Kinaxis Inc

TSX:KXS

Earnings Call Transcript 2018-Q3

[Operator]

Good morning, my name is Kelly, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Kinaxis Third Quarter Results Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to Rick Wadsworth, Vice President of Investor Relations. Please go ahead.

[Rick Wadsworth, Vice President Investor Relations]

Thanks, operator. Good morning, and welcome to the Kinaxis earnings call. Today we will be discussing our third quarter results that we issued after the market closed last night. With me on the call are John Sicard, our President and Chief Executive Officer; and Richard Monkman, our Chief Financial Officer. Before we get started, I want to emphasize that some of the information discussed on this call is based on information as of today, November 9, 2018, and contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in the earnings press release as well as in Kinaxis' SEDAR filings. During this call, we will discuss IFRS and non-IFRS financial measures. A reconciliation between the 2 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 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 third quarter and recent developments followed by Richard, who will review our financials for the quarter. Finally, John will make some closing statements before opening up the line for questions. I'll now turn the call over to John.

[John Ernest Sicard, CEO, President & Director]

Thank you, Rick. Good morning, everyone, and thank you for joining us today. During the third quarter, we grew subscription services revenue on a comparative basis by 19% and delivered adjusted EBITDA of 31% of revenue prior to adoption of the new accounting standards that we walked through in detail on previous calls. Current quarter subscription revenue growth was slightly lower than we expected as certain large subscription agreements are taking longer to conclude than we had originally anticipated most notably in Europe. We are working to close these late-stage arrangements as soon as possible, and I see no indication of tempering growth whatsoever, quite the contrary. Our overall pipeline continues to grow and strengthen. Given our sales and marketing activity and growing partner participation, we have every confidence in achieving our goal of accelerated revenue growth in 2019. Richard will review our current guidance later in the call. Giving effect to new accounting standards, our total subscription revenue was $27.7 million, and adjusted EBITDA was $9.5 million or 26% of revenue. We were pleased to welcome new customers in our 2 largest markets: high-tech electronics and life sciences. And also pleased to see new customers from every major geography we target. We have also made significant progress in growing our overall pipeline across all 6 six market verticals of focus. Our recent investments in Japan continue to pay dividends with significant new business in that region as well. Our partners continue to influence the majority of new deals, and we're pleased to add 2 new strategic partners during Q3. QUNIE in Japan and global supply chain specialist, Crimson & Co, headquartered in London. We are extremely happy to see a continued -- a continuing surge in partner consultant certifications more than doubling since the beginning of the calendar year. This success is built upon the unique concurrent planning capabilities of our RapidResponse platform. Validating that differentiation during the quarter, and for the third consecutive year, Gartner recognized Kinaxis as a leader in their Magic Quadrant for Supply Chain Planning System of Record and in fact, positioned Kinaxis as furthest overall with respect to completeness of vision. We were also thrilled to learn that Ventana Research recently honored Kinaxis as a digital innovation award winner in the operation and supply chain category for our use of machine learning techniques to create self-healing supply chain capabilities. We recently reinforced our dedication to market-leading innovation by welcoming Andrew McDonald as Chief Product Officer. Andrew comes to Kinaxis from executive positions at technology companies including Alcatel-Lucent where he led a division-generating $1 billion per year of revenue. As our new CPO, Andrew will leverage his extensive experience to scale product management, software design, research and development, quality, certification and documentation with a focus on further accelerating Kinaxis innovations for the market. With that, I will turn the call over to Richard for an overview of the financials.

[Richard George Monkman]

