Kinaxis Inc

TSX:KXS

Earnings Call Analysis

Strong Q4 Performance, Positive 2024 Outlook

In Q4, professional services surged to $34.3 million, marking a 31% increase, while maintenance and support revenue climbed 12%. Gross profit grew 12% to $68.99 million with solid margins, despite transitional costs from moving to the public cloud. Free cash flow hit a record $77.1 million, significantly higher than the $6.3 million of the previous year. With an 18% growth in annual recurring revenue (ARR) to $322 million, the company projects SaaS revenue to grow 17-19% in 2024. Total revenue is expected to reach $483-$495 million, representing a 13-16% rise. Looking at margins, a 60-62% gross margin and a 16-18% adjusted EBITDA margin are projected for 2024, with normalized figures likely improving to 24-26% over the next few years.

Impressive SaaS Growth and Profitability

Kinaxis Inc. concluded its fiscal year with remarkable performance, headlined by annual SaaS growth of 24%. This growth is notable for its balance with profitability that exceeded expectations, demonstrating Kinaxis' ability to expand while maintaining strong financial health.

Sturdy Financial Metrics

The company achieved an 18% adjusted EBITDA margin for the year, with record-free cash flow surpassing $75 million, indicative of both profitability and robust liquidity. This performance, coupled with a SaaS revenue growth of 19% in Q4, ensured Kinaxis finished the year within all updated guidance targets.

Record Renewals and Revenue Performance Obligations (RPO)

Kinaxis saw vigorous renewals which, together with a strong customer acquisition performance, drove an unprecedented RPO level. Specifically, SaaS RPO experienced a remarkable 28% growth, showcasing the company's momentum and promise for sustainable income streams.

Diversification and Market Expansion Success

A key success driver was breaking records in acquiring new customers, achieving a milestone both in the final quarter and annually. This success is attributed to strategic initiatives, such as targeting mid-market customers and engaging small customers through a value-added reseller channel. This strategy contributed to over 40% of Kinaxis' new business wins, emphasizing the effectiveness of targeted growth tactics.

High Customer Retention and Competitive Win Rate

The company's gross customer retention remained elite, solidly between the 95% to 100% range, reinforcing its ability to maintain its client base. Additionally, Kinaxis achieved a robust win rate against its top three competitors, securing over 60% of the pursued deals, which speaks to the strength of its product offerings and market position.

New Product Offerings and Strategic Focus

Kinaxis continues to innovate, with new products like supply chain execution, enterprise scheduling, and AI capabilities tailored for retailers. These offerings present additional growth avenues, especially in the retail sector which is the largest potential market. A focused team drives customer wins and in-base expansion, demonstrating a strategic push to capitalize on these new opportunities.

Growth and Expansion Metrics

The company reports that 60% of additions to annual recurring revenue came from new customers, with 40% from expansion within the existing customer base. This statistic underscores Kinaxis' significant opportunity to further penetrate and maximize revenue from its growing clientele.

Sales Pipeline and Profitability Outlook

Kinaxis ended Q4 with a record fourth quarter rolling pipeline, signaling sales prospects that could propel the company forward. While aware of macroeconomic uncertainties, signals point to positive growth trends. On the profitability front, Kinaxis is strategically positioned to push toward its midterm goal of more than 25% adjusted EBITDA margin, leveraging ongoing operating advantages.

Fourth Quarter Financial Performance

The company's total revenue for the fourth quarter increased by 14% year-over-year, reaching $112 million, with SaaS revenue up 19% to $69.9 million. However, subscription term license revenue saw a decrease to $2.9 million from $9.1 million in the corresponding quarter of the previous year, reflecting the variability in renewal cycles.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning, ladies and gentlemen. Welcome to the Kinaxis Inc. Fiscal 2023 Fourth Quarter Results Conference Call. [Operator Instructions] I'd like to remind everyone that this call is being recorded today, Thursday, February 29, 2024.I will now turn the call over to Rick Wadsworth, Vice President of Investor Relations at Kinaxis, Inc. Please go ahead, Mr. Wadsworth.

[Rick Wadsworth, executive]

Thanks, operator. Good morning and welcome to the Kinaxis' earnings call. Today, we will be discussing our fourth quarter and year-end results, which we issued after closing markets yesterday. With me on the call are John Sicard, our President and Chief Executive Officer, and Blaine Fitzgerald, our Chief Financial Officer.Before we get started, I want to emphasize that some of the information discussed on this call, is based on information as of today, February 29, 2024, and contains forward-looking statements that involve risks, and uncertainty. Actual results may differ materially from those set forth in such statements. For discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in the earnings press release as well as in our SEDAR filings.During this call, we will discuss IFRS results and non-IFRS financial measures, including adjusted EBITDA. A reconciliation between adjusted EBITDA, and the corresponding IFRS, result is available in our earnings press release and our MD&A, both of which can be found on the IR section of our website, kinaxis.com, and on SEDAR+. Participants are advised that the webcast is live and is also being recorded for playback purposes. An archive of the webcast will be made available on the Investor Relations section of our website. Neither this call nor the webcast archive may be re-recorded, or otherwise reproduced, or distributed without prior written permission from Kinaxis.To begin our call, John will discuss the highlights of our quarter and year as well as recent business developments, followed by Blaine, who will review our financial results and outlook.Finally, John will make some closing statements before opening the line for questions. We have a presentation to accompany today's call, which can be downloaded from the Investor Relations homepage, or our website. We will let you know when to change slides.I'll turn the call over to John.

