Kinaxis Inc

TSX:KXS

Earnings Call Transcript 2023-Q1

[Operator]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Kinaxis Inc. Fiscal 2023 First Quarter Results Conference Call. Currently, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session, and instructions will be provided at that time for you to queue up. I'd like to remind everyone that this call is being recorded today, Thursday, May 4, 2023.

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, Vice President of 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 closing markets yesterday. With me on the call are John Sicard, our President and CEO; and Blaine Fitzgerald, our CFO. Before we get started, I want to emphasize that some information discussed on this call is based on information as of today, May 4, 2023, and contains forward-looking statements that involve risks and uncertainties. Actual results may differ 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, including adjusted EBITDA. A reconciliation between adjusted EBITDA and the corresponding IFRS result 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 Investor Relations 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 Blaine, who will review our financial results and outlook. Finally, John will make some closing statements before opening the line for questions. We have a presentation to accompany today's call, which you can download from the Investor Relations homepage of our website and then while you learn on today's slides. I'll now turn the call over to John.

[John Sicard, President and CEO]

I'll be starting with Slide 4. We're pleased to report first-quarter results supporting our strong and improving outlook for the year. We achieved SaaS revenue growth of 28% in the first quarter. Solid start towards our overall goal of 25% to 27% growth for the year. Similarly, we posted an adjusted EBITDA margin of 17%, which puts us on track towards our new and higher target of 14% to 16% for the year. As strong as these numbers are, the most significant aspect of the quarter was the quality and type of new name accounts we continue to win. We have spoken about our focused entry into the retail market for some time now. And today, I'm pleased to share that we now have made significant progress in this regard. You would have seen our recent announcement of our recent win with Havi, a leading global supply chain company serving the unique needs of the very largest quick service restaurants, or QSRs, in the industry. For those of you unfamiliar with Havi, I would encourage you to do a little research. Havi will be using rapid response, including our new demand.AI module to help their customers enable advanced predictive and prescriptive analytics using machine learning and artificial intelligence. Provide end to end supply chain visibility and powerful what if scenario planning. I can't overstate how excited I am to have Havi as a customer, and to help improve the supply chains of the world class QSR brands they work with every single day. During Q1, we also want another iconic QSR brand, which unfortunately we can't name at this time but a true leader in their category.

Together with Havi, this win gives us an important cornerstone in the massive QSR segment of the retail market. We will continue our focused approach to retail and work to leverage these successes in similar opportunities. We also welcomed one of the oldest best-loved snacking powerhouses in the world, a true household name. As always, I'm humbled when such globally recognized brands place their trust in Kinaxis. I'm particularly encouraged by our progress during these uncertain economic times. Our win rates remain very robust, even as prospects continue to exercise extra care and rigor in their purchasing processes, which has temporarily extended some sales cycles. As our recent customer addition demonstrate however, market leaders continue to prioritize supply chain management transformations in their budgets, and our sales activity continues to operate at all-time highs. Today, Kinaxis has seven of the top 25 companies in the Fortune 500 and 11 companies named by Gartner either in their top 25 supply chains or masters category, Gartner's highest classification. These figures represent both amazing accomplishments to date and huge opportunities ahead. Also noteworthy in Q1, our annual recurring revenue grew by 23%. We continue to see a good mix of new business between enterprise-class and mid-market accounts. Our value-added resellers or VARs, also contributed some wins with smaller companies in the first quarter. We are in the very early stages of this strategy, but we are pleased to see initial proof points of its effectiveness.

