Kinaxis Inc

TSX:KXS

Earnings Call Transcript 2019-Q4

[Operator]

Good morning, ladies and gentlemen. Welcome to the Kinaxis Inc. Fiscal 2019 Fourth Quarter Conference Call. [Operator Instructions] I'd like to remind everyone that this call is being recorded today, Wednesday, February 26, 2020. I will now turn the call over to Rick Wadsworth, Vice President of Investor Relations at Kinaxis. Please go ahead, Mr. Wadsworth.

[Rick Wadsworth, Vice President Investor Relations]

Thanks, operator. Good morning, and welcome to Kinaxis' earnings call. Today, we will be discussing our fourth quarter results, which we issued after close of markets yesterday. With me on the call are John Sicard, our President and Chief Executive Officer; and 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, February 26, 2020, and contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in the earnings press release as well as in our SEDAR filings. During this call, we will discuss IFRS results and non-IFRS financial measures. A reconciliation between IFRS results and non-IFRS financial measures is available in our earnings press release and in our MD&A, both of which can be found in the Investor Relations section of our website, kinaxis.com, and on SEDAR. Participants are advised 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 and year as well as recent business development, followed by Richard, who will review our financial results and outlook. Finally, John will make some closing remarks before opening up the line for more questions. I'll turn the call over to John.

[John Ernest Sicard, CEO, President & Director]

Good morning, and thank you for joining us today. I'm pleased to report that our fourth quarter results were very strong across the board, including SaaS revenue growth of 26% to $32 million; total revenue growth of 47% to $56.3 million; and adjusted EBITDA of 32% of revenue. As a result, we met or beat our annual guidance for all of these important metrics. Key accomplishments included growing full year SaaS revenue by 22% to $119 million and achieving an adjusted EBITDA margin of 30% for fiscal 2019. These results were driven by a record number of new customer additions, including the recently announced wins at Lundbeck, a leading European pharmaceuticals company; Dr. Reddy's Laboratories, another leading pharma company and our first customer in India. Our success this past quarter is, in large part, the direct result of investments to significantly expand our sales and marketing teams across 2018 and throughout 2019. Given the strength of our markets, we will continue to increase these investments through 2020. While new customer wins are critical, our land-and-expand strategy is also focused on extending and expanding our relationships with existing accounts. Last year, we continued this strategy through renewals with several major existing customers, including Unilever, Schneider Electric and Merck. To support our renewal and expansion efforts, and as previously communicated, we have built a dedicated sales team that is solely focused on serving the needs of our installed base. Our success in 2019 was also increasingly driven by our relationships with partners who not only influenced a significant majority of our new wins for the year but continued taking ever-increasing roles in our deployments. We now work with approximately 25 partners globally. Recently, we have announced relationships with Syncronic in Denmark, ABeam Consulting in Japan and bluecrux in Belgium. Developing key partners around the globe continues to be a long-term strategic investment that involves education, training and joint commitment on the sales and services side. We believe that our global alliances strategy is instrumental to scaling the business, and we will continue our investments to strengthen these relationships through 2020. Growth in our customer base and our alliance partners also needs to be supported by growth in our own internal customer care and professional services capabilities. I'm very pleased to announce that we have recently acquired a long-time business partner, Prana Consulting. Prana is an India-based RapidResponse consultancy with over 70 professionals, including a team in California. Over the past 15 years, they have supported and continue to support many successful customer deployments, now will be instrumental in providing us the necessary scale in delivering services and customer care for our ever-growing customer base in Europe and Asia. We ended the year with an outstanding backlog of committed subscription business. Our multi-year SaaS revenue backlog was up by 40% from just 1 year ago, which will help underpin our growth for 2020 and beyond. Our strategic investments are clearly paying off, and we see market conditions that are continuing to strengthen. As a result, we anticipate SaaS revenue growth in the 23% to 25% range for fiscal 2020 and foresee an ability to sustain this higher rate in the midterm. Let me share with you some of the reasons why we feel the market and our position in it is strengthening. First, events that are wildly disrupting supply chains globally continue to shine a light on the need for concurrent planning. From tariffs, Brexit to the recent coronavirus crisis, the need for planning in real-time has never been more evident. We have seen opportunities emerge from some of these disruptions. Secondly, our market, just like the investment community, has never been more focused on the issue of sustainability. RapidResponse is core to the elimination of all kinds of waste in the supply chain, and customers and prospects are keen to understand the ways we can help them plan for less waste. Third, Kinaxis is laser-focused on innovation and we are hearing feedback that we're outpacing key competitors in that regard. Lastly, and perhaps most broadly, there is increasing acceptance that supply chains need to go through a digital transformation. As testament to that, in November 2019, Gartner held their first ever dedicated Supply Chain Planning Summit, targeted at the planning leadership team, which is the main audience for our unique digitally integrated concurrent planning approach.As a result of all these themes and our past strategic investments, we are seeing interest from our core vertical markets and geographies where we now have dedicated presence. Prospects in new countries within Europe and Asia are starting to show up as potential opportunities. Remember that sales cycles are long, approximately 18 months, so opportunities can take a while to come to fruition, but it is this reason for optimism. The time is right to continue to accelerate our investment in people and capabilities on a global basis and across all functions of the business. With that, I'll turn the call over to Richard to provide further commentary on this outlook and the financials for the quarter.

