Good morning, ladies and gentlemen. Welcome to Kinaxis Incorporated Fiscal 2021 Fourth Quarter Results 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, Wednesday, March 2nd, 2022. 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 fourth quarter and year-end results, which we issued after close of markets yesterday. With me on the call are John Sicard, our President and Chief Executive Officer, and Blaine Fitzgerald, 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 2, 2022, and contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in the earnings press release, as well as in Kinaxis' SEDAR filings. During this call, we will discuss IFRS results and non-IFRS financial measures.
A reconciliation between IFRS results and non-IFRS financial measures 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 IR section of our website. Neither this call nor the webcast or archive may be re-recorded or otherwise reproduced or distributed without prior written permission from Kinaxis. To begin our call, John will discuss the highlights per quarter, as well as recent business developments, followed by Blaine, who will review our financial results and outlook. Finally, John will make some closing remarks for opening up the line for questions.
We have a presentation to accompany today's call, which can be downloaded from the investor relations homepage of our website, kinaxis.com. We will let you know when to change slides. I'll now turn the call over to John.
Thank you, Rick. Good morning, everyone, and thank you for joining us today. I'll be starting on Slide 4. I'm pleased to report that Kinaxis had a strong end to our fiscal year, both in our financial results and key operating metrics. For Q4, we achieved SaaS revenue growth of 18% to $46.9 million, total revenue growth of 25% to $68.5 million, and an adjusted EBITDA margin of 16%. For the year, we hit all of our financial targets, including those we raised within the year. Turning to Slide 5, we are thrilled with the continuation of accelerated momentum Kinaxis is experiencing. In Q4 and for the full- year, we achieved a record high level of incremental subscription bookings, and in Q4, also set a new all-time high for new customer wins.
In fact, we more than doubled the number of new customer wins for the full- year compared to 2020. We were incredibly humbled to welcome some globally recognized brands across multiple vertical markets and geographies, and I'm happy to highlight just a few of them for you here today. In life sciences, we earned the trust of Cardinal Health, Lupin Limited, and we're particularly pleased and proud to be working with BioNTech. In consumer products, we added Boston Beer, Edwards, High Liner Foods, Jamieson Wellness, and Robert Bosch. In automotive, we welcomed Mazda Motor Europe to our ever-growing list of iconic customers in that market. In high tech and right here in Canada, Rogers Communications joined us. In the industrial sector, we won BP International Limited, our second bellwether account in oil and gas.
There are so many other names I hope to be able to share with you in the future, but these few shared with you today demonstrate that accelerated momentum is upon us. In fact, as maintained, it has maintained pace in the opening weeks of 2022 as we continue to add major global brands to the Kinaxis family of customers. Our success through 2021 in winning new customers combined with expansion from our installed base has resulted in very strong annual recurring revenue. At year-end, ARR was recorded at $225 million in constant currency, and our backlog of business recorded at a very healthy $484 million. Add to that a four-quarter rolling pipeline that continues to grow, and we have confident visibility into SaaS revenue growth of 23%-25% for 2022.
Our recent initiatives to expand into mid-market opportunities and accelerate time to value for new customers have been very successful. Year- to- date, we saw roughly 55%-45% split between new enterprise customers and mid-market or smaller customers. RapidStart was chosen as the initial implementation approach by roughly 1/3 of all new customers, and this is a trend we believe will persist. As we exit pandemic protocols, we continue to see supply chains at the forefront of boardroom conversations and in the news. The need for supply chain resilience has never been more apparent, and demands for transformation towards true end-to-end concurrent planning. Kinaxis simply has never been more relevant nor better positioned to serve the needs of our markets.
We are responding to this accelerated momentum and responding to market indicators by continuing to invest, to grow our market share, and enhance our platform and service offerings to further distance ourselves from the competition. I'll now ask Blaine to discuss results of our Q4 and the year. Blaine?
Thank you, John, and good morning. As a reminder, unless noted otherwise, all figures reported on today's call are in U.S. dollars under IFRS. We move on to Slide 6. Total revenue in the fourth quarter was up 25% to $68.5 million. SaaS revenue grew 18% to $46.9 million, driven by record new customer wins in recent quarters and the expansion of existing customer subscriptions. Subscription term license revenue was $1.4 million versus $1.9 million in Q4 of 2020. Fluctuations in this revenue item are generally tied to the normal renewal cycle of our customer-hosted software subscriptions and will vary period to period as a result. Our Professional Services activity was strong again, resulting in $17 million in revenue or 50% growth over the corresponding quarter of 2020.
The rapid growth reflects accelerating new customer wins in recent periods and expansion of our service offerings. Generally, this revenue item varies from quarter- to- quarter based on the number, size, and timing of customer projects underway, as well as the proportion of work assumed by partners. Maintenance and support revenue for the quarter was $3.2 million, in line with recent project periods, but up 72% from Q4 of 2020, which was largely due to an adjustment made to this revenue item in the comparative period. We continue to be pleased with the diversity and strength of our total revenue base. For the quarter and year- to- date, our 10 largest customers accounted for 26% and 25% of our total revenues, respectively, with no individual customer accounting for greater than 10% of total revenues.
