Kinaxis Inc

TSX:KXS

Earnings Call Transcript 2021-Q1

[Operator]

Good morning, ladies and gentlemen. Welcome to the Kinaxis Incorporated Fiscal 2021 First Quarter Results Conference Call. [Operator Instructions] I'd like to remind everyone that this call is being recorded today, Wednesday, May 5, 2021. I will now turn the call over to Rick Wadsworth, Vice President of Investor Relations at Kinaxis Incorporated. Please go ahead, Mr. Wadsworth.

[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 after close of markets yesterday. With me on the call are John Sicard, our President and Chief Executive Officer; Richard Monkman, our Chief Financial Officer; and Blaine Fitzgerald, our Executive Vice President of Finance.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 5, 2021, 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 our 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 archive may be rerecorded or otherwise reproduced or distributed without prior written permission from Kinaxis.To begin our call, John will discuss the highlights of our quarter as well as recent business developments, followed by Richard and Blaine, who will review our financial results and outlook. Finally, John will be making some closing statements before opening up the line for questions. We have a presentation to accompany today's call, which can be downloaded from the Investor Relations home page of our website, kinaxis.com. We will let you know when to change slides.I'll now turn the call over to John.

[John Ernest Sicard, CEO, President & Director]

Thank you, Rick. Good morning, and thank you for joining us today. First, as always, I hope you and your loved ones remain healthy. Nothing matters more. In particular, I'd like to let our fantastic team in India know that all of us at Kinaxis are thinking about you as you battle the very worst of this horrible pandemic under extremely difficult conditions. Wherever you are in the world, I encourage you to get vaccinated as soon as possible so we can all see each other face-to-face once again, something I dearly miss.We remain forever grateful to our frontline workers everywhere, especially those in supply chain, keeping our necessities flowing and continuing to extend our sympathies to families that have been deeply affected. I'm also forever amazed by and thankful for the resilience of our Kinaxis employees as we remain in this prolonged work-from-home condition.Turning to Slide 3. I'm pleased to report a strong start to our year, including SaaS revenue growth of 19% to $40.6 million, total revenue of $57.7 million and an adjusted EBITDA margin of 16%.Turning to Slide 4. While COVID-related delays are not fully behind us, the environment for booking new business, which started to show signs of improvement in the fourth quarter of 2020 has continued to return to a more normal state. We won a record number of new customers for a first quarter, which, together with project expansions, resulted in record first quarter incremental subscription bookings.These positive first quarter results, coupled with a continuing healthy pipeline of opportunities, reinforces our outlook for 2021. Assuming these trends continue, we remain even more confident in a return to higher SaaS revenue growth rates in 2022 and beyond. We continue to see momentum in life sciences and pharmaceuticals, adding in this quarter, Sweden-based Molnlycke, which has been in business for 172 years and has operations in more than 100 countries. Molnlycke designs and supply surgical and wound care products from the operating room to our homes.Alvogen is another win for us, a global pharmaceutical company focused on developing, manufacturing and selling generic, branded and over-the-counter products for patients around the world. The company has commercial operations in 20 countries with 1,700 employees. As we mentioned on our last earnings call, during Q1, we also won biopharmaceutical maker Morphosys, and a global engineering and technology solutions company Cyient.I'm also thrilled to share a win with a distribution company, a nascent vertical for Kinaxis. L&R distributors has been a leading national distributor within the supermarket drug independent and mass class trade across the U.S. for over 60 years. A number of these wins involve our RapidStart delivery program, which is an offering that takes full advantage of our knowledge of the industry best practices to set customers on the path to supply chain transformation in as little as 12 weeks. We continue to see the value proposition for strong and fast ROI resonating very well amongst our prospects.Our RapidResponse platform strategy is beginning to pay dividends. I'm very pleased to report that we have made initial sales of Transportation Load Optimizer, a solution developed on our platform by 4flow as well as Production Scheduling, a solution developed by PlanetTogether. These are just 2 examples of how our new solution extension partners can leverage our platform for mutual gain. The pipeline of opportunities for all such partners continues to grow and is a strong validation of our strategy to open up RapidResponse as a development platform. You can expect us to name more partners in the program this coming year.Overall, we continue to see a heightened level of interest from companies looking to drive hyper agility in their supply chain through our unique end-to-end concurrent planning approach.I'll now ask Richard and Blaine to discuss results for Q1.