[Richard George Monkman]

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. On a comparative basis, total revenue in the fourth quarter increased 47% to $56.3 million driven primarily by SaaS revenue, which grew 26% to $32 million and by the growth in subscription term license revenue. SaaS revenue growth results from contracts secured with new customers as well as the expansion of existing customer subscriptions. Consistent with our guidance, we recorded $12.1 million of subscription term license revenue in Q4. This was approximately 5x the Q4 2018 level. As we have previously noted, subscription term license revenue varies significantly quarter-to-quarter and year-to-year simply as a result of the timing of the individual underlying renewal date for subscriptions hosted by our customers on their site. Our customer-hosted subscription agreements are generally 3-year commitments that follow our renewal cycle, whereby 2019 was at the peak and 2018 below. Given our current customer base, we expect this 3-year pattern to continue with the next peak anticipated in 2022. Professional services revenue grew by 20% to $8.9 million compared to Q4 2018. Professional services revenue is driven by a number of factors, including the number, size and timing of customer projects underway as well as the level of deployment support being assumed by our partners. Overall, we remain pleased with the diversity and strength in our revenue base. For the year, our 10 largest customers accounted for 32% of our total revenues with no individual customer accounting for greater than 10% of total revenues. Gross profit grew 60% to $41.4 million or 74% of revenue compared to 68% of revenue in Q4 2018. This increase results from the growth in SaaS and subscription term license revenue, partially offset by an increase in cost of revenue. Profit grew by 168% during the quarter to $7.8 million or $0.29 per diluted share compared to $0.11 per share in Q4 2018. Adjusted EBITDA for the fourth quarter grew 102% to $18.1 million or 32% of revenue compared to 23% in Q4 of 2018. These results were due to an increase in revenue and gross profit partially offset by an increase in operating expenses, including investments to support our long-term strategic growth initiatives. Q4 cash from operating activities was up 21% to $8 million largely due to higher profit, excluding noncash items, partially offset by fluctuations in operating assets and liabilities, including a larger increase in trade and other receivables compared to the same period in 2018. As of December 31, 2019, cash, cash equivalents and short-term investments totaled $212.6 million, an increase of $31.1 million from $181.5 million as at December 31, 2018. Full year '29 (sic) [ 2019 ] results included total revenue of $191.5 million, up 27% from 2018; SaaS revenue of $118.9 million, up 22%; subscription term license revenue of $26.2 million, up 164%; adjusted EBITDA margin of 30% compared to 28% in 2018. Our minimum contracted revenue backlog has strengthened considerably as noted by John. As of December 31, 2019, it was $339.4 million, as detailed in Note 13 to our financials. This amount includes $310.6 million of SaaS revenue backlog. The backlog will be recognized over the following periods: $137.8 million will be recognized in 2020, of which $122.1 million relates to SaaS business; $100.1 million will be recognized in 2021, of which $91.8 million relates to SaaS business; and $101.6 million will be recognized in fiscal 2022 and thereafter, of which $96.7 million relates to SaaS business. Total bookings in Q4 were $97.1 million, of which SaaS bookings were $95.7 million. We are very pleased with this continued strong performance driven by several new customer wins and significant customer renewal activity. As you know, given the nature of our large enterprise sales model, bookings will vary between periods depending in part upon the timing of new customer wins and customer renewal schedules. Based on this backlog, strengthening market conditions and our own expanded capabilities, we are pleased to initiate guidance for fiscal 2020. We expect that total revenues will be in the $211 million to $215 million range. As to the key components of total revenue, we expect SaaS revenue to grow approximately 23% to 25% above fiscal '29 (sic) [ 2019 ] Levels. We expect professional services revenue due to both organic business growth and our Prana acquisition to grow in the 20% range. We further expect that our partners will continue to expand their deployment activity with Kinaxis. As communicated last year, for 2020, we expect subscription term license revenue will be approximately half the level of 2019 or in the $12 million to $14 million range. Regarding the timing of this revenue within 2020, we expect approximately 1/3 will be recognized in Q1 and approximately 40% in Q2. Again, the anticipated fluctuation in this revenue is simply a result of the timing of the individual customer-hosted renewals, which follow a 3-year cycle. We expect maintenance support revenues to be relatively stable and in line with the level of 2019 or in the $12 million to $13 million range. This revenue is almost entirely related to the residual portion of our customer-hosted subscriptions. And because it relates to ongoing support, it is recognized ratably over the full customer subscription term. Regarding our investments for 2020, as John mentioned, we continue to be encouraged by a number of factors, including significant backlog, greater capabilities of our expanded global team and general market conditions. Consequently, we are expanding our investments globally in a number of areas and expect the following ranges expressed as a percent of revenue for fiscal 2020. Cost of revenue representing professional services, data center and support operations to be in the 29% to 31%, which would support a gross margin between 69% and 71%. Sales and marketing expenses will be between 27% and 29%. Research and development expense will be in the range of 19% to 21%. And G&A will be in the range of 13% to 15%. Finally, we anticipate acquiring $14 million to $16 million of capital assets, largely reflecting expansion investments in our data centers to reflect the needs of our ever-growing customer base as well as our expanded R&D team. Roughly 3/4 of this amount will be invested in the first half of the year. Based on the above revenue growth and investments, we expect adjusted EBITDA for fiscal 2020 to be between 20% and 23% of revenue. This guidance reflects 2 key factors: first, the lower subscription term license revenue, which has a dollar-for-dollar impact on adjusted EBITDA and accounts for roughly $13 million of the expected change; second, the level of additional business investments for 2020, which are focused on product innovation and sales and marketing. As John noted, we anticipate that we can sustain our SaaS revenue growth in the 23% to 25% range over the medium term. Further, while we will continue to invest in growth, we anticipate the total OpEx growth rate will be lower after 2020. Consequently, we expect adjusted EBITDA margin will return to levels similar to 2019 and fiscal 2022, once we reach the anticipated peak of our 3-year subscription renewal license cycle. To help you understand the accounting for our subscription term licenses, we have posted a hypothetical example of IFRS 15 revenue reporting for a customer-hosted subscription agreement in the financial sections of our IR pages of our web page. As always, we will continue to assess our business and market conditions, and we'll update our outlook as appropriate. Thank you for your continued support of Kinaxis. With that, I turn the call back over to John.