Fourth quarter gross profit increased by 26% to $43.9 million as a result of our revenue growth. Gross margin in the quarter was 64% compared to 63% in Q4 of 2020. Adjusted EBITDA was up 85% to $11.3 million, for a margin of 16% compared to 11% in the fourth quarter last year. Our loss in the quarter was $2.9 million compared to $1.6 million in Q4 of 2020. Q4 cash flow from operating activities was approximately level with the comparable period at $3.2 million. At December 31st, 2021, cash and cash equivalents and short-term investments totaled $233.4 million compared to $213.1 million at the end of 2020.
We remain pleased with our outstanding track record of cash generation. Move to Slide 7. Full-year 2020 results included total revenue of $250.7 million, up 12% from 2020. SaaS revenue of $174.5 million, up 17%. Subscription term licenses revenue of $6.1 million, a decrease of 66%, which is simply a reflection of 2021 being the low point of the normal three-year cycle of customer-hosted subscription renewals. Adjusted EBITDA margin of 16% compared to 24% in 2020, reflecting the natural dip in subscription term license revenue and the significant strategic investments we made in 2020 and 2021, which are now resulting in acceleration across our business.
A loss of $1.2 million compared to a profit of $13.7 million, reflecting the same items as for adjusted EBITDA, plus higher share-based compensation and depreciation expense. Finally, cash flow from operating activities was $50.1 million compared to $59.5 million in 2020. As John mentioned at the beginning of the call, we are very pleased to have met or exceeded all aspects of our initial and increased guidance for the year. Ultimately, though, our focus in 2021 was on growing our incremental subscription bookings. In that respect, 2021 was our most successful year by some measure, as reflected in some key operating metrics. Looking at Slide 8, let's look at the most important metric first, annual recurring revenue or ARR.
Including currency effects, our ARR grew $36 million to $221 million or 19% compared to an increase last year of $26 million or 17% growth. Currency movements masked some even stronger underlying growth. We are very pleased that our ARR on a constant currency basis grew $40 million in 2021 to $225 million or 21% growth, compared to an increase last year of only $24 million or 15% growth. This dramatic improvement is a reflection of the unprecedented strength we have experienced all year winning new accounts and of success winning incremental business from our installed base. I'll remind you that growth rate for SaaS portion of ARR is higher than for total ARR.
We have full confidence that we can grow SaaS revenue by 23%-25% in 2022. I'll also note that an unusual number of the contracts we signed in the fourth quarter included provisions that build in meaningful expansion of the subscription amounts throughout 2022 and 2023. Our ARR at year-end is conservative in that it does not yet reflect its guaranteed growth. Including those amounts would have resulted in even higher ARR growth rates. Moving to Slide 9. Our remaining performance obligation, or RPO, is very strong at $484 million, up 27% from December 31st, 2020. Of that total, $424 million relates to SaaS business, which is up 20%. Further details on our RPO can be found in the revenue note to our financials.
The RPO growth reflects the record level of incremental subscription bookings in 2021 from new and existing customers, but also reflects the fact that more renewals happen to be scheduled for Q4 than in recent quarters, as we indicated would be the case on our last call. While RPO is a valuable metric, remember that it isn't impacted by the normal schedule of existing customer contract renewals and their duration among other factors. ARR is a more specific indicator of momentum in winning this Subscription business, which in turn drives future revenue growth. Of the 2021 RPO amount, approximately $217 million will be recognized as revenue in 2022, of which approximately $179 million relates to SaaS business.
This guaranteed backlog of SaaS business provides us over 80% coverage of our 2022 SaaS revenue outlook at the midpoint, which has been a typical target for us. Go on to sSlide 10. With respect to our outlook, we are pleased to be able to provide you with initial guidance for Fiscal 2022. We expect total annual revenue to be between $335 million and $345 million, representing approximately 36% growth at the midpoint. SaaS revenue is expected to grow between 23% and 25% over our 2021 level. Subscription term license revenue will hit the peak of its three-year cycle in 2022, so we're expecting between $30 million and $32 million. The growth in this amount since the last peak of $26 million in 2019 largely reflects expansion activity within the on-premise customer pool.
Roughly 2/3 of this revenue will be recognized in the first quarter, just less than one quarter of the amount in Q3, and the remainder in Q4. I should add that due to the growth in this item, maintenance and support revenue will also grow by $2 million in 2022. Finally, for 2022, we expect our adjusted EBITDA margin to be between 15%-18%. The market for supply chain planning and our own unique differentiation within it have never been stronger. We've decided to continue to invest aggressively in all aspects of the business, R&D, sales and marketing, professional services, customer care, and G&A, where necessary to support greater scale.
As momentum behind digitalization of supply chains continues to pick up pace, we will make sure that we have all the resources available to meet the opportunity and extend our lead. Looking at other financial targets for 2022, we are aiming for a gross margin in the 63%-65% range. Sales and Marketing and Research and Development to be approximately 22%-24% of revenue each, and G&A to be in the 16%-18% range. We expect CapEx will be between $23 million-$28 million, mostly related to expansions to our data center capacity to support our growing customer base. We've seen our bets from 2020 and 2021 pay off, and we see plenty of opportunities for continued growth.
