Kinaxis Inc

TSX:KXS

Earnings Call Transcript 2023-Q2

[Operator]

Good morning, ladies and gentlemen. Welcome to the Kinaxis Incorporated Fiscal 2023 Second Quarter Results Conference Call. [Operator Instructions] I'd like to remind everyone that this call is being recorded today, Thursday, August 10, 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, executive]

Thanks, operator. Good morning, and welcome to the Kinaxis earnings call. Today, we will be discussing our second quarter results, which we issued after closing 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, August 10, 2023, and contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in the earnings press release as well as in our SEDAR filings.During this call, we will discuss IFRS results and non-IFRS financial measures, 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 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 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'll 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 can be downloaded from the IR homepage of our website. 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, and thank you all for joining us today. I'm excited to share our Q2 results and developments with you today.I'll begin with Slide 4. In the second quarter, we achieved SaaS revenue growth of 25%, total revenue growth of 31%, and our adjusted EBITDA margin was 14%. These results keep us on track towards our targets for the year.Moving to Slide 5. We won a record number of new customers in Q2, surpassing the benchmark from last year, which demonstrates our ongoing momentum in the market. Our win rate against the competition continues to increase, and it was our best Q2 ever in terms of incremental subscription business won. In June, we had a record turnout at Kinexions, our annual customer conference where in-person attendance grew by over 50%. We also held more initial meetings with our prospective accounts in Q2 than in any quarter of our history, further suggesting that the market is heating up. While we need to remain appropriately cautious about the global economy, we continue to see a persistent urgency around the need to transform supply chain governance. And the demand environment for supply chain management solutions remains very strong.Moving to Slide 6. Thanks in part to the record number of wins in the second quarter, Kinaxis now has over 300 customers. We are leading with leaders. And as always, these companies represent some of the largest and most exciting brands in their sectors. In our Industrial segment, we're thrilled to add ExxonMobil, one of the largest publicly traded energy and petrochemical companies as well as oil and gas giant Shell International. In the same segment, we welcomed Westlake, a New York Stock Exchange listed company with roughly $16 billion in revenues last year.In Consumer Goods, we added major fitness lifestyle company, Peloton as well as Brown-Forman, distillers and marketers of premium spirits like Jack Daniels, Finlandia Vodka and Woodford Reserve. We also won water filtration leader, Brita as well as Premier Foods, one of U.K.'s largest food manufacturers with brands like Oxo and Bird's Custard. Unsurprisingly, given this success, Consumer Goods remains one of our fastest-growing segments.In High Tech, we welcomed Kyocera Communication Systems, a Japanese information systems company that is pioneering the communications of the future.This is just a small sample of our wins in Q2, names that clearly demonstrate how global innovation leaders are starting to embrace meaningful supply chain transformation. In total, roughly half of the companies we won in Q2 are enterprise class, and there are many more prospects of similar quality and size in our pipeline today. To me, there is no greater evidence that our opportunity remains in its early stages.Now moving to Slide 7. Siloed approaches to supply chain management are giving way to fully concurrent supply chain orchestration from planning through execution. Kinaxis remains alone in its ability to deliver on that vision. And we recently announced several major innovations that set us apart in this space.First, enterprise scheduling. Enterprise scheduling is the first and only scheduling tool that allows companies to orchestrate production across sites and creates a comprehensive, feasible and efficient manufacturing schedule, regardless of plant layout.Our new supply chain execution application, a result of our MPO acquisition, includes transportation management, order management and returns management. It empowers businesses to drive supply chain orchestration from plan through delivery across all time horizons.Our sustainable supply chain offering allows companies to ensure environmental factors are a key part of supply chain decisions by embedding carbon emission factors, including Scope 3 emissions into rapid response scenarios. If you read our ESG report, you'll know that commitment to a sustainable, socially responsible future is one of our core strategic pillars.And finally, Demand.AI will allow companies to better understand how both internal and external factors are influencing demand for their products and to take advantage of these changes quickly. HAVI, a giant in the strategic outsourcing for quick service restaurants and other industries took the stage at Kinexions to highlight its early adoption of this new capability.On Slide 8, not only are our customers recognizing these innovations, but in May, for the ninth consecutive time, Kinaxis was placed in the leaders category of Gartner's Magic Quadrant for Supply Chain Planning Solutions and became the first company ever to be simultaneously positioned furthest on both completeness of vision and ability to execute. Hopefully, you've seen this report by now, but the amount of white space between Kinaxis and the next competitor in that quadrant speaks for itself and it is a great testament to what our customers see in us. Simply stated, we are the innovative and trusted leader that delivers on our promises.With that, I'll turn the call over to Blaine to review results of the quarter.

