CA - Kinaxis Inc. (KXSCF) CEO John Sicard on Q2 2022 Results - Earnings Call Transcript

Kinaxis Inc. (KXSCF)

Q2 2022 Earnings Conference Call

August 10, 2022, 8:30 AM ET

Company Participants

Rick Wadsworth - Vice President, Investor Relations

John Sicard - President and Chief Executive Officer

Blaine Fitzgerald - Chief Financial Officer

Conference Call Participants

Richard Tse - National Bank Financial

Daniel Chan - TD Securities

Stephanie Price - CIBC

Thanos Moschopoulos - BMO Capital Markets

Paul Treiber - RBC Capital Markets

Christian Sgro - Eight Capital

Suthan Sukumar - Stifel

Nick Agostino - Laurentian Bank Securities

Martin Toner - ATB Capital Markets

Presentation

Operator

Good morning, ladies and gentlemen. Welcome to the Kinaxis Inc. Fiscal of 2022 Second Quarter Results Conference Call. Currently, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. I'd like to remind everyone this call is being recorded today, Wednesday, August 10, 2022.

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

Thanks Operator. Good morning and welcome to the Kinaxis earnings call. Today, we will be discussing our second 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 Blaine Fitzgerald, our Chief Financial Officer.

Before we get started, I want to emphasize that some of the information discussed on this call, based on information as of today, August 10, 2022, and contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in the earnings press release as well as in our SEDAR filings.

During this call, we will discuss IFRS results and non-IFRS financial measures, including adjusted EBITDA and constant currency results and metrics. The reconciliation between adjusted EBITDA and the corresponding IFRS results is available in our earnings press release and in our MD&A, both of which can be found on the Investor Relations section of our website, 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 website archive may be rerecorded or otherwise reproduced or distributed without prior written permission from Kinaxis.

To begin our call, John will discuss the highlights of our quarter, as well as recent business developments, followed by Blaine, who 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 home page of our website Kinaxis.com. We will let you know when to change slides.

I'll now turn the call over to John.

John Sicard

Thank you, Rick. Good morning and thank you for joining us today. I will be starting on slide four. Our second quarter result demonstrates the momentum we continued to experience in our business. While foreign exchange fluctuations are a headwind to reported results for global SaaS companies right now, our constant currency results pierce through that to reflect the very strong underlying fundamentals in our market.

For the second quarter, in constant currency, we saw a SaaS revenue growth of 27%. Total revenue growth of 42%, and adjusted EBITDA margin of 15%. Our constant currency ARR grew by 25% in the quarter, a record level for this important indicator of growth in our subscription business. Blaine will provide all the specific details on reported and constant currency results momentarily.

Turning to slide five. Our momentum winning new customers continued in the second quarter. We've seen well over 50% growth in new customer wins so far this year compared to the first half of 2021, which itself was a period that saw strong growth over 2020. Simply put, more companies than ever are replacing inflexible legacy cascaded planning techniques in favor of a more agile concurrent planning approach. As always, we're honored to be selected by a growing number of global companies that put their trust and confidence in Kinaxis and RapidResponse to bring about transformative improvement in supply chain planning performance.

For example, in Q2, we won innovative pharmaceutical companies like EQRX International and [indiscernible], high tech companies like test and measurement leader, NI, formally National Instruments, and control equipment manufacturer, IDEC. Consumer products companies like Xera [ph], which makes many of the tea brands we drink every day. An Aura Farm Supply [ph] who provide many over-the-counter health products. And in our industrial vertical, a specialty chemicals company, Infineum USA who focuses on sustainability in their engine fuels and oil products. You'd have also seen our news release in the second quarter, announcing that Castolin Eutectic, a welding, brazing and coating leader, is also now Kinaxis customer.

For the first half of 2022 amongst our new customers, roughly 60% have been enterprise class and 40% from the mid-market or smaller. We're thrilled with our ability to serve such a broad universe of companies and verticals with a single SaaS offering and continue to appreciate the support and influence our partners have on the vast majority of our wins.

