Kinaxis Inc

TSX:KXS

Earnings Call Transcript 2019-Q1

[Operator]

Good morning. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Kinaxis Inc. First Quarter Results Conference Call. [Operator Instructions] Thank you. Mr. Wadsworth, you may begin your conference.

[Rick Wadsworth, Vice President Investor Relations]

Thanks, operator. Good morning, and welcome to the Kinaxis earnings call. Today, we will be discussing our first quarter results, which we issued this morning. With me on the call are John Sicard, our President and Chief Executive Officer; and Richard Monkman, our Chief Financial Officer.Before we get started, I want to emphasize that some of the information discussed on this call is based on information as of today, May 10, 2019, and contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in the earnings press release as well as 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 in the Investor Relations section of our website, kinaxis.com, and on SEDAR. Participants are advised that the webcast is live and is also being recorded for playback purposes. An archive of the webcast will be made available on the Investor Relations section of our website. Neither this call nor the webcast archived may be rerecorded or otherwise reproduced or distributed without prior written permission from Kinaxis.To begin our call, John will discuss the highlights of our quarter as well as recent business developments, followed by Richard, who will review our financial results. Finally, John will make some closing statements before opening up the line for questions. I'll now turn the call over to John.

[John Ernest Sicard, CEO, President & Director]

Thank you, Rick. Good morning, and thank you joining us today. Kinaxis delivered very strong results in the first quarter of 2019. We grew total revenue by 24% to $45.8 million. We grew SaaS revenue by 17% to $27.3 million. We grew subscription term license revenue by 87% to $8.4 million, and we delivered adjusted EBITDA of 35% of revenue. In keeping with our land and expand strategy, we grew business with our existing customer base during the quarter, including significant business with our long-standing on-premise customers. While we added new cloud-based SaaS customers during the quarter, other large and active deals are taken longer to finalize than expected, and as a result, Q1 bookings did not meet our expectations. However, given current activities and the state of our sales funnel, we remain very confident in delivering strong SaaS bookings in the coming quarters. In fact, we have begun and we will continue to further expand our sales capacity above our initial plan for 2019. Based on our Q1 results and general outlook, we are reaffirming our full year revenue guidance with a slightly higher contribution from subscription term license revenue and related support and, given that timing of deal closure affects SaaS revenue contributions for the current year, a slightly lower SaaS revenue target. Further, we are increasing our guidance for full year adjusted EBITDA. Richard will provide you with details on this guidance shortly. Thanks to our ongoing strategies and increasing investments in sales, particularly in Europe, our funnel remains healthy in both volume and diversity and is much larger than it was during the same period last year. Our expanded and more focused marketing activities are increasing brand awareness and have resulted in quarterly unsolicited inbound inquiries growing for almost 2 straight years. In fact, this leading key indicator for Kinaxis jumped more than 30% in Q1 2019 compared to Q4 2018 and 60% compared to the same period last year. I remain very confident that our growing sales team, many of which have been with us for less than a year, will convert on the large funnel that has been created over the past 4 quarters. We have consistently demonstrated the strength of our competitive positioning through marketing new customer announcements, including Lenovo this past quarter and Unilever, Novartis and Dyson in the quarter before that, to name a few. We fully expect that success to continue. With respect to our growing list of strategic partners, we are pleased to be working closely with leading supply chain consultancies, including EY; Deloitte; Accenture; and Barkawi, now under the ownership of Genpact. In Q1, we announced that Exa Corporation in Japan formally became part of our partner enablement program. Every quarter, more partner practitioners are getting trained to deliver RapidResponse. Over the past year, the number of practitioners has more than doubled, and now several hundred individuals have collectively earned over 1,100 training certifications. Our global alliance strategy is working, and these key indicators are proof of it, along with the significant work they are doing to lead deployment projects. As I have stated before, this program is critical to our ability to scale our delivery capabilities more efficiently as we continue to execute our growth objectives. During our Investor Day this past March, we shared details behind a number of new product initiatives that are well underway, and I wanted to highlight some of them again for you today. We will be expanding our capabilities to include production planning and scheduling, which we're seeing demand for across multiple market segments. We are also expanding our machine learning and automated intelligent offerings to include demand-sensing capabilities. The release of our third generation in-memory engine, which has been under development for several years, is just around the corner. This significant leap forward in architecture and functionality will continue to ensure our dominance in concurrent planning and provide the foundation for what I believe to be our most significant innovation, RapidResponse as a development platform for planning. Similar to Salesforce.com and other leading platforms, our vision is to enable our strategic partners and customers with the means to build cloud-based extensions and solutions attached to RapidResponse. This will ultimately further leverage the value of their investment in concurrent planning. And particularly -- in particular, we believe this innovation will create significant opportunities for our partners to expand their Kinaxis practices. In short, I remain firmly confident that our core strategies, including sales team expansion, targeted global marketing, partner enablement and product innovation, are working. These all take time to fully develop and yield results, but I'm convinced these are the right investments to ensure long-term sustained success for the company. With that, I'll turn the call over to Richard for an overview of the financials for the quarter.