[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.Starting on Slide 9. Total revenue in the second quarter was up 31% to $105.8 million. Our SaaS revenue grew 25% to $64.1 million. Ongoing momentum in our markets continues to drive this very healthy growth. Subscription term license revenue was $7.1 million versus $0.4 million in Q2 of 2022. As you may remember, this item largely follows the normal cadence of renewals among our small group of existing on-premise customers or those that have the option to move their deployments on-premise. However, it's important to note that in Q2, one of our new customers that joined us will be accounted for as subscription term license revenue. Given our typical experience, we had initially forecast this and all other new wins to come in as SaaS revenue.Our professional services activity resulted in $30 million in revenue or 18% growth over the second quarter of 2022. New bookings for professional services were also very strong, which will help support our total revenue outlook for the year. 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 $4.6 million, up 17%. Second quarter gross profit increased by 28% to $63.7 million due to the significant revenue growth I just discussed. Gross margin in the quarter was 60% compared to 62% in Q2 of 2022. Software gross margin decreased to 76%, largely due to initial investments in our new public cloud arrangements. We are ahead of plan with respect to the number of customers hosted on public cloud, which is positive, but it does mean that costs are also a little higher than expected. As we move closer to a fully public cloud model, we expect software margins to return closer to 80%. This will also be helped by a higher proportion of expand business in future years. I would like to highlight that in Q2, over 70% of new subscription business won was in the land phase of our business.Professional services gross margin was healthy at 21%, though slightly lower than in Q2 of 2022, due largely to investments made in additional headcount to support new customer engagements and existing customer expansions. We still foresee a total annual gross margin in the 60% to 62% range.Adjusted EBITDA was up 47% to $15.2 million, with a margin of 14%, up 1 percentage point from the second quarter last year. Our loss in the quarter was $2.5 million or $0.09 per diluted share, a $0.01 improvement from last year. Cash from operating activities was very strong at $13.9 million compared with $8.4 million in the prior year period. The increase largely reflects normal periodic fluctuations in balances of operating assets and liabilities as well as higher interest received on balances in Q2 2023. At June 30, 2023, cash, cash equivalents and short-term investments totaled $293.4 million, up from $225.8 million at the end of 2022.On Slide 10, our annual recurring revenue, or ARR, grew 22% over the second quarter of 2020 to $293 million, representing a healthy balance in growth rate, given the economic backdrop. There is plenty of opportunity for even faster growth, but the final stages of procurement are still taking longer in some cases, a well-documented phenomenon in enterprise-class SaaS by now. It's especially applicable when targeting new customer opportunities, and over 70% of our ARR growth in the quarter was from new customers. In short, we have continued to grow well in this unusual environment, which highlights the ongoing urgency around supply chain transformation.Slide 11. At quarter end, our remaining performance obligation, or RPO, was $587 million, up 19% from Q2 2022. Of that total, $542 million relates to SaaS business, up 18% year-over-year. Of the SaaS amount, roughly $127 million converts to revenue in the remainder of 2023. I'll remind you that growth in RPO varies both with incremental business won and renewals of existing subscription amounts. So it's best to focus on trends over the longer term. Further details on our RPO can be found in the revenue note to our financials.Turning to Slide 12. We remain excited about 2023 and are pleased to be able to reiterate our outlook for the year. By way of reminder, we expect total revenue of $425 million to $435 million; 25% to 27% SaaS revenue growth; $16 million to $18 million in subscription term license revenue; and an adjusted EBITDA margin of 14% to 16%.Now I mentioned that we won a new customer in the quarter that will be accounted for as subscription term license. You will recall, the same thing happened in Q1, and we increased subscription term license and total revenue guidance at the time. In both cases, we had anticipated the business coming in as SaaS revenue and the combined impact to SaaS growth is roughly 1%. As a result, it will be more difficult to hit the top end of our SaaS revenue growth guidance, while our confidence in the elevated subscription term license outlook has grown.Overall, we remain fully focused on finishing the year within all our target regions. We remain pleased with our balanced approach to SaaS revenue growth and profitability as we work towards another year of Rule of 40 performance.And with that, I will turn the call back to John.

[John Sicard, executive]

Thanks, Blaine. As you know, we're working towards 30% plus SaaS revenue growth and 25% plus adjusted EBITDA margin in the midterm. Internally, we are hyper-focused on our path to crossing $1 billion in revenue.To help achieve these goals, we recently made some exciting changes to our leadership team. First, we appointed a new Chief Product Officer. Andrew Bell will lead the product road map and oversee its execution, including our continued excellence in AI and machine learning. Andrew has been with Kinaxis for more than a decade, most recently leading the product management group.We've also created a new Chief Operations Officer role and appointed former Chief HR Officer, Megan Paterson. Megan will have responsibility for our cloud services operations, corporate IT, corporate strategy, HR and global real estate.We named Amber Pate as Chief Human Resource Officer. For almost 3 years, Amber has worked closely with Megan as Vice President in the HR team and has previously led the entire HR resource function for other companies.Finally, we recently announced Margaret Franco as our Chief Marketing Officer. Based in London, Margaret has extensive experience, shaping global tech brands and helping companies scale well beyond $1 billion. And she has previously held positions as CMO at Finastra, held senior marketing global roles at Dell during a 13-year tenure, and was named to the list of top 25 women in financial technology.Our continued strong financial performance alongside a growing list of world-class enterprise customers, innovative new product capabilities and an exceptional leadership team positions us well for our next stage of growth. It is a privilege to lead a company that powers the world's supply chain, while preserving the planet's resource and all to ultimately enrich the human experience. I want to thank our amazing team around the world, our customers and partners and our shareholders for your continued support and commitment to Kinaxis.With that, I'll turn the line over to the operator for Q&A.