[John Sicard, executive]

Thank you, Rick. Good morning, everyone, and thank you for joining us today.I'll be starting with Slide 4. Let me start by saying how proud I am of the Kinaxis team. We delivered a very strong annual SaaS growth of 24%, balanced with profitability that came in above expectations. Our adjusted EBITDA margin for the full year was 18%, and we had record-free cash flow of over $75 million, more than 70% higher than ever before.In Q4, we experienced SaaS revenue growth of 19%, and adjusted EBITDA margin of 18%, which allowed us to finish the year within all our updated guidance targets. We had a huge quarter for renewals, a testament to the incredible value our customers derived, from leveraging our unique concurrency approach, to managing supply chains.As one noteworthy example, iconic consumer products' company Bosch was both a renewal in the quarter and a source of significant new ARR, thanks to expansion activity. Bosch confirmed their longer-term commitment to Kinaxis as the platform of choice for supply chain planning.Together, our net customer wins, expansion into the base, and renewals activity fueled a record RPO level, both in total and for the SaaS element alone. SaaS RPO grew 28% from the end of Q3 and its 3-year CAGR is a healthy 26%, demonstrating our exciting growth over a period of time.Now moving to Slide 5, I'm thrilled to say that we won a record number of new customers, both in Q4 and for the full year. This is an impressive accomplishment that reflects, in part, our success across some key growth strategies that I've talked about before. For example, we won a record number of mid-market customers, a growth strategy we initiated just over 3 years ago, and has now become a meaningful part of our business today, and is creating great expansion opportunities for our future.We also won a record number of small customers through our value-added reseller channel, which is just over a year old, and ramping up quickly. In all, over 40% of our new wins this year came from our mid-market, or smaller customers, including through VARs.As we've mentioned in the past, we continued our efforts to moving customers into the public cloud infrastructure, and I'm happy to report that we deployed the majority of our new customers in the public cloud through 2023. In fact, in Q3 and Q4, almost all our new customers were launched from either GCP or Microsoft Azure. Given the economic backdrop in 2023, our focus was to simply win the customer, and I'm extremely pleased we did that at a record pace.On previous calls in 2023, we talked about adding customers like ExxonMobil, Volvo, and Hobby, who is trusted by the world's largest quick service restaurants, to handle their supply chain management needs. To that impressive list, you can now add global names like performance running leader Brooks Sports, Switzerland-based global agricultural technology giant Syngenta, which has over $30 billion in sales.France-based global pharmaceutical group Servier, whose 20,000-plus employees make critical cardiology, oncology, and other drugs. Italian cosmetics leader Intercos, who provides behind-the-scenes research and innovation for some of the world's biggest makeup lines. Norma Group, who create the clamps and connectors, and systems that keep water and other vital fluids flowing smoothly for industries and for society globally.And finally, KIK Consumer Products, a leading North American private brand manufacturer, delivering top-tier national brand equivalent cleaners, bleach, laundry, and dish care products. Our gross customer retention rate remained at an elite level in 2023, solidly in the 95% to 100% range that we target.And our win rate against our top 3 competitors remained very strong, closing over 60% of the deals, we pursued against them in 2023. And none of the 3 had a winning record against us. Even with this success, I do see room for improvement as recent additions to our sales team continue, to gain tenure with Kinaxis, and as we continue to offer more value through rapid response.I'm on Slide 6. Today, we are the global leader in supply chain management, empowering businesses of all sizes to orchestrate their end-to-end supply chain network, from multi-tier strategic planning through down to the second execution at last mile delivery. New offerings that we have recently launched, like supply chain execution, enterprise scheduling, sustainable supply chain, and planning.ai, offer an additional opportunity for growth in 2024 and ahead.In January, we launched AI and ML-powered capabilities, tailored to help retailers manage the complexity, of their operations on a massive scale, including 10s of thousands of locations, countless SKUs, constant promotions, and complicated inventory variables. These innovations include a brand new replenishment planning capability for optimal restocking, as well as retail-specific enhancements to demand.ai and demand planning.The retail market is the largest of any we serve in terms of number of potential customers, and we're excited to further penetrate this under supported vertical. All these innovations will help us win new customers, and expand within our install base, where we now have a dedicated team focused on driving results.In 2023, additions to our annual recurring revenue were split roughly 60-40, between new customers and expansion with existing customers. We have a massive opportunity to penetrate this rapidly growing group further, and I am pleased to see early success from this team.On to Slide 7. I mentioned last quarter that our business development team indicated a record number of initial meetings with prospects, a stage in the funnel development prior to our pipeline. I'm pleased to say that the team hit another all-time high in Q4, helping to drive a new all-time high for our fourth quarter rolling pipeline, which has re-accelerated for the first time since early 2023. We're mindful of ongoing uncertainty in the macro environment, but we're encouraged by these green shoots of improvement.As mentioned on our last call, we have been intensifying our focus on profitability, and are in great shape to do that. In 2022 and in 2023, we made important investments in sales and other functions that put Kinaxis in a much stronger position across our business. In 2024, we will take advantage of ongoing operating leverage, to continue to march towards our midterm goal of 25% plus adjusted EBITDA.I'll now turn the call over to Blaine to review the financials for the quarter, and year and discuss our outlook in detail. I'll conclude with a few remarks after that. Blaine?

[Blaine Fitzgerald, executive]