Thank you, John, and good morning. As a reminder, all figures reported on today's call are in U.S. dollars under IFRS. Kinaxis adopted IFRS 15 and 16 or what I'll refer to as the new standards, effective January 1, 2018. We have not restated 2017 financial results. However, to enable comparison with Q3 2017 results, we have presented Q3 2018 financial information on a basis reflecting both before and after adoption of the new standards. Prior to the new standards, total revenue in the third quarter increased 18% to $39.6 million. This performance was driven predominantly by subscription revenue, which increased 19% to $30.7 million, due to contracts secured with new customers as well as the expansion of existing customers subscriptions. As John mentioned, this is slightly below our expectations due to delays in closing business with certain potential new customers. I will comment further on this matter when discussing our guidance. After giving effect to the new standards, total revenue in Q3 2018 was $36.6 million, and total subscription revenue for the period was $27.7 million, of which $27.2 million related to cloud-based arrangements and $0.5 million related to on-premise arrangements, which by their nature, will vary quarter-to-quarter. Professional services revenue remained strong in the third quarter growing 16% to $8.7 million. Professional services revenue reporting is not impacted by the new standards, but will vary quarter-to-quarter due to a number of factors including the size, timing and scheduling of customer arrangements as well as the engagement level of third -- of our partners. Part of the effect of the new standards, gross profit grew 16% to $27.6 million. This represents 70% of revenue in line with the 71% in Q3 2017. Slight change in gross profit margin reflects increases in head count and related compensation cost and higher depreciation costs associated with the expansion of our data center capacity. As previously reported, we have invested in new data centers in Europe and Japan to support our ongoing global expansion. Under the new standards, gross profit for the third quarter was $24.6 million or 67% of revenue. Prior to the effect of the new standards, profit for the quarter was $5.2 million or $0.19 per diluted share, compared to $6 million or $0.23 per diluted share in Q3 2017. The change reflects an increase in operating expenses made to support our global expansion and ongoing product innovation, net of increases in revenue and gross profit. General and administrative expenses increased largely due to the investments we have made in personnel and facilities to support our global expansion. In addition, we incurred legal fees related to our ongoing arbitration with a former Asian customer. Under the new standards, profit in the third quarter was $2.7 million or $0.10 per diluted share. Prior to the effect of the new standards, adjusted EBITDA for the third quarter grew 14% to $12.3 million or 31% of revenue, which reflects the growth in revenue and gross profit in the period partially offset by operating expense growth. Under the new standards, adjusted EBITDA for the third quarter was $9.5 million or 26% of revenue. Cash generated by operating activities was $1.5 million for the third quarter, compared to $3.3 million for Q3 2017 due to the lower profit before depreciation, taxes and share-based payments. Our cash balances was $176.1 million at September 30, 2018, compared to $158.4 million at December 31, 2017. The nature of our ongoing long-term contracts provides us with a high level of visibility into future contracted subscription revenue. With our adoption of IFRS, we are now disclosing the minimum committed subscription after giving effect to the new standards. As at September 30, 2018, the total backlog of subscription services was $197.8 million and reflects an overall increase for the 2019 and future period. Of the total backlog amount, $26.3 million will be recognized in Q4 20 -- this quarter; $86.3 million will be recognized in fiscal 2019; and the remaining $85.1 million in fiscal 2020 and thereafter. Kinaxis' success is driven by our unique ability to deliver concurrent planning, which enables large enterprises to transform their supply chain planning processes. Our sales cycles are often 9 to 18 months as prospective customers complete comprehensive analysis and assessment prior to adoption. We have considerable experience managing these conditions as we have consistently communicated, our efforts remained focused on driving high revenue growth through multiyear subscription arrangements. Accordingly, we have adjusted revenue guidance to reflect revised timing estimates. On a prestandards basis, we expect that total revenue will be in the range of $155 million and $157 million, and subscription services revenue will grow between 21% and 22% over 2017 levels. Giving effect to the new standards, we now expect that total revenue will be in the range of $152 million and $153 million. Subscription revenue will be in the range of $107 million to $108 million. Subscription term licenses will be between $9 million and $10 million. Our business model and operating margins continued to remain strong as reflected in our consistent adjusted EBITDA performance. We are pleased to update our already strong guidance related to this measure. On a prestandards basis, we expect that sales and marketing expense will be between 23% and 25% of revenue. Net R&D expense will be in the range of 17% to 19% of revenue and adjusted EBITDA for 2018 will be between 25% and 27% of revenue. Giving effect to the new standards, we now expect the sales and marketing expense will be between 22% and 24% of revenue, R&D between 17% and 19% of revenue, and adjusted EBITDA between 25% and 28% of revenue. As we have noted, we remain very confident in our future prospects. Specifically, we are very confident that our 2019 guidance will reflect accelerating revenue growth when we provide such information on our fourth quarter call. Thank you for your continued support of Kinaxis. And with that, I turn the call back over to John.

