Kinaxis Inc

TSX:KXS

Earnings Call Transcript 2022-Q1

[Operator]

Good morning, ladies and gentlemen. Welcome to Kinaxis Inc.'s Fiscal 2022 First Quarter Results Conference Call. [Operator Instructions] I'd like to remind everyone that this call is being recorded today, Friday, May 6, 2022.

I will now turn the call over to Rick Wadsworth, Vice President of Investor Relations at Kinaxis Inc. Please go ahead, Mr. Wadsworth.

[Rick Wadsworth, executive]

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; and Blaine Fitzgerald, our Chief Financial Officer.

Before we get started, I want to emphasize that some of the information discussed on this call is based on information as of today, May 6, 2022, and contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in the earnings press release, as well as in Kinaxis' SEDAR filings.

During this call, we will discuss IFRS results and non-IFRS financial measures. A reconciliation between IFRS results and non-IFRS financial measures is available in our earnings press release and in our MD&A, both of which can be found on the IR 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 archive may be re-recorded or otherwise reproduced or distributed without prior written permission from Kinaxis.

To begin our call, John will discuss the highlights of our quarter as well as recent business developments, followed by Blaine, who will review our financial results and outlook. Finally, John will make some closing statement before opening the line for questions. We have a presentation to accompany today's call, which can be downloaded from the Investor Relations homepage of our website, kinaxis.com. We will let you know when to change slides.

I'll now turn the call over to John.

[John Sicard, executive]

Thank you, Rick. Good morning, everyone. And thank you for joining us today. I'll be starting on Slide 4. I'm pleased to report that Kinaxis had a very strong start to our fiscal year, both in our financial results and key operating metrics. For Q1 we achieved SaaS revenue growth of 22% to $49.3 million, total revenue growth of 70% to $98.1 million and adjusted EBITDA margin of 34%. Blaine will provide all the specific details momentarily.

Moving to Slide 5, momentum in winning new customers continues to accelerate as more companies consider replacing inflexible legacy cascaded planning techniques in favor of a more agile concurrent planning approach. In Q1 we matched our all-time record for new customer wins that we said in the previous quarter. This is particularly noteworthy as the last quarter of any year is typically the strongest for Kinaxis. So matching that performance means this was an all-time record for any Q1 in our history and serves to boost our confidence in what is to come for the remainder of 2022.

We are honored to be selected by a growing number of global companies that put their trust and confidence in Kinaxis and RapidResponse to bring about transformative improvement in supply chain planning performance. For example, leading health science companies like Siemens Healthcare and Bayer Crop Science. In the consumer product sector we added the iconic brands Kimberly Clark and Carlsberg and we secured another major expansion with one of our many flagship customers in the automotive sector.

Complementing our ongoing success with large enterprise companies like these, we continue to see success in the mid-market with over 35% of our new customer wins in the first quarter coming from this category. We are thrilled with our ability to serve such a broad universe of companies and verticals with a single SaaS offering. It is a testament to the universal value of concurrent planning and validation of the strategic product decisions we've made in the past.

Record breaking new customer wins in Q1 coupled with expansion from our installed base has resulted in continued growth in our annual recurring revenue. At March 31, our ARR grew a healthy 24% year-over-year to $236 million in constant currency. Behind that, our fourth quarter rolling pipeline continues to grow stronger still and shows a healthy balance across all key geographies and vertical markets. In Q1 we experienced a sharp growth in the number of unsolicited inbound leads, in fact, an all-time historical high, which in turn helped to support all-time record number of direct prospects engagements for the quarter.

These are distinct signs of momentum in the business. Together, these leading indicators provide us with the confidence to grow SaaS revenue by 23% to 25% this year and to increase other aspects of our annual guidance.

I'll now ask Blaine to discuss the results for the first quarter and share more details about our improvements and guidance for 2022. Blaine?

[Blaine Fitzgerald, executive]

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.

Let's move to Slide 6. Total revenue in the first quarter was up 70% to $98.1 million reflecting strong SaaS revenue growth, typically strong subscription term license revenues and a high level of professional services activity. SaaS revenue grew 22% to $49.3 million driven by record new customer wins in recent quarters and expansion of existing customer subscriptions. Subscription term license revenue was $23.5 million versus $2.1 million in Q1 of 2021.

Fluctuations in this revenue item are generally tied to the normal renewal cycle of our customer-hosted software subscriptions and will vary period to period as a result. Q1 2022 represents the peak of that cycle. Our professional services activity was strong again, resulting in $21.5 million in revenue or 78% growth over the corresponding quarter of 2021. The rapid growth reflects accelerating new customer wins in recent periods, higher professional services capacity and utilization and expansion of our service offerings. Generally this revenue item varies from quarter to quarter based on the number, size and timing of customer projects underway as well as the proportion of work assumed by partners.