Our ongoing investment in strategic initiatives, as reflected in our guidance for 2022, demonstrates our high level of confidence that we are moving in the right direction as we build for the long- term. With that, I will turn the call back over to John.
Thank you, Blaine. Let me reiterate a few important points before we move to the Q&A portion of the call. First and foremost, the quality and quantity of customers that continues to join the Kinaxis family is beyond humbling. For both investors and our end markets, our blue-chip customer base continues to represent the biggest proof point of our entirely unique differentiator, concurrent planning. Secondly, key strategies that we have recently put in place, including our decision to proactively target the mid-market and to accelerate time to value with RapidStart, are working. New customer wins have hit record levels, and thanks to the proven value and stickiness of RapidResponse, we expect each to grow with us for a very long time.
Third, we have exceptional visibility into a 2022 that will deliver greatly accelerated SaaS revenue growth, as reflected by expansion in our ARR and RPO numbers shared today. Finally, our confidence in the market's demand for our future supply chain transformation remains very high, and we will continue to invest to ensure we are ready to absorb success. We see tremendous opportunities to capture more market share and enhance our platform and service offerings to distance ourselves even further from the competition. Momentum in the business is at an unprecedented level, and we intend to take full advantage of that. As always, thank you for taking the time to join us on the call. With that, I'll turn the line over to the operator for Q&A.
Thank you. We'll now begin the question-and-answer session. To ask a question, you may press Star, then one on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press Star, then two. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Thanos Moschopoulos from BMO Capital Markets. Please go ahead.
Morning. John, you mentioned the win with BP, which is interesting since that's obviously a non-traditional vertical. Anything you can tell us about that use case, whether we're talking upstream or downstream, and just in general in terms of the pipeline and opportunity you're seeing in oil and gas?
It's a great observation, Thanos, and we are seeing some general interest from that sector. As I mentioned, this was our second bellwether for that. I'll call it a sub-vertical of industrial. You know, we're generally in the upstream of those use cases, so obviously not in the refinement or the exploratory side of their supply chain. We do see it as a very interesting sub-segment of the industrial market, and you may very well hear some other names as the year progresses.
Okay, great. Can you update us on competition? I assume in enterprise it's probably the usual suspects, but as you're going through mid-market, is it a different cast of characters to some extent, or what are you seeing?
You know, there hasn't really been a meaningful change. You know, we continue to see SAP as the traditional incumbent. We see Blue Yonder and o9 from time to time. I would say the Gartner Magic Quadrant has done an exceptional job at showing where the gaps are, you know, between the competitors. I will say we are certainly looking forward to the release of the 2022 MQ. I'm told it is imminent. We shall see. I think that Gartner does an exceptional job at highlighting the differences between competitors. Again, I'll say we have not in the field seen any meaningful shift in one direction or the other.
Okay. Finally on M&A, you announced a small tuck in. I don't know if there's anything to call out there. In general, any commentary on M&A pipeline would be helpful. Thanks.
Yep, thanks for that. Yeah, we are, you know, I think I've said this on prior calls, being a lot more thoughtful about filling white space and what I would call technical gaps that we might, you know, see opportunities for. You know, at the same time, our approach to RapidResponse as a platform and really driving other companies to build their own intellectual property on top of RapidResponse is also, you know, part and parcel of that strategy. As far as it relates to this little tuck-in that we did, for competitive reasons, we're not gonna go into much detail here.
You know, this company comes with a small product and more so significant expertise in an area that we are strategically focused on. You know, we won't be commenting too much on exactly what that area is. Essentially, it was a $3 million-$4 million acquisition, all cash, approximately 10 people in North America. You know, more to come on what we'll be doing from a roadmap perspective.
Great. Thanks, John. I'll pass the line.
Thanks, Thanos.
The next question comes from Daniel Chan from TD Securities. Please go ahead.
Hi, good morning. You talked about the recent wins having some expansions throughout the next couple of years. Can you just help quantify how much those expansions are over the current ARR and whether they're in the current guidance and in the current RPO?
Yeah, great question. Number one, we don't disclose how much the amount of, I guess, ramping that's involved. It's a significant amount. I mean, if I think about our ARR growth, if we would have been including that amount, we would have had an all-time high with our ARR growth, which is a great sign. It will be spanning between mostly in 2022 and 2023, more the back half of 2022. We included obviously the 2022 amount that we know is already committed as part of our forecast. All the information is included in our guidance at this stage. We're really pleased. I mean, it's a. I don't like to always point to RPO.
Our RPO is partially increasing at the rate it was because we have a lot of faith that was put into us by some new customers that decided they wanna keep growing with us in the future. That was a great sign and a great testament to the success we've had in 2021.
Okay, thanks. I was wondering if you can give some color on the record number of new customers that you've won, whether most of those were competitive displacements or largely greenfield, whether they were mid-market or enterprise. Anything would be helpful.