[Richard George Monkman]

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.Total revenue in the first quarter increased 24% to $45.8 million. This performance continues to be driven by SaaS revenue, which increased 17% to $27.3 million. This growth was due to contracts secured with new customers as well as the expansion of existing customer subscriptions. Another key contributor to total revenue growth was subscription term license, which grew 87% over the same quarter in 2018. If you recall, for customers that have the right to host RapidResponse in their data centers, subscription term license revenue represents the economic value of the right-to-use component of the related fixed-term subscription revenue contract for the entire multiyear term. This component is 100% recognized at the start of a subscription term, regardless of the length of that term. The remainder of the subscription revenue contract is then allocated to maintenance and support and is recognized ratably over the full multiyear subscription term. So while the subscription portion allocated to quarterly maintenance and support revenue is relatively smooth, the right-to-use portion allocated to subscription term license revenue will vary significantly quarter-to-quarter depending upon subscription renewal schedules or the signing of new arrangements. In Q1, we renewed a number of these contracts, with total subscription expansion above the level we expected when we provided our additional guidance. One customer with an expanded subscription renewal, together with their related professional services and ongoing maintenance and support revenue, represented approximately 14% of our total revenue in the quarter. In general, we would not anticipate any one customer representing more than 10% of our revenue in the quarter. During the first quarter, professional services revenue was 13% increased to $6.9 million. Professional services revenue varies quarter-to-quarter based upon a number of factors, including the number, size and timing of customer projects as well as the level of deployment engagements supported by partners. Gross profit grew 26% at $33.6 million or 73% of revenue compared to 72% in Q1 2018. This increase resulted from the growth in SaaS and subscription term license revenues partially offset by an increase in cost of revenue. These costs include our expanding investment in headcount and third party costs, our expanding global support organization and the higher depreciation costs associated with the ongoing expansion of data center capacity. Profit grew by 53% during the quarter to $7 million or $0.26 per diluted share compared to $0.17 per share in Q1 2018. Adjusted EBITDA for the first quarter grew 29% to $16 million or 35% of revenue compared to 33% in the same quarter of 2018. The improvement in both profit and adjusted EBITDA was due to an increase in revenue and gross profit partially offset by an increase in operating expenses. Additional investments in research and development and sales and marketing, including new headcount and higher marketing event activity, are reflected in the operating expense growth. Cash from operating activities grew 81% to $18.8 million due to the collection of trade and other receivables at higher profit. At March 31, 2019, cash and short-term investments were just under $200 million, growing by $18.3 million in the quarter. Our minimum contracted revenue backlog as at March 31, 2019 was $234.5 million as detailed in Note 12 to our financials. This amount includes future SaaS revenue streams, maintenance and support, and subscription term license revenue. The vast majority of this amount of $212.6 million relates to future SaaS revenue. The total backlog amount will be recognized over a number of periods as follows: $88.2 million will be recognized in the remaining 3 quarters of 2019, of which $77.3 million relates to SaaS business; $73.1 million will be recognized in fiscal 2020, of which $67.1 million relates to SaaS business; and the remaining $73.2 million will be recognized in fiscal 2021 and thereafter, of which $68.3 million relates to SaaS business. While this future backlog remains strong, as John noted, this performance did not fully meet our expectations regarding the timing of new customer SaaS contracts. Total bookings were $35.9 million, of which SaaS bookings were $17.7 million. Based on these results and our business outlook, we are updating our guidance for fiscal 2019. We are reaffirming total revenue guidance of between $183 million and $188 million. We now expect full year SaaS revenue to grow between 20% and 22% over 2018 levels. We now expect subscription term license revenue guidance to be between $22 million and $24 million for the full year or between $13.6 million and $15.6 million for the remaining 3 quarters of the year. And approximately 40% of the full year amount or roughly 2/3 of this remaining amount will be recognized in Q4, with the remainder split between Q2 and Q3. We now expect maintenance and support revenue will grow approximately 5% to 7% over 2018. With respect to operating expense line items, we now expect that sales and marketing expense will be between 24% and 26% of revenue, reflecting the planned increase in sales capacity that John referred to earlier. Research and development expense will be in the range of 18% to 20% of revenue, and G&A expense will be between 13% and 15% of revenue. We are increasing our full year adjusted EBITDA margin guidance to between 25% and 27% of revenue. This reflects both Q1 performance and does provide growth in headcount and other costs to support our planned ongoing strategic investments. Regarding full year capital expenditures, we expect they will be in the range of $11 million to $13 million with approximately 40% of this investment occurring in Q2, representing planned data center expansion and R&D investments. I want to take this opportunity to address the common question we receive from analysts and investors regarding the outlook for subscription term license revenue beyond 2019. As I noted earlier, subscription term license relates to our on-premise or customer-hosted contracts and is immediately recognized in full during the first quarter of the renewal or new contract term and, as such, will vary significantly between periods. While we only provide guidance for the current year, we thought it would be helpful to share some high-level commentary on the renewal cycle of existing on-premise customers. The terms for these agreements is generally 3 years. Assuming no material changes, we expect that subscription term license revenue in 2020 will be approximately half the level we have guided to for 2019. Using the 3-year average, it would also be reasonable to expect the 2021 subscription term license revenue will be approximately in line with the 2018 amount and then the 2022 amount increasing approximately in line with the current year level. This commentary assumes no material changes, and we will provide updates as appropriate. Factors that could cause our outlook to change would include a conversion of a customer-hosted arrangement to the cloud, a nonrenewal or a renewal on a shorter- or longer-term basis and entering into an new subscription arrangement on a customer-hosted basis. Consequently, while we're not providing specific multiyear subscription term license revenue guidance, we hope this general commentary provides further insight into our expectations. Thank you for your continued support of Kinaxis. And with that, I will turn the call back over to John.