[Operator]

[Operator Instructions] Our first question comes from the line of Daniel Chan from TD Cowen.

[Daniel Chan, analyst]

Good to see the strong SaaS bookings in the quarter. If I look at the ARR added in the quarter, relative to the SaaS bookings, seems that ARR growth isn't quite as strong as what the SaaS bookings would suggest. Is that due to longer contract durations resulting in larger bookings? Or is there something else to point out?

[Blaine Fitzgerald, executive]

I'll take this one. Great observation, Dan. So one of the things that we've been noticing is there's a juxtaposition that's happening right now with companies. Number 1, they're realizing that they have these constraints on budgets. Number 2, they realize they need to have a solution for the supply chain issues that they're going through. The demand is through the roof, it's Taylor Swift tights. And so what we're starting to get is a situation where we need to get them in the door. And so the opening footprint, the ARR footprint that we initially get is smaller than we've seen over the past couple of years. And we've seen our pipeline move throughout the quarters, but the biggest thing is getting them in the door. And you've seen what our retention rates are. Our retentions are -- is extremely sticky, and we expect that these people will be here for a long time.So I'll give you a couple of examples. Our biggest customer coming on and the biggest contract that we had come on, they have an extremely big ramp. They go from, I'll say, a 1x in the initial contract and by 2025, that contract is at 3x, and that's for our #1 largest customer that we landed. The #2 is already lined up for a significant expansion that they have early in this year. And so we're getting them in the doors. We're showing them what we can do. We know that they're going to stay with us for the long term because of retention rates, and we expect to see the expansion. So we're kind of sticking to the script, which is, we are in that land phase, we're getting a lot of new name accounts that are coming on board. We're getting them in the door and we're expanding from there. So we're really happy with sticking to the plan right now.

[Daniel Chan, analyst]

That's very helpful. As part of that [Technical Difficulty] some of your public cloud investments. Can you just elaborate on what those investments are? And how long you expect those to continue?

[Blaine Fitzgerald, executive]

Sure. So the biggest investment is -- well, we have, I'll say, 2 main partners that we're dealing with right now, one of which we are in the process of moving the majority of our customers over to, and we will expect that we'll phase out to -- the double cost that we're going through right now with private cloud as well as public cloud should be eliminated by the end of 2024. We are luckily ahead of schedule for the business. For finances, it's not always great to have an extra cost that I'm incurring, but there's a high amount of demand to get on board with the public cloud environment. We expect by 2025 that we'll be back to the one cost hitting us.

[John Sicard, executive]

Yes. I might just add, our -- I'm just going to use the word delight to the speed at which we've been able to adopt not only the Microsoft Azure platform, but the Google Cloud platform as well, working both with their teams. They've been hyper-focused on us, which is great. It's awesome to get the attention. I think they realize and recognize the same thing that we do that the world of supply chain is going to undergo this massive transformation over the next 5 to 10 years. And so they obviously both want to be a major part of that. And as you can appreciate, we started what I'll call public cloud many, many, many years ago. And so translating our footprint into those public cloud environments, we had some assumptions around what the technology investments would be and any engineering investments and what they would be, and thankfully, and of course, sometimes that has some impacts on finance, but we're thrilled to see the speed at which we can migrate and start new customers on those public cloud environments.

[Operator]

Our next call comes from Thanos Moschopoulos of BMO Capital Markets.

[Thanos Moschopoulos, analyst]

Just looking at the ARR growth, obviously, it will have to reaccelerate, I guess, longer term in order for you to get to your 30% SaaS revenue target. So how do we think about that dynamic? Will that be driven as a function of some of these expansion opportunities kicking in? And then maybe kind of a related question from a macro, would you say it's consistent to what you've seen in recent quarters? Or is it directionally getting any softer?

[Blaine Fitzgerald, executive]

No, great question on ARR, Thanos. We do see that the expansion part of our business will be accelerating. I think I mentioned in the last call that we've, for the first time, added in a team that's dedicated to expansion revenue and building up the footprint that our customers have. We obviously have a lot more observation into our pipeline right now, especially what the upsell opportunities are like. And I can say quite confidently, the next 2 quarters, there's some significant upsells that we have in place right now. So we think that ARR is going to get us to a position to get to that 30% midterm SaaS revenue growth that we have in place. But I'll let John add any color that he wants to have on this because I think it's something that we've been very focused at, let's get those net new accounts in. We were able to say that we have these records coming in place, and we had a record incremental bookings also for Q2, which is nice. But we also want to do exactly what everyone else is hoping for is get the revenue in the door, and we're seeing that path right now. We're in the early stages of growing that path.