I am happy to report that momentum in the business has not let up. Leading indicators of demand remained robust. Our June 30th fourth quarter rolling pipeline continued to grow nicely over the comparable period of 2021. And we saw another sharp increase in the number of unsolicited inbound leads after experiencing the same dynamic last quarter. Both these indicators are at an all time high level. We view these trends as distinct signs of ongoing momentum in the business.

Moving to slide six. Certainly part of the reason we generated a lot of interest in Q2 was the May release of the latest Gartner, Magic Quadran for supply chain planning solutions. For the eighth consecutive time, we were named a leader. Of the 22 vendors evaluated Gartner position Kinaxis furthest on the completeness of vision access. In all our financial results and the other metrics from the second quarter provided -- provide us with the confidence to increase our annual total revenue guidance, subscription term license revenue guidance, and introduce a 2022 SaaS revenue growth outlook of 25% to 27% in constant currency.

I'll now ask Blaine to discuss results for the second quarter and share more details about our guidance for 2022. Blaine?

Blaine Fitzgerald

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. As has been widely reported foreign exchange fluctuations in 2022 have been a universal headwind to the reported results of SaaS companies that report in U.S. dollars and sell their products globally.

While the majority of our revenues denominated in U.S. dollars, the portion that is contracted in euro, Japanese yen, and British pound were dramatically impacted by the weakening of those currencies against the U.S. dollar. As a result for certain key metrics, I'll be sharing non-IFRS constant currency results, which eliminate the impact of such fluctuations and better demonstrate the ongoing underlying momentum in our business. We intend to share this information only as long as we deem it to be truly relevant to the interpretation of our results.

Take a look at slide seven. Total revenue in the first quarter was up 35% to $80.8 million and up 42% on a constant currency basis to $85.3 million. SaaS revenue grew 21% to $51.1 million. More significantly, it was up an impressive 27% on a constant currency basis to $53.5 million. The steadily increasing growth in our ARR metric is flowing through to SaaS revenue growth on a constant currency basis, as you would expect.

Subscription term license revenue was $0.4 million versus $0.6 million in Q2, 2021. You recall that we expected roughly two-thirds of the annual amount for this revenue to be recognized in the first quarter, just less than one quarter of the amount in Q3 and the remainder in Q4. The modest revenue in Q2 is consistent with that previous commentary. As always, fluctuations in this revenue item are largely tied to the normal renewal cycle of our customer hosted software subscriptions and vary period to period as a result.

Our professional services activity was stronger again, resulting in $25.4 million in revenue or 81% growth over the corresponding quarter of 2021. The rapid growth is consistent with and reflects our recent acceleration in new customer wins. Generally, this revenue item varies from quarter-to-quarter based on the number, size and timing of customer projects underway, as well as a proportion of work assumed by partners.

Maintenance and support revenue for the quarter was $3.9 million, up 25% from Q2 2021, reflecting recent growth in the subscription business with a small group of customers who have chosen to deploy RapidResponse on premise or who maintained the option to do so.

We continue to be pleased with the diversity and strength of our total revenue base. For the quarter, our 10 largest customers accounted for 23% of our total revenues versus 20% -- 27% in the comparable period, with no customer accounting for greater than 10% of total revenues.

Second quarter gross profit increased by 24% to $49.8 million, largely as a result of revenue growth. Gross margin in the quarter was 52% compared to 67% in Q2, 2021, largely reflecting a higher proportion of lower margin professional services revenue and the mix, the impact of foreign exchange fluctuations on revenue and recent strategic investments in related teams.

Adjusted EBITDA was up 45% to $10.4 million for a margin of 13% compared to 12% in the second quarter last year. On a constant currency basis, our adjusted EBITDA was $13.1 million or 15% of revenue. Our loss in the quarter was $2.6 million compared to a profit of $3.1 million from Q2 2021. As a result of the focused investment to drive future SaaS growth even higher, we remain very excited about our market and how our planned investments will help us continue to take share.