Maintenance and support revenue for the quarter was $3.9 million, up 26% from Q1 2021, reflecting overall growth in the subscription business with a small group of customers who have chosen to deploy RapidResponse on premise or who maintained the option to do so. We continue to be pleased with the diversity and strength of our total revenue base. For the quarter, our 10 largest customers account for 40% of our total revenues compared to 27% in the comparative period. As I just mentioned, the higher proportion is an outcome of being at the peak of our normal subscription term license revenue cycle. The value of one such on-premise subscription renewal was large enough to account for more than 10% of total revenues.

Now if you go back Q1 2019, at the same stage of our approximately 3 year renewal cycle, you will see the same pattern occurred. First quarter gross profit increased by 87% to $69.6 million as a result of revenue growth. Gross margin in the quarter was 71% compared to 64% in Q1 2021, largely reflecting a greater proportion of high gross margin subscription term license revenue in the mix and a very strong 20% gross margin on professional services revenue due to high utilization of the team.

Adjusted EBITDA was up 267% to $33.1 million or a margin of 34% compared to 16% in the first quarter last year. Our profit in the quarter was $12.5 million, compared to a loss of $1.5 million in Q1 of 2021. This significantly higher revenue and gross margin resulted in greater profitability despite increased investments in key operating areas.

Q1 cash flow from operating activities was up 7% from the comparable period at $22 million. At March 31, 2022, cash, cash equivalents and short-term investments totaled $252.2 million compared to $233.4 million dollars at the end of 2021. We remain pleased with our outstanding track record of cash generation.

Let's move on to Slide 7. Turning to some key metrics. Our annual recurring revenue grew $42 million or 22% year-over-year to $232 million, including currency impacts. Currency movements master even stronger underlying growth. In constant currency, our ARR grew 24% year-over-year to $236 million. This improvement reflects the unprecedented strength we have recently experienced winning new accounts and a success winning incremental business from our installed base. I'll remind you that the growth rate for the vast portion of ARR is higher than for total ARR.

Moving on to Slide 8, our remaining performance obligation remains strong at $479.1 million, up 25% from March 31, 2021. Of that total, $445.2 million relates to SaaS business, which is up 22% year-over-year. Further details on our RPO can be found in the revenue note to our financials.

Recall that growth in RPO were both incremental business won and renewals of existing subscription amounts which are subject to the normal schedule of existing customer contract renewals and the duration. ARR only reflects incremental changes, up or down in new or existing customer subscription amount and as such is a better indicator of future revenue growth.

On to Slide 9. With respect to our outlook, we are pleased to be able to provide you with increased guidance for fiscal 2022. We now expect total revenue for 2022 to be between $345 million and $355 million. SaaS revenue is still expected to grow between 23% and 25% over our 2021 level. We now expect subscription term license revenue to be between $32 million and $34 million. The balance of the incremental increase in total revenue guidance will come largely from the services. Finally, we now expect our adjusted EBITDA margin to be between 16% and 19%. Overall, our results for the first quarter were strong and the key metrics we watched as indicators of future business growth are trending very positively. We are thrilled to be investing in this exciting and developing opportunity.

With that, I will turn the call back over to John.

[John Sicard, executive]

Thank you, Blaine. Just over a month ago I celebrated 28 years of Kinaxis, I can honestly say that I have never been more energized about the future than I am now. We are at this very moment experiencing what I call a supply chain renaissance. A generational shift in how supply chains will operate for decades to come and setting a new foundation for future generations of supply chain practitioners.

We're moving away from legacy cascaded lethargic and siloed planning techniques and moving towards modern, hyper-agile, immersive, inclusive, concurrent planning techniques and I believe Kinaxis is uniquely qualified to accelerate that reality. And finally, a quick commercial about our upcoming customer conference. I'm thrilled to share that we are having a sold-out in-person event happening next week in San Diego. In fact, I'm told it's significantly oversubscribed at the moment.

The good news is that we are going to simultaneously stream virtual content through the Connections 2022 event. I encourage you all to participate virtually in our premier global conference for supply chain planners, innovators and thought leaders. You can register under the financial analyst category for the virtual event track at connection.com. During the conference, you will have the opportunity to hear from supply chain executive practitioners and experts from leading companies such as Amgen, Honeywell, PQ Corporation and Qualcomm, to name a few, on how they are meeting today's challenges and building their road map for the future.

Certain sessions that aren't initially available virtually will be made available later on demand. As always, thank you all for taking the time to join us on the call. With that, I'll turn the line over to the operator for Q&A.

[Operator]

[Operator Instructions] And the first question comes from Richard Tse with National Bank Financial Markets.

[Richard Tse, analyst]

Congrats on the really big quarter here, guys. Listen, it sounds like the pipeline is getting a lot bigger. Can you maybe talk about how much is that due to your marketing investments in recent years or the expanded partners or just the broad market tailwinds, trying to get a feel for where that's coming from?