Looking further out, growth in our 12-month rolling pipeline continues to indicate that the positive demand trend for concurrent planning capabilities will continue for some time. And as you know, Kinaxis is investing appropriately to fully capitalize on this very constructive environment. As part of that investment, I'm pleased to announce that we have live customers in both Microsoft Azure and the Google Cloud Platform or GCP. As we've mentioned previously, the focus is initially on hosting new customers in these public cloud environments rather than migrating existing customers. We're extremely pleased with both the performance and economics of these arrangements. Rapid Response is also now available in the Microsoft Azure marketplace, which raises our profile in this community. Now more companies will be able to take advantage of the supply chain agility Kinaxis delivers by accelerating buying cycles and using Rapid Response to help contribute towards their Microsoft Azure consumption commitments. As one final note, I'm absolutely thrilled to inform you that the latest Gartner Magic Quadrant for Supply Chain Management was published by Gartner yesterday. Management was published by Gartner yesterday. With their tremendously deep and objective inspection of our space, this important publication may just be the definitive guide for practitioners looking for a path towards digitizing and driving breakthroughs in supply chain management performance. If you're a practitioner of the supply chain or you care about those companies like Kinaxis, those of us supporting the craft, I would encourage you to seek it out through the Gartner subscription. In keeping with and respecting Gartner's communications policies, we will be releasing a complimentary copy of this report in the coming days. Watch our news, our social channels, and the website for more details. This one is not to be missed.

With that, I'll turn the call over to Blaine to review the results for the quarter and our improved outlook for the year.

[Blaine Fitzgerald, CFO]

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. While constant currency figures for all key metrics would have demonstrated even better results, we won't be sharing them for Q1, as the impact of foreign exchange fluctuations on year-over-year comparisons has been waiting. However, if that changes, we will consider reinstating such disclosures if doing so would significantly help with the interpretation of our underlying business performances. Starting on Slide 5. Total revenue in the first quarter was up 3% to $101.1 million. This lower growth simply reflects the extremely high level of subscription term licenses in the comparative period, which, as you know, naturally fluctuates cyclically. Our key SaaS revenue results grew 28% to $63.1 million. As you would expect, recent strength in our annual recurring revenue growth has been flowing through to higher SaaS revenue growth. Subscription term license revenue was $7 million versus $23.5 million in Q1 2022. This item largely follows the normal cadence of renewals among our small group of on-premise customers or those that have the option to move their deployments on-premise. We also added a new customer in the quarter that is the option to move their deployment on-premise and expanded our deployment with an existing on-premise customer. I'll speak to the impact of those events on our outlook shortly. Our professional services activity resulted in $26.6 million in revenue, or 24% growth over the first quarter of 2022. 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 $4.4 million, up 14%.

The First quarter gross profit decreased by 12% to $61 million. The gross margin in the quarter was 60% compared to 71% in Q1 2022. These changes are also largely a reflection of the extremely high level of high-margin subscription term licenses in the comparative period. Additionally, our recent incremental investments in related teams impacted margins, most notably in professional services. We expect the professional services component of gross margin to improve in future quarters. As a result, we still foresee an annual gross margin in the 60% to 62% range. Adjusted EBITDA was down 48% to $17.1 million, with a margin of 17% compared to 34% in the first quarter last year. Again, this was driven by the subscription term license revenue cycle and recent incremental strategic investments in the future growth of Kinaxis. Our profit in the quarter was $1.2 million or $0.04 per diluted share compared to $12.5 million in Q1 2022. Cash flow from operating activities was very strong at $38.9 million compared with $22 million in the prior year period. The increase largely reflects normal periodic fluctuations in balances of operating assets and liabilities, most notably receivables, including unbilled receivables, payables, and deferred revenue. At March 31, 2023, cash, cash equivalents, and short-term investments totaled $272.7 million, up from $225.8 million at the end of 2022. Overall, it was a good start to what we anticipate being another year of accelerating SaaS revenue growth, balanced with solid profitability.

On to Slide 6. Our annual recurring revenue, or ARR, grew 23% over the first quarter of 2022 to $285 million. This is a slightly lower growth rate than in the last couple of quarters. As John mentioned, given the macroeconomic backdrop, certain prospects continue to excise extra rigor in their purchasing process, which has moved some opportunities into future quarters. Both our initial and updated guidance for 2023 anticipate this could happen early in the year, so we remain comfortable with our SaaS revenue outlook. Our win rates remain very high, and our pipeline continues to grow quickly. Overall, we remain thrilled with the demand conditions in our markets. Our leading competitive position and with the opportunities that incremental investments in the sales team will create. Moving to Slide 7. At quarter end, our remaining performance obligation, or RPO, was $568 million, up 18% from Q1 2022. Of that total, $528 million relates to SaaS business, up 19% year-over-year. Of the SaaS amount, roughly $180 million converts to revenue in 2023. This amount, together with earned SaaS revenue in Q1, represents roughly 91% coverage of the midpoint of our SaaS revenue guidance for the year, which bolsters confidence in our outlook. I'll remind you that growth in RPO varies both with incremental business one and renewals of existing subscription amounts. Q1 2023 was a light renewal period, as is every Q1 in general. For example, you'll notice that our SaaS RPO dipped in Q1 2022 as well. Further details on our RPO can be found in the revenue note to our financials.