Q2 cash flow from operating activities was $8.4 million, down from $15 million in the comparable period, largely reflecting the lower profit resulting from our strategic investments. At June 30th, 2022, cash, cash equivalents and short-term investments totaled $258.1 million compared to $233.4 million at the end of 2021. We remain pleased with our outstanding track record of cash generation.

I'd like to highlight our year-to-date performance on some key items, all on a concurrency basis. SaaS revenue grew 26%. Total revenue grew 58%. And our adjusted EBITDA margin is at 26% of revenue. All of these results show us tracking very well against our plans for the year.

Moving onto slide eight. Turning to some key metrics. Our annual recurring revenue grew 21% to $241 million, including currency impacts, but currency movements matched even stronger underlying growth. In constant currency, our ARR grew to 25% year-over-year to $249 million. This record level of growth reflects the unprecedented strength we have recently experienced winning new accounts, and of success winning incremental business from our installed base. I'll remind you that the growth rate for the SaaS portion of ARR is higher than for total ARR.

On slide nine, our remaining performance obligation continues to be strong at $494.8 million, up 30% from June 30th, 2020. One of that total $459.6 million relates to SaaS business, which is up 28% year-over-year. $101.5 million of this SaaS amount will be recognized as revenue within 2022. Given the impact of renewal cycles on RPO, we look at growth in the metric over longer periods, and we are pleased that our three-year CAGR for total RPO sits at 26%. Now further details on our RPO can be found in the revenue note through our financials.

Go onto slide 10. With respect to our outlook, we are pleased to be able to provide you with increased guidance for fiscal 2022. We now expect total revenue for 2022 to be between $355 million and $365 million, largely due to an improved view on professional services and subscription term license revenue. Including the headwinds of foreign currency fluctuations, fiscal year 2022 SaaS revenue is now expected to grow between 21% and 23% over our 2021 level. But significantly though, we see SaaS revenue growing between 25% and 27% over the 2021 level on a constant currency basis.

We now expect subscription term license revenue to be higher between $34 million and $36 million for the year. And our adjusted EBITDA margin guidance remains at 16% to 19%. While our higher revenue guidance does mean that a result at the upper end of the range is more achievable, I remind you that our priority remains on making strategic investments to position us for the growing opportunity ahead of us.

Overall, while FX fluctuations have been a headwind to reported results, our constant currency results fairly demonstrate the ongoing steady improvement in the demand environment and our business. Remain excited to be investing into this significant developing opportunity.

With that, I'll turn the call back to John.

John Sicard

Thank you, Blaine. Along with a strong financial quarter, we also had some exciting developments on the product front. We introduced Planning.AI, which enhances RapidResponse by automatically detecting infusing the best combinations of heuristics, optimization and machine learning to provide highly accurate solutions to supply chain challenges and opportunities, both on the demand and supply side in the fastest time possible. Companies no longer have to manage the trade-offs between speed and accuracy and choosing between different planning algorithms.

We are thrilled to have won the 2022 Digital Innovation award for this new product presented by Ventana Research in the category of operations and supply chain. We also continue to enhance the capabilities of our product through the addition of two more global extension partners Wahupa and Blume Global. Wahupa brings probabilistic multi echelon inventory optimization, or MEIO, to RapidResponse, which helps calculate optimal inventory targets and safety stock settings, so companies can reach their goals while removing waste. With Blume Global, RapidResponse will be connected to their logistics visibility and transportation management system capabilities. The result will be better alignment between supply chain planning and execution, enabling companies to quickly remedy or even avoid freight transportation disruptions.

The ability to connect our unique concurrent planning capabilities across more aspects of the supply chain remains a core focus for our development, partnerships and acquisition strategy. Overall, we're very pleased with the financial results and the business developments in our second quarter. Despite a challenging economic backdrop, concurrent planning continues to gain momentum in its march towards becoming a critical capability for leading brands globally. We're looking forward to a very exciting back half of 2022.