[John Sicard, executive]

Yes, Richard, it's a great question. I think I probably had 90 conversations now, at least 90 one-on-one conversations in the last 15 months or so with Chief Supply Chain Officers and the narrative is really unified. Every Board is asking every CEO what will you do next time? There's an appreciation that uncertainty is the only constant and agility is becoming the new competence that people are looking for, and so the pipeline continues to grow quite strongly, I will say, quarter-over-quarter.

More importantly, I mentioned earlier the unsolicited inbound leads, which saw a very sharp increase quarter-over-quarter. I think it's a reflection of what I'll call an appreciation that we're at a crossroads in this craft, in this discipline that incrementalism is dead, that there has to be a fundamental shift in how supply chains are governed. And so I think this is what this global pandemic has done. It's created an opportunity for the practice, not just for companies, but for the practice of supply chain to reflect on what matters most going forward. And so there was a time, Richard, where we would be competing with CRM projects or competing with MRP upgrade projects. Those were, I would say, very strategic. Not anymore, supply chain, I think, is probably at least in my estimation, the most strategic endeavor, and I think it will last the next 5 to 10 years.

[Richard Tse, analyst]

Okay. So this is a related question here. If you look at the landscape, it's certainly been fairly active in the past years from an acquisition standpoint, and [indiscernible] like I'm not going to ask whether you guys are a potential target as well. But how has the competitive landscape changing in the midst of those acquisitions? Is it sort of strengthen your position as those companies regroup or what would you think about that?

[John Sicard, executive]

There's been no meaningful change, honestly, in the competitive landscape for us. You mentioned Anaplan there. I think they're predominantly focused on the Office of Finance coming in through the CFO's office. Supply chain is all together a completely different function and significantly more complex, I would say and so we very, very rarely will bump into them. I can't remember the last time, frankly. And so it continues to be SAP is the predominant incumbent.

We will bump into Blue Yonder and o9 from time to time as typical. And honestly, I would point you back to the Gardner Magic Quadrant which I recognize is the old one. I would encourage you to keep an eye out for the next one, which I think will be imminent. And I think they really get it right. I have a lot of respect for the process they put everyone through. It is very, very detailed. And I think they really get the competitive landscape right. And so maybe the next week or 2 will tell us the story.

[Richard Tse, analyst]

Okay. And then last one from me. The services number has actually continued to be quite robust here. Maybe just update us on the nature of the services versus the ones that you hand over to your partners?

[John Sicard, executive]

So yes, we've been looking at that. We were anticipating getting this type of a question. These last 2 quarters, in fact, I want to say, 5 or 6 quarters in a row, we've been experiencing record-breaking net new wins. And so as a side effect of bringing on that number of customers, it's a natural side effect that we would be starting more projects. That said, we are doing fewer projects, fewer engagements directly like where we're the lead versus when our partners are leading.

We're still seeing the vast majority of deployments that are occurring today where are partners are taking the lead. We might have a secondary role. But we are taking on the minority of lead, what I'll say, the professional services lead position for net deployments. So I think what we're seeing is a side effect of a very rapid successful net new customer acquisition over a very short period of time. The last 2 quarters, we announced in Q4 the record number of net new accounts in the history of Kinaxis. In Q4 being typically the strongest quarter of the year as long as I've been here and then replicating that yet again in Q1, which I think is a sign of momentum in the market.

So I don't see this as a systemic situation. It's really just a side effect of our recent acceleration of net new accounts. You asked about the type of service. That hasn't really changed either in the deployment services, whether it's starting with RapidStart and expanding from there or I did mention as a result of our acquisition in India, we are doing some sustainment services for some of our largest customers. But overall, we haven't seen a real shift in the type of service that we're offering.

[Operator]

And next question comes from Thanos Moschopoulos with BMO Capital Markets.

[Thanos Moschopoulos, analyst]

John, I remember at the time of your IPO at the time, you said that it gets constraint to growth as customers needing to realize they needed software like this and as you alluded to, clearly, that's not the case anymore they aren't going to get it. So at this point, what would be the constraints to growth? I mean, you're obviously putting up very strong growth. But in terms of accelerating beyond that, is there a constraint in terms of sales and marketing capacity or in terms of deployment capacity or what's the dynamic there?

[John Sicard, executive]

Yes, it's a great question. And there is something that keeps me up at night, obviously, that we think about as we absorb success. Obviously, there isn't a day we're not hiring across the board ourselves as a company. But more importantly, there isn't a day where we're not recruiting partners and system integrators. I believe we added another 15 or so in Q1. We're up over 90 signed agreements with partners, not all of them, system integrators, of course some of them are solution extension partners.