Yeah. They're, you know, I would say that largely competitive replacement, frankly. I think what we're seeing in the market now more than ever is. You know, we're hearing the term resilience quite often, right? A lot of organizations are driving towards a more resilient supply chain. Obviously, the conditions the planet finds itself in, you know, you would see that how that makes a lot of sense. Resilience isn't a competence, it's an outcome of one, and we believe the competence that brings about resilience is agility. Obviously, with agility comes concurrent planning.
You know, the customer wins, I would say by and large, are an offset of a traditional approach with a, what I might call a legacy software package that they're replacing, and moving towards concurrent planning. Blaine, you might comment on the split between enterprise and mid-market.
Yeah. As we mentioned in the script, we were at around 55%-45%. 55% being enterprise and 45% mid-market, which actually changes the way that we have on competitive dynamics because you can imagine that with enterprise, it's a very competitive scenario in place where we're having to displace generally another solution in that situation. With mid-market, it's not as much that what we would see it as competitive displacement, but it is a very competitive arena that we're fighting with other companies to win those companies.
Okay, thanks. Last one for me. Professional Services revenues coming in much stronger than expected. What's driving that considering we were expecting most pro serve to go to your SI partners?
Yeah, great question, and I'll maybe just start that you're absolutely right. The majority of the services are going to our partners in our ecosystem. We have less than 30% of the total revenue that's going for pro serve. But at the same time, this is a situation where we're in a great position, and everyone's in a great position in terms of everyone is in high demand. We're in high demand, our partners are in high demand. We simply seem to be a little bit ahead of some of our partners in terms of being able to fulfill and deploy the requests that are coming in right now. Although our partners are
We want our long- term to be even less than that 30% number or 20% number or 10%. We wanna have a smaller portion of the total professional services ecosystem revenue that's out there. For the time being, because the demand is so high, everyone is trying to do whatever they can to keep up with this demand. We just simply happen to be in a great position. I'll let John add on to that.
Yeah. No, we are monitoring the bench strength of our you know of our partner alliance very very carefully. It's hot in every geography in every vertical. As Blaine said, we're responding to the demand being put upon us and the speed at which our customers are driving these transformations. Our thesis has not changed whatsoever. We continue to sign partners. In fact, we've signed a record number of partners in 2021. We're continuing along that path. It's a situation right now where the demand for transformation projects outpaces pretty much the environment's capacity to deliver it. Everyone is exceptionally busy.
We're working very hard with the partner alliance team as part of our investment thesis for 2022 is investing heavily in partner enablement to accelerate partner enablement just to keep up with the demand.
That's great. Thank you.
The next question comes from Robert Young from Canaccord Genuity. Please go ahead.
Hi. Hi, good morning. Maybe I'll just continue on that last line. The EBITDA margin guidance for 2022 is I think maybe a little bit lower than expected, and I'm curious if that's reactive on the Professional Services. Are you just trying to pull people into the business? Is that where the impact on EBITDA margins are, or is this I think in the script you'd said it was, you know, reacting to the demand that you're seeing out there and expanding. Is this more go- to- market, sales expansion? Is it R&D? If you could just give a little more color and maybe some, you know, some idea of whether this is Professional Services driven or not.
Okay. Great question, and I think the first answer is nothing we're doing is reactive at this stage. It's intentional. I'll just go back to what happened in 2021. We made some intentional investments. As a result, we had some great situations that came out where we had five quarters in a row now of new name account customers that have won. We've won. We just had our highest incremental bookings ever. We have highest gross bookings ever. Expanded our TAM during that period of time. We're gonna be talking about 36% year-over-year total revenue growth that we're expecting in 2022. Right now, we've seen that the investments we're making are working.
I'll be very candid and say that we are a 30%-35% adjusted EBITDA company in the long- term. When we want to do that, we'll do that. Today what we're trying to do is grow that pie as big as we can so we can share it with our investors in the future. We're investing in professional services, like you said. They're screaming. It's not us, it's like us and our partners are screaming for support because there are so many customers that are asking for this service right now. Sales and Marketing. As you can imagine, Sales and Marketing, we are trying to keep up with the pipeline, and our pipeline keeps on growing.
We need to make sure that we have some experienced AEs and RVPs that can help them along the way, and they've done fantastic jobs over the last year. Data centers, we see the pipeline, we see the potential customer growth that we're expecting. We need to make sure that we have those data centers up and running in advance. Part of that is hitting us as well, and that's hitting our gross margins, particularly. Customer support, another great example of an area where we need to have people who are onboarded and ready to go to be able to support this bigger customer base that has been growing quite rapidly.
The other piece to remember is we made a big investment in R&D last year, and we did that because the opportunity is growing. We're continuing to maintain that R&D growth because we are no longer a company that is thinking that we're gonna have 200 customers for the rest of our life. It's gonna be 2,000 customers at some point, and we need to make sure that our platform is able to support that rapid scaling growth. I think we're going in the right direction. It's a great position to be in when you say, Okay, if we do this is gonna be the result. That's exactly what happened in 2021. In fact, it probably was a little bit better than we were expecting.