As always, thank you for taking the time to join us on this call. With that, I'll turn the line over to the operator for Q&A.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]

Our first question is from Richard Tse with National Bank Financial. Your line is open.

Richard Tse

Yes. Thank you. John, like we're hearing a lot of talk from our names about elongated sales cycles, elevated signing authorities. You're, obviously, very confident in the outlook. Are you hearing anything on that front or is it something unique to Kinaxis given the market that you play in?

John Sicard

Richard, we're actually seeing the opposite effect. We've been tracking, I would say our average cycle time, as you've heard us say has been closer to the 18 month mark, and I'd say we're closer to the 12 now than we are 18. And I think it's a sign and acknowledgement that the pandemic was just the start of some pretty wild disruption. We're seeing more and more now people -- our customers asking us to run scenarios around inflation recovery. I mean, inflation is hitting different parts of the world at different rates and recovering at different rates. And obviously, that has a pretty pronounced impact on profitability for a lot of companies and cash.

And so, would say it's had a little bit of the opposite effect. And that is also manifested in the growing pipeline, which has basically not been at a higher point than it is at this stage. And a pretty remarkable increase in unsolicited inbound leads, which I attribute largely to the Gartner MQ. But more so, I think, it's a recognition that supply chain isn't one of those nice to have applications. It's becoming a critical competence for survival. And I think I might have said this on previous calls, every Board is asking every CEO, what are you going to do next time? And of course, the CEOs are turning their chairs and asking their Chief Supply Chain officers, what are we going to do next time? Because clearly the methods that govern supply chain in the past will not survive the future.

Richard Tse

Okay. That's great. And in regards to professional services, it's obviously been a very robust part of the results here. How do you balance what you take on versus your partners? Because obviously your partner network is expanded considerably as well over the past few years.

John Sicard

We continue to have a partner first approach for professional services. And frankly, we talk about this a lot. Obviously, professional services coming in very strong. It is absolutely the side effect of a compounding success. Every quarter, we're seeing a pretty dramatic increase in net new accounts. And as you know, professional services is a transient kind of a revenue stream. You sign a three-year commitment, subscription agreement and a professional services are getting the projects underway to take anywhere from three to nine months. And so that revenue ends up being transit.

Well, we're seeing the compounding effects of record net new customer wins, and that's what's driving professional services revenues, not only for us, but for our partners. It is extremely hot, I would say right now, the whole project space. And as you would expect, in the current conditions, manufacturers aren't looking for perfection, they're looking for speed, right? They're looking for an inoculation to the pain they're in and so project timelines are extremely aggressive. And that is what we're seeing in the field. But I will tell you, the vast majority of net new accounts are partner influence. We still have a partner first approach. We continue to sign new partners and new VARs every single quarter.

Richard Tse

That's great. Thank you.

Operator

The next question is from Daniel Chan with TD Securities. Your line is open.

Daniel Chan

Hi. Good morning. Congrats on these strong results. With the uncertainty and the macro backdrop, potentially having a higher impact on SMBs and large enterprises. Are you planning a continue SMB strategy, or do you take the foot off the pedal there a bit? I'm just wondering if you seeing any change in your pipeline mix shift, just given the macro backdrop.

John Sicard

Actually, I think we're seeing an increase in the pipeline as a result of the macroeconomic conditions, and inflation, supply disruption, the war, transportation lane challenges, the lack of cargo containers. It's -- I can go on and on about the disruptions. It used to be all about the pandemic and now is absolutely multidimensional problem. And so, we're thrilled, in fact, with our broader approach, because we think that the supply chain pain is not just one for enterprise class customers.

This is a challenge being felt across all -- any size company and all the verticals. And so our TAM, in fact, has gone. You might have recalled us talking about our TAM being in this sort of 3000 or so. It's closer to 20 when we added the SMB market. So, we're going to continue along both. We've proven that the technology fits. We've proven that the economics work for both parties. And so, I think it's an absolute win-win-win.