Turning to Slide 8. We remain very excited about 2023 and are pleased to be able to update guidance for the year. We continue to expect 2023 SaaS revenue to grow between 25% and 27% over our 2022 level. This implies a midpoint of approximately $269 million in SaaS revenue. One reason for the unchanged view is that a major new customer, we had expected would meet the requirements for SaaS revenue accounting, wanted an option in their contract to migrate their private cloud deployment to an on-premise environment. As you know, the session option triggers subscription term license accounting despite their current cloud-based deployment. As a result, we are increasing our subscription term license revenue outlook for the year to $16 million to $18 million. The vast majority of the $4 million increase that we recognize in Q3. Naturally our maintenance in support revenue for the year will inch up as well. Accordingly, we are increasing our total revenue outlook for 2023 to be between $425 million and $435 million. As a result of these changes and stronger-than-expected profitability in Q1, we are now targeting an adjusted EBITDA margin of 14% to 16% for the year. We remain pleased with our balanced approach to SaaS revenue growth and profitability as we work towards another year of real authority performance.

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

[John Sicard, President and CEO]

Thank you, Blaine. When I think of Kinaxis, one word often comes to mind, resilience. It's what we deliver to our customers when they are forced to navigate the often unpredictable conditions of their supply chains. Resiliency is a key strength of our own business during these turbulent times and a direct reflection of the many dedicated Kinaxis employees that make it possible. I wish to thank them all for their commitment to our mission. On behalf of the Kinaxis team, I'm very pleased to have both delivered a solid first quarter and to be working towards an improved and exciting outlook for the year. With that, I'll turn the line over to the operator for Q&A.

[Operator]

[Operator Instructions] Your first question comes from the line of Thanos Moschopoulos with BMO Capital Markets.

[Thanos Moschopoulos, BMO Capital Markets]

With respect to the macro, I think what you're saying is that there's been some incremental extension in sales cycles in some cases, over the past 90 days. Obviously, still a strong demand environment, given the product's outlook. But can you just comment in terms of just what specifically has changed since the last quarter?

[John Sicard, President and CEO]

I think the main, I'd say the main issue is really in the very trailing section of a sales cycle. I'd say the final step where final approvals are being collected. And often, go straight up to board level. And so we're seeing, I'd say, right now, we're seeing a little bit of an uptick as a result of the activities in Q1. Certainly, deals are not evaporating. They're just taking a little bit longer to get through that final step. So there's what I would call extra rigor. Now I would also say in previous calls, I've been saying that our overall sales cycle, which used to be measured in, I want to say, the 18-month kind of a sales cycle, we're nowhere near that by any stretch. We continue to see a lot of activity. And certainly, sales cycles that are more aggressive than what we saw, I want to say, pre-pandemic where we were experiencing sort of that 18-month cycle. So our 12-month rolling pipeline continues to be very robust. Amazing names we're working with. And so I think it's really a situation where final approvals often goes directly to a Board. And the Board is based on a schedule, and those schedules may or may not fall in line with what our pre-knowledge would suggest.

[Thanos Moschopoulos, BMO Capital Markets]

And regarding the QSR vertical and your success there, can you comment on whether that vertical posts distinct nuances or challenges you had to address with respect to making the platform suit customer needs? And then with respect to also the pipeline you're seeing for other opportunities in that vertical if you comment?