Thank you, John, and good morning. As a reminder, unless noted otherwise, all figures reported on today's call are in U.S. dollars under IFRS.Starting on Slide 8, I'm pleased to report fourth quarter results that delivered on our performance goals for the year. Total revenue in the fourth quarter was up 14% to $112 million, which is affected by the normal subscription term license revenue cycle. Our SaaS revenue grew 19% to $69.9 million, and our subscription term license revenue was $2.9 million, versus $9.1 million in Q4 of 2022.Subscription term licenses largely hold the normal cadence of renewals, among our small group of on-premise customers, or those that have the option to move their deployments on-premise. Professional services activity resulted in $34.3 million in revenue for 31% growth over Q4, 2022, a reflection of the record number of customer wins in the quarter and year. We remain focused on being partner first when it comes to delivering professional services, but obviously, we're very pleased with this result. Maintenance and support revenue for this quarter was $4.9 million, up 12%.Fourth quarter gross profit increased 12% to $68.99. Gross margin in the quarter was 62%, the same as the comparative period. Software gross margin was 76%, compared to 80% in the comparative period, reflecting both the lower subscription term license level, and the duplicative costs related, to our public cloud transition. Shortly, I'll talk about the normalized results that adjust for these two factors. Professional services gross margin was extremely strong at 29%, compared to 13% in Q4, 2022, due to our favorable pricing environment and ongoing efficiencies in delivering projects.Adjusted EBITDA was $19.7 million for an 18% margin, compared to 21% in the fourth quarter last year. Our profit in the quarter was $4 million, or $0.14 per diluted share compared to $0.30 in Q4 last year. Again, these results were affected by the two factors I just mentioned.Cash flow from operating activities, was $28 million, compared to negative $2.3 million in Q4, 2022. Cash, cash equivalents, and short-term investments grew to $293 million from 225.8 million at the end of 2022, and even up from $290 million last quarter, despite significant investments in a share buyback, which I'll discuss momentarily.Our record free cash flow for the year was $77.1 million, up from $6.3 million in 2022, and more than 70%, or $30 million higher than in any previous year. The free cash flow margin was just over 18%, and slightly higher than our adjusted EBITDA margin in 2023.Our goal is to deliver a trailing 12-month free cash flow margin that more closely mirrors, our adjusted EBITDA margin. So we are pleased with this progress. We remain highly focused on being a strongly cash-generative business.On Slide 9, our annual recurring revenue, or ARR, grew to $322 million, an increase of $18 million over Q3, which is over 60% higher than additions in any other quarter this year. Year-over-year, the ARR balance grew by 18%, which was less than its full potential given cost of spending in the uncertain macro environment throughout 2023, as we've discussed throughout the year.Significantly, roughly 60% of our annual growth in ARR came from new customers. Many software and supply chain peers rely much more on upsell activity for growth than we currently do, and that's a huge opportunity for us to hit.Moving to Slide 10, at quarter end, our total remaining performance obligations, or RBO, left 25% over the Q3 balance to a record $741 million, and gained 24% from the year-ago period. Of the RPO in total, $701 million relates to SaaS business, up 28% sequentially, and 27% year-over-year. The 3-year CAGR for our total RPO is 25%, and 26% for our SaaS RPO. I encourage you to focus on these excellent longer-term results, as quarterly results fluctuate significantly with normal renewal cycles.Our fourth quarter, was characterized by both strong ARR additions, as well as very strong renewals. Of the year-end SaaS RPO amount, $274 million converts to revenue in 2024, representing roughly 88% coverage of our full year SaaS guidance at the midpoint. Further details on our RPO can be found in the revenue note to our financials. I will leave it to you to review our full year 2023 results in greater detail, but let me just reiterate what John said about our very strong performance.Our SaaS growth of 24% is a standout result in an unusual year, and even after making important investments, we delivered an adjusted EBITDA margin of 18%, or 4 percentage points above the midpoint of our initial guidance for the year. We also achieved record-free cash flow in the year, won a record number of new customers with a 60% plus win rate against key competitors, and maintained 95% to 100% growth in customer retention. I'd like to thank the whole Kinaxis team for such exceptional results.As we move to Slide 11, we are initiating our 2024 guidance. By far the biggest determinant of annual SaaS growth is the ARR growth rate and turn of the year. As you know, we publish ARR precisely to give you a good leading indicator of our future SaaS growth trend. For example, we ended 2022 with 24% ARR growth and grew SaaS revenue 24% in 2023.Of course, the relationship is not always one-to-one like this, but ARR growth and its directional momentum is by far the most important factor. We expect that the connection between these 2 metrics will only become tighter as SaaS businesses ever-increasing portion of ARR. We exited 2023 with 18% ARR growth, and accordingly expect SaaS revenue growth of 17% to 19% in 2024.As John pointed out, we are seeing some encouraging green shoots, of improvement in the environment, and this could start to benefit ARR growth in 2024. We expect total revenue of $483 million to $495 million, or 13% to 16% growth. This reflects 2024 as the lowest part of our normal subscription term license revenue cycle, for which we expect $9 million to $11 million in the year. Roughly 60% of the amount expected in Q1, 10% in Q2, and the remainder split, relatively evenly over the back half of the year.Looking further ahead, subscription term licenses should roughly double from 2024 to 2025, and then increase approximately another third from there in 2026. We expect a gross margin of 60% to 62%, and an adjusted EBITDA margin of 16% to 18%. Both margin results are affected by the normal low point of the cycle, for subscription term license revenue, which carries near 100% margin, and the duplicative costs related to our public cloud transition.With respect to CapEx in 2024, we expect to invest approximately $10 million to $11 million, including approximately $8 million for a private hosting infrastructure. We would expect to invest significantly less in our data centers in 2025 as we continue to work towards a public cloud-first model.Moving to Slide 12, as we discussed last call, we've been gaining operating leverage and intensifying our focus on profitability. As you can see, that trend continued throughout 2023, as operating expenses continue to decline as a percentage of normalized revenue. Normalized revenue averages our subscription term license revenue, over a rolling 4-year period to approximate related contract terms.In 2024, we expect this trend to continue directionally. Our investment allocation will shift somewhat as we absorb previous investments in our sales force and focus new investment into exciting R&D initiatives, including AI. I'll now take a few minutes to walk through the impact on 2023 results and 2024 guidance of the normal subscription term license revenue cycle and our public cloud transition.Turning to Slide 13, as you know, due to accounting rules, our reported subscription term license revenue is highly variable, between periods despite a very stable underlying business. Averaging that revenue over a 4-year rolling time frame, as I described a moment ago, provides a better view of normalized software gross margin and adjusted EBITDA margin.Our use of public cloud started modestly in 2022, accelerated in 2023, and will continue to expand rapidly throughout 2024 and 2025, to become our default hosting choice, with a small amount of private hosting remaining. In the meantime, we are incurring certain public cloud migration costs and significant, duplicative costs of supporting 2 infrastructures including public hosting fees that, aren't added back to EBITDA, through depreciation, as the servers in our private cloud are the analysis on this slide estimates an apples-to-apples view that allows you to better compare our margin achievements with past performance. On this basis, for 2023, normalized adjusted EBITDA was 21.5%, and you can see the separate term license and public cloud transition impact. Our normalized software gross margin for 2023 was 77.8%.For 2024, we expect our normalized adjusted EBITDA margin guidance would be 24% to 26%, including a normalized software gross margin of 78% to 80%. In short, both our software gross margin and adjusted EBITDA, are moving in the right direction on this apples-to-apples basis. We are confident that in the next 1 to 3 years under our public cloud-first model, we will achieve our midterm adjusted EBITDA margin target of 25% plus. This target is based on normalized revenue to remove the year-to-year volatility of subscription term licenses.On slide 14, since our Q3 results call, we have been very active on our normal course issuer bid, which allows us to purchase up to 5% of our stock, or approximately 1.4 million shares. During the 3 months ended December 31, 2023, we repurchased approximately 329,000 shares, for a total investment of roughly $36.6 million. We are pleased with these investments.As I reflect on my 4-year anniversary at Kinaxis, I am extremely proud to be able to say that our customer base, revenue, free cash flow, RPO, and pipeline have all more than doubled over that time. And it feels like -- that we're only getting started. Our market is in early stages and in excellent shape. We have an excellent competitive win rate and elite customer retention rate.We are addressing companies of all sizes, and more verticals than ever, with more products than ever to sell. These are the fuels of our long-term growth engine, and we are fully focused on re-accelerating growth as we move forward, even as we improve profitability. The last 4 years have been fun, but I can't wait to see what happens over the next 4. I am looking forward to kicking it off in 2024.With that, I will turn the call back to John.

