KINAXIS INC.
Phased Deals Driving Reduced Sales Cycles
Our Conclusion
With an in-line quarter and an unchanged 2023 outlook, Kinaxis’ Q2 did not
change our overall positive outlook on the business. The pipeline continues
to grow, although the procurement process remains extended for some
larger deals, with the company noting one large automotive win that slipped
out of Q2. Enterprises have also been opting for smaller initial deals, leading
to the slower ARR growth in Q2. Amid this environment, we have reduced
our 2023E SaaS growth to the lower end of Kinaxis’ guidance range and
remain comfortable at this level given significant contracted backlog, which
represents ~90% of F23 SaaS guidance. We see Kinaxis as well positioned
as the macro environment improves, with supply chains a C-suite focus and
Kinaxis’ growth in new verticals (consumer, QSR) and mid-market adding
company-specific tailwinds. We retain our Outperformer rating and $200
price target.
Key Points
Public Cloud Rollout Impacting Margins: Adjusted EBITDA margin of
14.4% was 50 bps above consensus, benefitting from a contract that
switched to term license revenue. Margins remain impacted by the shift to
the public cloud, with Kinaxis incurring both public and private hosting costs
for customers transitioning to the public cloud. This dual hosting cost
dynamic is expected to continue throughout 2024. We continue to see F23
as a margin trough (we are expecting 15% adj. EBIDTA margin) and
management reaffirmed its medium-term target of 25% adj. EBITDA margin.
Enterprises Shifting To Smaller Initial Deals: While the pipeline remains
at all-time highs, the composition of enterprise deals appears to be shifting
towards more staged implementations, with smaller contract values in year
one and contracted spending increases in future years. This has been
impacting ARR growth, given that only year one is included in the ARR
calculation. The company appears willing to shift to these smaller, staged
implementations given the protracted approval process required for larger
deals, with Kinaxis seeing continued contracting delays on larger deals.
Historically, Kinaxis has seen subscription revenue from “land and expand”
customers doubling over a three-year period, and with Kinaxis standing up
an expansion sales team we expect recent deals to translate into larger
revenue opportunities going forward.
Average Sales Cycles Declining: The average sales cycle for a new
RapidResponse customer declined below one year for the first time in
company history. Declining average sales cycles is primarily a function of the
shift to smaller customers, as purchasing decisions remain slower than
normal at large enterprise customers. Smaller initial year values for
enterprise customers are also a contributing factor. Margin contribution for
the enterprise and mid-market customers remains similar, while customers at
the smaller end of the spectrum are less profitable as a result of VARs
assisting with the sales process.