[John Ernest Sicard, CEO, President & Director]

Thank you, Richard. In summary, we are pleased to have delivered very strong first quarter results. Our updated guidance reflects a company that continues to perform to a very strong standard. I am encouraged by the ongoing sales activity, the growth and awareness of Kinaxis, the engagements of our partners and the exciting opportunities for extending our product. Most of all, I'm encouraged by the top-quality brands who have already chosen to work with Kinaxis and those who are actively engaged with us to join them. On behalf of Kinaxis, I would like to thank you for your support and, as always, for taking the time to join us on this call. With that, I'll turn the line over to the operator for Q&A.

[Operator]

[Operator Instructions] Your first question comes from the line of Richard Tse from National Bank Financial.

[Richard Tse, Managing Director and Technology Analyst]

Either John or Richard, I was wondering if you can maybe give us a little bit of color on terms of that 14% customer and why they decided to sort of go with this -- the term approach as opposed to subscription SaaS?

[Richard George Monkman]

So we support a number of companies in different industries and also with different outlooks. And Richard, right from the start of our conversion in -- which was cold turkey in 2005, we have really focused on that business with the visibility of the subscription. And we haven't as focused much on whether it's cloud or customer-hosted premise, if you will. The vast majority of arrangements are cloud. And -- however, depending upon, again, the industry or, in some instances, a specific customer, their data policies require their abilities to host. And so this is one of those customers. And I just want to emphasize the 14% was a combination of this customer renewing, this is a longer-term customer, renewing their subscription arrangement, increasing that arrangement as well as then we had the professional services. So it's really a mixture of the 3 revenue sources that resulted in the 14%. The cash flow, as you can understand, doesn't vary the way we support the customer other than we're not hosting it in our cloud. It doesn't change, and it's -- again, it's a minority, a vast minority of customers. But in some instances, that's what's going to occur.

[John Ernest Sicard, CEO, President & Director]

Yes, I might just add some color to that. There are -- the larger the corporations that we deal with -- and in some cases, there are firms that are well over $100 billion in revenue, and those firms often have very, very sophisticated data centers and a CIO that just demands the use of their environment, which is fine. We have a bias towards good business, and that's, I would say, a rare condition. The other thing I would say is there are, as Richard said, certain market segments that require heightened security, I will say, where the environments are very closely guarded by the customers themselves.

[Richard George Monkman]

Yes. And in fact, that would be because just on the security, we have a world-class security. We're continuing to upgrade that. And we have a number of new initiatives actually from our European customers in particular. It's just a matter of it is a -- it's just outright requirement of certain industries that data is not outside of their premise.

[Richard Tse, Managing Director and Technology Analyst]

I don't suppose you want to share the vertical of those customers then, would you?

[Richard George Monkman]

We are privileged to host a number of customers across multiple verticals, and I don't want to -- I mean just our process is not to comment on any specific customer. And so by doing so, I would, I think, maybe shortlist that customer. And it is a long-term great customer. They've been -- it's been an extremely successful relationship, and it is in our -- one of our core 6 verticals.

[Richard Tse, Managing Director and Technology Analyst]

Okay. And John, I was sort of curious about your comments about the third gen in-memory update. I think you talked about that at your recent Investor Day. What I sort of picked up -- I don't know if this is a nuance, but you talked about it as planning RapidResponse. And when you say planning, you don't really sort of refer specifically to supply chain. Does that mean or should I read that to be that you have aspirations to taking that platform beyond supply chain?