[John Ernest Sicard, CEO, President & Director]

Thank you, Richard. We recently had the privilege of spending time with our customers in key prospects at Kinexions, our annual user conference. Remarkably, over $2 trillion of revenue was represented at our event. Customers shared the myriad and often unexpected ways that they are realizing value through RapidResponse and concurrent planning. These outcomes and incremental value were not being achieved using competing conventional approaches. I am more confident than ever that we are the only company truly transforming supply chains via concurrent planning. The benefits of our highly differentiated technique are undeniably real. We heard repeatedly how the ability to detect and react instantly to constant change in the supply chain, using RapidResponse, has helped our customers improve customer service, reduce costs and manage their business more effectively than ever before. I am thrilled with the health of our growing sales funnel as well as the distribution between verticals and geographies. Continue to develop our sales team and our partner network. We continue to innovate and extend the capabilities of RapidResponse. We continue to build our global reach and capabilities. We continue to drive significant and measurable customer value. As I mentioned in my opening remarks, I have every confidence in our long-term growth including our ability to achieve accelerated revenue growth through 2019. On behalf of Kinaxis, I would like to thank you for your support and as always, for taking the time to join us on the call. With that, I'll turn the line over to the operator for Q&A.

[Operator]

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

[Richard Tse, Managing Director and Technology Analyst]

Gentlemen, just curious if you can may be give us a little bit more color on the nature of the deal slippage here in Q3?

[John Ernest Sicard, CEO, President & Director]

Yes, so as I mentioned and we've talked about in previous calls, our sales cycles tend to be 9 to 18 months. And on occasion, they can take longer. On occasion, they can take less time. And in this particular case, over the summer months, we had anticipated these deal closures occurring and they just slipped. It's just a question of timing and nothing more.

[Richard Tse, Managing Director and Technology Analyst]

Okay. So you've made a lot of changes in the award structure here over the last little while, and made a bunch of investments. Is it sort of fair to sort of make this assumption that that's kind of providing the sort of new foundation of the sort of accelerating growth. And I guess, related to that question, are we pretty much complete when it comes to those work structural changes and you're happy with where you are today?

[John Ernest Sicard, CEO, President & Director]

Well, that's a -- it's a great question and absolutely, we've been -- I've been personally focused heavily on improving the overall management talent as we scale to the next plateau. And so in every case, whether it was Paul, Jay, recently Andrew, bringing on people who have not only been part of, but witnessed the scale-up to $1 billion. And so not only am I thrilled with the talent that we've been able to attract, this is an incredibly simpatico team, the culture is phenomenal. So I'm thrilled with it. Whether or not, there's an opportunity to increase that, there may be. I'm always looking for talent. But the motive is entirely focused on preparing for that next plateau. You hear about companies who don't think about it soon enough, and they get crushed by success. That won't be us. So this has been part of the philosophy of strengthening the overall management team.

[Richard Tse, Managing Director and Technology Analyst]

Great. And just this one last one from me, in regards to the partner channel. Is there sort of a target number of partners you want going forward here? Are you sort of at peak or capacity there? Just trying to understand directionally where you're headed there? That's it.

[John Ernest Sicard, CEO, President & Director]

Thanks, Richard. So the answer to that is a resounding no. There's no limit. In fact, we've learned depending on geography, depending on market segment, depending on geography and market segment, you can sometimes get different partners engaged with these large organizations. And so, we have no exclusivity whatsoever in our partner program, it continues to grow, we've added 2 this last quarter. We have others in the funnel you may be learning about. So, there is no limit whatsoever. We're highly focused on that as a key leverage point.

[Richard George Monkman]

I think maybe we can share that to show an indication of the success of that partner network. We have -- there's actually a greater professional services base of practitioners outside of Kinaxis and our partners, and they are generating at a revenue level higher than Kinaxis. So, this is the absolute success that we were seeking and we're very excited by that acceleration as well.

[John Ernest Sicard, CEO, President & Director]

Yes, absolutely.

[Operator]

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

[Daniel Chan, Research Analyst]

Just wondering if there's any change to your revenue retention rate for the quarter?

[John Ernest Sicard, CEO, President & Director]

We continue -- thank you, Dan. We continue to have over 100% net revenue retention, which is great. And it just shows that, that block of revenue from existing customers is carrying forward. And we continue to also expand with our customer base. So that business model continues to drive forward.

[Daniel Chan, Research Analyst]

Okay, so just to confirm there aren't any customer losses?

[John Ernest Sicard, CEO, President & Director]

Well, occasionally, we do lose a customer. It's -- there are different reasons as we've noted on other calls, everything from financial issues of liquidation to consolidations. But the focus here, Dan, is that as an overall cohort, that revenue base is extremely stable and continues to grow.