[John Sicard, President and CEO]

Yes, absolutely. I love that question. And certainly, the QSR space, in general, is where you see tremendous volume. You see use cases that are heavily leveraging machine learning and artificial intelligence, demand sensing, and the consumption of sentiment data as part of the forecasting. I'm thrilled to see our performance there. It's just amazing. In the case of the early QSR accounts that we're working with, with what I would call sizable footprints, we are presenting those QSRs with better results faster, which is just thrilling to see. It's really a testament to the work coming out of the R&D function. And frankly, much of that came from the RuboCloud acquisition and the team. That's when it all started. The bench strength and machine learning that came from that team is really fueling the use cases in that space. It's just getting started, as I said, but we can certainly name Havi and those that wish to know who Havi serves while it's relatively straightforward to find that. And hopefully, very soon, we'll be able to announce the other very large name brand and QSR that we're working with.

[Operator]

Your next question comes from the line of Richard Tse with National Bank Financial.

[Unidentified Analyst]

This is [Indiscernible] calling in for Richard. Congrats on the quarter. So I just wanted to ask, would you be able to quantify how much hosting workloads on the public cloud versus your own data centers has kind of impacted margins?

[Blaine Fitzgerald, CFO]

Well, yes. So right now, the vast majority of our hosting is still with our private data centers. We are obviously moving much more towards the public cloud, but it's early days, both with Microsoft and GCP. We do have customers, a number of customers that have already migrated over, and we're going to continue to grow that. We do have some migration costs that are going to be hitting our COGS line, which will dampen the early years for early quarters, at least for gross margin. But it's, I'd say, a fairly insignificant amount at this stage.

[Unidentified Analyst]

And then just one follow-up. Just thinking about the trajectory of the Pro service margins, how should we see that scaling as we move through the year?

[John Sicard, President and CEO]

We came out of a quarter that I'll tell you how my heart and my brain was going throughout the quarter. The first month, I was pretty worried about their margins, and it was a lot lower than I would have liked. I got to the second month of the quarter, and it was a little bit better, but still a little bit worrisome. And then we got to the third month of the quarter, and they had a phenomenal, I guess, revenue month in that part of the quarter and showed a lot of trajectory in the right direction. Now coming in the mid-7s for a margin is not what we want for that type of margin profile. We much prefer what we had in 2022. But everything is indicating, based on the last month of the quarter as well as where we are starting Q2, that we are going to get up to at least, if not higher, on the margins that we had in 2022.

[Operator]

Your next question comes from the line of [Scott Butcher] with CIBC World Markets.

[Unidentified Analyst]

This is [Scott Butcher] on the line for Seche Price. I just wanted to ask a question about partner sales and sort of the traction you saw in the quarter. If you could just sort of dig into how that's trending and what you're seeing there?

[John Sicard, President and CEO]

So we continue to see the vast majority of net new wins being influenced by our global alliance team or global alliances that we've established. I mentioned in the opening remarks that our value-added resellers or VAR initiative, which started not that long ago, relatively new initiative for us. Well, they're on the board in Q1. They're contributing already, a very, very short period of time. And they're in geographies that we are not in. The whole point of the VAR section of our business was to expand into geographies and also go after what I'll call the small to midsized accounts. So that's showing some great progress. We also have SOLEX partners, what we call SOLEX partner solution extension partners. So these are other software vendors that are building intellectual property on top of Rapid Response. And we go to market in lockstep with them. And we've seen some great success there with our relationship with Plan it Together on the production scheduling side. And certainly, progress on the transportation load optimization with 4Flow just to use a couple of examples there. And so they've been on the board also, I would say, even more significantly, those relationships are helping us, I'd say, remain qualified for other very large accounts. The fact that they're in providing their unique intellectual property puts us in a game we might ordinarily not be able to play. So that's the color I would provide on what I'd call the partner influence on net new wins.

[Operator]

Your next question comes from the line of Christian Sgro with Eight Capital.

[Christian Sgro, Eight Capital]

I wanted to start on MPO and Kinaxis' expansion functionally into supply chain execution. Maybe give you a chance to unpack some of the updates there. How do you think of NPL coming under the umbrella tab in the way of branding over time, but also in your go-to-market and your conversations with customers?