Thanks for all that color. My next question will just be around RapidStart. I think you said it was 1/3. Is it? I think that seems to me to be lower. I might be wrong on that, but is that a normalization of the business? Are you seeing the core larger enterprise sort of go back to a more normal deployment with more customization and, you know, RapidStart is driving channel and mid-market? Or maybe you could just talk about that dynamic, if that's the case.
Sure. Absolutely. Yeah, this quarter we're gonna see quarter-to-quarter fluctuations. We've seen quarters where it was half and half. You know, we've seen some quarters where RapidStart was being picked up by mid-market over enterprise. I'd say in this past quarter, we were surprised to see some enterprise companies moving in that direction as well. We are gonna see some fluctuations, you know, quarter-over-quarter. The key here is, you know, for us anyway, is just to be able to offer unmatched deployment speed for any size company. In that regard, RapidStart has been an absolute success. If you think about it was. It's relatively new, and so we're thrilled to see the adoption and the uptake.
I also wanted to clarify one thing that in some cases we are signing long-term agreements that's obviously building our ARR and our RPO numbers, where it's in an enterprise class kind of a deal structure where the first phase is still a RapidStart. It just doesn't stop there, right? You know, that to some degree you know is coloring those numbers a bit. In any case, I would say the RapidStart methodology it was a great decision. It's working exactly as expected.
Frankly, without it, some of the deals that we closed, we wouldn't have been qualified for without having a RapidStart, rapid value, you know, go live in 12 weeks or less kind of an approach.
All right. Is that dynamic what's driving that guaranteed expansion that you talked about?
Well, certainly, you know, our land and expand strategy is always, it's been omnipresent as long as we've known each other, Rob, right? It continues to be so. We've had many cases where customers who started with a RapidStart 12-week deployment have already expanded. You know, you see them expanding one quarter later, and they're already saying, Okay, this is great. Let's keep moving. Let's expand from here. The expansion model is definitely baked into the model here. We certainly don't count any future-state revenue because of RapidStart. That's another very important statement to make.
The fact that we are deploying this rapid time to value, reducing the friction to making a decision, you know, getting live inside of 12 weeks, by no means does that mean that Kinaxis is forfeiting any future state opportunity. It's quite the contrary. We're, you know, looking at the expansion as soon as we hit that go live.
Okay. Last question, just on the subscription, a lot bigger than I expected. I've always assumed that to be a flat or maybe slightly declining business with expansion. Is that entirely what's going on here? You had the new win in Q4 that you were talking, or last quarter you were talking about. Is this subscription result driven by expansion, or is there new wins? Is there some other dynamic that's causing the growth this quarter? I'll pass the line.
A great question, and happy to answer that. It is technically an expansion. It's a number of companies coming together that fall under one umbrella. That has expanded. You know, I'm just gonna jump into and go a little bit off the question, which is, we gave guidance of 23%-25% SaaS growth. If we weren't expecting that, we would have the increase that we got in subscription term license revenue. We thought it might have been more on the SaaS side, which would've provided us with the opportunity to give you maybe a higher guidance than we have at this point. We're very pleased that we're still getting the subscription term license revenue. It does come from expansion.
It is an interesting scenario where we had a lot of great things that happened in Q4, and that expansion was one of the ones that was a nice surprise.
Our next question comes from Paul Treiber from RBC Capital Markets. Please go ahead.
Oh, thanks very much, and good morning. Just a follow-up question about your comment on expansions. I mean, you mentioned it for term license. But just in regards to the renewals in the quarter, you know, how has gross expansion been tracking in 2021? Have you seen an expansion versus historical rates? And then also, did you see an improvement in logo retention and ultimately net dollar expansion this year?
Yeah, great question. We currently provide disclosure or guidance that we're over 100% NRR. I will give you a little bit of color on that. It is definitely going up into the right. It's higher than we've seen. A large part of that is driven because the revenue expansion that we've seen over 2021 is some of the strongest we've ever seen. Our renewal expansion was extremely strong in 2021. When we think about the logo retention numbers, well, we've talked about this before, for enterprise-type customers, you should expect somewhere in the range of 95%-100%. We're right in the middle of that, despite the fact that we also have mid-market, and we have even smaller customers than mid-market.
We are very strong on the logo retention, I'll say.
Thanks. That's helpful. You know, a high-level question in terms of the overall demand environment, meaning obviously your comments are very positive about the demand environment. Just, you know, there's a number of other, you know, digital transformation initiatives that large enterprises are going through right now, and also, you know, supply chains have been disrupted. You know, based on just the feedback from partners and customers, you know, how do you see supply chain transformation ranking among all the digital transformation initiatives out there?
Yeah, it's a great question. I've had probably between 80 and 90 now, one-on-one conversations with chief supply chain officers all over the world. You know, call them interviews, if you will, as part of our process here, and it is absolutely at the forefront. I mean, Boards are asking their CEOs, What are you going to do next time? If it isn't a pandemic, it's the inflationary impacts globally, you know, to profit margin, or it's a war or a stuck boat, a deep freeze in Texas. You know, there's this appreciation that the only constant in all of supply chain is disruption.