Daniel Chan

Great. Thanks, John. And maybe one for Blaine, just on the margin guidance. It's unchanged, despite the higher term licenses mix. Is that just from the higher mix of Proserve or is there something else in there? And how do we think about how the FX impact EBITDA margin? Thank you.

Blaine Fitzgerald

Yeah. Good questions. We -- I can say that our -- if we had provided an outlook on constant currency for just so you got, that number would be higher. And we are having a little bit of headwind on FX on the bottom line, but we are really proud to be able to keep our profitability range in the same ballpark is what we've shown in the past.

As we look at the mix, Proserve is -- could be a big, big part of why we're growing so fast on the revenue side, which obviously brings along a lower margin alongside it. We're also showing a little bit of increase on the subscription term license revenue is as all of you know that's a 100% margins that we get to have from that. But more importantly, we are very direct in -- what I've been saying for the last little while we are -- we see a huge opportunity right now. We've seen our TAM grow quite a bit over the last couple of years. We are seeing our pipeline grow extremely fast. And so we don't want to take our foot off the pedal.

And at this stage, one of the things everyone is seeing right now, there are all these tech layoffs that are happening around Canada and the U.S. And it's unfortunate for all those companies that are going through this, the exact offset's happening. I'm looking forward to when the media starts talking about the success stories that are out there, despite some of the headwinds that that other companies are seeing. And some of the macroeconomic factors that are impacting other companies. We're one of the success stories. And because of that opportunity that we see, we have to keep an investing and keep that pedal down and accelerating into what we see as a huge opportunity in front of us.

Daniel Chan

Thank you.

Operator

The next question is from Stephanie Price with CIBC. Your line is open.

Stephanie Price

Thanks. Good morning. Just following up on that comment, wonder if you can get a bit of an update on talent attrition and talent traction and attrition here. I just wonder if it's improved a bit, just given the macro environment and the techs we're seeing other company.

John Sicard

Yeah. Thank you for that question. There's never a day we're not hiring. I will tell you that. We are seeing pretty strong retention in business. I think a lot of that has to do with the culture, the mission that we are on. I've always said supply chain is about saving humanity well, doing the least amount of harm to the planet. And obviously a lot of people resonate with that mission. At the same time, to meet the demands, we are perpetually hiring. We're roughly around that 1400 or so mark, today -- but I will tell you we're under our targets, so we're very aggressively looking to increase staff to meet the demand. So, hopefully that answers your question, Stephanie.

Stephanie Price

It does. Thanks. And then on the 2022 guidance, the revenue guide was increased overall, which is great to see, but the SaaS growth expectations were down slightly in real dollars. Just curious if there's a geographic mix difference between SaaS and the rest of the revenue lines here.

John Sicard

Yeah. So, I'll start off by saying we're not disclosing the exact percentages that we have, but definitely the Japanese yen and euro, the two biggest additional currencies that we have where we have billing in, in those currencies. GBP is third. And we obviously have a couple of other smaller currencies. But the majority is U.S. dollars, we are seeing the effects that a lot of other companies have seen. I mean, I was looking at the numbers over the last couple of days. And right now, the Japanese yen has dropped 15% since year-end. Euro has dropped 10% and GBP has dropped 11%. So, we are doing the best we can with those headwinds. But more importantly for us is that, as we believe the FX will come back and it'll eventually even itself out. And because we have these long-term contracts, we're going to be in a great position to see that grow quite hopefully rapidly in the future, which is a good sign for us. But at this stage, I would say the majority of our contracts are in U.S. dollars, but there's a healthy amount that comes from Japanese yen, euro. And I guess the third one is GBP.

Stephanie Price

Okay. Thank you.

Operator

The next question is from Thanos Moschopoulos with BMO Capital Markets. Your line is open.

Thanos Moschopoulos

Hi. Good morning. John, just going back to the strong professional services growth and the ongoing extension to the partner ecosystem. Have you been able to scale it up to meet demand sufficiently? Like at this point, are there any constraints to SaaS growth in respect to implementation capacity, or have you been able to scale it as needed?