[John Sicard, executive]

Yes. It's -- everything that you noticed, Thanos, we noticed first. So when we looked at this phenomenon, there's a couple of things that really surfaced for me, really, really, really exciting things. First, I can say for the first time in the history of selling enterprise-class software in the supply chain space, our sales cycle time fell under a year overall. That's pretty exciting. This is like an acceleration in, I'd say, the market. The market is clearly saying we've got to rethink our supply chain governance model. So that's exciting.Now the other thing we're seeing is, I'd say, a remarkable surge in the SMB space. So obviously, those deals, much smaller companies, I think I mentioned this in the past, we've closed business with a company that does less than $100 million in revenue. That's phenomenal for a lot of reasons. One, it proves that the financial formula works for both parties at that scale. And also, the technology complexity works for both, right, that this can be absorbed by companies of that magnitude, which is quite exciting.Enterprise-class, one of the trends that we're seeing is, yes, sales cycles are shrinking, which is very exciting. But initial deals are -- as Blaine noted, initial deals are starting smaller and ramping up. Some of those ramps are outside of the ARR range, but they're baked into the contract, right? So they're baked into year 2, 3 and sometimes beyond those points. And so we'll see a natural -- what I might call a natural escalation occur because they're contracted, and they're sitting just outside -- just beyond that 1-year horizon.And lastly, clearing 300 customers and continuing to see record logo growth which is unbelievably exciting for us, to me, that is creating a -- it's creating its own little mini market, if you will, as we produce new products and sell back into it. We expect to start seeing, perhaps, a more balanced ratio between subscription from the base versus subscription from landing net new. Now at current state of the pipeline and I look at the current state, when I think about pipeline years ago, it might have been the size of an orange, now it's more like a watermelon, it's just growing. It's quite exciting, a different mix. But I think we're going to continue to be able to say net new logos are going to be the story for a while here as we start seeing more and more adoption.

[Thanos Moschopoulos, analyst]

I appreciate the color. And then just on the term license guidance, given that you had an unexpected term license win, why are you not raising the full year term license guide? Is there maybe a term license renewal that is now going to transition to the cloud? Or what's the dynamic?

[Blaine Fitzgerald, executive]

Yes. No, there's a term license customer that has come in. I will use the word that how the contract was constructed, the recognition of revenue may be dependent upon certain clauses in that contract. And so it doesn't mean that -- I would say, this could -- that revenue will come in. It's a matter of when. And so I haven't figured out which period it's going to come in at.

[Operator]

Our next call comes from Paul Treiber from RBC Capital Markets.

[Paul Treiber, analyst]

Just wanted to quickly clarify John's last comment just on ARR and the calculation there. The -- you mentioned that the expansion in year 2 and 3 is outside of ARR. Can you just walk through the ARR calculation? And then is there a risk -- any risk that the expansion may not occur and that's -- like if it's not contracted? Can you just walk through how you think about the future expansion?

[Blaine Fitzgerald, executive]

Yes. So the example that John spoke about, it's committed ARR. It is in our RPO right now, and it will come through. So they're contractually obligated to pay that amount. So I have no concerns. The way it works in our calculation is, if we have a ramping deal, and I'm just going to throw like random numbers. So say, in year 1, they are committed to pay based on certain modules, certain amount of users, say, it's $100,000, which would be low. If they came with that amount, that's what we would recognize ARR for that first year. If, say, in year 2, it's now ramped up to $300,000, we wouldn't start recognizing that ARR until we've gone over the cliff of it's within 12 months that we expect to recognize a certain amount of revenue that's recurring. And so we're in a period where we're more in the $100,000 range versus the $300,000 range for that particular customer.

[Paul Treiber, analyst]

That's helpful. The -- just in terms of customer wins, it sounds like the momentum has been much stronger than you would have expected at the start of the year. Is there any way to quantify how customer wins have been tracking versus your expectations?