Some of them are VARs. That all said, we're investing quite heavily right now in the onboarding and the training required to make sure we can accelerate the readiness of our partners. So we're obviously looking, as I said, to these leading indicators. I've talked a lot about this in past earnings calls about unsolicited inbound leads, which is essentially when somebody rings your doorbell with -- they come to your store without any solicitation, they just come to you. So we monitor that very, very closely as a leading indicator, and that has us working very, very diligently with our partner network to certify as many third parties as we possibly can so that we can be ready to absorb the momentum and the success we see in front of us.

[Thanos Moschopoulos, analyst]

Great. Kind of partner-related question. I think in the past, you've alluded to the opportunity of leveraging resellers to perhaps tackle a market segment, even if it is smaller than mid-markets. Is it very early days on that front or anything to report?

[John Sicard, executive]

I'm happy to report that we actually had our first successful VAR sale. That initiative isn't very old. It's quite in its nascent state, but we have signed many of VARs already. I don't know the exact count because, do you know it?

[Blaine Fitzgerald, executive]

I believe we're up to over 20 of the...

[John Sicard, executive]

Yes, over 20 VARs and one of them has successfully closed a deal on their own well with our support, obviously. But so we're thrilled with that. You mentioned the mid-market, and I talked about this in the opening remarks that we're thrilled to be able to satisfy the needs of such a broad spectrum of customer sizes and verticals. Our smallest customer does under $100 million in revenue, under $100 million. And they're using exactly the same software as companies that are over $150 billion.

So it is a testament -- as I said, a testament of the power of concurrent planning is technique. And obviously, our VAR program right now is really focused on expanding our sales footprint outside of the geographies that we're already in and certainly tackling a much broader pipeline potential. I think we used to talk about targeting 3,000 accounts in previous earnings calls, we've talked about that growing to 6,000 or 7,000. I can tell you today, with the VAR engagement that we have, we're probably closer to 20,000.

[Thanos Moschopoulos, analyst]

That's great. And just a quick one for Blaine. Is it safe to assume that the 23% to 25% SaaS revenue growth would be a couple of points higher in constant currency?

[Blaine Fitzgerald, executive]

It's a great observation and a great question. I will say that our numbers are being held back a little bit from -- because of FX issues. I'm looking forward to the euro and Japanese yen and British pound all to make a recovery during the year. And I'll say I'm very confident in the 23% to 25%. But I will also say that FX is part of the reason that we're in that range right now.

[Operator]

And the next question comes from Daniel Chan with TD Securities.

[Daniel Chan, analyst]

Another question on the guidance. It seems to be coming from ProServe, and you guys are talking about a lot of net new customers coming in. So I'm just wondering why this increased ProServe outlook doesn't correspond with a substantial increase in software guidance, whether that's from term license or SaaS? I know you increased the term license guides, but that seems it could be mostly related to the strength from this current quarter.

[Blaine Fitzgerald, executive]

Well, maybe I'll just jump in with the professional services and why we're seeing the increases number of reasons, but the biggest reason goes back to again, the customers that we're seeing coming in. And as you can imagine, the professional services revenue comes in at the upfront for any of our software agreements that we have in place. And so that revenue it's right now hitting the front of that ramp that we're going to have with the subscription amount that's coming over a longer period of time.

We are in a position that we're very fortunate to have very big numbers that are coming for professional services, but we are working very diligently to make sure that our partners are getting the bigger bulk or the bigger piece of the pie when we do those that work. So this is just a symptom of the fact that this is the upfront fee that a lot of customers will take on to deploy our software into their environment.

[Daniel Chan, analyst]

Is it fair to say that the professional services that you're deploying this year and the upside that you've guided to, is it fair to say that maybe some of the software revenue you're going to see would fall into '23 then?

[Blaine Fitzgerald, executive]

Yes, definitely. Our software revenue, we generally have contracts between 3 and 5 years. So other than subscription term license revenue, which the majority of it is recognized upfront, our SaaS revenues will be recognized over that 3 to 5-year period and we do have some ramping deals that are in place as well. So we do have some committed ARR that we'll be landing over the next 2 to 3 years.

[Daniel Chan, analyst]

And then just another question on ProServe's strength. You mentioned that your engagements with your partners haven't changed. Just wondering to what extent your move into the mid-market is driving stronger demand for ProServe as well considering some of these smaller customers may not have the resources to deploy themselves and they want to leverage your services?

[John Sicard, executive]

Well, yes, absolutely. As I mentioned, just the sharp increase in net new customer wins in a very tight window translates to a sharp number of project starts, all at the same time. Now I will say, obviously, mid-market companies will tend to have smaller overall projects than our enterprise class customers. But there's definitely foundational work there. So that comes back to working very, very diligently with our system integrators to make sure that they're well prepared to absorb those projects alongside those net new wins. But again, I wouldn't classify them as being substantively different. They might be smaller in scope, but not different from enterprise class accounts.

[Operator]

And the next question comes from Robert Young with Canaccord.