[John Ernest Sicard, CEO, President & Director]

Well, here's how I would answer that question. First, we have exactly one product, and that one product is currently supporting supply chain planning for very different verticals, whether it's aerospace and defense, automotive, food and beverage, life sciences. These are all wildly different supply chains, and yet we were able to solve them with one, what I call, max runtime configurable environment. And so this third-generation platform is, I'll say, extended the ability to configure planning applications that, yes, can be outside of traditional supply chain and attach to RapidResponse. It's why I used the analogy of Force.com. What Force.com did for Salesforce, it allowed -- I mean companies were born because they were building on top of and connected to a very, very powerful platform. So it's -- today, we're looking at it as an opportunity to potentially enter new markets. There -- we're not in every market segment that we could be in. And I often have said, it's really only a matter of time. It's not an if, it's a when. And so the speed at which we can enter new markets, I believe, is directly related to the speed at which individuals with the right pedigree could leverage RapidResponse to build solutions. And so this is why we're so excited about this. It's been a long process, obviously. It's, as I mentioned, several years in the making here for this third-gen engine. And I look at it as it's a giant leap forward in flexibility.

[Richard Tse, Managing Director and Technology Analyst]

And the release, as I had expected, this year?

[John Ernest Sicard, CEO, President & Director]

Yes.

[Operator]

Your next question comes from the line of Daniel Chan from TD Securities.

[Daniel Chan, Research Analyst]

The sales cycle seems to be lengthening beyond your expectations. I think this was the second quarter that we've seen this happen. So do you have a good feel for why this is happening? Is it because the deals are larger and more complex, maybe that the new team is coming up the learning curve? Anything to shed some light on this and if we should expect sales cycle to continue lengthening?

[John Ernest Sicard, CEO, President & Director]

Yes. So we're still seeing sales cycles -- we often talk about that 9- to 18-month window. And if you recall, it was about a year ago, we put the foot on the gas on sales. And so -- and again, we're doing it now above and beyond our plans as they were even 3 months ago. And so yes, to some extent, it takes time to get the sales force up to speed and working the pipeline. I'd say there's nothing systemic here at all other than, yes, the larger the deal, the larger the corporation, the longer the sales cycle. That is definitely something that we have witnessed, but then again, then the larger the contracts ultimately are.

[Daniel Chan, Research Analyst]

Okay. That's helpful. And then, Richard, in the past, you said that 80% of your next -- of next year's revenue was usually booked. Does this still hold given the sales cycle as well as the change in accounting?

[Richard George Monkman]

Well, yes. It's -- thank you for recognizing that. And in fact, the guidance that we have provided, if you take a look at the 12 months, so in other words, the forward 12 months as at December 31, was right in that range. So yes, we publicly disclosed backlog that we had just for the SaaS component that was being recognized was in that 80% range at the start of this year. And then again, the remainder of that is really coming from 3 sources. So it's coming from renewals. So again, if the customer, the 3-year term was ending on June 30 of this year, we would only have had 0.5 year in that backlog. And then the other 2 drivers are the new name acquisition as well as then the expansion with the customers.

[Daniel Chan, Research Analyst]

Okay. And just one final one for me, a clarification. Did you say that 2020 term license revenue is expected to be half of 2019? And if it is, then what are the implications for EBITDA margin?

[Richard George Monkman]

Well, we're trying to get some color in that regard, and so the other drivers are going to be the subscription revenue growth and the level of investment and innovation that we continue to drive. John spoke to the increase in sales capacity. So there are actually going to be a number of elements, and it's a little early to comment on 2020 just because this number again, from the cash flow, it remained unchanged. But because of the way we have to recognize the revenue, it can vary. And just as we provided quarterly guidance of that timing range, this year, we thought it would be helpful for you and your colleagues when -- and our key investors when modeling to give them that insight. Now again that is just more a directional statement. We have converted customers from customer-hosted environments to the cloud. In fact, in some cases it's a 2-stage process where we'll actually start hosting them with them still retaining a right. And then ultimately, they realize it's a much enhanced performance, and we'll go that way. And as John said, we are always looking at growing the business. And there maybe -- I would think it would be not that common, but there may be situations where there is a new customer-hosted arrangement signed. And so it's just -- that's a directional statement and the EBITDA and other factors we'll comment at the corporate time.

[Operator]

Your next question comes from the line of Thanos Moschopoulos from BMO.

[Thanos Moschopoulos, VP & Analyst]

Richard, maybe to ask Dan's question a different way, can you remind us, are subscription term license gross margins typically in the 90% plus range?

[Richard George Monkman]

Well, from a pure accounting variable accounting, they're essentially 100%. Because what's happening is we're very concerned on our costs. Our costs are taken to the extent that we can and the only variance really being customer -- the variable, in others words, commission or referral fees they're going to capitalize. So we're going to be -- our team that's supporting them, the way we're supporting them, their -- those costs are generally fixed for the period. And then that the economic allocation, if you will, will come in that -- in the lump period. So it -- think of it virtually 100%.