[Richard George Monkman, CFO & VP of Corporate Services]

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.Looking at Slide 5, you'll see the total revenue in the first quarter was up 9% to $57.7 million as healthy growth in SaaS and professional services revenue was offset by a normal cyclical decrease in subscription term license revenue. SaaS revenues grew 19% to $40.6 million, driven by new customer wins as well as the expansion of existing customer subscriptions. Subscription term license revenue was $2.1 million, down 58% from the comparable period. This revenue item is linked to the normal renewal cycle of our customer-hosted software subscriptions.Our professional services revenue activity was strong again, resulting in $12 million revenue or 13% growth over the corresponding quarter of 2020. As previously noted, this revenue will vary from quarter to quarter based on the number, size and timing of customer projects underway as well as the proportion of work assumed by our partners. Maintenance support revenue for the quarter was $3.1 million, largely in line with the result in Q1 2020.We continue to be pleased with the diversity and strength of our total revenue base. For the quarter, our 10 largest customers accounted for 27% of total revenues with no individual customer accounting for greater than 10% of total revenues. Gross profit increased by 1% to $37.2 million, representing a gross margin of 64% compared to 70% in Q1 2020. The change in margin reflects a few items. First, the lower proportion of subscription term license revenue, which contributes nearly 100% gross margin. We also made important strategic investments in our direct costs throughout 2020 and Q1, and that's reflected in these new costs.These investments will help Kinaxis support our ever-increasing base of customers. Adjusted EBITDA margin in Q1 was 16% compared to 29% in the first quarter last year. Again, this reflects the impact of the natural cycle of subscription term license revenue and important investments in all our operating teams across the organization globally. These investment initiatives will help create a scalable base to support much higher revenue for Kinaxis in the future. We had a loss of $1.5 million in the quarter compared to $5.6 million profit in Q1 2020, largely due to the factors I just mentioned.Q1 cash flow from operating activities was $20.6 million compared to $21 million in the first quarter of 2020. At March 31, 2020, cash, cash equivalents and short-term investments totaled $229.3 million compared to $213.1 million at the end of 2020. We remain pleased with our outstanding track record of cash generation.I will now turn the call over to Blaine.

[Blaine Fitzgerald, Executive Vice President]

Thanks, Richard. In the enterprise software space, Q1 is often a slower quarter for booking new business, but we are very pleased that we had a record first quarter for winning incremental business and for new customer wins. As a result, our minimum contracted revenue backlog remains very strong. Backlog grew by 11% compared to March 31, 2020, to $384 million. This amount includes $360.8 million of SaaS revenue backlog, which represents a 16% increase from a year ago.Backlog details can be found in the revenue note to our financials. The backlog will be recognized over the following periods. $129.5 million will be recognized in 2021, of which $119.8 million relates to SaaS business. $127 million will be recognized in 2022, of which $118.6 million relates to SaaS business. And $127.5 million will be recognized in fiscal 2023 and later, of which $122.4 million relates to SaaS business.Total bookings in Q1 were $48.5 million, of which SaaS bookings were $47.9 million, representing 40% growth compared to Q1 2020. These bookings figures represent the difference in opening and closing quarter end backlog, adjusted for revenue recognized in the period and includes bookings of both incremental and non-incremental business.Moving on to Slide 7. The strong start to the year and ongoing positive outlook continues to give us confidence in our guidance for fiscal 2021. To reiterate, we expect total annual revenue for 2021 to be in the range of $242 million to $247 million and expect 2021 SaaS revenue growth to be between 17% and 20%. Based on the normal cycle of customer-hosted subscription renewals, we expect subscription term license revenue to be between $3 million and $5 million in 2021. We continue to expect an adjusted EBITDA margin of 11% to 14% for 2021. Though given the 16% result in Q1, we will continue to monitor and update.While the impacts of COVID are still not fully behind us, we still anticipate that 2021 will be a much better year than 2020 for signing incremental business and winning new customers. As a result, we continue to see 23% to 25% SaaS revenue growth as a sustainable target over the midterm, including for 2022. We will give specific annual targets on our usual cadence.Thank you for your continued support of Kinaxis. With that, I will turn the call back over to John.

[John Ernest Sicard, CEO, President & Director]

Thank you, Blaine. We're pleased with our positive start to the year and continue to see a heightened level of interest from companies looking to drive hyper agility in their supply chain. Ongoing major disruptions in supply chain, whether microchip shortages, a container ship blocking the Suez Canal, or of course COVID-19 and its variants, continue to hit the news and shine a light on our unique differentiated technique. Add to these, the omnipresent and more mundane disruptions that impact supply chains from delayed delivery trucks, issues on the manufacturing line or large purchase orders that customers want to accelerate, and you start to see how invaluable concurrent planning is for our customers.The weakness of rigid legacy cascaded techniques that introduce latency in planning and follow a functionally siloed approach are being exposed every day. I am confident that Kinaxis has never been in a better position to serve our markets.As always, thank you all 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] You have a question from the line of Daniel Chan with TD Securities.

[Daniel Chan, Research Analyst]

You commented that you saw record Q1 incremental bookings from new customers and expansions. And I just want to drill into this a bit more. Given what sounds like a heightened sense of urgency to modernize supply chains in the current environment, has there been a change in the size of these initial deals that you're seeing? And has the pace of expansions also changed compared to what you saw before the pandemic?