[John Sicard, executive]

Well, there's a couple of things. One, we obviously track overall sales cycle. And it's been -- over the past, I want to say, 2, 3 years, it's been slowly coming down and compressing, I'd say. And then this quarter, we measured this religiously this quarter, first time ever, less than 365 days is a pretty big milestone for us, less than a year. This has all kinds of implications in terms of how we ramp up net new sales when we look at the pipeline, how we ramp up sales executives and work with partners. So that's one of the key areas that we focus on.The other, obviously, we're studying net new wins across the segments that we serve and the size of companies that we serve. And as I stated in the script, about half of the customers were in the SMB space and half were in the enterprise space. So I think that's -- that trend continues. I think over time, obviously, the TAM of SMB versus TAM in enterprise deals will be larger in general. They may have ramps. We're happy to do those. It's very, very common for extremely large enterprises to bake in a 3- to 5-year contract where they know what they're going to do. They just don't want to pay the full freight on year 1.It's impossible to cover every country, every theater, every product family in a short time frame like that. So it's very common to have that ramp. And in the case of SMB, we, in some cases, still have ramps because they don't choose every module right away. They start with what is most urgent and then grow it from there. So far, looking at the pipeline and current activity in current state, as I said, I think we're going to be talking about this net new logo surge for some time.

[Blaine Fitzgerald, executive]

I'll just maybe add in on that. There's -- it's a good thing to touch on, which is the number of new name accounts that we are seeing at any particular quarter and is that within our expectations. John touched on the SMB side, and we haven't talked about value-added resellers, but I'm sure someone will ask a question at some point, either on this call or during today. And we had obviously a conservative outlook as to how this would grow. We're seeing where the pipeline is right now, and it is a lot bigger than what we expected at this stage. And so that will also contribute to the amount of new name accounts to be coming in place. But we're very happy with where that pipeline is and that will help contribute with the beats that we're seeing on new name accounts.

[Paul Treiber, analyst]

Just one last question for me just on land and expand. Can you speak to -- what's your typical expansion rate historically or just general thoughts around that? And then can you give us a sense for the magnitude of how that's changed here?

[John Sicard, executive]

Yes. In past conversations, we've talked about looking at the whole cohort where subscription would, on average, see sort of a 3x over a 3-year -- sorry, a 2x over a 3-year period. That would be atypical over past segments. Now with -- in cases like that, that was when we were dealing with enterprise. We had no SMB space. It's a little early now to look at the sum of both. In fact, I would expect to see those 2 cohorts having differing ratios, looking at SMB versus enterprise. I haven't seen anything to suggest that the ramping, if you will, the subscription ramping, would be any different. But I will admit that we haven't been monitoring, it's been a little earlier -- too early to say whether the SMB market will be yielding different ratios. We just don't have the years of history to be confident with the number.

[Operator]

Our next question comes from Richard Tse from National Bank Financial.

[Richard Tse, analyst]

It's nice to see the growing base, like you said, the 300 customers plus today. Could you maybe share the mix of SMB versus enterprise in terms of the wins? And then I guess related to that, is the cost to acquire and serve those SMB customers the same, on a relative basis, as a large enterprise?

[Blaine Fitzgerald, executive]

Sure. So on the call, we mentioned that our enterprise versus, I guess, mid-market and SMB is somewhere around 50-50. We don't split out the SMB versus mid-market. Cost of acquisition, I'll say, for mid-market is quite similar to enterprise. Once you get to SMB, especially because of the relationship with the value-added resellers that are mainly concentrated on that area, the cost of acquisition is higher. But as you can imagine, there is -- or sorry, the cost of the gross margin that we have at the initial deal is smaller for those SMBs. But as you can imagine, we don't have the sales and we don't have some of the support and some of the PS issues that we have with our own business, so the contracted margins we have with that.Overall, we are continuing to evaluate, and I think what John mentioned on the expansion piece of the business. As we expect a higher percentage of expansion with those SMBs, that's going to contribute to larger gross margins over the lifetime of the contracts. But as of the early days, the margins are thinner for SMBs.

[Richard Tse, analyst]

Okay. And John, I appreciate your comments about sort of this $1 billion revenue target and 25% margins. But if you kind of look ahead, let's say, in the next 3 years, like what's your kind of vision for the company from almost, I guess, a product perspective? Are you kind of moving potentially beyond sort of supply chain planning? Like there were certainly glimmers of that at your recent user conference, but maybe help us kind of understand what the company will look like from a platform product perspective.

[John Sicard, executive]