[Robert Young, analyst]

Just looking back over the years, it struck me that you haven't really raised guidance in the first quarter very often, certainly not the quantum you're doing with this quarter. And so given a lot of that is coming from professional services, as others have pointed out, I'm just curious, is there an implication there around the speed of growth at the beginning of the year, faster than other years, is there anything that's creating a dynamic where you're trying -- you see a higher level of professional services here in the short run?

[Blaine Fitzgerald, executive]

Yes. So I'll answer it. We are in a fortunate position obviously that things are ramping really quickly and professional services are going to be the first group that are going to be touched by this rapid growth that we're seeing. And you're right, we generally haven't -- we've been pretty accurate in terms of understanding what our opening year forecast or guidance would look like. I think we're in a situation where we're in a fortunate situation where things are happening faster than we anticipated.

And professional services, the first area that we're seeing that increasing a lot quicker than we expected. We're also seeing on the retention period, like our customers are extremely happy with us. And so some of the reasons why you're seeing this increase in guidance is that we've gotten to a position with a lot of our renewals that we're seeing for the rest of the year that are looking really, really good at this stage. I mean I would say on a retention perspective, especially on gross retention. This will be one of the milestone years that any company out there would ever have.

So we're very, very fortunate to be in that position at this stage. But we're in one of those situations that I think every CFO wants to be and where things are rolling in our favor in a lot of different respects. And we're able to increase the guidance at this stage, and we'll keep you up to date for the rest of the year.

[Robert Young, analyst]

Okay. Just to be clear on the comments on gross retention, is that expansion that you're trying to highlight there or it's just the high level of expansion you're expecting to drive the growth retention?

[Blaine Fitzgerald, executive]

No. Great comment. So when I talk about growth retention, I talked about our customer retention. So we've always talked about that we're in the mid-90s to high 90s. I think we're closer to the latter at this stage through 2022. Net retention has continued to be over 100%. We're still very, very happy with the expansion that we've seen on our current customers. And what we're doing right now is we're in the process of -- with every new customer we bring in, that's more powder to be able to allow us to expand that revenue over time. So we're situated pretty well on both those retention figures.

[Robert Young, analyst]

Okay. The comments made on the unaided inbounds, I'm curious how you're handling those as far as I understand, you're not covering all of the verticals out there as yet and so are you seeing a lot of inbound outside of your target market, target geographies? And how do you handle those? Are most of these going to your partners? I mean, maybe if you can talk about that and how it informs your planning.

[John Sicard, executive]

Yes, absolutely, Rob. So we're certainly seeing inbound leads from mid-market accelerate as we show evidence of success in supporting that sector and certainly across all the geographies. And of course, we're taking inbound leads in geographies where we're not necessarily directly present and with a growing list of VARs, that gives us an opportunity to make allocations, if you will, on those opportunities. And so that is continuing as we go.

And of course, that is fueling, as I said in the earlier comments, it's one thing to have somebody ring the doorbell and just be browsing. It's another when they say, no, no, I have a project. I have a process I'd like you to go through. And that is fueling not only the pipeline but active engagements. And for me, these are leading indicators. The other thing I can tell you, I think maybe you and I have known each other a long time, Rob and I've always said our cycle times tend to be on average 18 months well. I've been monitoring that very, very, very closely.

And that is now -- there is evidence to suggest it's closer to 12 to 15 now. And I'm confident enough to say that I think that will sustain for some time because this is becoming so crucial for so many companies to tackle. So we're obviously thrilled with that momentum and the bets we made on our global alliance initiative and growing that team are really, really paying off.

[Robert Young, analyst]

The cycle time, it's a whole can of worms. Hope others expand on it more, but what's the key driver, the rapid value? Is it the shift to mid-market customers pushing you to go faster through the sales process? I mean if there's 1 or 2 key drivers in the compression of that sales cycle, what would it be?

[John Sicard, executive]

Yes. I'll tell you that based on my conversations, that if I had to pick the #1, I describe it this way, when I'm talking to a Chief Supply Chain Officer, they tell me, I have 104 fever. I like the symptoms are so horrible and so they're looking for a really rapid prescription can you lower my fever? And then we can talk about transforming for the future. And I think that is the one catalyst that is really driving this.

The other, I think I mentioned this before, that boards are all over this topic. Supply chain isn't something that's tactical or a cost center. It's an absolute strategic weapon. Even just recently, I want to say yesterday, this might be the first time this happened, where Cardinal Health specifically mentioned Kinaxis as a partner in their press release, in their earnings call script. And so this is becoming more and more typical where supply chain is becoming hyper strategic and the need to transform away from the legacy lethargic approach, the cascaded approach to one that is hyper-agile is becoming urgent. I think those would be the 2 things I would say, Rob.

[Operator]

And the next question comes from Stephanie Price with CIBC.