[John Ernest Sicard, CEO, President & Director]

It's a great question. And the answer is, yes, in that our prospects are looking for a much more rapid -- well, a rapid start to their transformations rather than looking at it in -- at the beginning in a wholesome way. And so we're really pleased with the uptake last quarter and in Q1 with RapidStart initiatives. So that I think is an indicator. And we're seeing it with both very large enterprises and mid-market as well, both. And so that's how I would describe perhaps the change that COVID has brought on. It's really customers looking for a much more urgent and rapid return on their initial investments.

[Daniel Chan, Research Analyst]

Okay. That's helpful. And then can you comment on how customer activity has trended so far into Q2?

[John Ernest Sicard, CEO, President & Director]

Well, we continue to see a return to more normal, I'd say, conditions. Obviously, we're still early in the quarter, but I would say that the quarter started strong as did Q1. And the pipeline of business continues to look very strong. And I see the pipeline strengthening in every vertical and every geography. So I don't see necessarily a concentration problem at all. And so yes, I would say we're cautiously optimistic. Obviously, every day, you read the news and COVID is not behind us. And so we're cautiously optimistic that we're closer to the end of it than we are the beginning. And we're certainly seeing a trend right now towards a more normal operating environment.

[Operator]

You have a question from the line of Richard Tse with National Bank Financial.

[Richard Tse, MD & Technology Analyst]

Sort of a similar question, [ Dan ], and it's nice to see that you had the record number of new customers falling on a record last quarter. How many of those new customers are RapidStart customers? Not a specific number, but is it like half of that raise? Or is it a quarter? Just trying to get a sense of what that is.

[John Ernest Sicard, CEO, President & Director]

Yes. When we look at -- obviously, we don't disclose the details of every deal or the customer counts in a given quarter. But I could tell you that it's roughly double that of the same quarter last year in terms of net new customers. And I will also tell you, as I -- as we described last quarter, we're seeing more activity from the mid-market. And I think that is also reflective of, I'd say, the recognition of the potency behind concurrency and the fact that mid-market companies can step into this new world, this new transformation in 12 weeks or less. And so in Q1, we certainly saw a continuation of progress in the mid-market space. But again, great question, Richard. I classified as roughly double the number of customers added in Q1 as the same period last year.

[Richard Tse, MD & Technology Analyst]

Okay. Is it fair to say that given RapidStart is kind of like a RapidResponse light version, so to speak, that sort of the value of that contract is really a fraction of what a full deployment would be? And if you get those conversions to these full deployments there, obviously you're going to get a sort of a bit of a pickup. So the question is that what's sort of like the relative ratio of RapidStart versus RapidResponse? Is it kind of a quarter, 1/10 of what a full deployment value of a contract would be?

[John Ernest Sicard, CEO, President & Director]

Yes. Well, every one of these is a little different because the size of these organizations are different. So it's difficult to necessarily describe it as it's exactly X amount. I will say it is less risk for a prospect to begin because we're doing this inside of a 12-week window. It is a prescription. It is not a light version of RapidResponse. That just for clarity, it's RapidResponse. It is concurrent planning. But it is a -- based on templatized best practices. And it is the first step that a customer will take.So think of it as a patient who has a severe fever, and they're looking to lower their fever before they can work on the cure, okay? And so they're looking for the, call it, a supply chain inoculation. That's how I often describe it. We're the doctor, you're the patient, we're going to come in here, 12 weeks or less, you're going to feel an awful lot better. And when you feel better, you can now start to strengthen and cure the underlying governance model.

[Richard Tse, MD & Technology Analyst]

Okay. Great. And just one last quick one for me. So it's been around a year since you acquired Rubikloud. And can you maybe give us an update on the progress? I can't really tell. And just wondering how much it sort of contributed to the business to the extent that you can provide any color on that, that would be helpful.

[John Ernest Sicard, CEO, President & Director]

Sure, Richard. So as I think we described this in the last quarter that we had been successful in what I'd say cross-selling their value proposition into our base and into the CPG arena in the CPG vertical, which was the first -- I'd say the first motivation for the acquisition. And the second motivation was strengthening our machine learning and AI bench. And so we're thrilled with the talent that we've been able to add in that area and have that talent implicated in RapidResponse and the rest of our ML and AI road map. The last element has been focused on retail. And so this calendar year, we're focused on merging in all of that technology into RapidResponse and getting it ready for the market.

[Operator]

You have a question from the line of Thanos Moschopoulos with BMO Capital Markets.

[Thanos Moschopoulos, VP & Analyst]

In terms of the traction you're seeing in the mid-market, can you clarify, are you targeting the mid-markets through the same sales teams and partners? Or do you have an overlay focusing on market specifically with dedicated salespeople?