John Sicard

We've been able to scale it as needed. We work very, very closely -- Conrad Mandala who runs our Global Alliance Team is, in lockstep with our partners. And obviously we have quite a lot of, I'd say, foresight in what is coming in. And so, it's not like, deals are manifesting and closing inside of a few days. That's not the case. We have a very, very robust point of view on the current state and the current stages of every deal. So there's a lot of planning that goes into it.

And as you heard prior one of the -- what I might have called existential threats to scale, was data center capacity, and we'd assigned an agreement with Microsoft to provide us with that public cloud offering. So, we're not going to be subject, let's just say to any capacity constraints as it relates to data center, hardware and such. So, so far, Thanos, we've seen -- we've been able to absorb. We've been able to absorb the rate of success, I will say. And again, a lot of that is great planning, lots of visibility in what's to come. It's giving us tremendous amount of confidence in what we're guiding, obviously because of that visibility and the strong partners that we've signed already, and working very, very closely with them.

Thanos Moschopoulos

Great. And then, as far as RapidStart, does the ratio of RapidStart deals continue to increase? And now that you've been selling it for a while, if we look at kind of the initial cohorts of RapidStart customers, are those expansions kind of perceiving as you would expected or any surprises there?

John Sicard

Yeah. RapidStart has become, I would say one of our leading differentiators, and many of the prospects we speak to, the first intuition is how can you go live in just 12 weeks. I'd say two-thirds of our accounts will start at some point with RapidStart, even though they have expansion opportunities. And so, it is progressing exactly as we have anticipated it too. And again, it gives us a tremendous competitive advantage in the sales cycle.

I will tell you that, uniformly, it's not where people stop, think of it as, it's the initial inoculation. And it gets -- it brings the fever down, as I like to say, for many of these manufacturers and it makes them healthy enough to take on subsequent phases of the project. So, it's -- we're seeing great adoption.

Thanos Moschopoulos

Great. Thanks.

Operator

The next question is from Paul Treiber with RBC Capital Markets. Your line is open.

Paul Treiber

Thanks very much. Good morning. I just wanted to ask about the growth in mid-market. You mentioned that 40% of new customers are mid-market. How should we think about the contribution to either SaaS revenue or ARR from mid-market, or at least the growth there? Or maybe another way to look at it is, how do we think about the average deal size in mid-market as opposed to enterprise?

John Sicard

Yeah. So we license RapidResponse through number of users and sites, obviously. And so mid-market companies are likely to have fewer users and fewer sites. So, right now, we're seeing mid-market deals. They'll often start at roughly half of that, of an enterprise account, just because of size and the overall capacity. But it's still early days. In many -- and in many ways, as I said, they suffer exactly the same challenges as the enterprise customers. But the value to Kinaxis is less the starting point and more that it adds 17,000 accounts to go after. And so, that's where we're extremely excited to be able to offer RapidResponse in its current state, where the technology fits, small to medium sized businesses and the economics work for both parties. This is not some lost leader in any way, shape or form. These are still very, very profitable accounts for us. And so, that's where our strategy, I think, for the long-term is really going to pay off as we -- as we get to our aspirational goals of a significantly accelerated business.

Paul Treiber

Thanks. That's helpful. Just in regards to public cloud, I imagine it's probably too early to be coming up in bookings for Q2. But can you just speak to like the interests that you've seen from customers in considering public cloud as a deployment strategy? And then when do you think you'd start seeing that show up in bookings and in customer deployments?

John Sicard

Yeah. That's a great question. So, we're proceeding as planned as it relates to public cloud and our Microsoft as your partnership. We're still on track to be able to host new customers on that platform in the third quarter, that's the target and things are on track for that. I think, it's best for Kinaxis and our customers to be able to host from anywhere. Whether it's our own environments or current or public cloud, regardless of where you are geographically. So, we're well on our way to achieve that. Stay tuned. This next quarter is where we anticipate seeing the first step -- the first customer stood up in that environment.