[Daniel Chan, Research Analyst]

Okay. And then if I take a look at the midpoint of your full-year guidance now on the old accounting standards. It suggests that EBITDA for -- EBITDA margin for Q4 will come in at about 21%. We haven't seen that low in EBITDA margin in about 2 years. So, kind of wondering why the implied Q4 margin is expected to be that low? Is it from customer acquisition costs you're expecting in the quarter?

[John Ernest Sicard, CEO, President & Director]

Well there's a number of factors. Prior to the standard, we have -- we've had today, even still we do primarily a very conservative expense model where everything's taken as a period cost. The exception to that is deal customer acquisition costs which is the variable component only that is capitalized. But we are, in essentially both instances, guiding to that 25% to 28% or 25% to 27% depending upon the standard. So very, very strong EBITDA performance. And Q4 marketing costs traditionally are higher given the -- given our customer conference as well as other key marketing activity that we've participated in. We continue to invest and so there is a bit of an uptick in some other op cost. But that strong EBITDA performance is what we're guiding to for the year.

[Daniel Chan, Research Analyst]

Okay, and I guess related to that question since we're already almost halfway through the quarter. Those deals that slipped, have you already closed any of those?

[John Ernest Sicard, CEO, President & Director]

We don't comment until we've closed the quarter. We do have this long-term experience of this -- of working with large enterprises, and as John noted, over the 9 to 18 month cycle. We are very confident in these late-stage discussions, and I would say, comfortable with regards to the way they are tracking. We do continue to close business throughout the quarter and I think that's reflected in our confidence and in our guidance, not only for this quarter, but in terms of the messaging for the future as well.

[Operator]

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

[Thanos Moschopoulos, VP & Analyst]

John, in terms of the deal slippage, does some of it have to do with the fact that you have less historical experience with respect to selling in Europe and the nuances of predicting sales cycles there? Or would you characterize it as more of a random event?

[John Ernest Sicard, CEO, President & Director]

I would characterize it as more of a random event, quite frankly. And we've been at this a very, very, very, long time. I intonated there that most notably, these are in Europe. And I also intonated to some extent, you pass over summer months, and things don't necessarily move as quickly. So it's nothing more than a random event and a timing event in my estimation.

[Thanos Moschopoulos, VP & Analyst]

And generally speaking, it seems like you're selling, in some cases, to larger companies than ever before, and so that being the case, can you comment on whether sales cycles have been changing at all? Or whether they've been consistent at that 9 to 18 months' range? And also whether deal sizes have been changing on average?

[John Ernest Sicard, CEO, President & Director]

Yes, not so much. In fact, when I look at deal closures, it was actually quite even through the quarter. In terms of large and small -- well small -- large and medium, I'll call them. In this particular case, and I would say it's almost uniform that the larger the opportunity, it will tend to a longer sales cycle. They tend to be much larger opportunities requiring signatures at a significantly higher level, sometimes at a board level. And so these tend to take longer, but I wouldn't necessarily say that there's any askew between them.

[Thanos Moschopoulos, VP & Analyst]

Great. And then one last one for Richard. Could you provide us with directional color on term licenses in 2019? Or is it too early to do that? And when you provide guidance next quarter, will you provide pre-IFRS 15 guidance as well or just post-IFRS 15 guidance?

[Richard George Monkman]

So we will -- thank you, Thanos. We will be -- in our next call, we will be providing guidance with regards to the term subscription license. This is the right to use component for the rest of the audience and what we do is we recognize that at the commencement of the term. So that is the one that will vary quarter-to-quarter. And so absolutely to provide transparency, we'll provide that guidance when we do that for 2019. However, this is a transitional year and that's why, just to help investors track our long-term growth, we have been providing both pre and post IFRS. But come 2019, we will just be only providing guidance and reporting under the current GAAP. So post-IFRS and -- but that will still provide the full quarter-to-quarter comparison.

[Thanos Moschopoulos, VP & Analyst]

Maybe just to clarify your commentary in the press release about accelerating growth in '19, would that refer to total revenue or subscription revenue specifically?

[Richard George Monkman]

It really focuses on the engine of growth, which is subscription revenue, but that does tell you that both total revenue and subscription revenue, we see accelerated growth.