If anything, Boards have realized that supply chains haven't proven to be as resilient as they should be to absorb these types of things. I will say this, and this is a narrative that is really, really well received. This is not a technical problem. You know, many people think, oh, it has to do with digital transformation. I would posture that it's, that's secondary. The primary dialogue that we're hearing, the primary narrative that we're hearing from practitioners is that what's wrong with current supply chains is the technique, not the technology. It's not a technological discussion at first. It's one of technique. I do think this is absolutely at the forefront. We're being asked now from some customers to do inflationary scenario management.
Like, you know, again, inflation occurs in different geographies at different rates, and we'll see recovery of reinflation at different rates in different geographies. These companies are running daily scenarios to try to understand what the implications are of that disruption. You know, I think, again, as I said earlier, maybe in previous quarters, you would have heard me say, I'm not quite ready to call this systemic momentum. Maybe I am now. Again, you know, Q4, the success that we experienced, and as I just said, you know, earlier, the success that we've experienced in the first eight weeks of 2022, the momentum is, the pace is maintaining itself here.
I you know I would say this is at the forefront of enterprise discussions and what boardrooms are talking about.
Maybe I'll just add, there was an interesting article or an update from the forecast from Gartner in January of this year on application software. They made a statement saying that they expected that their modeling growth rates to increase the most now within supply chain management sector in 2022. That's just another testament to the fact that we're in this renaissance that we're going through. We're going through this push that is, we're in the process of land grab, getting as many customers because it's at the forefront of everyone thinking right now. They need to figure out their supply chains.
Just a final question for me, and maybe, you know, it's a bit of the punchline here is, you know, in terms of win rates, I mean, you talked a lot about pipeline. You know, how is the pipeline converting through the funnel compared to your, you know, historical? Like, are customers closing
You know, at a faster pace or, you know, pace, but a probability than what they historically have.
Paul, I don't know, like you can't see my smile here, but you must be like just giving me like slow pitches right now. You're tossing it up. These are great questions. Our pipeline is obviously growing, but the other big factor that you have to look at is what are our conversion rates? It's great that you ask that question, and our conversion rates are going up. Conversion rates, win rates, we were in a Board meeting yesterday, and we were looking at win rates and how they've changed over the last four years, and it's like up and to the right. Our conversion rates, Q4 was one of the strongest.
We, you know, we went into Q4 going, Our pipeline is really good, but to get the number that we want, we're gonna have to have pretty high conversion rates, and then it converted even higher than we were expecting, which is a great sign. All that to say is that you're making me very happy with your questions. Conversion rates are doing great, win rates are doing great, pipeline is growing, and those are all the things you'd want as a CFO right now.
Okay, great. I'll pass the line.
The next question comes from Stephanie Price from CIBC. Please go ahead.
Hi. Good morning. Just curious on inflation and how much inflation is factored into the margin guide here. Just thinking about talent acquisition and retention specifically.
Sure. We're like every other company around the world. We're getting hit by some of the inflation issues that are happening. We've included increases in salaries and benefits within our guidance. That's already baked in. We do see that there is going to be a situation at some point where I think because we're in an area that a lot of people are seeing more often, supply chain, that I think we will benefit on the attrition that some of the other companies may have, and they may be attracted to our area. We are seeing some attrition issues in our area as well. I think they're lower than what we're seeing throughout the rest of the industries.
I think we're also in a great position that the more people talk about supply chain and the issues that supply chain have, the more time, the more chance that we'll get people attracted to our business, so.
Thanks. Just sticking on the margin guide, maybe you could talk a little bit more about the investments that you're making. I understand that it's kind of broad-based, but where specifically should we kind of think about?
I think you know, there are certain things that we need to do purely because of what we're seeing in the current environment and demand. I would say sales and marketing is the one that you should really focus on. We have an exceptional sales team, and they're very efficient. We do look at our sales efficiency. We compare ourselves to our peers. We believe we're best in class in that sales efficiency metric. We're looking at where it's gonna be with respect to 2022, and we think that we'll be in a very strong position. Sales and Marketing is where I would say that people should focus.
If they understand the efficiency metric, which you can actually calculate. We look at the next 12-month ARR growth divided by the last 12-month sales and marketing. You can see the trend going up into the right over the next year, I believe, based on our ARR projections that we have baked in. It's a nice place to be.
Great. Thank you very much.
The next question comes from Richard Tse from National Bank Financial. Please go ahead.
Morning. This is Amir calling in for Richard. Just wanted to ask about the CapEx. We noticed there was a ramp in PP&E. From the looks of it seems like it's related to the new offices. Just wondering if that thinking is correct. Then also, for your guidance for 2022, how much is there any sort of office expenses basically baked into that?
Yeah. I caught most of that. I think you asked about the Q4 ramp in CapEx. Majority of that does relate to our headquarters that have been basically completed at this stage. We got to say that we're 100% on all levels, and it came in, funnily enough, a little bit below our budget, which never happens, right? Then for our guidance, just to make sure I understood your question correctly, were you asking about what our guidance was? Did it bake in the CapEx amounts? Is that what you're asking?