[John Sicard, President and CEO]

So MPO, that acquisition was really designed to extend our concurrent offering, extend our value proposition onto the execution side of the supply chain. And this is very, very significant. I really do think this is a fundamental shift that we're seeing in the industry where supply chain planning and supply chain execution are becoming one. The lines are blurring there. And so that was the thesis behind that acquisition. And since that time, we've been hard at work integrating the technologies. When we got them, they had a limited sales team, limited sales resources. So we've been working to increase. I'd say that the sales size, the size of the team is no longer really a barrier in our go-to-market. We have a good pipeline building. And again, the point of the exercise is to offer supply chain execution-related use cases to our existing customer base while simultaneously growing our footprint in the supply chain execution space that MPO had been building themselves. So generally speaking, I'd say the industry analysts would size the supply chain execution market as roughly the same size as the planning market. Think of a doubling of the TAM, if you will. And so we're obviously really thrilled with our progress there. And more importantly, I really think this will become the new standard going forward for supply chain excellence. There won't be two distinct categories. In fact, we may even see the terminology supply chain planning being abolished because people will be thinking about supply chain management or supply chain, even better yet, orchestration.

[Christian Sgro, Eight Capital]

On the build-out of the sales team and maybe, congrats on it, it sounds like having aggressive plans to hire there through this year, which is certainly a sign of confidence. Maybe just unpack for us where you're adding sales team staff, how you're thinking about structuring the team and how the go-to-market will look, and how you're incentivizing aligning people to attack market opportunities as you grow the team there?

[John Sicard, President and CEO]

Well, we continue to grow the sales team for sure. And those that have done the analysis would see that our sales efficiency numbers are, I might even classify, best-in-class. Maybe that's bold, but I'm bold. I bet I would get behind that statement. It would be best-in-class. And so as we continue to monitor sales activity, as I mentioned, we're seeing a lot of sales activity right now. And by that, I mean we monitor every single demonstration done, every proof-of-concept, every interaction done with a prospect gets measured. And we monitor that as a sales support activity, what we call an SSA. And we're seeing that as a leading indicator to drive the sales team. So we're going to continue to grow our footprint of the sales function in North America, Europe as well as Asia Pacific, and primarily Japan, is where we're focused. We're also growing what I call the installed base sales rep group. So we're at a scale now. We're having dedicated sales account reps that focus solely on the base makes a lot of sense. And so we're investing aggressively on that team as well.

[Operator]

Your next question comes from the line of John Shuter with RBC.

[John Shuter, RBC Capital Markets]

It's John Shuter on the line for Paul Treiber. Just a quick question on your mix of verticals. Are you seeing any difference in the buying patterns across verticals? Or is it pretty consistent?

[John Sicard, President and CEO]

It's a great question. It's quite consistent. I look at the pipeline. And I would say, our traditional verticals where there's a lot of activity continues to be, I'd say, active. We see a lot of activity in the automotive industry right now. And I would posture that the automotive industry was heavily hit by the impacts of COVID, the very, very rapid move towards electrification of that industry is also causing some major disruptions in the supply chain. And so we're seeing a lot of pickup in that area. We continue to see high-tech electronics and life sciences and some great activity in those areas as well. And obviously, in the CPG and retail functions, we continue to see some very good progress. As mentioned, one of the most iconic snacking brands on the planet, and seeing them place their trust in Kinaxis. We're just thrilled with it. So it makes me want to eat chocolate, let's just say. So we continue to see broad activity. Now as it relates to geographies, I haven't necessarily seen a shift there also. It's quite even. In fact, most supply chain practitioners are all having the same conversation. What am I going to do next time? Some might say, oh, the supply chain is stabilizing. Well, it's certainly not as volatile as it was in the midst of the pandemic. But make no mistake, every Board is asking every CEO what are you going to do next time.

And so it is absolutely driving a uniform conversation around supply chain excellence for the future. Something that is unique, and so I'm glad you asked the question, is the very, what I would say, adoption of Rapid Response for small accounts through our VAR program. Many wouldn't necessarily know the name, but we are serving manufacturers that are in the $100 million range and some that are in the $150 billion range, and everywhere in between. What that tells me is that we're able to solve supply chain problems across that broad spectrum, and we're starting to see more pipeline activity in the small to medium size, which obviously is an enormous TAM. And we're proving that the economics work, but so does the solution. It's not like in Rapid Response is so complex that only the biggest and largest corporations can use it. So we're improving the economics, and we're proving the use case works for both parties. So it's an absolute win-win. And we are seeing that's one area where I might describe it as emerging.