[John Ernest Sicard, CEO, President & Director]

Thank you, Richard. I'm pleased with our meaningful progress in 2019, and I'm confident in our ability to accelerate SaaS revenue for 2020 and sustain that rate over the midterm, all while maintaining healthy profitability. Our strategy to get there is largely the same as what has brought us to such outstanding success to date. We are going to put innovation first through our own work and in collaboration with our alliance partners. We believe we have the best solution available in the market today, but we are relentlessly working to prepare for tomorrow's needs. We're going to drive customer excellence by maximizing ongoing value throughout our customer relationships. We believe this will create opportunities for increased retention and expansion. We are going to evolve our amazing culture globally. The sense of pride that exists in our company today and our corporate goals will extend everywhere we have people as we continue to attract and retain world-class talent globally. Lastly, we will diversify our growth strategies. Entering new markets and tackling new use cases has been a cornerstone for our growth to date, and we will continue to actively investigate ways to augment our revenue streams. Before closing for questions. I would like to extend a warm welcome to Betsy Rafael, who was appointed to our Board of Directors yesterday. Betsy has over 30 years of executive financial experience in the technology industry, including senior roles at Apple, Cisco and Silicon Graphics, to name a few. She currently sits on the Board of Autodesk where Betsy is the Audit Committee Chair, and has also been a director of several other innovative technology companies. We are thrilled to have her experience and pedigree added to our team. On behalf of Kinaxis, I would like to thank you for your support and, as always, for taking the time to join us on this call. With that, I'll turn the line over to the operator for Q&A.

[Operator]

[Operator Instructions] The first question comes from Richard Tse with National Bank.

[Richard Tse, MD & Technology Analyst]

Yes. Given your backlog here, which is incredibly strong, it looks like you guys are being quite conservative here with the guidance. Is that a fair characterization?

[Richard George Monkman]

Well, thank you, Richard. I think you're referring to sort of our general practice when we provide guidance of having approximately 80% of that 12-month forward view in our subscription backlog. And based upon that midpoint of the guidance, yes, that sort of calculates to sort of the -- about 82%, 84%. So it is a little bit above. But I like to say, it's in the 80% range. And so given market conditions, given where we are in the year, just given the nature of the enterprise sales and the timing, we feel this guidance is appropriate.

[Richard Tse, MD & Technology Analyst]

Okay. And John, you talked about a number of reasons why some of the prospects are looking at RapidResponse. Could you maybe give us some examples of how RapidResponse has helped some of those customers against this current virus outbreak?

[John Ernest Sicard, CEO, President & Director]

Yes. So much of it has to do with, what I'll say, material movement and sourcing scarce raw materials. And while Kinaxis isn't currently doing business in China, we certainly have customers that have significant operations in China. And under conditions like this, like we saw under the disruptions of tariffs, our customers are looking to run frequent simulations and course corrections based on understanding where they will have supply risk. And so that's where we're predominantly seeing the interest and the activity. And as I stated earlier, any disruption, quite frankly, in supply chain, the velocity of disruption in supply chain calls for frequent concurrent end-to-end concurrent planning in real time in order to navigate conditions that our customers find themselves in.

[Richard Tse, MD & Technology Analyst]

Okay. Great. And just one last one for me. You guys had a strong professional service this quarter and then now you're acquiring one of your former partners. It kind of seems a little bit inconsistent with your former strategy to sort of offload some of that service revenue to your partners. So why are you making that move today? Is it that you're so busy you're doing a lot of evaluations that you need that extra manpower?

[John Ernest Sicard, CEO, President & Director]

Yes. Well, that's exactly it. It's good -- it was good timing for both parties. Our success in Europe and Asia is driving the need to scale up customer care and services at a rapid pace. And so we see -- we've been working with Prana for the last 15 years. We know them well. Their practice has been entirely focused on RapidResponse. And so in essence, we are procuring instant scale. And again, in light of our growing business in Europe and Asia and them being largely located in India, it made a lot of sense in preparing for 2020 and beyond. The other thing I will tell you is based on the skill set that we see in Prana, we see a broader use, if you will, of that function. So I don't look at it as buying a professional services arm so much as I say -- I see it as buying 70 individuals with significant experience in Kinaxis and RapidResponse that can be used at a much broader level, which -- so again, in the earlier mentioned, the notion of customer care and support being one of those functions.

[Operator]

Next question comes from Thanos Moschopoulos with BMO Capital.

[Thanos Moschopoulos, VP & Analyst]

John, on the topic of the virus. I mean, as you mentioned, I'm sure it clearly highlights the need for software like yours. But on the flip side, if customers are too busy putting out fires, might that delay some sales cycles in the short term? And have you seen any instances of that or not yet?

[John Ernest Sicard, CEO, President & Director]

Well, certainly, as we see these kind of macro level disruptions that I've mentioned to others, whether it's Brexit or tariffs or so on, yes, that can sometimes disrupt sales cycles as people turn to absorb that particular disruption. We have not seen that in our current sales cycles today, but certainly, it's possible. We've certainly taken that into consideration as part of our guidance. But again, based on the activity that we're seeing in the field, which is augmented, quite frankly, we have not seen that negative effect.