[John Ernest Sicard, CEO, President & Director]

Yes, it's a great question, Thanos. And I describe it this way. It's a little bit of both. We have seen a -- also as a result of the Gartner MQ being published in Q1 a record number of unsolicited inbound leads. These are people ringing our doorbell and asking to come into the store. So we're thrilled to see that. And obviously, there's a larger proportion of those that we're seeing now in mid-market as we start to see success.So some -- in some cases, we have mid-market companies coming to us with their free will. And in other cases, we have partners bringing them to us. And so again, in this quarter, the vast majority of net new business was influenced by our partner ecosystem. So it's a bit of both.

[Thanos Moschopoulos, VP & Analyst]

Okay. And would you characterize that across all geographies? Or is the mid-market traction kind of more geographically focused in certain regions?

[John Ernest Sicard, CEO, President & Director]

All geographies. In Asia, Europe and the North American market.

[Thanos Moschopoulos, VP & Analyst]

Okay. From a product perspective, back at the user conference, you had introduced some pretty [ meaty ] AI capabilities with respect to testing scenarios and then implementing scenarios. Just curious if that's been launched and whether that's something that's a factor in terms of deal wins or whether that's being adopted by clients? Or is it early days for that?

[John Ernest Sicard, CEO, President & Director]

Yes. It's still early days. We're obviously thrilled with the innovations of last year, especially around command and control. And so that's been picking up some traction and a lot of interest, a tremendous amount of interest with prospects. Still early days to highlight any significant contribution.

[Operator]

You have a question from the line of Paul Steep with Scotiabank.

[Paul Steep, Analyst]

John, maybe talk about the partner solutions and maybe the genesis, we know you launched a new transportation planning app on the Apple house yesterday. Can you talk to where that's at at this point?

[John Ernest Sicard, CEO, President & Director]

Yes. So this is -- it's just an extremely exciting time for Kinaxis and a long time coming, getting RapidResponse exposed to third-party developers so that they can build intellectual property on top of RapidResponse. And that, by definition, eliminates our own development teams from being a bottleneck in delivering net new value to customers. And so I couldn't be more thrilled. It's been a great quarter, and that's been one of the greatest highlights is having a third-party 4flow successful as well as PlanetTogether in selling their extensions on top of RapidResponse.We have several other development projects in the works with several other solution extension partners. And so throughout this year, I'm very confident you're going to be seeing more unique applications being posted on our warehouse and more press releases of successes and solution extension partners. It's just a thrilling, absolutely thrilling time for us and for our customers, quite frankly.

[Paul Steep, Analyst]

Great. And I guess then maybe the quick follow-up on that. And then one last one. Just what -- how should we think about maybe the evolution of this app ecosystem? It's been a number of years in the works, we're here, apps are launching. What are you seeing in terms of customer interest and uptake? Obviously, you just launched now the third one and more to come. What's sort of the customer response so far? And then I've got one quick follow-up.

[John Ernest Sicard, CEO, President & Director]

Yes. It's been really good. We're demonstrating these applications together with these partners. The integrations are completely seamless, extremely tight. And for our customers, they feel like they're still working with RapidResponse, and they're still getting benefits of concurrency. So I think it's still early days as excited as I am. We're seeing the initial successes for our investments here. We're seeing a lot of interest from solution extension partners. As I said, we have several other projects in the works at various stages.And so as they become certified, we have a formal certification process that all of them go through. Once they become certified, they're pushed up to the app warehouse. So I think it's early days, but for sure, I liken it to what happened when Salesforce announced Force.com, where -- whether it's third parties or even customers themselves, having a safe way to extend the platform and add your own intellectual property and have it safe from upgrades. That's the -- that is the -- that's the holy grail, in my opinion.And so we haven't really invented this technique. I often quote the Force.com type of analogy. But I think our customers are going to love it. We are seeing evidence of that. And so there's already a strong pipeline of business in 3 short months for some of these applications that we're just talking about.

[Paul Steep, Analyst]

Great. And then just last quick follow-up here for Blaine or Richard. Maybe on the margin, was there anything noteworthy guys that you'd call out in the quarter that maybe had either investment or spend sort of push out in the year? Or should we think that that cost base, apart from normal seasonality reflects where you're sort of at at this point?

[Blaine Fitzgerald, Executive Vice President]

Yes. I'd like to -- I mean, I would love to give a more exciting answer, but everything has gone according to plan for Q1. As you know, our cost profile is nonlinear. And the things such as connections and marketing programs, they're going to ramp up throughout the year. Connections is back half of the year that it usually hits. So that's something that's allowing our margin to be a little bit higher at the beginning of Q1 than we potentially will see at the end of the year. So right now we're pretty comfortable with our guidance. We think that we -- if we normalize the full year impact that we're comfortably in that 11% to 14% guidance range.

[Operator]

You have a question from the line of Stephanie Price with CIBC.

[Stephanie Doris Price]

With Panasonic announcing the acquisition of Blue Yonder, just wondering if you can comment a bit on the competitive environment and if you see any implications from that acquisition?