[Operator]

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

[Robert Young, Director]

A while ago, you were providing medium-term targets for, sort of, the targeted business model of subscription revenue growth of around 25% and adjusted EBIT margin -- EBITDA margin of around 25%. And so is that, when you look at the model, I'm not looking at guidance for 2019 or -- is that still the model that you're looking at? And is the acceleration and growth you're talking about, is it relative to that targeted business model or is it relative to the results you've seen in 2018?

[Richard George Monkman]

Well, we are -- clearly, we're delivering in the mid to upper 20% range for EBITDA performance. And our aspirational goals continue to remain strong in that mid-20% range. And as we see the partner takeup, our goal quite frankly -- our longer-term goal is to further accelerate above that.

[Robert Young, Director]

Okay, great. And then maybe a mechanical question. The current deferred revenue, not the longer-term deferred revenue, but the current deferred revenue has dropped in Q1, Q2 and now it's dropped again in Q3. And so I can understand why the longer-term is longer duration contracts, but I don't understand why the deferred revenue in the current has been dropping. If you could explain mechanics around that, that would be helpful.

[Richard George Monkman]

Sure, so we have too measures that we report. One is bookings. That deals with the subscription. So this is, you sign a contract, you make the commitment and the minimum term commitment is reflected in bookings. And that's what gives us the longer-term confidence. Deferred revenue is as a direct financial measure and is really based upon the level of invoicing. So depending upon everything from the customer issuing that purchase order to the timing of the invoicing, the deferred revenue will vary. So we'll obviously book the deferred revenue upon the invoicing and then draw that down as we recognize revenue. So we are going to see this fluctuation in it. It really depends upon the term. The better indicator of a go-forward-view is really from our general guidance that we've been providing as well as then looking to the bookings. And as you've seen, the bookings for the relevant period, I mean the future period, have continued to increase.

[Robert Young, Director]

Okay. And then maybe one last just broader one for John. I've heard Kinaxis mentioned some aspirations in the midmarket a few times, and I was wondering if you could talk about some of these recent channel partners and whether that's preparing you for the midmarket and whether that's something that's an emerging piece of the business? And then I'll pass the line.

[John Ernest Sicard, CEO, President & Director]

Great. So, yes, I have made those statements that the, I'll call it, the fitness of RapidResponse for midmarket is ever present and our -- when we look at the entire cohort of our customers today, there are midmarket customers in that mix. So we know if there's a fitness. It's a question -- for us, it's a question of focus on when to and how to harvest that specific market segment. It's a different sales cycle. And you know, at the moment, it isn't an absolute focus of ours. We've -- we still tend to focus for -- focus on extremely large complex supply chains. However, as I said, we do have some that are in the midmarket. At this time, we are not focused on it. When we do, it will very likely be through a partner channel.

[Operator]

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

[Stephanie Doris Price]

Could you talk a bit more about the current sales environment and whether you're seeing any clients moving slowly, just given trade and Brexit concerns, et cetera?

[John Ernest Sicard, CEO, President & Director]

It's a great question. And honestly, we're not -- we're not seeing necessarily a slow down, and in some cases, we're seeing an acceleration. We've had cases recently where individuals were looking for, what I call a tariff management simulator, which -- we have been using RapidResponse to identify opportunities there. So I wouldn't necessarily classify this as slowing down, it's -- I wouldn't necessarily call it accelerating either, but I'd say that the use cases are changing somewhat. And overall, our pipeline has never been stronger, frankly. It just hasn't, and it's remarkably evenly distributed, not only by geography, but by market segment.

[Stephanie Doris Price]

Great. And you also mentioned earlier about a partner uptick and the partner enablement program, maybe you could touch a bit more on that?

[John Ernest Sicard, CEO, President & Director]

Yes, so we are seeing the majority of new named wins continues to be partner-influenced. So the program is absolutely working. We have seen a doubling of certified consultants across the spectrum of our current partner ecosystem. And so everything that we had envisioned as a leverage point from customer -- from these partners, and influencing new names and in assisting in the deployment of those projects is actually occurring. There are far more consultants outside of Kinaxis certified to deploy than there are inside. And that is exactly the model that we're aspiring to.

[Stephanie Doris Price]

Great. And then just one last one from me. Last quarter, I think you provided a bookings number. I wonder if you could provide that this quarter as well?

[Richard George Monkman]

Well, from a -- if you take a look at the bookings, the draw is $26 million -- just over $26 million.

[Operator]

Your next question comes from the line of Paul Steep from Scotia Capital.