[John Sicard, executive]

Thank you, Blaine.Moving to Slide 15, as you will remember, in 2023, Kinaxis was recognized by Gartner in the very top right corner of their Magic Quadrant, positioned furthest in completeness of vision, and perhaps even more importantly for our customers and prospects, highest in our ability to execute. We were the first and only vendor to ever achieve that distinction. It was the ninth consecutive time, we were named a leader in the Magic Quadrant, and it goes a long way to explaining the strong win rates and retention rates I mentioned earlier.On Slide 16, while we are clearly an established leader, it is also true that our opportunity is just beginning. We have more than doubled our customer base in just the past 3 years, with 2023 being the biggest contributor yet. Today, we serve companies that help keep more than 100 billion teeth clean each year, ensure more than 35 million pets are fed nutritious meals each year, we help caffeinate over 85% of Canadians through quick-serve coffee, we help supply 75% of all tofu products to the U.S., we help support historic human journeys into space, and so much more.The market for supply chain management, is in excellent shape, and I believe its renaissance will continue for many years to come. Efficient and resilient supply chains require concurrency of the foundation, and as reflected through our many new patents, our advancements in applying artificial intelligence, machine learning, and generative AI to that foundation is the path to what I believe, will be the new gold standard.More importantly, this new gold standard will be accessible to all manufacturers, from small size to enterprise, and eventually for all market verticals. Our TAM is growing, and we are working hard, to serve every last opportunity that presents itself. Thank you for your ongoing interest in Kinaxis.I'll turn the line over to the operator for Q&A.

[Operator]

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

[Daniel Chan, analyst]

Really good booking for this quarter, but as you highlighted in the prepared remarks, it also implies that the SaaS RPO is 88% of the 2024 SaaS guide. I guess that implies a lower proportion of deals, are expected to close in 2024 than historically. I guess, we would have expected more deals closing as the pipeline matures. You talked about the sales team, moving up the learning curve this year, and I believe you revised your sales cycle, to 12 months in the filings, down from 18 months. So how do we reconcile the implied lower deal closings when these dynamics would suggest otherwise?

[Blaine Fitzgerald, executive]

And good question. Obviously, you're referring to the fact that we have committed RPO for SaaS at around 88% number, against what we're guiding to right now. SaaS here is about 86%. And we obviously, don't include the termination clauses, so any options there for termination clause, or any renewals that are in that number that may can come in as well.So, we don't think that there should be a slowdown in 2024. We do think that they'll continue to accelerate. We see a lot of opportunities. Our pipeline, as we mentioned, is at an all-time high. So right now, it's just a matter of us executing the way that we know how to in 2024.

[Daniel Chan, analyst]

Okay. Thanks. Maybe some more details on the geographic, on the different geographies as well. If we look to APAC, revenue declined by 17% in Q4. I think it was also down 18% in Q3. U.S. growth seemed to slow to 6%. Are these due to one-time revenues in the comparable periods, or was there any change in customer churn? Any color would be appreciated?

[Blaine Fitzgerald, executive]

Overall, I think every year, we have different areas that grow faster and slower versus other areas. I think that the main thing that we've seen is EMEA did extremely well in 2023. It is probably one of our strongest years that we've ever seen with EMEA. North America, I think, was a solid year.It's our largest region by far. And so, we don't see as much variance from that area. In APAC, we're continuing to grow our presence there. We have a new leader, which we are very excited about, and the opportunity that we have in front of us right now.

[Operator]

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

[Thanos Moschopoulos, analyst]

Just given that mid-market has been ramping and the reseller channel has been ramping, I guess the implication is that enterprise growth has been subdued. So if you could expand on that, I guess some of its macro and, as you're alluding to, maybe better environment. But, I mean, are expansions from existing customers unfolding at the pace you'd expect in terms of new initial wins? Are sales cycles starting to look better? Are they getting worse? Just any color on the enterprise dynamic would be helpful?