[John Ernest Sicard, CEO, President & Director]

Well, first, I would say when any company is acquired, it drives disruption. There's no doubt about that. There's got to be some disruption. And to the extent that a competitor is being disrupted and focusing on other things, well, that's a good thing. That's a good thing for us. And we've been -- last quarter and this quarter, we continue to be successful in winning business in this arena. So obviously that's the way we look at it. We wish the disruption to continue, and we look forward to competing in good faith as the year progresses.

[Stephanie Doris Price]

All right. And then in terms of the distributed vertical, you mentioned a new contract win there. Just curious how we should think about the potential in that vertical and the potential for it to become one of your core verticals?

[John Ernest Sicard, CEO, President & Director]

So yes, we announced that on purpose obviously. It's a new vertical for us. We have some additional opportunities in the pipeline, which gave me some confidence, frankly, in sharing that bit of news. As you know, from our history, we're extremely deliberate when we enter a new vertical and look to establish some good momentum in wins and proof. And so it's still very early days. When you look at how we grew life sciences, for example, it was a 6-year run to get to the point where we are right now.And right now, life science continues to be our #1 vertical, slightly -- just slightly ahead of high tech. And so this -- we're thrilled. We're always thrilled to enter a new vertical because it increases the TAM and increases our value. Increases the leverage of our R&D spend because they get to leverage RapidResponse. The same technology is used for aerospace and defense, automotive, industrial equipment, life sciences, high-tech and consumer packaged goods. And so it's just a great leverage point for us.

[Stephanie Doris Price]

Great. And then just one final one for me. Just given Rubikloud's 1-year anniversary here, just wondering how you're thinking about M&A at this juncture?

[John Ernest Sicard, CEO, President & Director]

Yes. We continue to be very thoughtful about it, in fact. We've increased our muscle, I would say, in evaluating potential accelerations to cover off some white space. I would say there are certain areas that have some interest. I wouldn't say there's anything imminent at the moment. And if you see anything during the year, it would probably be categorized more as a tuck-in than anything grand or large or disruptive.But I will say, different from, say, a year ago, we -- even during COVID, we went through 2 acquisitions successfully. And as a result, developed a stronger muscle around that function. And it is a topic which we discuss as a management team. So it's an active, I'd say, portfolio of work.

[Operator]

You have a question from the line of Deepak Kaushal with Stifel GMP.

[Deepak Kaushal, Director and Technology & Communications Analyst]

Just a couple of follow-up questions for me. I think it was just building on Thanos' question around the mid-market strategy. Beyond RapidStart, John, what do you have to do differently from a sales product-driven pricing strategy to fully penetrate the mid-market? Or do you see that you don't have to do anything different at all? Just thoughts on longer-term strategy for penetrating that market fully?

[John Ernest Sicard, CEO, President & Director]

Yes. What we've realized is that it's not just mid-market. I think maybe this pandemic has been the catalyst to get supply chain as a global craft to rethink the governance model. It's that grant. It's not like, well, we just need better technology. No. Mid-market, large enterprise, they're looking to -- they're looking at changing the governance model. Now there has been studies now published on how companies that leverage concurrency over a cascaded planning, how have they fared during COVID, versus companies that have not leveraged concurrency.And so -- and the reports are overwhelming, quite frankly. It's quite obvious that those companies that have already adopted concurrency as a governance model as an underpinning for planning have fared better during this pandemic than those who have not. And so that proof point now allows mid-market players to say, hey, I'll have what they're having to quote a famous line. I'll have what they're having. And what RapidStart does is it eliminates a lot of the risk because we're coming in and saying, hey, it's -- you're inoculated, if you will, in 12 weeks or less.And we have successfully deployed in 12 weeks or less for mid-market companies. And so that gives us a lot of confidence. In terms of doing anything differently, certainly, these companies are -- they're looking for reduced amount of risk and an earlier start. And I think, as Thanos mentioned, the net effect of this strategy is we fully anticipate an increase in that, I'd say, the expansion opportunity because we're -- we know, hey, we're just getting started. This is like step 0. And we've already had expansion occur after a rapid start. That's already happened.So you get to the 12-week window and they go, okay, we're thrilled. We're feeling so much better. Our fever is gone, and we'd like to take step 1, okay? And they start to expand further from that point. So I think over time, it's early days obviously, but over time, I'm looking for those indicators over the next 18 to 24 months, where we'll start to see some potential for an increase in expansion of subscription over -- as a result of RapidStart.

[Deepak Kaushal, Director and Technology & Communications Analyst]

Okay, great. That's helpful. And then just a follow-up on, I think it was Richard's question about Rubikloud. There's been a rapid adoption of e-commerce in retail. Are you starting to see that move the needle for your business either with Rubikloud organically? Or is this something that we should still expect to come as the integration matures? I mean, I guess what inning are we in? And how would you evaluate your penetration of the e-commerce segment of the retail market today?