[Paul Steep, Analyst]

John,it's been a while since we've done a little update on the competitive market landscape. Can you give us your take on what the industry's looking like out there? And any changes you may or may not have seen? And then I've got one quick follow-up for Richard.

[John Ernest Sicard, CEO, President & Director]

Sure, so we continue to see, I'll call it, the large SAP incumbents, if you will, as the primary competitive threat. At the same time, we look at the Gartner positioning and they've still identified us as #1 from an innovation standpoint. And I will tell you, as I said in the past, we don't necessarily compete on product capability, we compete on technique. We walk into these accounts, whether they're SAP or otherwise, and talk about the potency of concurrency, right? It's a different way of thinking about the problem. It's not, we have a better planning solution than someone else. We have a distinctly different technique. It's -- here's the equivalency. It's like -- it'd be like, the difference between flying from New York City to London versus taking a boat. One is a clearly differentiated technique that provides significant breakthrough. And that continues to be the way we're winning.

[Paul Steep, Analyst]

Great, and then the follow-up for Richard. Just you guys do have a long track record of forecasting large lumpy deals. Any changes or thoughts about how you're going about forecasting, maybe with some of this, I guess, more unusual behavior you're seeing out of Europe or at least it sounds like maybe 1 or 2 accounts, it's hard to tell there?

[Richard George Monkman]

Sure, I mean, we -- this is our heritage, Paul, in that we solve complex problems for large enterprises and that means working with those large enterprises. We are going to the very fabric. They're typically -- this is a rip and replace. They are not succeeding or driving the value that they need. And so they work with us. It typically will go through the proof of concept that they'll want to ascertain. And because they're going to be teaming with us for a long term, they want to know that we're -- we can drive those benefits for them. And so this model, it's going to -- until we are really through that, across the chasm, if you will, we do anticipate that it's going to take 9 to 18 months. What has happened is a significant increase in sales capabilities, both in terms of individuals as well as geographies. We have talked multiple times about the ongoing health of the funnel and health really describes a number of dimensions, including geographic coverage, vertical coverage, just the names of the marquee. So that continues to build. I wouldn't characterize this as an unusual -- sorry, sort of a -- as a trend. This is just the way that some of the deals have happened. I mean, you almost want to think of activity almost -- as some waves. And this just is the bit of a -- some days you have a crest, some days you have a bit of a trough. But it doesn't change the long-term view. I mean, I think people understand that, if you sign a 3-year significant agreement starting in September, that's obviously going to generate more revenue than one that's signed December 15 in the current year. But in terms of the 2019 revenue and the overall value to the company, it doesn't matter. And it's really better to focus on ensuring that, that initial deal is the right deal for the company longer term. So this is -- we're just trying to communicate that our focus remains on the long-term, our confidence remains on that long term. We are extremely excited about what's in front of us, both from -- John commented on the quality of the team, as it continues to build and the quality of our partners, and the growing realization of a need to fundamentally transform your supply chain. So that's where our focus is.

[Paul Steep, Analyst]

Sorry, I should have been more pointed around how I asked you. You're not seeing anything systemic that requires you to change your contracting or to try to sort of chunk down deal size to prevent some of these issues? It sounds like it's more isolated to 1 or 2 clients, is that fair to sort of walk away with, guys?

[Richard George Monkman]

Yes, we are responsive to the market and we do work with our customers to align. But our goal is not to go short term. And quite frankly, neither is their view. They are going to be making some significant changes, and as John commented on, changing the technique. I would love, I mean, I will tell you, it would be great to have applications that would be directed to, say, the CFO's office as opposed to the supply chain. Now with the ability of the platform and with the experience of our partners, that may be something that can be addressed in the future. But we don't really foresee major changes to the model and the reality is that we are just going to continue to directly and through our partners, work with these organizations.

[John Ernest Sicard, CEO, President & Director]

Just to be clear, there's nothing systemic that we see whatsoever. Nothing.

[Operator]

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

[Paul Treiber, Associate]

Just in regards to the increasing size of the company and the greater number of partners involved, the more geographies that you're in. How do you think about, I guess, managing the complexity or increasing complexity of the sales operations and the processes around that?