[John Sicard, executive]

Yes, so in 2023, I'd say the enterprise customer wins were roughly identical, I'd say, to sort of small to medium size. So certainly, as we saw an uptick in small to medium size, as it relates to our work with VARs. The enterprise market is still a massive opportunity for us. We mentioned before ExxonMobil, Hobby, Volvo in the past. We had the biggest deal, was an enterprise account expansion in Q4. And that was the biggest that we had for the year. So it's still extremely healthy.On the energy sector, when we talk about ExxonMobil. I want to say we have 3, maybe 4 of the top 5 in the world. So we're just getting started there. And these are companies that turn over roughly $400 billion in revenue. So they've got quite complex supply chain. And so, we're not slowing down there by any stretch. So I don't, to answer your question, Thanos, I wouldn't say there's anything peculiar about enterprise in the market today.

[Blaine Fitzgerald, executive]

Maybe I'll add into this like. We have obviously 2 segments that we look at enterprise. There's enterprise and there's what we consider large enterprise. And year-over-year, we have seen the large enterprise slowdown, compared to what we saw in 2022. And that was particularly, because of the sales cycle we have attached to those particular size of companies.As you mentioned -- well as the mid-market is on fire right now and it grew extremely well year-over-year. Enterprise grew year-over-year. But large enterprise, those really, really big guys, it's taken a lot longer getting over the line on some of the deals.

[Thanos Moschopoulos, analyst]

So just to clarify, if you look at maybe the discrepancy between the growth you're guiding for SaaS revenue this year versus what you've done historically and versus your 30% long-term aspiration, would it be primarily that very large enterprise that would be the main factor? And then just directionally, has that gotten any better or worse in recent weeks?

[Blaine Fitzgerald, executive]

Yes. So overall, we're going to have a different mix than we anticipated to get through we are. We need our mid-market. We need our SMB to grow faster than enterprise, and large enterprise just, because of the nature of how many customers we have or the customer profiles we have right now for those size of customers. But as large enterprise, we expect it to keep coming. They're still in our pipeline. It's just a matter of they've been sitting in our pipeline longer than we had seen in 2022.

[Operator]

Your next question comes from the line of Doug Taylor with Canaccord Genuity.

[Doug Taylor, analyst]

I appreciate the detail you provided on Slide 13, with respect to the normalization of your costs. Blaine, a couple questions here on the public cloud transition. I believe last time you said you were ahead of schedule. Can you update us on the status of the migration, and perhaps speak to when, if at all, over the course of this year, you're going to see -- we're going to see the pressure from those duplicative costs start abating, if at all?

[Blaine Fitzgerald, executive]

Yes. Good question. So overall, I think we're on track. Indeed, you're right. I would say in Q2, we got a little bit ahead of our skis, and we're migrating faster than even, what we would plan and what we wanted. Obviously, there's an optimal time to do the transition, and to do the migration. So that we can offload, some of our costs at the right time that, come from the private cloud.And then, also turn it up on the public cloud side. But there's also the optimization that you have from the cost that you have with either GCP, or Azure that we are going through, obviously, a process of decreasing that unit cost, and the unit economics over time. What we've done is, we've actually looked at it region-by-region and we have the first region that is, which should be 100% migrated over will happen in 2024.And that will be probably the APAC region. From there, we're obviously looking at EMEA and North America to come online as well. But what we're trying to do as much as possible is make sure the economics make sense for this migration, so that we can obviously reduce the duplicative costs. But also make sure that we do that in an optimized fashion.

[Doug Taylor, analyst]

Okay. So in that, are you saying then that even with the 6% public cloud normalization that we see here for fiscal '24, that is inclusive of some relief -- to some degree by the end of the year?

[Blaine Fitzgerald, executive]

Yes, there should be some relief. Some of the one-time migration costs that, we're seeing right now will be alleviated, I think, by the end of this year. There will be all the APAC duplicative costs that, will be removed. And it doesn't mean, we're not still migrating North America and EMEA.We're just not doing 100% of it at this stage. Part of the reason, we're doing that, is because of technical capabilities, and part of the reason is, because of cost effectiveness. But by the end of this year, we should see some reduction in that duplicative cost segment.

[Doug Taylor, analyst]

Okay. And let me just ask a question on the professional services organization. 2 parts. 1, you once again had a pretty impressive margin result there, almost 30%. I think you referred to it as extremely strong. So I'll reiterate the question as to the sustainability of those kinds of, levels in the near and medium term. And then the second part, I think from your guidance here, would suggest ongoing growth of your professional services kind of, in line with the SaaS revenue growth for this year. I just want to gauge your ability and willingness to continue, to expand at that same pace here, in the coming years?

[Blaine Fitzgerald, executive]

Yes. Again, a good point. We are trying to move more and more towards partner first. I think we've been saying it for the last number of years we're trying to. I would say that we've got some exciting developments on some of the partner side that I think will help accelerate this over the next year.Things that we can't talk about at this stage, but we do believe there is a path forward, to start to reduce the amount of professional services that we're taking on. And to again, put that in the hands of our partners, before ourselves as we move forward.

[Doug Taylor, analyst]

And just to double back on the margin question for professional services and then I'll pass the line?

[Blaine Fitzgerald, executive]

Sure. Yes -- on margins, yes we're extremely happy coming close to 30% or hitting I guess 29% for our quarter growth. It's opening our eyes to, again, the pricing strength that we have in place as well as the utilization of our team, to make sure that we're getting the most out of them as possible. I'd always said that, I think that, the ultimate place for us to land is around an 80-20, where we have 80% margins on the subscription side and 20% on the PS side.But at the same time, we're starting to open our eyes, to thinking that there might be more margin available, on the professional services. So we do think that there's still some expansion. The full year is around 22%, and I think there's some expansion on top of that. So we are planning right now, for a little bit higher margins on that front going forward.

[Operator]

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

[Paul Treiber, analyst]

Just wanted to hone in on renewals. You commented in a pair of remarks that renewals are really strong. We saw it in RPO. What trends are you seeing across the board in terms of renewals? Is there typically expansion included in it? Any change in duration? And are you benefiting also from any pricing changes?