[John Ernest Sicard, CEO, President & Director]

Yes. I'd say we're in the first quarter game here, and we've been successful with pillar #1, which was our prime motive, right? Can we leverage this technology in the CPG space. And so we have been successful there, and we're thrilled with that output. At the same time, it's a long game for us. We have our eye on the prize, and that's entering the retail space. And so this calendar year is all about preparing to do that. So I'd say the -- I'd say substantive return will happen once we get that -- their technology fully integrated into RapidResponse.

[Operator]

You have a question from the line of Robert Young with Canaccord Genuity.

[Robert Young, Director]

A couple of clarifications for me. In the past, I've always seen you as a company that's very intentional in where you shift your resources. And I think maybe different than -- I mean, adding on some of the questions on the mid-market, it always seems to me that the mid-market has been out there. It's just been that Kinaxis has been unwilling to put the resources there. I think that your -- some elements of your sales organization probably love to go after the mid-market. And so I think if I look at this from a different point of view that says that the mid-market is there, is Kinaxis now saying that it's going to go after the mid-market?

[John Ernest Sicard, CEO, President & Director]

Yes. It's a great question, Rob, and you're right. Those who follow us closely would see press releases and say, yes, that's not -- that's a mid-market company that they just closed there. And so I'd say that we would be more opportunistic, not necessarily targeting mid-market in our past life, whereas today, it is definitely more deliberate. There's definitely more deliberate. And part of that is in the pricing packaging and the promotion of RapidResponse and how we target. And I -- so I think you're going to continue to see more success in the mid-market.The other thing that I'd say we're drafting to use a cycling term. We're drafting off of proof points. We're drafting off of some of the greatest companies on the planet adopting concurrency as an underlying governance model and recognizing just how powerful that is. I've had 40-plus interviews with chief supply chain officers in the last 6 months and the one thing I'm hearing which is quite uniform is incrementalism is dead.People are looking for a breakthrough. They're recognizing that the past 30 years won't survive the next 3. And so I think the mid-market is looking at how the greatest supply chains in the world have governed themselves, and they're just saying, I'll have what they're having. The proof is there. I think our technology has matured also with that, the opening of the platform has matured. Our integration processes have matured.And we are now capable of deploying RapidResponse in all its glory in 12 weeks or less. And perhaps -- and years ago, when you and I first met, I wouldn't have been able to say that. And so I think that's what's really fueling our deliberate approach here.

[Robert Young, Director]

Okay. And then the distributor -- the new vertical you talked about, you said specifically that it expands the TAM. When I look at this, it looks like it might just be an element of retail of CPG, it sounds like you're breaking there as a brand new vertical. Is there any size around the TAM that you would think? Or would it largely fall in underneath retail CPG at first?

[John Ernest Sicard, CEO, President & Director]

Yes. Retail CPG -- well, CPG itself is a collection of verticals. It is so large. And so yes, you're right to think of it that way. And when we think of CPG, there's food and beverage, there's [Technical Difficulty].

[Operator]

You have a question from the line of Paul Treiber with RBC Capital Markets.

[Paul Michael Treiber, Director of Canadian Technology & Analyst]

Yes, John's line, I think it got cut off in the last part. So I just want to make sure John is there before I start.

[Rick Wadsworth, Vice President Investor Relations]

Operator, it's Rick Wadsworth here. Are you seeing John's line is available?

[Operator]

Paul's line is still connected.

[Paul Michael Treiber, Director of Canadian Technology & Analyst]

Yes. I'm...

[Rick Wadsworth, Vice President Investor Relations]

I'm sorry, this -- Paul, and I think the rest of the audience is here. I'm referring to our main speaker line.

[Operator]

One moment.

[Rick Wadsworth, Vice President Investor Relations]

I think they're going to have to redial in. Paul, if you want, while they're doing that, I could address your initial question. And hopefully, they'll be back momentarily free.

[Paul Michael Treiber, Director of Canadian Technology & Analyst]

Sure. I just -- on the growth of the pipeline in the last quarter, the company indicated the pipeline was up 40% year-over-year. Just should we -- how should we think about the growth going into Q1? Is that momentum sustained, accelerating? How should we think about relative to that 40% metric you put out last quarter?

[Rick Wadsworth, Vice President Investor Relations]

Yes. I mean when we introduced or talked about that metric, it's not something we're expecting to sort of give a number every quarter. Really, it was -- we thought that was a good time to talk about that underlying growth given the situation at the time. And we can certainly say that, I'd say the trend is continuing. This is not a one-off phenomenon. In fact, the pipeline has been growing steadily through 2020, and we'd characterize it as still on a positive trend here. So won't provide a pipeline growth metric quarterly. But yes, I mean, everything that John mentioned that's coming on in the world, whether it's COVID, Suez Canal, all the disruptions as well as the daily ones and all of our success being able to name new customers is helping here.And he also mentioned the Gartner report and how that alone resulted in the highest number of inbound inquiries that we'd ever had. So there's a lot of good tailwinds behind us at this point.