[Thanos Moschopoulos, VP & Analyst]

Great. And then just on the overall demand environment, I was struck by Genpact's recent commentary. They said that they've seen a threefold increase in their supply chain management pipeline over the past year, and I believe they're your largest partner or among the largest partners. You might not be prepared to share any quantitative metrics in the pipeline, but just broadly speaking, is that consistent with what you're seeing?

[John Ernest Sicard, CEO, President & Director]

Well, we're certainly really happy with both the size of the pipeline and, equally, if not more so, the quality of the pipeline and the activity that we're seeing in comparison to the same time last year, quite frankly. And we've been telegraphing this, obviously, that we are investing heavily in sales and marketing. With the team, our sales engine has more than doubled since January of 2019, and it will continue to grow. That is a direct reflection of not only the size and shape and health of the pipeline but, frankly, the activity that we're seeing in the pipeline.

[Thanos Moschopoulos, VP & Analyst]

Great. A couple for Richard. Would you be able to disclose Prana's trailing revenue?

[Richard George Monkman]

No. We haven't disclosed that.

[Thanos Moschopoulos, VP & Analyst]

Fair enough. And then, should we assume that term licenses in 2021 will be similar to 2020 levels, if I look back at the historical pattern?

[Richard George Monkman]

Yes. So what we had indicated was that they'll be at a lower level in 2021 than '20. So basically, 2021 would be in line with 2018. Again, this is assuming renewals and without expansion, sort of just at the run rate. And then again, returning to the levels of sort of the peak in 2022.

[Operator]

Next question comes from Daniel Chan with TD Securities.

[Daniel Chan, Research Analyst]

Just to ask another question on this term license. At the beginning of 2019, you had -- you said it was going to be half of -- 2020 term license is going to be half of 2019. At that time, that would have implied around $10 million to $11 million for 2020. So does your current 2020 term license guidance, which is above $10 million to $11 million, does that include assumptions for expansions when they renew?

[Richard George Monkman]

Well, it's -- Dan, it's really just this ongoing reflection of level of activity. And so when we were forecasting that 2 years ago or sort of 1.5 years ago, it was sort of an indication where we thought 2020 was going to be, and we've just updated that based upon current conditions. So it's about -- it is at the half range, so that's why the $12 million to $14 million range. And then again, I noted a significant portion would be in this quarter.

[Daniel Chan, Research Analyst]

Okay. And then for the current quarter, if we assume term license revenue is nearly 100% EBITDA margin, that implies the rest of the business is generating EBITDA margin of about 14% this quarter, and that's down from the low 20s that we saw in Q1 to Q3. So just wondering if there are any onetime expenses this quarter, if there was some sort of seasonality that we should see in Q4 of every year.

[Richard George Monkman]

Well, there is a little bit of seasonality, just moving the subscription term license element away. There is a little bit of seasonality in that. So for instance, we hold our very large customer event connections in Q4 and some other key marketing activities, so marketing expenses tend to be higher in Q4. In Q1, often what's happening is budgets for customers are just being finalized. And so therefore, sometimes, the professional services level is a little bit lower. The impact of new payroll taxes hits a little harder in Q1 and so on. So there's some variability. That's why we tend to focus on the overall annual, and at that level, we're talking about gross -- given the 29% to 31% that we noted for the overall cost of revenue for the full year. So this includes the expansion of the data centers and so on that we also talked to in that approximately 70% gross profit line. With respect to your specific question on subscription term license, because that is really the construct where we have to allocate revenue over the 3-year terms to that right-to-use component, and yet, we're spreading our support over the 3 years, yes, the -- that notion of that day 1 component as approximately 60% on a 3-year arrangement of the full 3-year term is 100% from an accounting perspective, really, 100% margin. And so that's why you also saw the strong, strong margin in Q4 with the $12 million level of subscription term license. So as we hit those numbers, you're going to see a variability in the gross profit. But again, we take this longer-term view at a minimum on an annual basis. And what we're trying to do, Dan, is help people understand some of that variability from that accounting change. But from the business operations side, you'll see it's quite consistent in the subscription. SaaS revenue is -- it just is growing and continues to grow quarter-over-quarter, but you'll also see that those ongoing expense investments in product and sales and marketing. So we hope that provides. And our goal here today was just to help give a bit of visibility through to the dimensions of our overall P&L for 2022 so that people could see that sort of 3-year cycle and ranges, how it impacts adjusted EBITDA.

[Daniel Chan, Research Analyst]

Yes. That's, I think, helpful. And just final question for me. If I look at your SaaS backlog, it kind of dips to $91.8 million in 2021. But then you have it ramping up again at $96.7 million in 2022. So just wondering if you could help me understand why you have that kind of a backlog that kind of ramps up as you move up to [ however ] years. Do you have expansion agreements that are already booked for the next couple of years?

[Richard George Monkman]

It's actually 2022 and thereafter. So all we have -- as I was saying, on average, our subscription agreements are 3 years. So we do support customers with 5-year commitments. This is again a minimum level so that customers with expansion privileges, unless they've committed contractually to that, we don't include that in backlog. So this is the minimum contracted amount. And because some deals are greater than 3 years, we break it into thereafter. So that's our practice, is try to provide that midterm unwind, if you will, as well as the overall confidence in the total backlog.

[Operator]

Next question comes from Stephanie Price with CIBC.