Paul Treiber

Okay. Great. I'll pass it on.

Operator

The next question is from Christian Sgro with Eight Capital. Your line is open.

Christian Sgro

Hi, good morning. And thanks for taking my questions. The first one I'll ask is on the guidance. Now, when we think about, been motivated to raise the guidance two quarters in a row here. I'm wondering from your view, how you would split that between conversations with new customers year-to-date, or maybe it's more related to sales cycles that have moved quicker than expected. Are those the two main factors there? Is there a split or is there anything else has increased your confidence through the year?

John Sicard

Sure. Well, I'll start on a subscription term license revenue, because that one's an easy one. As you're aware, the majority of our new customers come on and they have on demand hosting of RapidResponse and so they end up on the SaaS line. Every once in a while we have an anomaly that occurs. And in this case, we will have an anomaly happening in Q3 where we have a new customer, which will be hopefully very excited to build able to say the name at some point. And they have added -- they've chosen to do or take the option at least to have on premise. And so as a result, that was an easy reason why we've increased that guidance.

On total revenue, yeah, I mean, we had a discussion the other day we were in an executive meeting and we started realizing like, we are -- have to start talking about records every single quarter. And we have been talking about records every single quarter for the last -- I think we're back to six or seven quarters in a row now. And that increase in new name account is really driving the front of the spear for professional services, which as you can imagine, they need to come in and be able to deploy our RapidResponse solution to these new customers, to a vast majority of them and share that with the partners that we have on board.

So, every quarter it seems like we're getting these records, which are in pushing us above the forecasting that we expected. The SaaS revenue is doing, I think, quite well considering the FX headwinds. And so, we're maintaining a fairly healthy, I guess revenue number on the SaaS revenue side to support professional services as well as subscription term license revenue, which are doing phenomenally well right now.

And I hope I continue to keep doing these raises every single quarter. It's -- I like the surprises that we're getting from the business that we're continuing to outperform.

Christian Sgro

That's all helpful color. And for my second question here, I'll poke into the subscription term license line, still the mechanical, but maybe two questions. So, first, you mentioned it's a new customer coming on board Q3. My first question is, what motivates someone to stay on-prem? Is it a public sector customer, for example, what the motivation would be? And then my follow on there is, worth understanding, just if there's any economic difference, big economic difference to Kinaxis, when it's on-prem or SaaS, I understand it trickles through accounting quite differently, but the way you guys see it as a customer win, just broadly.

John Sicard

Sure. So, I guess the customers that are sitting right now in subscription term license were have chosen on-prem hosting. The biggest category is aerospace and defense. I will say that this customer is not falling under that category. Every once in a while. And we had this last year in -- I believe it was Q3, maybe Q4 last year as well. We do get the surprises where a customer comes in and says, hey, we want you to do the hosting. But we want the option to be able to do this on-premise at some point in the future, if we need to. And this particular customer is falling under more under that category. So, it's a situation where we have to give the option sometimes to a customer, if that's, what they need to get over the line and to be comfortable with our agreements. And it's as simple as that now.

As far as the economics, the on-prem deals that come on that are pure on-prem, it's a 100% margin for us. So, those are great agreements that we can provide our solution at the same pricing that we would for on demand and very little cost that hit us. We do have some support costs that will come in, but very little cost compared to an on demand.

Christian Sgro

That's all helpful color. Thanks for taking my questions.

Operator

The next question is from Suthan Sukumar with Stifel. Your line is open.

Suthan Sukumar

Good morning guys, and congrats on the quarter. The first question I had was, just wonder you guys could actually share some color on your go-to-market strategy in the mid-market and how it differs from the enterprise and really what are the key drivers of your pipeline there in the mid-market?