[Paul Michael Treiber, Director of Canadian Technology & Analyst]

Okay. And then -- I mean, that's on the...

[John Ernest Sicard, CEO, President & Director]

Okay. Can you guys hear me back now?

[Rick Wadsworth, Vice President Investor Relations]

Welcome back, John.

[John Ernest Sicard, CEO, President & Director]

All right. Sorry about that. I guess just got bounced. I could hear you, but you couldn't hear me. Sorry about that.

[Paul Michael Treiber, Director of Canadian Technology & Analyst]

It's loud and clear now. Just a couple of questions on the supply side in terms of managing your business. I asked Rick on the demand side, but for supply, can you speak about the ability to hire new employees in this environment? Are you finding that you can source the talent in the Ottawa region? Or are you beginning to broaden that out with remote work? Like are you finding -- are you actively sourcing outside of Ottawa than perhaps what you've done in the past?

[John Ernest Sicard, CEO, President & Director]

Yes. A great question. So as we said last call, in 2020, during the pandemic, we grew the -- our workforce by north of 50%, very aggressive hiring and that was worldwide. North America, here in Ottawa, Europe and Asia and in India. And we've continued to hire in Q1, not to the same pace, but to the expected pace. And I'd say the work-from-home global workforce certainly provides opportunity to find talent anywhere in the world. At the same time, I think it is not necessarily conducive to building careers for young people.It sounds great at the beginning, and then they realize, how do I build my career if I'm never physically with anyone? I'm -- so I'm not a buyer of work-from-home perpetually. I'm just not a buyer of that. I think ultimately culture will erode. That will -- you will forgo culture as a result. I think there's a reason why people are stronger together. I think there's a reason why communities are stronger when they lock arms. And so our approach going forward will be hybrid.This is what we're hearing from our employee base. They prefer a hybrid approach, but they are all looking forward to seeing each other once again. And we're going to -- we're continuing our work on our new global headquarters, which we're still on target to move in, in Q1 of 2022. And it will be a magnet. We're going to magnetize that place, and it will be a place employees will want to be.And -- but at the same time, we're not going to rush. We're not going to put safety behind us here. We have to be safe, first and foremost. We're never going to put employees in harm's way. And we're building a phenomenal culture. Our people matter here. Culture resonates really, really well globally, all around the world. And so we haven't had, I'd say, a systemic challenge in finding talent.

[Paul Michael Treiber, Director of Canadian Technology & Analyst]

And last one for me, also on the supply side. The MD&A called out the data center expansion in Montreal, which is starting in January. How is that progressing despite the restrictions? And then also in regards to the supply technology hardware, which is quite tight, how should we think about the capacity of your existing data centers and the need to expand that capacity? And how do you sort of think about mitigating risk if there are delays on the expansion side?

[Blaine Fitzgerald, Executive Vice President]

Well, good question, Paul. And just to clarify, it's ongoing expansion of our Montreal data center. And what drives our data center growth is really twofold. First, the growth of our customers, both from new name as well as expansion. And then secondly, we develop in the cloud. So it's the engineering team as well. Now it's something whereby we always invest again ahead of the curve. And so what we want to do is make sure that we have appropriate additional capacity so that we can expand, whether it's driven by our customers' increased usage or by that expanded R&D team. So it is with purpose. It is planned. It's part of our CapEx plan for the year, and it's proceeding as anticipated.

[Operator]

You have a question from the line of Suthan Sukumar with Eight Capital.

[Suthan Sukumar, Principal]

When looking at your recent wins, how much of that is being driven through the Rapid direct mall versus traditional RapidResponse model? And how much of a role do partners versus direct sales play in kind of driving new deals to this new program?

[John Ernest Sicard, CEO, President & Director]

It's about the same, actually. I wouldn't say that we've shifted our practice or our sales protocols. We haven't shifted our approach to leveraging partner influence and involvement. We haven't shifted away from having partners. More and more become prime on deployment. So I wouldn't say there's any -- there's been any shift at all in that regard.

[Suthan Sukumar, Principal]

Okay. Great. And are you guys seeing any learnings from Rapid direct that you can take back into your traditional deployments to maybe improve overall the launch time frames?

[John Ernest Sicard, CEO, President & Director]

Okay. So if I correct -- if I understand you correctly, when you say Rapid direct, you're meaning what we call RapidStart, which is that -- a program...

[Suthan Sukumar, Principal]

Yes.

[John Ernest Sicard, CEO, President & Director]

Yes. Okay. Well, in that case, we're definitely seeing a shift in customers, more customers now than same time last year, looking at RapidStart as their first step. And it's too early to say. It's too early to say this out loud as something that is systemic. But we have experienced faster sales cycles as a result of RapidStart. As you would imagine, we're dramatically reducing the amount of risk that a prospect has to take to get started. And so early days. We're monitoring that very closely.As we've always said, our -- when we look at our cohorts of deals, they tend to be in that 18-month range in terms of sales cycle. With RapidStart, there's the potential to basically lower that number and start to see a faster rate of close than we have in the past. And hopefully, that -- I answered the question you asked, but that's -- for sure, the most significant thing that we're watching right now is the sales cycle. There's something like RapidStart as a vehicle, reduce the time to close.