[Stephanie Doris Price]

With the Dr. Reddy's contract win and the Prana acquisition announcement, can you talk a bit about India as a region for Kinaxis? And should we expect further investments in the region?

[John Ernest Sicard, CEO, President & Director]

Well, life sciences, as I've said in the past, has been probably the warmest and continues to be. And in fact, there was a moment in which they outpaced high-tech electronics, and I can tell you, it has continued to outpace high-tech electronics even today. And so as we expand our footprint in that market segment, it made a lot of sense to target some of the largest pharmaceutical companies in India. And as you know, we have very, very strong alliance partners that have a global footprint. They're in every country that matters, in manufacturing and especially in life sciences. And so it isn't uncommon to get that kind of influence from partners to help us expand in life sciences beyond sort of the target geographies that we talk about most often. Certainly, the Prana acquisition helps with customer care and support and service opportunities as well being in region and local time zones and with the language issues and such. So I wouldn't say that we are proactively targeting accounts outside of the geographies that we have traditionally talked about, North America, Europe and Asia Pacific, portions of Asia Pacific. We are nowhere near saturated in any vertical in any geography. And so we feel like that's where we will continue to target but certainly be opportunistic when we see very reasonable deals in markets where we should be winning those accounts with the assistance of the wind of our alliance partners at our backs.

[Stephanie Doris Price]

That's helpful. And then in terms of the Prana acquisition, does this signal more of a focus on M&A here? And are there other areas of the business that you would -- you are looking at building out through acquisitions?

[John Ernest Sicard, CEO, President & Director]

Yes. We've -- I mean, obviously, the current condition of the business has been the result of focus, rigor, responsible operation of the business and organic growth. And so when I think about acquisitions, I'm forever thinking about making sure we don't poison the soup with every acquisition. Every -- these are new ingredients into the organization, and frankly, we have a wonderful business continuing to grow organically. Obviously, with Prana, personally, myself, have been friends and have known Vijay for 15-plus years, and they've been working with us for quite some time. So culturally, this was an extremely natural fit and the timing was exceptionally good for us given our growth in Europe and Asia. It was just a very, very obvious thing for us to do given the conditions of the business. As it relates to the broader question of M&A, certainly, we're -- we have our ear to the ground for things that might push what I call technically accretive, things that -- opportunities for us to fill white space to support our customers and prospects beyond where we currently are. I will tell you that we do these evaluations with extreme rigor, knowing that Kinaxis, as a company, has grown and developed to be just an absolutely valuable asset as an organic growing company. So I guess that's the best way I could describe our current condition on M&A. I wouldn't call it a significant growth strategy for us. It's more -- we'll be opportunistic when we see technologies that can help us expand use cases for our customers and prospects.

[Operator]

Next question comes from Paul Treiber with RBC Capital Markets.

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

Just in regards to bookings in the quarter, could you speak to the magnitude of bookings for new customer wins as opposed to renewals?

[Richard George Monkman]

We -- so yes, the backlog reflects both the new name wins as well as renewals and related expansion for their customers. We don't break that out from a backlog perspective, but our trend from an incremental revenue perspective, about 2/3 being driven by new name wins and 1/3 by expansions has continued. We -- the sales team -- and part of the expansion of the sales team has actually been a team dedicated to just working with existing customers and expansions. So we're very pleased to see that level of activity also continue to increase but with the overall expansion that John noted to the sales, so there's -- and the activity, there's still a lot of additional capabilities now just focused on new name wins. And so those 2 just basically continue to be working in tandem, and that sort of 2/3, 1/3 is continuing.

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

Okay. And then thinking through the EBITDA margins, when you look at back at 2019, you did exceed the guidance you provided at the beginning of the year by about 600 basis points at the midpoint. I think some of that was on higher term license revenue. Can you speak to just the moving parts there? And then also when you look forward to 2020, what do you see as potential upside or downside drivers versus your guidance?

[Richard George Monkman]

Yes. So you're correct. We significantly exceeded overall guidance, especially from an adjusted EBITDA from -- especially from the initial guidance that we provided last year. At that point in time, we had anticipated a lower level of subscription term license. As it turned out, not only did we have a very, very strong absolute renewal rate but with some meaningful expansions with those same customer-hosted arrangements. And as such, the subscription term license revenue is higher. In fact, they represented about 13% of our overall total revenue. And as we talked briefly earlier in the call, that essentially implies straight down to the bottom line. So with the nature of the cycle and the revenue declining, this year, the subscription, the midpoint, the subscription term license revenue is sort of in the 6%. So you can sort of see that 13% to 6% delta, 7%, all things being equal, would flow through to the adjusted EBITDA percentage. So Paul, we're going to -- we provided you and the market with our view as to that, not only the cycle, but the level of subscription term license that we're currently anticipating. Should that change, we will continue to update you. But yes, if we do have a higher level of subscription term license or specifically expansion therein, that will have a positive impact on adjusted EBITDA.

[Operator]

Next question comes from Gus Papageorgiou with PI Financial.

[Gus Papageorgiou, Head of Research]

Congrats on a great quarter. I mean, the results are fantastic. You had really good growth and very high profitability. But if I look at your business side, I guess, the only metric that stands out as being kind of poor would be the return on equity. You're kind of high single digits to low double digits, and the key reason is because of the huge cash position. So if you look at that cash and can you talk -- you know what to do with it, can you talk about how you think about 3 things: one, perhaps being more aggressive on M&A; secondly, perhaps being more aggressive in investing in the business and sales channels; and thirdly, issuing a dividend? Because I think, given that you continue to pile up cash and it's just sitting there, now there's probably a more effective use for it.