[Stephanie Price, analyst]

Just following up on that last conversation there, I was hoping you could talk a bit about the pace of RapidStart sales cycle and conversions to maybe more sales [indiscernible].

[John Sicard, executive]

Yes, Stephanie, I can certainly speak to that. In fact, RapidStart was very much born out of many conversations I was having with chief supply chain officers that told me exactly that. You need to deal with symptoms first before I can deal with cure. I need to be strong enough if I can use that analogy. And RapidStart continues to be, what I believe, unmatched in the market, the ability to shake hands and go live inside of a 12-week period. In fact, from one recent life science customer, I want to say it was 6 to 8 weeks to their initial go-live, which I think is revolutionary right there.

We are seeing continuation of a pickup on that theme. Although depending on the size, it's not uncommon for an enterprise class customer to say, look, I love this RapidStart. I need to go live as fast as possible, but I need to embellish the starting point just a bit. And so we might see something in the sort of 4-month time horizon for that initial go live. It continues to be very, very strategic to us. It's something that we lead with. And obviously, for mid-market, it is extremely well received.

[Stephanie Price, analyst]

Great. And then one for Blaine. Just on the Q1 margins. You're obviously very strong. Can you talk a bit about the decision to raise margin guidance for the full year by 10 basis points and the investments that you're looking at for the rest of the year maybe?

[Blaine Fitzgerald, executive]

Sure. Yes, it simply -- it actually came down math at the end of the day, going from '15 to '18 to '16 to '19 with a slight increase in subscription term license, which generally brings to us 100% margin. But as you can imagine, with professional services also being a large part of the increase in total revenue, it has less of an impact on the margin at the bottom line. But it does have obviously, a dollar a big dollar impact for us, but the percentage impact is less so because what we expect, that we came in around 20% for professional services at the end of Q1.

We expect we're going to be somewhere in that 10% to 20% range for professional services. One of the things that we're noticing is that the utilization of our team is extremely high, and we want to manage that utilization throughout the rest of the year. So we're going to ensure that although when we see revenues continue to ramp, we're going to try and ensure that we have enough resources to support a slightly lower utilization, which will then mean a slightly lower gross margin. But we're pretty happy with that margin in any case. And so at the end of the day, it is a spreadsheet to math, math formula, it works out '16 and '19. So we're happy there. Your second part of the question was asking where do you see investments? And our biggest investment is going to be headcount and dealing with the increase we're seeing.

We will have to add people on the professional services side. We are continuing to look at the sales side to try and meet the demand that we're seeing. The fact that we have this great inbound funnel that's coming in is amazing, but we also need to make sure that we're finding all those potential customers that haven't picked up the phone, and hasn't emailed us, and so we're in a position right now where we know there's a lot of open field and we're doing our best to get as much of that to continue to ramp our revenue over time. And right now what you should expect from us is ramping revenue for the next little while.

[Operator]

And the next question comes from Paul Treiber with RBC Capital Markets.

[Paul Treiber, analyst]

Just want to focus on scalability longer term and big picture. You mentioned that the gating factor is security partners and also capacity. With RapidStart, is that -- I know it speeds the time to market, but then also does it accelerate or improve scalability in terms of reducing some of those constraints in terms of professional services, like yours and third parties the attach rate lower? Is it -- obviously it's [indiscernible], but it sort of reduce that gaiting factor?

[John Sicard, executive]

That is a wonderful question, Paul, and very astute in that it does actually, it was very much designed to as it's a prescription. The idea behind the prescription is that it's the same medicine for everybody. And the thesis there is that we can teach our partners how to administer that very same prescription, as this is the same for everybody. It's the same starting point. And so this comes back to the training and onboarding and readiness of our VARs and our system integrators for that matter, to be able to rapidly deploy and replicate RapidStart as a starting point for every customer.

That's definitely the thesis. And it is working in our favor, especially in the VAR area where we're seeing more mid-market activity than enterprise class activity. And so absolutely, the answer is yes. We do see RapidStart as being a vehicle to reduce the friction, if you will, of getting VARs started and successful in deploying RapidResponse.

[Paul Treiber, analyst]

And taking that and looking out and sort of extending RapidStart, can you move -- ultimately, is it a possibility of moving more towards something that's more self-service and maybe even along the lines of multi-tenant from an architectural point of view. So your partners is much more hands-free for them to deploy it for customers or eventually get to the point of customers can just deploy it themselves.

[John Sicard, executive]

Yes. Part of the beauty of RapidStart is it uses a prescribed set of data that is very, very typical and, I would say, uniform across the customers that we serve. There may be some industry-specific nuance between, say, high-tech electronics and life sciences and CPG, there will be some certain data elements that exist in one market vertical but does not exist in the other. But those are completely encapsulated in the, what I'll call, the dosage of RapidStart. In terms of self-serve, I would say the systems that incorporate a customer's supply chain data is typically not a, what I would say, walk up and use.