[John Shuter, RBC Capital Markets]

And just on the cash position after the strong cash flow this quarter, it looks like you guys are back over $200 million in net cash. So what are the potential uses there? Are you thinking about acquisitions at all? And how do you think about that?

[Blaine Fitzgerald, CFO]

We're absolutely proud of our strong cash position. Closing on $300 million is always a nice place to be. And it gives a lot of options as to what we can use it for. M&A is something that we are considering, but we're being very thoughtful about it. We have an idea of the types of companies that we want. We're a Canadian company, but we don't like hockey stick companies. So we don't like companies that say that they're going to have this huge inflection point that goes straight up based on a whole bunch of losses. As we continue to look at companies that meet our needs, either through [Indiscernible] or IP that we need, we are going to evolve our process, and we're doing that right now as we just brought on a new leader for our corporate development team. So we're pretty excited about the direction we can grow both organically and organically. The one thing to remember is that we're a build-first company. And we're always going to be a build-first company. But I think the ability to increase through inorganic growth is a great complement to that build function that we have in place already.

[Operator]

Your next question comes from the line of Martin Toner of ATB Capital Markets.

[Martin Toner, ATB Capital Markets]

Congrats on a nice quarter. Just wondering, I wanted to pick up on the comments you made about integrating, planning, and execution with MPO. What other competitors have done that?

[John Sicard, President and CEO]

I don't know. I can't find one that has fully integrated in a concurrent environment. And when you think about what has really shown a light on this as a key use case during the pandemic, it was near impossible to find containers. There were a lot of containers stuck at the port. In other words, the transportation risk of material and motion had never been higher. And practitioners were trying to understand the implications of transportation risk on current plans and current promises, right? There's an absolute direct link between the material and motion risk and the promises made to the street and the promises made to customers. The problem is that there was a broken link between those 2. And this is why we are really keen on investing and fusing these things together so that we have true end-to-end concurrent supply chain orchestration from tip to toe. But to answer your question, I quite frankly, have not seen another equivalent. And again, part of that is because we have a very unique, what I would call, a very unique engine in our concurrent planning function. And so we're just extending it to include, now, the use cases that are on the execution side and on the, what I would call the transportation risk side.

[Martin Toner, ATB Capital Markets]

So it's been a while now since Panasonic bought Blue Yonder. Have you seen any change in the way they approach this market, or how do you see them in competition and RFPs?

[John Sicard, President and CEO]

No, I would say that our primary competition continues to be the incumbent. SAP tends to be our largest competitor. They're omnipresent. They have a very legacy footprint, but they are omnipresent as a legacy provider. And so I would still put them as number one. We continue to see Blue Yonder from time to time, and we see '09 from time to time as well. I would probably put them in that kind of sequence. But I wouldn't necessarily say that we're seeing any difference in how we go to market. When Kinaxis competes, in fact, one of the bold things I say is the software doesn't matter. Techniques inform technologies, not the other way around. And so if we can get prospects to bond on technique first, then we obviously do very well because I don't believe that any other providers in the industry can provide the same level of concurrent planning that we do. And so that's been a very, very potent go-to-market strategy for us, and we're going to continue to do it that way.

[Martin Toner, ATB Capital Markets]

Can you confirm that your pipeline is still a record? And can you comment on the growth in the pipeline compared to this time last year and compared to your current ARR growth?

[Blaine Fitzgerald, CFO]

So let's talk about the pipeline, and I'll clarify the ARR growth question that you had. Absolutely, it's a record. And we don't comment on the percentage growth that we've had, but it's growing at a very nice growth rate to make me believe that all of our guidance right now are definitely achievable. With respect to AR, maybe if you could clarify that question in comparison to the pipeline.

[Martin Toner, ATB Capital Markets]

Well, I'm just thinking that the pipeline, you talked about robust growth in the pipeline at this time last year, and present AR growth was what, 23%? So just wanted to give you an opportunity to comment on the growth of the pipeline relative to those two things.