[Thanos Moschopoulos, VP & Analyst]

Okay. Great. John, Gartner recently released their new S&OP quadrants. You're once again ranked the leader, which is great. Although there were more vendors in the leaders' quadrant then in prior years, can you talk about the competitive dynamic? Is it still the case that you're primarily up against SAP the vast majority of the time? Or are you starting to see some of the other emerging vendors increasingly in the mix?

[John Ernest Sicard, CEO, President & Director]

Yes. Thanos, thank you. Yes, for sure, we -- the competitive landscape continues to shift. In fact, when you look at one quadrant over another between years, you can see quite a lot of variability in players moving about. I'd say the usual suspects for us continue to be dominant in the field, if you will, in terms of competition. We don't -- we're not seeing necessarily many new players, I'd say. And so -- and for us, we -- when we look at one Magic Quadrant, it's a piece of -- it's one side of the coin. It has another side, right? There's 2 MQs that we care about: the system of record and the system of differentiation. So we're obviously pleased -- we're obviously very pleased to position well in both of those. And in fact, when you look at the sum of the 2, it tells an even brighter story. So again, we continue to focus on current planning as our prime value proposition and our prime differentiator. I think I said this before, we often start with that as a premise, not so much a technology comparative. So I'd say yes, there's a -- there continues to be a dominance in terms of competition from SAP. And our recent wins, they sort of speak for themselves. SAP -- I'd say our customers, by and large, the vast majority of them are -- we share with SAP. So they continue to be primary in that position.

[Thanos Moschopoulos, VP & Analyst]

Great. And then finally, you talked about expanding sales capacity beyond your prior plans. Just to clarify, will that incremental investment be directed at specific regions or market segments? Or will that be sort of more broad-based across all of your markets?

[John Ernest Sicard, CEO, President & Director]

It'll be broad-based. I mean the -- we're seeing terrific -- we're seeing absolutely terrific activity out of Asia right now and Europe through the investments that we're making and as well as North America. So it will be quite broad across the spectrum. We're seeing a lot of partner activity in Europe as a result of our investments there as well. So those -- I would say Europe and Asia are growing faster from a rate perspective, but they were significantly smaller than the North American sales team to begin with. So all regions are going to get an infusion of capacity.

[Operator]

Your next question comes from the line of Stephanie Price from CIBC.

[Stephanie Doris Price]

Wonder if you could talk about the recently announced contracts and how you see them scaling through the year and how we should think about the implementation process here?

[Richard George Monkman]

Well, Stephanie, that's a great question. So from a financial perspective, let me address it from that perspective, when we do engage with a new customer, there are generally 2 revenue streams. There is the subscription, and that subscription arrangement starts immediately, and so the deployment itself might be 9 months, a year, or some cases, a bit longer. There is the subscription revenue through that as well as carrying on a SaaS basis ratably over the term. The other element then is the actual deployment services. And in the case whereby Kinaxis is providing those, that would be our professional services revenue for that 9-month or 1-year period. And in other cases, it will be dealing with partners if they're enabling it. So our role there will be more on the overall assurance side of things. And so in that case, our revenue is going to be just on the subscription side of things. Does that address your question?

[Stephanie Doris Price]

It does. And then in terms of the partner channel, you mentioned Exa and E&Y (sic) [ EY ] last month or last quarter. I just wondered if you could characterize kind of the maturity of your partner relationships and kind of talk a bit about that channel?

[John Ernest Sicard, CEO, President & Director]

Sure. So I would say that the partners that we -- the strategic partners that we have that also have Kinaxis practices for deployment are obviously going to drive more activity with us. They're influencing in a couple of different ways. One, they often have a management consulting practice that is designed to advise. And so where appropriate and when appropriate for projects, they're advising towards a concurrent planning type of a solution. Secondly, we're seeing more and more -- as I mentioned, we're seeing more and more of those SI-type partners lead deployments, not play the secondary role but lead as a result of their relationships they've established and as a result of their involvement in the process of closing the deal. So we're definitely seeing, as I said, some great uplift there. The numbers of certifications now over 1,100. There's 100s of people involved in this training, what we call the partner enablement program. This is very formal. It's done online. We have proctored exams. It's -- these certifications are quite meaningful for the consultants, and so we're thrilled at the uptick.

[Operator]

Your next question comes from the line of Paul Treiber from RBC.

[Paul Treiber, Associate]

Just on the subscription term license, you did mention expanded business with some of your on-premise customers, I mean that one 14% customer. Can you just elaborate on that in terms of how they are expanding their usage?