Yes, absolutely. There's a few things that are perhaps quite unique about Kinaxis that are noteworthy. One, we have exactly one code base. We do not believe in custom coding. In fact, when I meet with prospects, I often educate them, if anyone ever tells you that they can do anything they need to be done with enough time and their money, run. This isn't the path to excellence. And so when you look at Kinaxis being able to support some of the largest CPG companies, some of the largest life science, automotive, aerospace and defense, now the oil and gas sector, you start seeing quite unique supply chains being supported by this platform. It's unbelievably exciting and certainly gives me great confidence in our journey towards $1 billion and well beyond, frankly.So when I think about the next 3 years, we're going to continue along that path. I think about, for lack of a better analogy, being the sales force of supply chain, being the ubiquitous golden standard, regardless of industry and regardless of size. And so some of the things that excite me while might not be wildly financially a huge part of our business when you close a deal under $100 million, it tells you that the economics work for both parties. That's a momentous thing. It's just momentous to realize that the economics work for both because now you start thinking about what kind of impact could you have on the planet, if you could serve every manufacturer that does $50 billion or higher. It's just an incredible thing. Again, using this -- you have this company that does less than $100 million in revenue using the same technology as a company doing $150 billion. They're using exactly the same software. So that's exciting. When I think about the next 3 years, I think we're going to continue down that penetration, that land route.Leveraging RapidResponse, when I think about innovation, Kinaxis can never be the bottleneck for innovation. And so we've been focused. A lot of our energy is focused on building out RapidResponse as a platform and allowing partners to create their own intellectual property on top of that platform. That's just going to accelerate innovation for a growing market, and not only growing a market, but a market that's desperately in need of transformation. So that, to me, are the sort of key ingredients to fuel the confidence behind $1 billion and beyond. That's how I think about it.Obviously, machine learning. We have more patents in machine learning than -- it's so concentrated. You have no idea how many people are focused on this, focused on leveraging machine learning for the purpose of automating the obvious for the purpose of demand sensing, absorbing what I would say is unstructured sentiment and signal data that we've never been able to process before. It's unbelievable what's happening there. I think all of those things are going to be fueling a continued surge in our business.

[Operator]

Our next question comes from Robert Young of Canaccord Genuity.

[Robert Young, analyst]

I'm just trying to understand the professional services, the amount of growth here in the quarter relative to all of the new wins and the high level of new logos. Is this just a function of smaller wedged contracts that are easier to deploy? Or is there some other dynamic at play?

[Blaine Fitzgerald, executive]

Sure. I'll start, and John can always add in some color if he wants to as well. So when we think about our professional services growth, we've been doing our best to obviously make sure our partners are involved. We like to make sure that our -- it's a partner-first type of organization where we want them to be focused on growing their footprint, and they point to us as being the solution that they think should be used going forward. So part of the growth that you're seeing there is on that. Now we like to talk about records, sometimes talking about records just gets boring, and we don't talk about all the records. And we had a record bookings number for professional services in Q2, which we did mention before. And we're extremely excited with the fact that we have a long runway in terms of where we think that revenue is going. But ultimately, what we're trying to do is move that revenue stream as much as possible into the hands of our solution integration partners that are out there.

[Robert Young, analyst]

Okay. That's great to hear. And then the win rates being strong and sales cycle decreasing to the high level of new logos. I mean how does this change your outlook on the sales headcount? Is efficiency increasing? Or like, do you have to expand to keep capitalizing on all of this top-of-funnel activity? I'll pass line.

[Blaine Fitzgerald, executive]

Sure. Yes, our sales efficiency has come down a little bit from crazy high numbers, which when I say crazy, it means like I think we were missing out on opportunities, I've mentioned this before. I think they're at the levels that are -- now I would say, they are just best-in-class, and they're not crazy anymore. So best-in-class is getting us to a position where we're pretty comfortable with the continued growth at sales and marketing at a reasonable level, rather than bring out as many as we had. Now, what you would see from our sales and marketing team is that we have a large cohort of sales folks that are still early in their tenure at Kinaxis. And the productivity or the efficiency that they get doesn't take place until closer to the sales cycle times that we just mentioned. So we are in early days of getting that new cohort ready to go and accelerate and expand our wins even more in the future. I'm excited to see when they get past that 12-month mark because we might see another acceleration.

[Operator]

The next question comes from Mark Schappel from Loop Capital Markets.

[Mark Schappel, analyst]

John, just stepping back a little bit here at a higher level, could you just speak to the changes that you're seeing with respect to executive sponsorship for supply chain software over the last, say, 6 months or so?

[John Sicard, executive]

Absolutely. I'll tell you, chief supply chain officers are being invited to every Board meeting, not just once a year. I mean, it's -- people are realizing supply chain done well is a weapon. And so coming out of the pandemic, many have realized -- well, I'll say first, many boards are asking their CEOs, what are you going to do next time? Of course, CEOs aren't necessarily supply chain practitioners, so they swivel and ask the Chief Supply Chain Officer, what are we going to do next time? And oh, by the way, the Board is also taking governance responsibility for ESG. There's no discipline on this planet that consumes the earth's natural resources more than supply chain. So boards are saying, can you be more resilient, which basically means can you absorb volatility faster, can you absorb or avoid hardship faster, and oh, by the way, do less harm. And so those 2 narratives are colliding, which is what I believe is causing this surge. It's causing what I often describe as a supply chain renaissance, a rebirth. People are rethinking.And look, every 30 years, you think about this, right, that 30 years ago, where were we with technology, 60 years ago, where were we with technology. These types of periods cause you to rethink and adopt new ways, new techniques that are giant leaps forward. So conversations have been really, really fascinating. I -- there's nothing I enjoy more than spending time with practitioners and learning the new language they use to describe the pain they're experiencing. So if you were -- if I were to answer the question, how is the narrative changing? Well, first, I would say there's this realization that the pain they're feeling is not a failure in technology. It's a failure in technique. And that is what is fueling a great resurgence in this space. It's not just, hey, I need to keep doing what I'm doing, only a little bit better.They're having conversations about doing things completely different. It's like the birth of the Internet. We're not going to write each other letters anymore and lick stamps. That's absurd. There's no breakthrough in that, right? Even if you get a stamp licking machine, well, that's still not going to make communications faster, right? So this is what we're seeing now and why I'm -- well, as some might tell, I'm a little excited about the state of the business and obviously the state of the craft of supply chain. It's fascinating to hear the narrative.