[John Ernest Sicard, CEO, President & Director]

Yes, so, Paul, for me it's about repeatable rigor. Those 2 words are really important to me, and so Paul has extensive experience in running extremely large sales forces. He's had a very long pedigree of billion-and-above revenue target on his back. So he knows what that looks like, feels like, smells like. And we have a very repeatable rigorous sales operations team that basically governs the entire planet and how sales cycles are monitored, how they are -- how they progress through the sales cycle. We have a rigorous education program as we bring on new talent. We have a very consistent partner enablement program, that is a capital E -- capital P, capital E, capital P, PEP -- a PEP program, is consistent for all partners, and it's that kind of repeatable rigor that gives us confidence that when we're looking at data and we're looking at progress of the business that we can rest assured that it's accurate and that's the way we've -- we prepared ourselves for scale.

[Paul Treiber, Associate]

That's helpful. The -- looking at guidance in regards to the implied number around professional services, it looks like the professional services' revenue is -- would be unchanged. How would the professional services relate to the slipped deals? Is there no change in the outlook for professional services regardless of the deal timing? How do you think about that?

[John Ernest Sicard, CEO, President & Director]

Well, yes, so because the focus is obviously on enablement and customer success, the level of professional services is related to the timing of deals. And when I say the level of professional services, that's both our partner revenue and our own revenue for the deals that we're working on directly. But our typical arrangements, it's not unusual to have a 9-month to maybe even a 15-month deployment cycle. And so as such, there is ongoing activity. We are very comfortable with the bookings that we have in professional services and -- but yes, so our professional services' revenue would have been somewhat higher but it is still -- we are still forecasting, as you note in our guidance, strong, sustained professional services' revenue.

[Operator]

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

[Deepak Kaushal, Director and Technology & Communications Analyst]

I just wanted to go back, Richard and John, to the long-term vision here. You guys have identified 2,000 large enterprise customers as a target market, excluding the midmarket, as you contemplate hitting your $0.5 billion and $1 billion revenue goals. What kind of penetration of this market does that imply? And what's your sense of, at what point the market starts to become price-sensitive?

[Richard George Monkman]

Yes, so it's difficult to predict sort of a number, if you will, on at what point would we see it crossing over the $0.5 billion versus $1 billion mark. And so I would tell you that as we progress through market segments, that number continues to grow. You mentioned 2,000. Some have noted that we have also entered into the food and beverage space, for example, which is a subset of the consumer packaged goods, when we announced Pulmuone, the largest tofu manufacturer on the planet. So as we continue to progress, we're also looking at expanding our market -- our market verticals that we would be tackling. And that just further expands the TAM, which again further expands the market opportunity. I will say that when we look at the speed at which we will achieve those levels of growth, I do look at it as a function of market maturity. And at some point, you start to see momentum in market maturity and that can sometimes happen in one vertical and not happen at the same rate in another. So life sciences is an example, for -- our target continues to be quite warm. There's a lot of activity and maturity in that market segment as it relates to the adoption of concurrency and concurrent planning as a technique. So we're going to continue to focus, I don't like to put a date out there that says, we're going to hit this number at this point, people will say, if you hit the inflection point, well it won't be Monday. It's not a point in time, it just happens quite naturally over a period of time. The things that give me great confidence and the things that I look at very, very carefully, and scrutinize, is the size and health and distribution of our pipeline. Especially the size, health, distribution of our pipeline under the guidance of an extremely rigorous sales process. And as I've intonated previously on the call, it has just frankly never been this large. So it's a very -- we're quite excited for the potential.

[Deepak Kaushal, Director and Technology & Communications Analyst]

I know none of us have crystal balls and it's hard to bring precision around these long-term things, so I appreciate the thoughtful answer. My follow-up is on the continued theme of new sales and marketing executives. Can you talk about any kind of change in thinking that they've brought into the organization, are you guys ready to start talking more about reference customers and certain markets and naming more of your customers? What kind of new thinking have the new executives brought in on a sales and marketing front?

[Richard George Monkman]

Yes, so both -- I would even say sales, marketing and what we're starting to experience now even on the product side. And it really goes to preparing for scale. If you have a sales team focused on -- you have 5 people focused on 1 microgeography where everyone knows each other. When you have hundreds of people, for example, spread all over the world, where people don't know each other, you need different process, right? This is where this repeatable rigor comes into place and how you can sustain growth. And so the types of thinking and the preparation that is going on right now, within the management ranks, is preparing to scale. And it's preparing to scale sales, we're already seeing that, we described that at the beginning of the year, where Paul came in and dramatically increased the size of the overall sales engine inside a very short period of time. And so preparing a larger group of strangers to follow a consistent process that operates at scale, is what -- is -- I'll call it the learnings that were gaining from the experience of folks like Paul and Jay -- Jay is the same, his experience in global marketing. We're starting to see significant improvement in those areas as well. And focused on the R&D centers, it's is the same thing. We have RapidResponse serving 6 different market segments today, and 3 geographies. The team is growing, and running an R&D shop with 20 people versus 1,000 people, for example, is quite different. And this is what I'm looking for when we're scaling the management talent.