[John Ernest Sicard, CEO, President & Director]

Well, thank you, Gus, in particular, for noting our very strong cash, and we continue with that very, very strong cash generation. And with regards to aggressively investing in the business, first off, we believe we are. I mean, we have now more than doubled our sales capacity, in fact, are well on track to extend beyond that one. We've significantly increased our marketing profile. One of our Achilles heels, as you and I have chatted previously, is being our awareness. And that is changing, and it's changing for a number of factors. One is just the marquee names that we've been able to have the privilege of working with and that association. And then the general recognition of ongoing disruption in the market and the importance of planning, so those things are positive. So we are now moving into that high 20% range of sales and marketing versus the mid percentage point. We continue to sustain a very strong investment in product, in fact, are increasing that. We're very fortunate to have a number of strong individuals. We are expanding our capability on the service side not only with our general expansion, but with the significant step-up of the Prana capabilities to provide ongoing sustained services. With regards to M&A, we are actually taking a more, I would say, thoughtful approach in that with the strength in -- the management team's strength in our product management capabilities, strength in our thought leadership, we are now aware of additional opportunities and we're going to continue to review that. So it is very much -- from a product road map perspective, is it a buy or a build. But as we've stressed before, RapidResponse is a single product, and it is -- the team is so focused on growth opportunities. We need to ensure that whatever IP that we do bring in, if it were by way of acquisition, is going to be immediately accretive, is going to be highly scalable, and quite frankly, that has been a challenge. We are continuing to pursue and review opportunities, but we're not a company where we're going to be buying -- at least at this juncture, buying a revenue stream. So it really is product-focused. And then your last question on a dividend, companies that have -- there's a number of tech companies with high growth that have strong business models that have started dividends. We're not aware of any SaaS company, though, that at certainly in our growth level that has initiated a dividend. And the consensus from our key investors at this point in time is continue to execute as you have, continue to direct your cash resources to that investment. So that's something that, at a later time, there might be some consideration. But at this time, there is no consideration on the dividend.

[Operator]

Next question comes from Deepak Kaushal with Stifel GMP.

[Deepak Kaushal, Director and Technology & Communications Analyst]

Got a couple of questions. First one on the margins. I'm trying to parse out in your guidance and your outlook, what's changing in terms of structural margin versus cyclical. It doesn't seem like the swing through the cycle and margins in the last cycle was as big as the one we're expecting going forward. Certainly, as you expand internationally, you have to add more data centers and now you're adding a dedicated sales team for existing customers. Does this structurally change your margins for the long term?

[John Ernest Sicard, CEO, President & Director]

Well, we do have significant leverage in our business model. And the -- so let me -- when you say op margin, I'm going to first sort of first -- at first, focus on the gross profit, so general gross margin, if you will. And that, yes, we are investing in data centers, and we continue to expand that. We do so for 2 reasons. One is not only to support our expanded customer requirements but also by way of showing and demonstrating our commitment to our different theaters. So that's the reason for the 2 data centers that were brought on in the last couple of years in Japan as well as in Europe and the significantly expanded capabilities in North America. We're going to continue to invest there. The other big operation -- another cost is global support, and we have consciously also pushed out global support into our theaters so that we have people, not only in the same time zone, but the same language capabilities and so on. Now these are a bit of step functions, and so there's going to be -- we anticipate higher yield over time. But it's important to make sure that we demonstrate our commitment and support to those customers. And the last component is professional services. In professional services, the capabilities tend to move in line with the underlying revenue. The other margin going down to -- and this is where sales and marketing expense would be, is down to the adjusted EBIT, if you will. And again, we've commented there how we are continuing to accelerate our investment in sales and marketing just because we feel it's so important to gain on a global basis, have enhanced capabilities to work with our expanding mix of customers. So I think you'll see over a period of time that those margins are relatively in line, but what you will see is, that from a quarter-to-quarter basis, there is some variability. I hope that helps.

[Deepak Kaushal, Director and Technology & Communications Analyst]

Yes, that helps. So when you expect to get back to normal margins in 2022, if we assume that's a 30% EBITDA margin, what would your gross margin level be at that time? Are you expecting it back at the mid-70% range or stay in the kind of that...

[Richard George Monkman]

First, I do not mean to be arrogant and -- whatsoever. But I think that 30% margin is quite exceptional and probably is not normal. I mean, what we're talking about is moving to an EBITDA range of 20% to 23%, which is still, from a peer perspective, very, very strong. And yes, you'll see over that 3-year cycle some variability on that just again, primarily as an artifact of the subscription term license revenue. But when you look at it over the 3-year cycle, it still -- continue to be very strong performance. The point I was trying to make earlier on with regards to leverage is that I think it's probably a reasonable assumption over time that our growth rate in revenue, certainly in SaaS revenue, will probably be at a higher rate than, for instance, G&A. And so you'll see that over time, that leverage manifests itself in our operating results. The -- however, we and, I would say, our investor community feel it's very important to continue our sustained focus on sales and marketing. So that is why whether it's cash or from a P&L metric perspective, we're investing heavily.

[Deepak Kaushal, Director and Technology & Communications Analyst]

Okay. And just my last question, just going back to the Prana acquisition. In terms of the need, I know you mentioned that you need to support growing customer deployments. But I mean how much of this was driven by a need for local presence? Because you only have one customer in India. And are you getting a margin pickup on services through kind of an off-shoring effect by adding the Prana team versus organically supporting services teams through Canada?