[Operator]

The next question comes from Kiran Sritharan from Eight Capital.

[Kiran Sritharan, analyst]

I'd like to start here with MPO being rebranded and fully integrated. Are you approaching certain end markets differently? Maybe a few thoughts on how your changes to the broader branding strategy, given the new CMO as well.

[John Sicard, executive]

Yes, absolutely. I think I might have said this during the last earnings call that -- well, I certainly have said it publicly that there may be a day people will no longer use the term supply chain planning. That's just one side of a 2-sided coin. And so with our acquisition of MPO, we're able to satisfy the needs of supply chain execution. And so the sum of the 2, at least the terminology being used by practitioners is orchestration. Supply chain orchestration is the fusing together of planning a thing and executing on that plan and course correcting when invariably, the plan never happens, right? It's one thing to plan things, it's another to actually execute in an environment that's forever shifting. And so that's one area of the narrative that we're seeing change. And obviously, with our acquisition of MPO, puts us in a very advantageous position to be able to fuse together those 2 elements of supply chain.

[Kiran Sritharan, analyst]

And for my second here, just looking to unpack how your AI/ML solutions are positioned today. How has the competitive landscape changed with regards to any other innovative AI features you're seeing? Also how crowded is the AI-pointed solution, marketing SEM? And I'll leave it there.

[John Sicard, executive]

Yes. That's a great question. And as a software engineer myself, I'm always enthusiastically researching these types of technologies. And like anything, techniques inform technologies, not the other way around. There's a lot of interesting technologies that have no value. Value is always in the eye of the benefactor. In our case, the benefactor is the Chief Supply Chain Officer. So I have as many conversations with data scientists and our PhDs and machine learning here at Kinaxis as I do with practitioners and work to really tie the needs of the practitioners with the abilities of the science. Now, I will say there are a lot of competitors out there that are leveraging machine learning and AI to improve a specific function of supply chain. I think that's incrementally better. There's no breakthrough in it. It's incrementalism.And so at Kinaxis, we think about leveraging machine learning and AI above a concurrent environment when you can start automating decisions that have implications across a vast number of processes in supply chain, that's where the breakthrough comes in. And so that's where we have been working very, very closely with innovators like HAVI, other innovators in the CPG space that are dealing with enormous data sets, where signals can dramatically impact their demand at a moment's notice, and that needs to be absorbed all the way right through to distribution. So our machine learning AI posture and all the patents we're working on is around that.The other area, there are many machine learning technologists out there that say, it's just a really smart black box, you should just do what it says. And of course, humans don't trust what they don't understand. And so explainability is everything. Explainability is everything, especially now. We're dealing with a lot of very smart practitioners out there that's saying, okay, I see the answer, but I don't understand it. And so a lot of our patents and a lot of our investments are going towards explainability, which is actually a technology. When you unpack what machine learning and artificial intelligence are surfacing for you, it's understanding why did you surface that for me. And so this is where we are spending our energy, and I think that's where the breakthroughs are going to come from.

[Operator]

Our next question comes from Martin Toner from ATB Capital Markets.

[Martin Toner, analyst]

Martin Toner here. Congrats on another good quarter. At Kinexions, there were a tremendous number of new initiatives announced, very impressive. What's the OpEx impact? What do you see the OpEx impact of how busy you are there? And when should we expect EBITDA margins to start to improve?

[Blaine Fitzgerald, executive]

Sure. Well, obviously, I'll answer this Martin Toner. The OpEx is hugely in the past at this stage. So the R&D impact that we had was something that we've put through our P&L already for the most part. That's why we've talked about where we are in the progress of those initiatives. There is like Phase 2, Phase 3, Phase 4 and where those products could go. I think Supply.AI is a good example. We have 2 main use cases that it's focused on. There's going to be more use cases in the future. We're seeing a high amount of demand already for those first 2. Demand.AI is -- I'm just blown away by some of the results we're seeing with our early adoption and how much better the forecasts are getting on the demand sensing, demand planning side of those customers. So that's another area that we'll continue to focus.But it's going to be natural R&D investments that we're going to have in there over time. I think the sales and marketing will be the main driver of OpEx as we continue to move forward, as we try and make sure we have a good balance of where our sales efficiency is. But overall, we've talked about where we want our midterm targets to be for adjusted EBITDA, and that's that 25% in the next 2 to 4 years. We are absolutely focused on getting to that position, and I have no worries that we're going to get there.