[Operator]

Due to the limit of time, we will be limiting questions to one question. You have a question from the line of Nick Agostino with Laurentian Bank Securities.

[Nick Agostino]

I guess so my one question, looking at professional services, obviously second largest revenue component for you guys. In your press release and MD&A, you talk about I guess more revenues coming from expanded service offerings. I know, John, in the past, you talked about introducing services and being able to bill for them. So I'm just wondering what type of service offerings are you -- I guess make up that comment about the expanded service offerings? And more importantly, can you maybe provide a split between how much of your professional services is tied to the implementation work to get a customer onboarded versus services being offered in the aftermarket? And how much of professional services overall can we maybe quantify, if possible, as being recurring in nature? That's it.

[John Ernest Sicard, CEO, President & Director]

Thanks, Nick. I mean, first and foremost, we've always viewed and continue to view the primary role of professional services is subscription enablement. And we're pleased to see that actually our partner -- our extended partner network is actually generating significantly more collective revenue than we are. What we've done is just to continue that connection with our customers and primarily through our Prana acquisition last year, is also now being able to cost-effectively introduce what we call sustained services.So this is after that subscription enablement is the ongoing connection and helping them better use and leverage and expand their usage of RapidResponse. Primarily though, that it -- the professional services are still focused though on either the initial subscription enablement or further expansion of that subscription enablement.

[Nick Agostino]

And any comment on -- is that Sustainment Services, is that a recurring revenue stream? Or is that onetime in nature as well?

[John Ernest Sicard, CEO, President & Director]

No, it's recurring because it's living with our customers and living with their RapidResponse experience. So it is absolutely sustained. And we continue to expand our strong team in India. The skill set there is amazing. We have, well, 20 years of experience building that. And they're a very, very focused, knowledgeable team and have developed rapport with our customers. So that is -- that's an ongoing -- just it's just ongoing relationship.

[Operator]

You have a question from the line of Martin Toner with ATB Capital Markets.

[Martin Toner, Analyst]

Is it fair to say that customers looking for a more rapid return on your investment result in shorter lead times, smaller initial contracts and then higher NRR over time?

[John Ernest Sicard, CEO, President & Director]

That's the thesis for sure, exactly in that order, right? Should we -- I would expect reducing the risk increasing the return on initial investment and providing a path, providing a journey to transform their governance model will yield those outlooks, right? Now it's too early to say. We've seen -- we absolutely have seen some cases where sales cycles are radically reduced. And in some cases, they continue to be exactly as we have been seeing for 25 years.And so we're going to monitor it very closely. We're obviously very pleased. It's coming off of a record Q4 2020. And then breaking records in Q1, again, and some of that -- the result of RapidStart. We're going to continue to monitor that and see if that becomes a trend. But it's a logical thesis.

[Martin Toner, Analyst]

Super. And congrats on a good quarter.

[Operator]

You have a question from the line of Robert Young with Canaccord Genuity.

[Robert Young, Director]

Cut me off before. I guess you're letting me back in the queue here for a last question. Maybe just a quick one. The chip shortage, the impact on the automotive sector seems tailor-made for what you guys are doing. And so maybe if you could just use that as an example of maybe how the automotive sector is seeing your tool set in a different way, and then I'll just let you off the hook.

[John Ernest Sicard, CEO, President & Director]

Yes. I mean it's another classic major disruption that you can't plan around. Know -- the old techniques, the old governance models don't know what to do when such disruptions occur. And you're right, it's a perfect use of concurrency and scenario planning and trade-offs and so on. So we've certainly done very well in high tech, and I might even say more so in the subsegment in chip manufacturing. And so our -- the customers involved in that space for us are certainly leveraging our technology as a result. There's no doubt about it.But it's just one example. As I talked to other chief supply chain officers, whether it's a stuck boat, a plant fire, COVID pandemic or material failing inspection upon arrival at a factory, all of these things are unplanned events. And all of these things require hyper agility to absorb. You can't plan your way around it, and this is where concurrency works best.

[Operator]

And there appears to be no more questions in queue. We will turn the call back over to Richard Monkman for closing remark.

[Richard George Monkman, CFO & VP of Corporate Services]

Thank you, operator. As you know, we announced my retirement in March with Blaine transitioning to CFO on August 1. Consequently, this is my 28th and final earnings call. I want to take this opportunity to thank the analysts, investors and other listeners for your support over the years. It has been an absolute privilege to be part of the Kinaxis team and to share our story. Thank you, and goodbye.

[Operator]

Ladies and gentlemen, this does conclude today's conference call. You may now all disconnect. Thank you for your participation.