[John Ernest Sicard, CEO, President & Director]

Yes. So first, having worked with this organization for the last 15 years, I can tell you that their focus of support and services has not been India. They've established a team in India, a skill set in India, but they have supported our customers globally, including in Europe and Asia Pacific. So largely, I would say it's -- given their location and time zone, will be very helpful in supporting our business as we grow in Europe and Asia. That's predominantly where we're focused.

[Operator]

Next question comes from Robert Young with Canaccord Genuity.

[Robert Young, Director]

Is that work starting on the new building in the background there?

[John Ernest Sicard, CEO, President & Director]

Yes. We're good. We're trying to get them to stop one second.

[Robert Young, Director]

I thought the building wasn't going to be built for a while yet. So I wanted to ask you a couple of questions on the backlog, maybe continue some of Paul's question and maybe ask it a different way. The growth in the backlog in Q4, you added a lot to backlog. You only announced 2 new wins. You had 3 renewals. And so I guess the natural question there is given that you said 2/3 of the growth is driven by new logos, but it appears in Q4 that a lot of that growth was driven by the renewals versus new wins. Is that correct? Or were there wins that just weren't announced and we wouldn't have known about?

[John Ernest Sicard, CEO, President & Director]

Well, there are a number of wins that were not announced. And we work with our customers and in a number of instances, we have their support to announce. Quite frankly, what will happen is that, generally, it will take about 3 months. So an announcement that we may say in December, it very well may have been with regards to a Q3 sale. And I would say in the majority of new name wins, we're currently not making an announcement, but that will vary quarter-to-quarter. The -- with regards to the term, some of our terms are 3 years, some are 5 years. And so from a contract with minimum contract backlog, all things being equal, a 5-year deal is going to be significantly more than the 3-year. So the backlog reflects both the volume of business activity and the term. And it is a pattern of not only the new wins, but then the renewals and the expansions they're in. We're, right from day one, between a land-and-expand type of model. So what we're trying to do is provide the best view in terms of that expansion of revenue between the 2 areas. So...

[Robert Young, Director]

Okay. The second question for me would be about the funnel. John, you said that you'd see the opportunity for sustainable growth in the SaaS business. You've clearly added a lot to backlog, like I said there. And so when you look at the funnel, is the funnel -- do you see large deals in the funnel that'll support wins in the future? And I think you said that you saw a lot of the growth in Asia and Europe. And so when you look at the top of the funnel, would you say that it's growing faster than the middle of the funnel?

[John Ernest Sicard, CEO, President & Director]

Yes. So as it relates to the activity, it's not just size and location. I look at the quality as well and the actual activity and velocity, quite frankly. So we have been investing heavily in sales over the last 24 months, as mentioned, and more than doubled the sales engine since January of last year, and we're continuing to push hard on that, accelerate our investments, if you will, in that function. And it's a reflection of the activity we're seeing in the pipeline. What I can tell you is, certainly, life sciences continues to be strong. CPG continues to be strong. I see -- I don't see any challenges as it relates to concentration, whether it's concentration in market verticals or concentrations in geography. I would tell you that we've seen an acceleration in quality and health of pipeline in Europe, and that's a reflection of our investments there and our successes there. You've seen some of the names. You've seen some of the names that we've recently posted. We can't post every customer name, that's for sure, as much as we would love to, but we are definitely seeing activity in the pipeline and health of the pipeline that would drive our continued investments in both sales and marketing.

[Robert Young, Director]

Okay. And then just on that, the range that Richard provided, 27% to 29%, is a little bit higher. Is that an acceleration in sales head count or marketing spend? Or is that a function of the top line just a little lower growth because of the gap on the sub term in 2020?

[Richard George Monkman]

Yes. It's a combination of both. So it is increasing. But because it is a percentage of total revenue, and with the lower level of subscription term license, it does have a bit of an amplification impact. But it is also very much real dollar significant investment, as your model will show.

[Robert Young, Director]

Any regions to call out where that investment would fall? And then do the ranges include Prana? And then I'll just pass the line.

[Richard George Monkman]

Well, Prana is -- primarily because it is a professional support people as well as to sustain support, those costs are predominantly in the cost of revenue line. So they do not -- they're not characterized in sales and marketing. So the sales and marketing is the continued expansion of the teams globally. We significantly increased the European team. Starting 2 years ago, that has continued to grow. Asia and new areas and team has expanded as well as then just the core North American team. So it is a global expansion of the personnel. And it's not only in quota-carrying individuals, if you will, but because of the nature of the team sale, the enterprise sale and the continuing sort of 18-month sales cycle, is really the sales community. So it is in the industry professionals, it's the technical professionals that work with them and then significant expansion in our marketing capabilities as well. So those are the increased capabilities that we've invested in.

[Robert Young, Director]

Okay. And then, Prana is in the gross margin guide you gave? I'll then pass the line.

[Richard George Monkman]

Yes. It is both in the revenue range as well as in the [ COGS ].

[Operator]

Next question comes from Suthan Sukumar with Eight Capital.

[Suthan Sukumar, Principal]

You guys talked about seeing an acceleration in pipeline in Europe. Can you touch on the level of maturity and involvement you're seeing with partners in growth markets overall? Are these relationships and their contribution progressing as planned or better? Or do you see an opportunity to accelerate further?

[John Ernest Sicard, CEO, President & Director]

Yes. Certainly, Europe as a percentage of activity and opportunity for us, reflective of our investments there, a growing team, we put a data center in Amsterdam to host our European customers. Quite frankly, we're really pleased with the growth and the expansion of the pipeline and the health of the pipeline in that region. We don't generally comment on overall size as a percentage, but I will say Europe is an area we see a continued contribution in our growth for 2020 and beyond.