[Richard George Monkman]

Sure. Our -- when we go in, it's very much, as you know, a land and expand model. In fact, for the last while, it's been pretty consistent that approximately 2/3 of our incremental subscription revenues have been from new name customers and 1/3 from the expansion. And on that 1/3 from expansion, there are a number of factors. Because again, our customers and we really focus on the return on investment that we provide, and so that return on investment can manifest itself in many ways. Sometimes, it's a matter of seats or users, so as they expand their number of users. In other cases, it's dealing on the operational side of things, so as they bring extra factories or distribution centers, sites, if you will. In some instances, what we've done is we -- because we -- again, we go into typically a business unit and keep radiating, we'll move into a sister business unit. It could be some -- in a few cases, product lines. So there really are a number of ways. But essentially, what they all come down to is a deeper penetration and a broader expansion in their operations and realizing that ROI.

[Paul Treiber, Associate]

And then in regards to land and expand, I think in the past, you've mentioned that revenue from an existing customer typically or historically doubles over 3 years. Is that a similar trend with term -- subscription term license customers as is it with SaaS?

[Richard George Monkman]

Yes. So let me -- and I'm sorry if I am repeating things here, but I think it's important to understand, there is a subscription arrangement. And what's happened is recent changes to IFRS accounting, and in this case IFRS 15, in the U.S. ASC 606, have required companies to go beyond the commercial terms that have been established to try to, I guess from an economic theory, attribute to the revenue streams. So in both cases, our subscription agreements, whether it's a customer-hosted or on a cloud- or a Kinaxis-hosted basis, stipulate very similar models. It's the configuration of those users, those sites, those business lines. And typically, it's an annual payment, so that's the cash flow. And so businesses grow and expand and we partner with them in both instances, that's -- those are the growth vectors. And what is required now is just because -- let's say a customer increases their -- I'm going to keep this math very simple. If they increase their subscription $50,000 a month, so $600,000 a year, and they renew for 3 years, under prior IFRS and certainly now for cloud, that's -- we just pick that up as $150,000 a quarter, $600,000 a year. With IFRS, we have to take that total new commitment over the 3 years of $1.8 million and allocate it and, maybe half of it goes to the -- or more to the subscription term component and the other is done ratably. So cash flow, business perspective, drivers of the business, all that remains unchanged. This is just the artifact, if you will, of the accounting. And that's one of the reasons why we just provided a commentary a few minutes ago to start to help understand the paper -- the papering and timing of that stream.

[Paul Treiber, Associate]

Yes. No, that's helpful. And just lastly and sort of tied all together, the comments on the term license revenue in 2020 and beyond, that's only assuming renewals and no expansion. Is that correct?

[Richard George Monkman]

Yes, that's correct. I mean we are delighted to service a number of very long-term customers. In some cases, those customers are pre-2005 and have converted now on a customer-hosted basis. And so you are correct, that is what -- it's basically based on renewals. And that's why I commented that amount could be reduced for customers that we subsequently convert to cloud. Because then, you're going to be, in most instances, reverting to a ratable basis. There may be a nonrenewal, which would have that impact. But we could also continue to expand further and possibly even sign a new arrangement. But you're right, this is based upon our stable of customer-hosted arrangements.

[Paul Treiber, Associate]

And sorry, just one last one for me. The -- are you -- from a business point of view, are you encouraging customers to convert to SaaS? Are you indifferent?

[Richard George Monkman]

Well, I would say we believe strongly the experience for a customer that we're hosting is better. I mean our people are going to be just as dedicated. But what we can do in our environment, not only do we have the security standards and other benefits that I mentioned earlier in recovery up, but we can actively monitor their environment as opposed to working through, I mean, their highly qualified customer personnel. But -- so we believe it is better. And absolutely, we would encourage it. I think we all appreciate the -- again, coming back to '05, the smoothness of the model. And so we encourage that.But there are -- again, as we mentioned earlier, it's -- sometimes, it's just the -- it's -- I want to say personal preferences, sometimes more of it's just a corporate direction. And we are dealing with -- this is not B2B -- sorry, this is not B2C. This is not small businesses. These are sophisticated, deep customers that have certain capabilities and certain perspectives, and we're going to -- our goal is just to have that long-term subscription business with them.

[Operator]

Your next question comes from the line of Deepak Kaushal from GMP Securities.

[Deepak Kaushal, Director and Technology & Communications Analyst]

John, just on the gen 3 in-memory engine launch coming up later this year, is that invisible to the customer? Or do they have to actively upgrade to that? And maybe you can talk about how you're mitigating the technical and commercial risks around that launch?

[John Ernest Sicard, CEO, President & Director]

Yes. So yes, that engine comes across as an upgrade. And it's -- the upgrade burden is obviously on us. The customers won't even realize that it's happened, and so the compatibility equation is sacred, I will say. You can't survive in the SaaS world if you compromise that kind of compatibility across releases. So the answer is, yes, it's transparent.

[Deepak Kaushal, Director and Technology & Communications Analyst]

Okay. Excellent. And so -- and then when you're adding new features like production planning, scheduling, demand sensing, do you have to change your sales approach or add to your sales approach? Or are you selling to the same teams here? How should we think about those added features in terms of sales process?