[Blaine Fitzgerald, CFO]

Well, why don't you just jump in AR because pipeline is going really, really well. AR growth, I'll be like every other CFO, I always want more. And we have very high standards and very high targets that we go after. And Q1 is no different than any other quarter. I wanted more, and I still want more. But if I look back 1 year, our year-over-year growth on a constant currency basis for ARR was 24%. On a constant currency basis, again, we are at 24%. So we're pretty much in line with what we did a year ago. The thing that we didn't tell you at the start of the year and what we don't give disclosure on is there's a profile of our pipeline. And we had expected a slower start in Q1 with a very strong profile in Q2 to Q4. One of the things that we do on a weekly basis, is we talk about our pipeline with our sales team. I've never seen our sales team more bullish than they've ever been. This is the most bullish, I've ever seen them in a quarter. And coupled with what everyone will start seeing very soon with the Gartner MQ results, I think we've got some great tailwinds that are available. So I'm looking like it's going to be a good ARR growth year, but it all depends on the profile of the pipeline. And as you know, as I just mentioned, we had a pipeline that was smaller in Q1, which I think will pick up.

Now all that being said, John mentioned the installed base. And we can't always name all of our companies or brands that we use. But I think we have a huge ability to expand on some of the customers that we have in place. If you take two examples, I brush my teeth with one of the products that we have this morning. I also have a vaccine that I've had recently from one of our customers. One of my vehicles either fill up gas from one of our customers. And if you think about when I was driving in this morning, I had to decide between do I want to go to my favorite Canadian QSR, or do I want to go to my favorite global QSR to grab a little bit of food before we got started this morning. All of those are great options for us to figure out how can we really do expand on this customer base that is growing, and we have phenomenal brands that are joining us. So to say it very briefly, I'm pretty excited too.

[Martin Toner, ATB Capital Markets]

Last one, Blaine, how much of a positive should the growth in deferred be to free cash flow like on an annual basis? Is there kind of a rule of thumb I should use, just wondering if I have that correct.

[Blaine Fitzgerald, CFO]

I'll just say, I don't really look at deferred too much. It will always vary depend on where we have our subscription term license revenue that's in place. And so when that flushes out. But for the most part, you should expect that Q1 always to be a fairly nice growth. Obviously, you just saw that in quarter one here. But we don't really look at deferred as an indicator for our cash growth.

[Operator]

Your next question comes from the line of Suthan Sukumar of Stifel.

[Suthan Sukumar, Stifel]

Just a follow-up question on the M&A front. Just wondering how your outlook and priorities have been changing with respect to M&A. I'm wondering if you expect M&A activity could meaningfully pick up compared to what we've seen historically? And if there is still a focus on technology [indiscernible] or do you see more opportunity now to acquire to grow share in a particular end market or geo?

[John Sicard, President and CEO]

We definitely have a use case thesis in serving the market. And so we're being very thoughtful about the candidates that we look at. It's very difficult to forecast, as you can imagine. But again, our focus is in really building out the product rather than buying market share. It's really about extending use cases. When you look at what we did with MPO, it was absolutely motivated behind use case thesis. And so we're going to continue that very thoughtful approach. We have recently added to the muscle, I'd say, the internal muscle around M&A here inside of Kinaxis. And so nothing imminent. I can't share there's anything sort of imminent. But the thesis absolutely is to focus on use case expansion. We won't do anything unnatural. And it has to be the right product fit. It has to be the right cultural fit, the right financial and valuation perspective, and that's what we're going to continue to do.

[Suthan Sukumar, Stifel]

And my second question is around your major targets that you shared last quarter. Just wondering if there's been any update or change on the outlook there.

[Blaine Fitzgerald, CFO]

Our midterm target still remains. We are, I think, 30% revenue growth in the midterm is our SaaS revenue growth in the term is something that we're going after and 25% adjusted EBITDA is something we're going after. So no change on that. It's midterm.

[Operator]

Your next question comes from the line of Nick Agostino with Laurentian Bank Securities.

[Nick Agostino, Laurentian Bank Securities]

Just I guess two quick questions for me. First, going back to I guess, some of the caution you're seeing from some of the prospects. Can you just qualify if there's a particular sector or a group of sectors where you're seeing that caution, or is there a geography that you can point to where you see that caution?