[John Sicard, executive]

Yes. So on the renewal front, a couple of considerations. 1, it is not uncommon to hit a renewal period that has an expansion component to it. We certainly track that. And in the fourth quarter, we had a rather large 7-year renewal with big expansion, which is really a testament of a company, who absolutely is doubling down on our approach and basically baking in their next 7 years with us.So, we are seeing those types of negotiations. As I mentioned earlier as well, our churn is very low. Our renewals is north of 95%, 95% to 100% is what we target. I consider that to be, if not best-in-class, near best-in-class, an elite performance. Now, the fourth quarter, in terms of that particular renewal, we saw it coming. We did not necessarily see, I'd say the magnitude of the expansion in the number of years is not common. To go for 7 years is not common. It is more common to see 3 to 5.

[Operator]

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

[Stephanie Price, analyst]

You mentioned in your prepared remarks that the pipeline exited Q4 at an all-time high with growth re-accelerating. I'm just hoping you can dig into that statement a little bit when you think about the ARR growth in the quarter, which was kind of flat sequentially in what is typically a seasonally strong quarter. How do you think about that pipeline converting into ARR growth and ARR growth accelerating from here?

[John Sicard, executive]

We are certainly feeling pretty good about our win rates against our top 3 competitors. We have been tracking that. We have what I might call repaired a few failed deployments in the process and taken some business back from those competitors. And so that, I think, is boding well for the pipeline as we move forward. We're also tracking very strong sales experience as we enter 2024 as well.And based on what we see. Of course, we are listening to other vendors, and what they are saying, about macroeconomics and the condition out there. Certainly, it is not what I would call predictable. But the facts that we are looking at, is that we have doubled the number of our accounts in 3 years. We have just had 2 years in a row of record-breaking net new wins.'22 was a record-breaker in net new ads and '23 beat that number. And so, we're feeling pretty good about the health of the pipeline. We are feeling good about not seeing any, what I would say concentration problems in the pipeline. It is healthy in all geographies and all variables.

[Stephanie Price, analyst]

Then, Blaine, maybe one for you just on, a little bit more detail during that cloud normalization. I just want to dig into it a little bit more. So if you think about fiscal 2025, should we expect the overall public cloud costs to come down, or other costs related to the North American EMEA transition that could offset the end of the APAC transition? It may be related. Can you just touch on that private cloud CapEx you mentioned in fiscal 2024?

[Blaine Fitzgerald, executive]

Sure. Public cloud costs in -- across the board are going to go up. I think that's definitely going to happen in North America, APAC and EMEA. We still have a growing footprint in EMEA and APAC. If we have not gotten 100% we are still, have a significant percentage that has moved over. So we should see that go up. But we were here -- I think what you might be asking for, you are looking at, is the duplicative cost.Is that percentage going, to be as big as it was in 2025? The answer is no. That should shrink specifically, because of APAC, but also because of some of the optimization things that we are doing with the -- I guess across the globe with public cloud on the unit economics, which we expect to decrease significantly over the next year. In terms of CapEx, so we mentioned that we're investing, or we should be putting around $8 million of CapEx that are related to private cloud in 2024.One of the reasons is that, we've always had this belief that we want to have a hybrid environment. We have obviously, the environment with GCP. We have the environment with Microsoft Azure, but we will also have that private hosting element as well, because there are going to be some situations particularly, because of essentially -- security and some of our aerospace and defense that do not want to be on a public cloud environment, where we are going to have to keep it on our own private cloud.And so, we do have some investments that we have to maintain over time. It just seems -- happens that it is coming due in 2024. I expect there will probably be a smaller portion in 2025, but it will be something we will have to maintain going forward. But as a percentage of our total revenue, it will be a smaller portion as we grow.

[Operator]

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

[Kevin Krishnaratne, analyst]

Again, on the ARR, if I actually look at it on an ex FX basis, it looks like it picked up slightly from 17% to 18% sort of what drove that? And then, more bigger picture question, actually. I know that that ARR growth does sort of blend in the term and the SaaS. So if you did 18% the end of the year on ARR, can you give us a sense of what the SaaS ARR growth would have been?

[Blaine Fitzgerald, executive]

Yes. You're right. It has picked up a little bit. In fact, if you look closely, it is a slight record in our net ARR that you would see in terms of what we had in Q4. It almost looks like it's the same as what we had in Q3 of 2022, but technically, we're slightly ahead. But we don't breakout the SaaS portion versus the term license portion of ARR, but I can tell you that the term license, is a much smaller piece of that total amount, less than 10%.

[Kevin Krishnaratne, analyst]

It's less than 10% of your ARR?

[Blaine Fitzgerald, executive]

Yes.

[Kevin Krishnaratne, analyst]

Got it. So it's probably top-facing a bit higher. I'm just trying to think, about how do we think about sort of the SaaS revenue set point, sort of as you head into Q1? I know you've given us the guide for 2017 to 2019 for the year, but just thoughts on the starting point for us Q1?

[Blaine Fitzgerald, executive]

We don't give guidance for the quarter. Yes, we don't provide guidance for Q1. We're feeling confident in the full year and that we should be able to achieve our guidance.

[Kevin Krishnaratne, analyst]

Okay. Got it. No, fair enough. And this is another one for me. Just on the competitive win rate, you mentioned 60%. Has that gotten better? How's that trending? And if you are losing against those 3, what are sort of some of the key reasons for why that may be the case?