[John Ernest Sicard, CEO, President & Director]

Absolutely. There -- these are -- when you think about concurrent planning as our key differentiator, these are all -- it's all about connecting all of these chain links together, right? Whether it's inventory, optimization, capacity planning, master scheduling, sales and operations planning, these are all functions of running a supply chain. And things like demand sensing are just extensions of the exact same process, if you will. So these are typically sold again through the same communities that we sell to. They're just a continuation of concurrency.

[Deepak Kaushal, Director and Technology & Communications Analyst]

Okay. Great. And do you kind of have a target penetration you hope to get to in terms of rolling those add-ons to your customers over the next 12 months or 24 months?

[John Ernest Sicard, CEO, President & Director]

We certainly have a rollout plan for them. And things like demand sensing and production planning tend to be quite ubiquitous. And so obviously, our plans would be to have them penetrate every vertical that we're in.

[Deepak Kaushal, Director and Technology & Communications Analyst]

Okay. Last question, if I may, for Richard. You guys have quite a bit of cash on your balance sheet. How much do you need to really support your organic growth? And what else can you do with the cash you have?

[Richard George Monkman]

Yes. We do, and in fact, it's a milestone. I kind of kidded with our team, like, couldn't we have collected another $100,000 to get it to the USD 200 million even. So -- but all serious now, this model clearly, we have a long history of generating cash. So -- and our customers absolutely are delighted by the resiliency that this company has and the level of investment it can sustain. We continue to be focused on the growth. So this cash is available for not only the organic growth that you noted, but it's something whereby we will continue to consider M&A. We have not found an opportunity that's met our requirement to really, in a scalable and effective way, support accelerated growth. But that's where we are right now. There are no broader or specific plans, Deepak.

[Operator]

Your next question comes from the line of Robert Young from Canaccord.

[Robert Young, Director]

The data that you gave on this unsolicited increase is encouraging. Could you talk about how you're handling those? Are they not being handled? Or they are being pushed into the channel? Is it part of the reason by -- behind the sales expansion? And then if you could also comment, if I can ride a bit on Richard Tse's question, are you seeing any unsolicited increase there outside your supply chain? Are you getting customers that are encouraging you to look at applications of your platform outside the supply chain?

[John Ernest Sicard, CEO, President & Director]

So great question, Rob. So first of all, that's what I call a key leading indicator, unsolicited inbound inquiries. As I said, 30% increase quarter-over-quarter, 60% increase in the same period last year. And those are against our existing targeted TAM. These are -- when we -- we only measure it as qualified -- as a qualified inbound lead if it's in our TAM. So there's a placeholder in our Salesforce.com list of targeted opportunities. There's in and around 2,000, slightly over 2,000 names in that list. So that's what it compromise -- that's what it's made up of, those 30%. They're not outside of supply chain. They are clearly in the targeted pipeline. And so this is another reason why, exactly right, we are seeing that as a leading indicator and a reason to start pushing on the gas once again as we did last year on the sales capacity front.

[Robert Young, Director]

And then on those opportunities outside of your targeted verticals, what are you doing with those?

[John Ernest Sicard, CEO, President & Director]

Well, I think I've mentioned this during the Investor Day. We talked about being in 6 key verticals, but we have accounts that are outside those 6. And we -- our approach is to build success around those new verticals, around usually a bellwether account before we formally announce and formally target on purpose that particular vertical. We feel like having recently entered the CPG market and the obvious success that we're having, I mean the name brands that we're winning in that segment are quite exciting. And they span -- you might typically see as large CPG such as Unilever, but it includes companies that are in the food and beverage industry as well. And so I'm always going to be razor-focused. I'd rather not bifurcate our energy here, and we'll go fight the fight that we know we can win before we start being overly opportunistic into market verticals that are just not our main wheelhouse, I would say. That said, again, I would say we are already expanded outside those 6. Our strategy to get beyond is certainly going to be through partners, right? For example, you haven't necessarily heard us talk about forestry, I'll say just as an example. Well, we have partners that have forestry-type practices. They already have a pedigree. There's many, many areas that are yet to be penetrated, and leveraging partners is going to be key to that strategy.

[Robert Young, Director]

Okay. And non-supply chain, any bite there?

[John Ernest Sicard, CEO, President & Director]

None that are -- no, I would say -- I think with the third-gen engine here, and I'm obviously very excited and passionate about the flexibility of concurrency for planning, not just concurrency for supply chain planning. I really do believe it is a revolutionary technique. But obviously, right now, we are hyperfocused on the existing TAM. We're hyperfocused on the targeted markets in the 3 geographies, and there's significant business for us to work on there.

[Robert Young, Director]

Okay. And then my next question was around the larger deals that impacted SaaS revenue. Last time we saw this, I think you attribute it to Europe expansion and summer doldrums, not -- that's not the case in Q1. And so I was wondering if you could talk about the difference. And is there any worry if these haven't already been closed? Or if you don't expect them to close in near term, is there -- when do you start to worry that they may bleed into the summer and this will be delayed over a long period?