No. I was just asking on the CapEx, like you guys guided to $23 million-$28 million. Was there any incremental, basically, office-related CapEx there? Is that all related to data center, et cetera?
Oh, yeah. Sorry. It is almost all related to data centers. There are some small amounts that relate to offices. We are in the process of moving our building in India, so we have a smaller fit up amount that we will have. The majority of this has to do with data centers.
Okay. Sorry, I heard a bit of it, but I missed it. You said for the subscription term license that basically 2/3 would be recognized in the first quarter. What was the breakout for the rest of the quarters again?
No, 100% of that amount will be in Q1.
Okay.
2/3 of it will come in Q1 of the total amount that we guided to. There'll be a very little amount in Q2, and then other amounts in Q3 and Q4.
Okay. Just one question about whether there's been any change in the competitive environment, including pricing.
On the competition side, we really haven't seen any meaningful shift. You know, we continue to see SAP as the typical incumbent, especially in larger enterprise. You know, I'd say, as it relates to pricing, you know, I wouldn't say competitive pressure isn't necessarily where we're focused, but RapidStart and the ability to lower the friction of getting started is where we have focused our attention there. And that has worked in our favor. This certainly helps with mid-market companies that are looking for an extremely aggressive timeline to value. Not only is the pricing and the timing of a RapidStart beneficial there, it certainly increases our win rate, I'd say that.
Okay. Thanks. Congrats on the quarter, and I'll pop a one.
Thank you.
Our next question comes from Christian Sgro from Eight Capital. Please go ahead.
Hi, good morning. I wanted to ask about the current pipeline. Maybe we could ignore geography. I'm more curious on what you're seeing from the different verticals. Now, which do you think could be the strongest key verticals this year?
Yeah, it's interesting, as we were just in a Board meeting, and I, you know, describing to the board what the pie chart looks like by vertical. I have to tell you, all six verticals are on the board in very meaningful ways. We don't necessarily see any out weighting. That said, just looking at general pipeline, we continue to see high-tech electronics and life sciences as predominant drivers of subscription revenue. As you just heard during the opening remarks, I think I mentioned five or six consumer packaged goods companies in that list. I think on prior calls I've said, you know, we are starting to see that area warm up for us. That has actually manifested.
You know, as I said it in previous calls, it's manifested in some significant net new names there. That's, you know, I would say high tech, electronics, CPG, life sciences, you know, tend to be the warmest. As I noted, you know, with Mazda in the automotive sector, there has been some wins in the aerospace and defense sector, which we're not able to share. You know, I'd say all the verticals are warming up. The pipeline itself, I don't see any concentration issues geographically. I don't see concentration issues from a vertical perspective. You know, I feel a little bit like a broken record 'cause I feel like I say that every quarter, but it's the.
You know, I'm saying it because that's what the charts are telling me. We're really happy with not only the strength and size, but the distribution of the pipeline.
That's very helpful. I've got a second question here on the partner channel. I wanted to ask about the Planning One program with the VAR partners. So maybe a two-parter. You know, first I was curious, like what can Kinaxis's level of engagement be with these VAR partners and when we think of things like sales and support? Then the second question is just some of the traction you're seeing, what you're hearing from your partners to date.
Yeah. I think I mentioned this earlier that, you know, our thesis around the alliance partnerships remains very, very strong. It's working. You know, our partners are as busy as we are. We're doing our best to leverage, you know, bench strength where we can find it. All of us, the partners and us, obviously, hiring to serve the demand. The VAR program is quite new. We announced that in 2022. I'm happy to say that in a very short period of time, we've signed, I wanna say it's close to 20, if not 20, VAR partners around the world. We're working right now on getting them ready for success, if you will, and onboarding them and the enablement side.
You're absolutely right to call on RapidStart as the foundation. You know, the Planning One as a product, leveraging RapidStart as a deployment methodology is obviously where we think we can get the most leverage. Stay tuned on that. As I said, it's a relatively new program for us. But I would say the number of VARs that we've signed to date has outpaced our expectations. You know, we're investing right now. This is again, part of the investment thesis in preparing for success, is to make sure that we don't just sign VARs in name only. They have to be successful and they have to be properly onboarded. And for that, we have to make investments.
Perfect. That's all helpful color. Thanks for taking my questions.
Thank you.
In the interest of time, we ask that you ask one question from now on. Our next questioner will be Paul Steep from Scotiabank. Please go ahead.
Great. I'll make my quick one-two parts, just a clarification and a first one. Blaine, can you just confirm that in terms of how you think about deploying capital on investments, you guys haven't changed how you're thinking about that in terms of data center, right? In terms of the build profile, you're still looking one to two years out when you're doing it, if we sort of read into the growth of that. The second follow-up quickly would just be on the term license, how should we think about the dropdown of that over a three-year period? Should it mirror what we saw the last go around? Thanks, guys.
Great. Ran through the first question, yes is the answer. We're not changing anything on our capital deployment. The second question with respect to how we should see subscription term license over the next three years, again, we've seen subscription term license historically before Q4 and what you're seeing in 2022, fairly flat, like, no renewals, a little bit of expansion. Obviously, we saw some new name accounts in Q4 and then some expansion you're gonna see in 2022. What I would expect is you'll see a similar drop-off in 2023 compared to what you saw, again, the three years prior to that, and the same thing in 2024.