[Martin Toner, analyst]

That's great. I apologize if I missed this earlier. But you talked a little bit about customer caution. And can you just tell us what does the pipeline look like today compared to when you announced last quarter's results?

[John Sicard, executive]

Well, recently, we saw another, I'd say, tip over a record in terms of that pipeline. The shape of it is shifting a little bit, as I said, as a result of our investments in the SMB space and our investment with VARs, that's starting to contribute. I won't say that the VAR contribution is huge right now. But it's essentially where we expected it to be, and we're investing quite a bit of energy right now in training and preparing the VAR community to sell on our behalf, not only sell, but to deploy on our behalf. And so that's the commentary. I wouldn't say there's any huge shift in terms of the market verticals that we serve. I think I mentioned earlier that CPG is definitely one of the larger segments for us. We've done exceptionally well there. And some of the names that we announced during the call are just an example. And so we're seeing some continued pipeline interest from that particular segment.I will also say, maybe just to make sure this gets mentioned, as it not only relates to the pipeline but relates to deals that are closing, there -- we had mentioned that when we're cautious because of some delays in getting ink to dry, meaning signatures done, I've been studying that very, very deliberately and that's mostly in the enterprise-class for one thing. That's one thing that we've noticed, and it's mostly with the very largest deals that we will see that. In fact, one of the -- well, definitely one of the top 3 deals that we were working on slipped just outside the quarter because of such a thing, very large in the automotive space where it just slipped outside by days.And again, we continue to see a little bit of that prolonging of signatures during that process and sometimes it goes back to the board and so on. So we're not -- we remain confident at that stage that the ink will dry. But in some cases, there -- we're seeing little slips that are elongated there. Ultimately, I think the pipeline is strong, gives us confidence in the year, guidance gives us confidence in our ultimate midterm goals. We have little code words here at Kinaxis to talk about that path to $1 billion and beyond that keep us razor, razor-focused but we all have a flagpole we hang on to.

[Operator]

Our next question comes from Suthan Sukumar.

[Suthan Sukumar, analyst]

First question I wanted to ask on was on Planning.AI. It sounds like early progress has been encouraging here. Can you provide an update on some of the early results and engagement you're seeing with initial customers? And when do you expect to make a full commercial rollout? I'm just wondering what the factors there might be.

[John Sicard, executive]

Yes. Well, it's -- first of all, it is commercially available. Make no mistake. And for those that attended Kinexions would have seen some great demonstrations of which and some great sessions around our machine learning AI poster. So I would say in terms of results, maybe I'll add this color because in some cases, we are replacing competitive products, which is always exciting for me. There's only one thing I enjoy more than replacing a competitive product. It's when you get proof positive that your forecasts are 2x better and they're, in some cases, more than that faster. So you're faster and better, which is very, very exciting. So obviously, we're leveraging that success with real-life customer examples.And trust me, in the world of demand sensing and ingesting sentiment data and weather data and promotion data, huge, huge volumes. And when you're able to prove that your results are not only significantly better than something that has been in place for decades of mass [ petitions ] working on this, we step in giant leaps forward in accuracy and a huge improvement in speed. It's just -- it's super exciting. So obviously, we're working to leverage that. And I think we're going to continue to see that penetrate through the customer base and through prospects.

[Suthan Sukumar, analyst]

Great. I want to touch on supply chain execution mix. Can you talk a little bit about how much of a role is having execution now with capability? How is that helping with new customer discussions on your win rates there?

[John Sicard, executive]

Yes. It's a great, great question. This is something that we can -- coming out of the pandemic, many people realized that material and motion was one of the biggest areas of risk. You couldn't find a container to save your life. And even if you could find one, the cost of said container was in some cases, 5, 10x, 20x more to get that capacity. And so that is ultimately what caused the urgence in fusing together the 2. I would say, fusing supply chain execution and planning has been a topic talked about for decades. So it's not like that's new. But being able to actually produce an end-to-end concurrent system that actually does it, that's been relatively new.Now it's early days for Kinaxis. Certainly, we just absorbed the acquisition of MPO is going exceptionally well. Martin, who led that organization has a very, very senior role here with us. He's not only academically incredibly bright, but he understands tremendous about business and is definitely the smartest I've met in the world of supply chain execution. So he is already infusing his intellect into our product management function. So in terms of the impact it has on sales, in some cases, it got us in the door. And in some cases, it's an opportunity for us to expand with our own customers and being able to offer up a supply chain execution attachment, if you will, to RapidResponse. So very early days, but let me tell you, the use case is unbelievably natural.

[Operator]

There are no further questions at this time. I turn the call back over to you, Mr. Wadsworth.

[Rick Wadsworth, executive]

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

[Operator]

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