There's typically some -- I'd say some IT work that still has to happen to integrate the data sets between even a mid-market player and our cloud platform. So obviously, I would love to see a press hard bottom copies, yours, log in and use your credit card kind of a process. Maybe we'll get there someday. I will tell you that supply chains are kind of like people, almost all the same, but just different enough to be meaningful. And so for the time being I think we're still going to have some need to have human beings involved in the deployment. That said, we are seeing a continuous reduction in the amount of effort it takes to go live.

I mean there was many -- I will tell you conversations I have with executives, and I said, no, no, you can be live in 12 weeks. There's absolute disbelief until we prove it. I've always said it, you can only earn someone's respect after doing what you promise. And so we promise. And so I think we're going to continue to improve on that. I'm not sure that we'll end up with a walk up and use anytime soon.

[Paul Treiber, analyst]

That's helpful. Just one last one. Just in terms of the momentum of new wins. You mentioned that mid-market is 35%. If you exclude mid-market, how do you characterize the momentum in large enterprise? Are you also hitting record highs or quarterly highs in terms of large enterprise wins?

[John Sicard, executive]

I don't know that I've actually measured it that way, but my intuition tells me that the answer is yes. In fact, conversations we've had recently on the management team, it felt like Q1 was a return of enterprise-class customers coming back, slower boats to turn. And we're looking at -- we're looking at the pipeline, and we're seeing very, very, very healthy activity in the enterprise class. Obviously, we're thrilled with being able to announce Bayer and Siemens and obviously, Kimberly Clark and Carlsberg, and these are all very, very large enterprise class accounts. You're going to see a continuation of those based on what I see in the pipeline. But at the same time, with our adoption of leveraging VARs, we're going to continue to see success in the mid-market as well.

[Operator]

And the next question comes from Kiran Sritharan with Eight Capital.

[Kiran Sritharan;Eight Capital, analyst]

Can you comment on how the disconnect between private and public markets rules is affecting your M&A pipeline and have you had any negative conversations with potential customers?

[John Sicard, executive]

Well, I think as I said earlier -- on our earlier calls anyway, we're being a lot more thoughtful when it comes to M&A. We concluded a very small, very small tuck-in in Q1 and obviously, our pipeline, we continue to look at a pipeline of M&A potential, and it is motivated around filling white space in our technology, like accelerating white space in our technology. It's not so much looking to buy revenue, but looking to accelerate whitespace in technology.

I would say that there may be some other potentials throughout the year as we go through that process. We're exceptionally diligent to ensure that anything that we look at is technically accretive, that anything we look at has strong use case fit for the markets we currently serve. And so stay tuned, I'd say, on progress there. That's I guess, my commentary on the M&A front.

[Kiran Sritharan;Eight Capital, analyst]

Great. And has on loading the PPE customer last quarter helped accelerate any conversations in that vertical and other wins, similarly greenfield or a more competitive displacement?

[John Sicard, executive]

It's a great observation, in fact, that we were able to pick up BP in the oil and gas sector, not the first, not the only. There are some that we have not announced. And obviously, very, very complex supply chains in that space, very complex. And of course, Kinaxis does complex really, really well. So I wouldn't say that we're at a stage where we would announce that vertical as one of our primary ones. I think I've said this on previous calls, while we announced 7 that we're actively engaged in, we certainly have customers in many more than that. It's really one of an area of focus for us that we tend to be guided by. But we are really happy with our progress, not only with BP, but in that sector. So stay tuned for more news as things progress.

[Operator]

And the next question comes from Martin Toner with ATB Capital Markets.

[Martin Toner, analyst]

I would like to talk about what needs to happen for EBITDA margins to move into the 20%s and then higher. When I strip out subscription term licenses, it looks like you're pretty close, can you talk about that?

[Blaine Fitzgerald, executive]

Sure. I'll jump in. It's very -- I'll just say that it's one of those situations where you have a company that like ourselves that we believe we're very, very balanced in terms of growth as well as profitability. A lot of you are obviously aware of the rule of 40, and we tried to invent the rule 100 this quarter. So we're pretty happy with the direction has gone. And what we've done on the profitability side is we've been cognizant of the fact that there is a lot of growth still in front of us. And so we are trying to manage that growth with accelerating revenue streams that we're seeing right in front of us right now.

And so definitely, I think I said in the last call, if we wanted to be -- we could continue to be at a 30% to 35% adjusted EBITDA margin company right now. We are consciously making decision to stick in that range of right now we're saying 16% to 19%. We want to be over 20%. We could easily do that this year. I think we are going to be very, very close to that range. Obviously, 19% is not too far away. But we also don't want to under invest for the opportunities in front of us because we do think that this is an accelerating revenue stream. And I want to come back to you one day and say, again, hey, guess what? This is the second time we've had a rule of 100, and that potentially could be in our future.