All that is dependent on what happens with expansion in our subscription term license revenue area. I don't expect it to change, but at this stage, I wasn't expecting to have the increases we've seen over the past two quarters.
Understood. Thanks.
The next question comes from Nick Agostino from Laurentian Bank Securities. Please go ahead.
Yes, good morning. I guess my one question is with regards to the Big Ideas event you guys hosted last year in October, obviously well attended. My question is, how much of that event itself is contributing to the pipeline growth you guys are talking about on this call? Maybe how much of that event has led to deals that are being baked into the guidance for 2022? Or is the answer nothing, but you walk away with prospects that maybe you think are contributing to 2023, 2024? Thank you.
Yeah. It's a great question, Nick. You know, we were actually quite thrilled and surprised at how much these virtual events have driven you know from an interest and ultimately in some cases you know real pipeline development. We track exactly these are you know I won't say by invitation but they're by registration. We know with absolute precision who is attending and that gets mapped to our TAM. We know exactly which accounts are joining in on these virtual events like Big Ideas. That gives us an opportunity to warm up prospects that we know are in our sweet spot.
You know, I can't tell you I know with absolute precision what the percentage of pipeline of individuals that attended Big Ideas, but it is definitely not zero, that is for sure. We have other events that we're doing and you'll see more during 2022. We are hosting an in-person connections event and certainly hope to see our analyst community attending that in early May. You know, we're gonna continue with the virtual programs as well because, as you saw, you know, we had thousands of people tuning in to hear our story and to understand what makes us so relevant.
I think, you know, part of that, Big Ideas is absolutely fueling the pipeline, and part of it is coming from the likes of a Gartner and, you know, a recognition that concurrency is truly a breakthrough technique.
Okay. Thank you.
Our next question comes from Suthan Sukumar from Stifel. Please go ahead.
Morning, gents, and congrats on an impressive quarter. I had a question on your market opportunity. You know, it really sounds like you guys are seeing some really strong broad-based demand, globally, within the market today. Do you see an opportunity for more geographic expansion to increase your presence in a market that may not be served today? Or do you already see yourself as well-positioned with your current footprint and your partner reach?
You know, I love this question because, I mean, the answer is an unequivocal yes. Just like, you know, whether it's geography or other verticals and, you know, as the call started with Thanos pointing out oil and gas, where you might not have thought of Kinaxis being a viable fit. I always say the same thing, are we gonna, you know, break into this vertical or that vertical or cut and sew or forestry? Yes, it's a matter of time, you know. The same is true for geographies. Now, that said, you know, part of our thesis, and I think part of what makes Kinaxis able to grow while simultaneously providing responsible, you know, profits and cash flow is that we're hyper-focused.
We're razor-focused on the verticals and the TAM that we see before us. I'm just not a believer in bifurcating our energy across, you know, too many geographies and too many verticals simultaneously and failing at all of them. The answer is yes. We think about that a lot, about geographies and verticals. We think more so on verticals in the geographies where we're already strong, frankly. If I'm gonna be frank about that. You will see continued expansion as we progress as a company. Part of that is the investments we're making in R&D. You'll see us enter the retail sector, for example, in earnest during 2022, based on the investments that we're making. We already have retail customers, and we have retail prospects.
You know, at some point in the future, I hope you'll be able to describe exactly who they are. Again, these take investment. You'll see us continue to do that for many years to come.
That's perfect. Thanks for taking my question.
Thank you.
The next question comes from Martin Toner from ATB Capital Markets. Please go ahead.
You've talked about the acute reasons for professional service growth being higher than subscription and higher as an overall percentage than in the recent past. Is there anything structural about that?
I don't see anything other than just pure accelerated demand. You know, when you have a certain collective bench strength between your partner alliance group and Kinaxis and obviously our own bench, and a combined market demand that's driving the need for service in an accelerated pace, that's where this is coming from. We have customers asking us for sustainment services at a record pace. Again, a lot of this is a reaction. You know, manufacturers are reacting to the volatility they're experiencing in the market, and that is driving a need to accelerate the value of concurrency.
You know, when you look at the demand, you know, the capacity required to fulfill that demand, well, the truth of the matter is we're seeing a demand that's outpacing the collective capacity at a rate that we. Well, it's a great problem to have, but it's a problem, and it's not just ours. It's our alliance partners are tapping, and they're hiring as fast as they can. And again, this is a reason for our investment thesis for 2022. We're not going to be timid. We are not going to be timid in the face of this momentum, and nor will our partners. We're going to seize the day. It's a great problem to have, but it's a problem. We're working on it every single day.
Great answer. Thank you very much.
This concludes our question- and answer session. I would like to turn the conference back over to Rick Wadsworth for any closing remarks.
Thanks, operator, and thank you all for participating on our call today. We appreciate your questions and your ongoing interest and support of Kinaxis. We look forward to speaking with you again when we report our first quarter results. Goodbye for now.