[John Ernest Sicard, CEO, President & Director]

Yes, so these are in a very active state, and we're not necessarily subject to quarterly pressures, if you will, that the old model of perpetual sales might suffer. And so we really care about good business, not just winning any business. And so when you're dealing with very, very large multinationals, it can take often weeks and, on some occasions, months to negotiate a good contract for both parties. And so obviously, our focus is to win good business, not just win business. We have to win good business that's sustainable, that's good for shareholders and good for the company. We -- I certainly don't see any -- as I said, we're very confident that we'll be seeing some significant SaaS bookings in the quarters ahead.

[Richard George Monkman]

And I think, Rob, one of the things that we did -- we talked about was just the -- more on the geopolitical sort of play with regards to whether it's tariffs or changes and so. The decision-makers that we're working with are also on the front lines of those. So it's only natural that while strong proponents, it's sometimes -- they're dealing more with some more urgent problems. And as John noted, our view is for the long term. And mathematically, whether that deal closes June 1 or April 1 matters for the current year, but it doesn't matter on the, say, over the -- really over the 3-year term or certainly for the 2020, 2021.

[Robert Young, Director]

Okay. So just to clarify, is this more about staying steadfast on your terms and, more importantly, your pricing? Or is this more about delays that are being created by other reasons within the target customer?

[Richard George Monkman]

Well, it's a highly competitive place, so we're not going to comment further on that. But I think what you should take from John's view -- John's comments are that we have rigor, we have discipline. The classic, well, if it's March 31, if you [ concede in ] all these things, we'll do a deal, where that the old cross the line with perpetual. We look at this as a meaningful partnership long term with the customers. And if it takes a little more dialogue, it's going to take a little bit more dialogue. There are other areas that, I think, is just a matter of front of mind. That's what I was mentioning with regards to other elements. And as John said, these are active and moving along. Companies -- we deal with a broad set of companies, and their procurement processes will vary. And so we will act as expeditiously as we can, but we will do so within that framework of their procurement practices.

[Robert Young, Director]

Okay. Maybe if I ask it just a little bit differently. Do you have confidence in your ability to control the process and bring these deals in, in the near term?

[John Ernest Sicard, CEO, President & Director]

Yes.

[Operator]

Your next question comes from the line of Suthan Sukumar from Eight Capital.

[Suthan Sukumar, Research Analyst]

Just a question on your partner ecosystem. Could you speak to what your current pipeline looks like for the new partners? And curious to know if you're seeing a similar lift in interest given what you're seeing on the unsolicited customer side?

[John Ernest Sicard, CEO, President & Director]

Yes. So we have said, the vast majority of opportunities are -- have partner influence associated with them. And over the last several years, we've been really happy with the names and the stature of the companies that we're working with. And so that's been the model where we work in lockstep with those customers. We don't speak specifically about the size of opportunities on a given -- from one partner over the other. It's quite competitive. We also don't share scorecards of how many consultants are certified from one to the other. So we're sharing in aggregate today because obviously we're quite pleased with the numbers. We have significantly more professional services revenue being generated for our partners than it's been -- than is generating for us. That is exactly what we want to see. We want to see a very prosperous environment for the partners, and we want to see a lot of engagement, and the engagement is coming through training and certification. It's a number that is changing every month, and it's just getting better and better as the months go on. So we're -- that's how I categorize the activity with partners.

[Suthan Sukumar, Research Analyst]

Okay. And then just one last one for me. Can you touch on kind of the level of maturity and involvement you're seeing with your partners and in your newer growth markets like Europe and Asia?

[John Ernest Sicard, CEO, President & Director]

Yes. So in Europe, as I mentioned, we're definitely seeing a lot of activity there. It's not unlike what we see in North America, frankly. Last year, we saw a significant opportunity to invest in that region, and the results manifested in the same calendar year with some terrific names, many of which were made public, which I mentioned, companies like Unilever, Dyson, BASF and others. And so we're extremely pleased with the level of involvement from the partners. We signed partnerships with MSD, for example, which are European-based partners that we're extremely involved with. So yes, it's -- and deep, deep, long-term relationships in Asia. Yes, Asia is very much a partnership-influenced-type of a deal structure. Just about 100% of the deals there are done through partnerships.

[Operator]

And there are no further questions at this time. I will turn the call back over to the presenters.

[Rick Wadsworth, Vice President Investor Relations]

Thanks, operator. Thank you, everyone, for participating on today's call. We appreciate your questions as always as well as your ongoing interest and support of Kinaxis. We look forward to speaking with you again when we report our Q2 results. Thanks very much. Goodbye.

[Operator]

This concludes today's conference call. You may now disconnect.