[Martin Toner, analyst]

That's great. The RapidStart cohort of customers, they're still fairly new. Just wondering can you talk about the success you've had growing with those customers at this early juncture?

[John Sicard, executive]

Yes, we've absolutely. Exactly as the thesis had predicted, lowering somebody's fever and making them feel stronger leads to them doing more, adding more value. So expansion is a very natural side effect I would say of getting to that stage. And so we have already seen significant expansions across multiple accounts that have already started with RapidStart. It's where they start. It's definitely not where they expect to end in their transformation journey. So it's been very, very successful. We're thrilled with the initiative.

[Martin Toner, analyst]

Great. And can you say that your pipeline is still growing faster than ARR?

[Blaine Fitzgerald, executive]

Yes. That's the short way to say it. Yes, our pipeline is growing faster than revenue. It's growing faster in ARR. So it's given us the confidence to be very -- we'll be very, very confident in this call because we see the projections and where our conversion rates are. But pipeline growing faster than revenue or ARR is a good sign.

[Operator]

And the next question comes from Suthan Sukumar with Stifel Canada.

[Suthan Sukumar, analyst]

One question I had left here was more on the RapidStart versus RapidResponse piece. Kind of curious what considerations are enterprise customers making today when they go with the flagship RapidResponse platform versus the RapidStart program and the go-to-market benefits that, that brings today.

[John Sicard, executive]

Sure. It's a great question. First of all, I'll just clarify that RapidStart -- think of RapidStart as being a blueprint, a prescription of the RapidResponse platform. There's nothing -- the software itself isn't different. It's not different at all. It's the configurations, the starting point, the starting configuration that is different, but it's not a watered-down version of RapidResponse at all. It has all the full power and potency and concurrent planning and end-to-end transparency.

It's fully immersive and inclusive from tip to toe in terms of the software platform itself, is 0 difference, 0. The only difference with RapidStart is we're coming in with our 25-year plus experience in saying, this is the starting blueprint that we can leverage to get you live to get you concurrent to start adding value inside of a 3-month horizon. And from that point forward, we can grow the configuration to become more, what I'll say, is tailored to your own specific use cases.

And so that is why this has been so powerful. We've been at this for so long that our customers are relying on our own intellect and our own experiences to blueprint very valuable starting points. And that's what RapidStart is. It's a blueprint. It's a prescription, it's a starting point and from that point onwards, well, then they tailor it to their own specific use cases and expand it from that point.

[Suthan Sukumar, analyst]

Got you. Okay. And then just a follow-up on that, John. The customers that are more comfortable with making kind of that full-blown purchase decision with a RapidResponse. Are they looking for an expanded set of capabilities right out of the gate or are there other sort of decision factors that are kind of influencing that?

[John Sicard, executive]

Yes, absolutely. We have encountered even recently some very large enterprise accounts that I absolutely appreciate the RapidStart approach, and they start there with some embellishments. I'll use that word they say, okay, we want RapidStart plus I don't know, constrained planning. Can you add that one feature on top of that prescription, and that might extend that starting point by a few weeks. But that would be, say, more typical in the enterprise class than mid-market. But I think the philosophy of getting a very rapid go-live is uniform between mid-market and enterprise. The only difference is sometimes the starting point has some additional complexities in it that will extend -- might extend the go live by a few weeks, but it will hit a very urgent need of that particular account.

[Suthan Sukumar, analyst]

Got you. Great. And then one last one from me, just on kind of the -- just kind of looking ahead here and looking at the macro backdrop. Do you see any sort of change in the mix of it or the mix of adoption between RapidStart and kind of the RapidResponse platform given the potential uncertainty had in the macro backdrop or has it not really been a factor given that supply chain has just been going to be growing in the strategic imperative year for the company that you're working with?

[John Sicard, executive]

Yes. I think the supply chain is going to be a growing imperative for many years to come. I fundamentally believe that. I really think this is becoming urgent. As they say, necessity is the mother of invention. And it might have started with weather events, the Evergreen being ever stuck in the Suez, port strikes and then the pandemic hits. And then there's war. And then there is fluid inflation challenges hitting different parts of the world and recovering at different rates. This is really informing management teams all over the world and a recognition that if we are going to absorb this level of volatility, what I say is the ferocity of volatility, then something needs to change. They need to become more agile. And I think that is what's really fueling our momentum, momentum begets momentum, and we're experiencing it right now here at Kinaxis.

[Operator]

This concludes question-and-answer session. I'd like to turn the call over to Rick Wadsworth for any closing comments.

[Rick Wadsworth, executive]

Thanks, operator, and thank you, everyone, for participating on today's call. We certainly appreciate your questions, as always, and your ongoing interest in supporting Kinaxis. We look forward to speaking with you again when we report our second quarter results. Bye for now.

[Operator]

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.