[John Sicard, executive]

Yes. It is getting better, I think. As I just recently mentioned, in fact, we've been engaged in repairing some challenges with our competitors, and coming in to repair those deployments. And we've been doing quite well in the win rate as well. Some cases, we are in a situation where we might be in a vertical that Blue Yonder has a stronger presence in. We're not all equally strong in every market vertical.We're not equally strong with every use case. And so, I'd say, if there is any challenge, and again, our win rates have been north of 60%. If there isn't a challenge, we might see it in a market segment, where it's a little more nascent for us, and it's a little more mature with that. The same could be true in situations where use cases are a little more nascent for us and very mature for a particular competitor.As it relates to SAP, they've been omnipresent for as long as I've been here. And it's been decades. They're the incumbent. And so, the other side of the equation that we will see is losing to do nothing, where somebody says, I'm just going to stay the course with what I own and not make any further investments this year. Interestingly, though, even in the current pipeline, we're seeing a very similar situation where somebody made that, that choice in the life sciences space 3 years ago, and are now coming back to us.And much of that is, I think, the reflection that continuing to leverage legacy approaches, while one might say that's economically sound, it's certainly a challenge as it relates to building let's say a sustainable, efficient, and resilient supply chain. And so, but -- that's how I would provide color on that question. It's in some cases, competitors that are stronger in particular vertical. In some cases, more so SAP, where we'll see an account do nothing.

[Kevin Krishnaratne, analyst]

Got it. I just want to flip 1 last one in. I didn't see it in the deck, but are you guys still committed to the 30% SaaS growth outlook longer term and 35% EBITDA margin?

[Blaine Fitzgerald, executive]

Yes, so for -- let's go back I think it's a longer term. We gave midterm outlook for SaaS growth of 30% last year and we also right gave the 25% EBITDA margin. So -- let's talk about the 30% first. At this stage, I'll say that the math has changed, because 2023 and that we don't see it in our next 2 years. But as you rightly pointed out, is that still a target for us?

[John Sicard, executive]

Absolutely. We think that we can get there.

[Blaine Fitzgerald, executive]

For all the reasons that we talked about on the call, that great retention rate, the fact that we have these loyal customers that are driving a committed RPO that's the highest it's ever been. We think that we are in a position that with our new modules, with the new verticals we're going into, that it is something that we have to have as a target there, because we know it's capable.But I will say in the next 2 years, I don't have a sight to 30% at this stage. And the 25% adjusted EBITDA, absolutely, we think that we're on that path. We think we're going to do it in the next 1 to 3 years and that it'll be sustainable over a long-term. After that, I think as you mentioned, do we think we can get up to 30% and 35%? We do think that's a long-term target similar to where we're putting that SaaS revenue growth number at 30% as well.

[Operator]

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

[Richard Tse, analyst]

I just wondering if you guys could elaborate a bit more in terms of what's holding back these large enterprise deals. Is it just macro, or is there some other reason? Mainly, because I think you talked about sort of the last question, sort of seeing a course towards sort of accelerating growth. Now that seems to be the culprit in terms of the moderating growth. So just really trying to understand what's happening on that large enterprise side?

[John Sicard, executive]

Yes, so Richard, I'd say a couple of things. 1, I'm going to reiterate what I've said in past calls and we continue to see this. One of the larger deals in the fourth quarter, which felt quite assured, was delayed as a result of CEO and Board level signatures that were required. And those types of delays, it appears that large enterprise that is more common.We're seeing that more common, for the larger and extremely large enterprises. And I can maybe surmise that's cash preservation, reaction, let's just say, by those accounts. And certainly there's competition for dollars in large enterprise. So that's one of the challenges we're seeing. The other is less so a situation where we're not getting those deals across the line, but they're getting smaller.People are taking bite-sized chunks, and paying for their journey as they go. And that's another trend that we've seen even in, what I'd say the ultra-high enterprise. Now, interestingly, and this has happened multiple times, it happened in Q4 where following very successful deployments with extremely large enterprise, the expansion comes in at the size that we would have expected in whole in the past.So in some cases, we're seeing a delay in the expansion. People are starting their projects in a much smaller footprint, proving it out. And if we get to that proof point, the expansions bring those enterprises back to there, what I'll call full potential.

[Richard Tse, analyst]

Okay. And so when it comes to the pipeline, can you maybe comment about the mix between large and then mid-market versus small?

[John Sicard, executive]

It hasn't really changed that much as it relates to our win rates. Approximately 50% of our wins were large enterprise and 50% were small and medium. Our VAR program now has 30, I believe, 30 partners. Don't quote me on precisely that number, but its close enough. Approximately 30 and we're adding more. These are third-party resellers in geographies that we're not in -- serving and that we're not going after directly.So, I think we'll see as a mix of net new wins, we'll be grabbing land through those mechanisms. But we still have a very healthy pipeline of enterprise deals that you'll hear about throughout the year.

[Richard Tse, analyst]

Okay. And just one last one from me. You've made a lot of organizational changes, I think, over the past, call it 12 months, especially on the sales side. So when it comes collectively to those changes, where do you think you are in terms of your peak productivity, or in terms of where you want that group to be? Are you 3 quarters away there, 90% there? Just trying to understand what point of scale you're at there?

[John Sicard, executive]

Well, like any business, I'm always looking for operational efficiency. In some cases, we have individuals that have planned retirements and things of that nature. So that's not uncommon. And certainly we look at organizational structure. For me, anyway, I think about the next 3 to 5 years, and make adjustments based on that thesis. So I don't think there's anything really to call out other than normal course of business operations.

[Blaine Fitzgerald, executive]

Just to add a little bit extra color on that, the other things you were asking about is, so we had around 29% year-over-year growth in sales and marketing. And a large reason for that was because we increased our head count on the sales team at the back half of 2022 and the first half of 2023. And what we're seeing, obviously, is getting to that 18-month range, which is where our account execs get extremely productive.They're 3.5x more productive than someone who's less than 12 months, as an example. And we've gone through a process of maturing and getting that tenured AE in place over the past year. And so, we're expecting to see higher productivity from that team as we go into 2024, as more and more of them reach that 18-month range.