[Suthan Sukumar, Principal]

Okay. Great. And you guys also touched on being a focus on outpacing competition on innovation. What are you seeing broadly from an industry and competitive response to your recent product release? And what's been the partner contribution to innovation to date?

[John Ernest Sicard, CEO, President & Director]

Yes. So we continue to believe that there really isn't anyone competing with us on concurrent planning. This is what I described as the technique of solving supply chain problems, more so than the technology. This notion of end-to-end inextricably connected concurrent planning is the technique that I would say the market is realizing is superior to the legacy approach of cascaded planning. And so there is -- we're certainly seeing that in our growth. We're seeing that in the pipeline and the activity and the maturity of prospects coming to see us about concurrent planning. We continue to see SAP is the predominant incumbent. Most of our customers, the vast majority of our customers and prospects are on an SAP platform, and again, we don't compete with SAP on their "platform" or ERP system, but certainly we work in lockstep with it. And so we continue to outpace, I believe, their efforts. And as it relates to how we work with partners, well, we announced last year our investments in RapidResponse as a platform. We announced at our record-breaking Connections Conference the RapidResponse platform. We have what I would call some privileged alliance partners that are very close to us working with us in a beta program with that platform and basically building intellectual property on top of RapidResponse. We're also seeing customers, in fact, engage with us. Very sophisticated customers engage in extending RapidResponse using the platform as well. So it's early days in terms of predicting the monetization of that platform, but we're really pleased to see the uptake and interest from both partners and customers, frankly. We're seeing it from both sides.

[Operator]

We have a question from Nick Agostino with Laurentian Bank Securities.

[Nick Agostino]

I guess, 2 things. First, just going back to product innovation. I think late last year, you guys introduced the Self-Healing Supply Chain or at least brought it to the market, and you spoke about the initial customer feedback and reaction. I'm just wondering if we can get an update there as far as what the take-up is on those -- on that module and what the interest level is looking like.

[John Ernest Sicard, CEO, President & Director]

Yes, we're very excited, obviously, with our investments in machine learning and what we call automated intelligence. That team has been the fastest-growing team, quite frankly, in our R&D facility. And the notion of self-healing is very well received by senior level practitioners. They recognize supply chains as being a machine, a machine that is designed by humans, and yet the notion of self-healing is to continuously monitor that machine -- that machine's behavior in the real world. And so self-healing, the way we describe it is having that supply chain adjust and self-tune based on the conditions of the road. Think of it that way. We've expanded our capabilities in this calendar year, and so far, the beta programs are being extremely well received. It's very, very powerful. The self-healing technology runs continuously in the background, 24/7. It's continuously monitoring as demonstrated against, as designed, and predicting adjustments based on that. So we're going to continue to invest heavily, obviously, in that function, but that's not the only area of innovation. RapidResponse as a platform, as I described, is really key to our long-term growth strategy and our entry into new markets, partners being able to build their own intellectual property similar to what Force.com did for Salesforce, quite frankly, is the way I look at it. And so we're pretty excited there. We're anticipating another Connections event with some significant innovations to announce. So yes, we're pretty excited about what we're doing today and what's in the pipeline for tomorrow.

[Nick Agostino]

Okay. And then second question, just maybe going back to the Prana acquisition and the timing on it. I believe a couple of quarters ago, I think you had about 80 job openings that you guys were highlighting. When I look at your website now, I see about at least 40 on the site right now. So I'm just wondering, is this a case of you guys maybe adding positions or bodies, specifically within Europe and Asia, maybe is going a little bit slower than what you were hoping for? And so the question really is did you guys go out from a buy versus build? Did you guys go out and seek Prana as an acquisition? Or did they maybe approach you? So just trying to understand how that -- the whole deal came about.

[John Ernest Sicard, CEO, President & Director]

Yes. So again, having known Prana and their founder for many, many years, and I described this earlier on the call, the timing was really good for both parties. Our growth trajectories and need for talent, frankly, was a key element or a motivator for the acquisition. And I can't stress this enough. When we were -- when we talk about investing in the business, even overall as a company, we're expecting to see nearly 40% growth in head count year-over-year. This is across -- broadly across the business, and that is a reflection of our confidence in what is happening in the pipeline, what is happening with activity and just making sure that we're prepared for success. We certainly don't want to be one of those anecdotes where success is upon us and we're crushed by it. So we're investing across the board to make sure that we're well prepared, and again, the timing was just right for us especially as it relates to growth in those 2 regions and their location and their [ scale], the cultural fit. It was just an obvious thing to do.

[Nick Agostino]

Can we assume that you may consider similar Prana transactions in the future?

[John Ernest Sicard, CEO, President & Director]

As I mentioned on M&A, in growth -- our growth strategy is not to acquire revenue. That's not how we think. We think about organic growth, we think about filling technical white space that is accretive to our markets, accretive to the customer base we have and certainly accretive to prospects. So that's the way I would characterize our M&A strategy. We have certainly been active in looking and evaluating things. But again, I will say, we're -- we do so with extreme rigor, extreme rigor. And so that's the way I would categorize it. That's the color commentary is really things that are technically accretive, we will certainly continue to look at.

[Operator]

At this time, I will turn the call over to Mr. Wadsworth for closing remarks.

[Rick Wadsworth, Vice President Investor Relations]

Thank you, everyone, for participating on today's call. We appreciate your questions, as always, and your ongoing interest in and support of Kinaxis. We'll speak to you again when we report our Q1 results. Bye for now.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.