[Operator]

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

[Suthan Sukumar, Research Analyst]

At Kinaxis, you guys announced an expanded relationship between yourselves and Deloitte. Could you touch on some of the goals for that and how that could help accelerate sales and deployment time line?

[Richard George Monkman]

Yes, sure. Not only Deloitte, but in general, our partners are very keen on producing their own intellectual property, if you will, associated with either market segments or geographies that they are targeting. And RapidResponse as a platform is wildly flexible, it's very adaptive. As witnessed with the fact that we serve companies that make tofu and companies that make rockets and everything in between. And so a company like Deloitte and other partners are looking at RapidResponse and this unique technique of concurrency, not only as an opportunity to grow their business in deployment of supply-chain transformations, but quite frankly create new and unique IP, which they could then subsequently sell to their customers. So this isn't just a Deloitte-specific endeavor or a Deloitte-specific desire. We're seeing this across the board with every partner.

[Suthan Sukumar, Research Analyst]

And on the R&D front, I know there's a number of technology initiatives underway at Kinaxis. But just curious, what are your R&D and product development priorities heading into 2019 and how should we think about R&D spend going forward?

[Richard George Monkman]

Yes, so we continue on our path to innovation. Last year, we were quite excited about the invention of the self-healing supply chain and even more thrilled at Ventana recently honoring us with an award. And if you look at the cohorts, it's just a -- we're quite proud of it. We think it's a very innovative technology, and it is also extremely practical and powerful. So we're going to continue along those lines in investment, and in machine learning and what we call, augmented intelligence. So the ability to -- I often describe it as taking the robot out of the person. And so you'll see some significant investments along those fronts. I have just mentioned this notion of RapidResponse as a platform and I've talked about it in the past as well. How flexible and adaptive the platform already is. Well, we are currently not in oil and gas, we're not in retail, we're not in cut and sew, we're not in forestry, there's many, many different markets segments available for RapidResponse. And my belief is, in the hands of our partner ecosystem, with this potent platform, we will see some acceleration in either new solutions or bringing us into new market segments. And so that -- where we continue to apply investment in RapidResponse as a platform.

[John Ernest Sicard, CEO, President & Director]

And as going forward, that level of investment and innovation, we would anticipate that the spend, if you will, on R&D would, as a percentage of revenue, remain on the same bend as it is now.

[Suthan Sukumar, Research Analyst]

And just one quick last one from me. We noticed some changes to your premium customer support tier. Can you speak to what some of those changes are and how do you expect that to enhance your post sales revenue opportunity with expansions and such?

[John Ernest Sicard, CEO, President & Director]

Thank you for noting that and what's -- what we're doing is we're continuing to evolve a level of support for all our customers, not just our core customers. But we are -- because we are mission-critical in a number of growing cases, we are advancing the level of premier support for our customers. And yes, as you noted, that is an additional revenue opportunity and it's just as you would expect in an industry. This is more of a direct touch dedicated to people of higher level of response above that, which quite frankly, is already very high. But it is a growing area and something that will -- we anticipate will extend in the future and is part of the confidence of our revenue growth.

[Richard George Monkman]

Yes, in fact, I'll add. I didn't mention Mike Mauger, who is heading up our global customer support, who has extensive experience running large-scale global operations for support. And again, using the terms, repeatable rigor, we are looking at -- we're always looking at investing in new ways to provide high degree of support and care for customers regardless of where they are. RapidResponse, once deployed, is seen by our customers as part of their business fabric. It is mission-critical. And under those circumstances, the degree of repeatable care, as you scale, becomes vital. And so what you're seeing is the influence of a guy like Mike Mauger applying it to that function.

[Operator]

And there are no further questions at this time. I will now turn the call back over to Rick Wadsworth for closing comments.

[Rick Wadsworth, Vice President Investor Relations]

Thanks, operator and thank you, everyone, for participating on our call today. We appreciate your questions as always, and your ongoing interest in support of Kinaxis. We look forward to speaking to you again next time when we report our Q4 results. Bye for now.

[Operator]

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