[Operator]

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

[Christian Sgro, analyst]

Could you comment on the typical expansion motion with the newer customers? Sometimes they sign on maybe for less than they would have in the past to get going. So are you upselling capabilities, new sites, or geographies over time? How does that expansion effort look on average?

[John Sicard, executive]

Yes. The most typical is geographies, especially for large enterprises. It's not uncommon for them, to tackle a use case, focus on a geography, build a blueprint, and then rinse and repeat. And so for us, that geographic expansion leads to both 2 dimensions worth of growth, let's just say, but certainly on user counts and things of that nature. And so that, I would say that's the most typical that we would see.It is also for companies that are more mature geographically where they have a foundation across their entire enterprise, then they'll look to expand different use cases. They may start with sales and operations planning, for example, and start moving into inventory optimization, or other components of the business after the fact. So it's a bit of a mixed bag there with the one caveat that most of it is geographic.

[Christian Sgro, analyst]

Okay. That's helpful. And then plenty of cash on the balance sheet, buybacks, or use capital this year. But what are your thoughts on M&A, your appetite for M&A as you look at your outlook for 2024?

[Blaine Fitzgerald, executive]

Yes. Under the right circumstances, M&A is open. We have a new Head of Corporate Development, who has been here with us for about a year now. Obviously, we have a healthy pipeline of opportunities that we've been looking for. But hopefully, as any good and thoughtful company, we're very picky about what we want. It needs to -- meet the needs of our product.And we don't want to have something that we're requiring technical debt, obviously. We're also had a company that is trying to grow our profitability. So I don't want to have anything that's going to set the standard in the way of us getting to that 25% adjusted EBITDA midterm target that we know we can achieve in the next 1 to 3 years. So there's going to be something that can disrupt that, something that we're not going to be looking at.But to put it directly, that cash will be used for now one of a few ways. We're going to continue to look for M&A opportunities that make sense for us. But also, we have a normal course issuer bid that we are going to continue to, buy stock when it makes sense. And we think we have a lot of room to do that.And the nice thing about that for, I think for all the investors listening on is that 2023, we actually covered all of our stock-based compensation we had with our employees based on that buyback that we had in place. We're going to continue to do that. And we think we're helpfully using our capital in ways the best we can.

[Operator]

[Operator Instructions] Your next question comes from the line of Suthan Sukumar with Stifel.

[Suthan Sukumar, analyst]

Just wanted to touch on expansions. Just given the record number of customer wins to-date, how much of the expansion opportunity you see ahead in the near term? Is that contractual versus not? And how do you see the bookings mix of expansions versus net new evolving in the coming quarters? Just curious if it's going to get to a 50-50 ratio, or may skew to expansions over time?

[Blaine Fitzgerald, executive]

Yes, yes so obviously -- we're at a 60-40 ratio right now, which I would love to stay at that 60-40 ratio as long as we can, as long as the total number keeps on growing. I think it will start trending towards a 50-50, as you mentioned, over the next year or so. Obviously, a lot of opportunities we see that come in from expansion deals have a much shorter sales cycle.And they flow through a lot quicker, obviously, because we're not generally going through a situation where -- we're not going to a situation where we're against competitor. But when we look at our peers, that we go against, a lot of them have 2/3 of their new deals coming through expansion. I kind of look at them almost enviously, because I know how the impact is on our bottom line and I know that's something that's in our future.But we are trying to be as patient as possible by making sure that we get as much land as we can. But that doesn't stop us from saying we need to start that role of getting as many of our install-based customers, expanding and upselling and cross-selling in any fashion we can to get them in the door, to help them out really, and to drive the dollars they need within their own supply chains.

[Operator]

Your next question comes from the line of Mark Schappel with Loop Capital Markets.

[Mark Schappel, analyst]

John, just building on an earlier question, about 18 to 24 months ago, the company expanded on -- they expanded sales capacity pretty meaningfully to drive further growth. And given the moderating ARR growth and SaaS revenue growth, I was wondering if you could just kind of comment, on what your plans are, with respect to sales capacity in the coming year or so?

[John Sicard, executive]

Yes. So two things I would say. When I think about expansion, I think about it two ways. Obviously, fantastic if you can get both. But there's certainly the SaaS revenue growth that we're looking for, but there's also net new accounts to make sure that we're building a strong base to expand in. And as I said in the script, 2023 was about winning customers, eliminating all friction.The way I described it to sales is you have to make it irresponsible for someone to choose anyone, but us and create the conditions where that can be true. Knowing in advance what happens when you win a logo, great things, you have. As Blaine said, you have an account that you can upsell into much simpler, than landing it for the first time. And so part of our investment in sales and the training.Everything that we've done over the last couple of years, well, they've yielded exactly what I might have hoped. Sure, more SaaS revenue would have been phenomenal, but we've more than doubled the number of accounts. We've had 2 record-breaking years in a row of net new names that we can now farm into. One of the investments we made in sales was to build out a team and an executive that is solely responsible, for serving the base.So, I'm feeling pretty good about the decisions that we made in the past about sales. And as Blaine just said, I think when we do our work here, in the next couple of years, you'll see, a move to perhaps more of a 50-50 split, between net new and what is being farmed from the net new accounts that we're winning every year.

[Operator]

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

[Martin Toner, analyst]

Quick question on 2025 and the STL cycle. You're pointing out in Slide 13 that EBITDA margins are being impacted by public cloud normalization. Is the -- can we expect a normal cadence for STL in 2025, which would -- will that create a shot in the arm for margins?

[Blaine Fitzgerald, executive]

Yes, 2025, as I talked about in the script, we're expecting it to double. So STL should go from, we obviously mentioned 9 to 11, we expect it to double in 2025. And then increase approximately another third in 2026. And so that should put us closer to the normalized total revenue that, we would expect. And we'll use obviously, if we -- had the same slide that I had in the presentation that shows the normalized EBITDA, you should expect the STL line to be closer to 0.

[Operator]

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

[Rick Wadsworth, executive]

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

[Operator]

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