only through concurrent planning. You just flat out, don't get it any other way. So So we often compete first on technique. We don't talk about technology. We talk about the merits of this breakthrough technique.
And once we get someone to say, that sounds like fantasy, then you know you've generated the right amount of interest and intrigue and all you have left to do is trust and confidence. And that gets done through, you know, let me show you. Let me show you the technology that brings about this, this fantastic transformation. So
Okay. Maybe I'll go
ahead. Ahead.
Well, no, I want I want to push my luck and ask then, is is your European automotive customer then, competitor replacement, or are you doing it parallel with with some competitors? Or
Yeah. So I, you know, again, we, we generally don't talk about any specific, customer account or competitive, situation about anybody specific. I could tell you in generalities, as I said, we typically compete first on technique and then the technologies that bring about the, that value proposition. In terms of whether we replace, versus augment, quite honestly, quite frequently, it is a replacement. Whether somebody is running a competitive product or not, without concurrency, we often see rampant Excel use Excel is the glue between all these planning processes.
And certainly that gets, ripped and replaced with, with rapid response.
That's very helpful. Thank you. And then my final question, and this is my usual question. Every time I see you guys, you've been at, quote, about a hundred customers for for a couple of years now. Any change in that or any sense of when we might be able to hear about 200 customers or at about 300 customers?
Are you seeing any meaningful acceleration?
So there is meaningful acceleration. We are continuing to grow and grow profitably. You know, we we have arrangements with customers, you know, even the initial arrangement could be 4,000,000 or 5,000,000 a year, but it could also be 400,000 or 500,000 So our goal has always been to establish that relationship, to build on that relationship. And we've we've we just, I don't we don't really see it as value, valuable right now, you know, noting and noting the customer, count. What we do think of value is that long term sustained growth noting the 100 percent plus net revenue retention of dollars, noting the strong consistent performance.
So that's really where our message is going to remain. Got it. Well, so if
I can ask you a different way than now that more of your new wins are partner influenced, how is the makeup of partner influence wins trending? Are they more trending towards new customer additions or expansions within existing customers?
Oh, yes. Well, it is absolutely focused more on new customer arrangements. But we also have, we have terrific relationships with customers sorry, with our partners, as well as our customers. And in some cases, there has been a transition of existing customer ongoing deployments expansion. To, to our partners.
But really the partner, theme has always been really two key measures. One is we want to virtually expand the company and and to and to drive growth. And we believe that's best through partners. So hence, their focus on new name opportunities And then second of all, to be able to execute upon those deployments, and hence, the, the expansion of certified professional partner personnel that can manage these deployments. So, it is very much focused on on new name.
Excellent. Well, thank you for taking my questions. I know the call is long, so thank you. Appreciate it.
No problem.
Your next question comes from the line of Blair Ivernessi with Industrial Alliance. Please go ahead. Thanks. Thanks for squeezing me in guys. John, just expanding on the automotive vertical Can you talk a little bit about the opportunity and perhaps traction that you've been seeing in the supply chains of the automotive are your existing auto customers influencing the supply chain to maybe pick up rapid response?
Yes, I am it's great question. And, and, you know, I do think the, I mean, this is an opinion that the automotive supply chains are transforming right now. And from my vantage point in looking at how automotive companies have been planning supply chain, it, they haven't seen the transformation in a very, very very long time. And and now that automobiles are, in my opinion, again, largely computers with a motor attached. And in some cases, no motor attached at all.
You know, the the methods used for manufacturing these these machines, require change. The notion of line stocking, just in time line stocking of nuts and bolts and so on, are quite difficult to do with electronic components. So, we're definitely seeing that as a catalyst for change and transformation. And I think that if you are going to transform, you learned from the electronics sector first. I think they were first to transform and adopt Again, what I believe to be the breakthrough here of concurrent planning.
So I, you know, so certainly we're proud to have, the names that we have in, in that sector. I do think to some degree, that gives you some trust by association when you can win the types of names that we've, described, described already, companies like nisan, Toyota, and and Ford and others, That definitely points to some very world leading manufacturers, let alone world leading auto manufacturers. For a transformative approach to supply chain.
Great. Thank you very much for the color. And And just one quick one for you, Richard. The deferred revenue, 6, just a $64,000,000 versus under prior IFRS, a $76,000,000. I assume is most of that changed due to the term license amount?
And can you remind us, is there any professional services revenue in that deferred deferred revenue?
Yes. So you are correct, Blair, that change. And as you can see how we've We've noted it on the comparative basis in Note 3 is, is driven in large measure by that retroactive recognition of revenue and consequently reduction of deferred revenue. And our deferred revenue is is almost exclusively on the subscription side. Yes.
Your next question comes from the line of Sethan Sukumar with 8 Capital. Please go ahead.
Good morning guys and appreciate you guys squeezing me in here. Just wanted to Just want to ask a question on an R and D notice of an uptick in spend this quarter. Kind of broadly, can you speak to some of the recent progress you're making from an R and D perspective some of the areas of focus on the level of activity with respect to joint efforts with partners and customers?
Sure. We mentioned some of the innovative investments we've made in R&D on previous calls. And we're And we're certainly making a lot of progress on this, this notion of a self healing supply chain. So rather than, folks have heard me talk about machine learning in the context of a use case rather than the academically interesting technique of machine learning. And we made some terrific progress on that front.
There are other significant investments driving, you know, new innovations, things that we're calling Live Lens, for example, you'll hear about entering the market shortly here that we're excited about. And much of our investments are also tied to driving into new market segments. We're obviously very excited with the, the, you know, the uptick in consumer packaged goods. And every time you enter a new vertical like that, it influences the analytics that you, that you need to invest in inside of, of rapid response, what I call the, the brain function of rapid response. And so we continue to invest to make sure that we're, we're able to take advantage of every opportunity in the CPG space.
Okay, great. Thank you. That's quite helpful. I'll pass the line.
And we have no further questions at this time. I would now like to turn the call back over to Mr. Wadsworth for closing remarks.
Thank you. Pardon me. Thank you for participating on today's call, everyone. We appreciate your questions as well as your ongoing interest and support of Kinaxis. We look forward to speaking with you
Thank you to everyone for attending today. This will conclude today's call and you may now disconnect.