[John Sicard, President and CEO]

Well, first, it's absolutely a subset that we're seeing it. Nick, I can't honestly say that there is sufficient numbers to suggest that it's one geography or one sector. So it isn't what I would call broad, so broad is to suggest there's some characteristics there. So I know it's kind of a short answer, but I don't see anything that would suggest there's some characteristic based on either size of account, based on vertical, or based on geography.

[Nick Agostino, Laurentian Bank Securities]

And I guess really my next question is, I think I'll just answer it, and you just confirm. But if you try to compare the level of caution you're seeing now, given that it's just a subset. And if you compare that caution to say, back to the beginning of the pandemic or if we could even try to go as far back as, say, 2008, the last major recession. How would you put your rates on the scale of one to 10, the level of caution you're seeing compared to those two prior events?

[John Sicard, President and CEO]

I've never really thought about the problem in that context. I might say that this isn't something that I would measure in months. When we're looking at this rigor, this extra rigor we're seeing during the final stages of our sales cycles. It's something that I would measure in weeks. And that's why I wanted to make sure in the previous question I mentioned that we're not seeing anywhere close to the types of sales cycles we were seeing prior to the pandemic. We've actually seen since the start of the pandemic an acceleration in the overall sales cycle, and I was saying it was closer to sort of the 12 to 13 or 14 months maybe during the pandemic. And so I wouldn't say we're close to where we were prior to the pandemic. And I think it's just a function of some of the current economic fears that are out there and the extra rigor that boards are asking their corporations to go through. Nick, I would also say just to reinforce all of this is built into the strength of our guidance. And so despite these challenges and like I said, the deals aren't evaporating, we're just being forced to adhere to the processes and more so the timelines often associated with Board meeting schedules. That's what we're seeing.

[Nick Agostino, Laurentian Bank Securities]

And my last question, you mentioned earlier about when it comes to small, medium-sized customers and making those economics work, how would you compare, say, the margin contribution from those transactions compared to, say, the larger deals you're doing on the enterprise side. Would you say they're similar?

[Blaine Fitzgerald, CFO]

I think there's three categories that talked about as there's enterprise, which we've obviously historically done really well with their margin profile. Mid-market, we're doing extremely well with disrupting the mid-market right now and having more and more customers come on board at the mid-market level. Again, their margins are actually showing up very close to what we have to the enterprise customers. When we get to SMB, a lot of them are being driven by value-added resellers. And we have a much smaller cohort of customers in that group at this stage. And for us, SMB, just so everyone is aware is anything below $500 million of revenue per year. But what we're expecting is to have a little bit of tighter margins on the smaller customers, especially in the early years. Over time, I think this is something with Rapid Start being in place with optimization of our cloud position that will get those margins higher towards what we would expect on the mid-market enterprise. But I'm expecting that they will have smaller or tighter margins in the early years.

[Operator]

Your next question comes from the line of Kevin Krishnaratne of Scotiabank.

[Kevin Krishnaratne, Scotiabank]

Just one quick one for me on MPO. I think we have a view of what that business may have done last year, single-digit million revenue. Wondering if you can talk about, I know it's small, but the way you think the profile of that might look during the year. I know the sales cycle there, I think, is shorter. You've got your connector now up and running. Just wondering if you can maybe talk about how you see that piece of business sort of evolving over the coming quarters here?

[John Sicard, President and CEO]

Yes, I'll try and give as much information as I can. So I would say they were single digits in 2022, I expect double digits in 2023. I still expect them to be profitable or very, very close to profitable at this stage. And I think what we're seeing is some great upside from the connector that we're building and the current customer base that we have in place. So everything leading for us to believe that was a good acquisition still.

[Kevin Krishnaratne, Scotiabank]

And that connector was completed in Q1?

[John Sicard, President and CEO]

Phase 1 was completed. And so we're already in process of some potential new customers coming on board through maybe the Kinaxis side first, but Phase 2 is just about to finish and Phase 3 will be at the end of the year. But I will say customers are already lining up our current Kinaxis or Rapid Response customers already lined up to see if it makes sense for them.

[Operator]

There are no further questions at this time. I will turn the call to Mr. Wadsworth.

[Rick Wadsworth, Vice President of Investor Relations]

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

[Operator]

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