John Sicard

Yeah. It's a great question. And the thing that I've come to appreciate and realize, as I said, is the challenges being felt by the largest companies in the world are equally being felt by the smallest. And in some cases, the smaller you are, the more acute the challenges they face, because they don't have a lot of buffer, if you will, for the smaller companies. And so, in the end, I would say that the thing that unites all manufacturers right now is this belief that, the methods they use to govern supply chain over the last 30 years, won't survive the next three. They realize that there's a new competence required in order to survive all of this turmoil in the world. And you're certainly not going to harness all of this chaos.

And so, we're using precisely the same pitch. This isn't about technology. It's about technique. The flawed techniques of the last 30 years will not survive the next three. And there's an appreciation for that. The competence that the small to medium sized companies are looking for is hyper agility, just like the large enterprises are looking for. So, again, we're just absolutely thrilled to be able to run a sales process with the same messaging, with the exact same product. And there's -- I would say, the economic model for us and them continue to fit the business. And so this is what's given us so much -- we're just so excited for quite frankly, the next five years. I think we're living through a Renaissance. And so it's -- this is not a enterprise class customer problem only. This is a global supply chain challenge, and that's why I believe we're going to be living through this Renaissance for many years to come.

Suthan Sukumar

Gotcha. Thank you. And my second question, how should we think about your investment priorities for the remainder of the year. And on the hiring front, where's the catch up most needed? Is it on the pro services side or on the go-to-market side or R&D?

John Sicard

Yeah. We're -- we continue to -- as I said earlier, there's never a day that we're not hired. There's never a day, we are not hiring. And obviously professional services experiences the first wave, as sales brings in success, they're the first to experience the wave. And so, of course, we're working with our partners and filling in gaps ourselves where our partners can't, where our partners run out of capacity and obviously they're hiring as quickly as they can as well.

We continue to hire in sales. Again, as you heard from Blaine, the prognosis here out many years to come, we see a tremendous opportunity. The pipeline continues to maintain its robustness and grow quarter after quarter. Unsolicited inbound leads continues to grow quarter after quarter. We had another record this last quarter. And so, we're not letting up on the sales engine either.

Now at the same time, when I think about the sales engine, it's not just feet on the street. We're investing heavily in our partner alliance group and our support of VARs, value added resellers, and in onboarding VARs and preparing them for success. So, we're investing heavily in what I would call the partner enablement program here, because we recognize that in order for us to absorb the success we believe is in front of us, we can't do it alone. We have to do it with partner support, and army of people outside of Kinaxis. So, we're investing heavily on that side as well.

Suthan Sukumar

Okay. Great. Thank you for taking my questions. I'll pass it on.

Operator

The next question is from Nick Agostino with Laurentian Bank Securities. Your line is open.

Nick Agostino

Yes. Good morning, buddy. John, just a quick question for you, just thinking about verticals in general. You mentioned earlier, obviously, the macro environment, the challenges that businesses are seeing the conditions. And then, obviously, there there's a -- just an acceleration of disruptions in the overall marketplace, something that I don't think we've seen in a very, very long time. Just given that whole environment, given the fact that you guys are introducing the public cloud now in Q3, you're seeing tightening sales cycle.

And I guess my question is at the end of the day, what are you seeing any dormant verticals where maybe guys that were a little bit less active in the past, are you seeing them waking up to the environment, just even over the last six months and the fact that you guys are introducing Planning.AI and the public cloud, have you seen any verticals that are waking up to that? Are you seeing any verticals that maybe were scratching the surface and aren't really part of your six or seven verticals that you're focusing on today, but just because of what's happening, you're seeing more and more conversation that's really starting to wake people up as a result.

John Sicard

Nick, thank you for that question. Yes. And I think you've probably heard me say while we target the traditional seven verticals that we talk about, but I've always said we're in more verticals than that. And it's more exploratory for us until we are confident that we can serve that particular market. I will tell you, maybe even just this earnings call where we mentioned specialty chemical, that's not the first one. The oil and gas sector might be one that I might highlight as exceptionally interesting for us. And I won't necessarily call them dormant, but as it relates to supply chain and the energy sector that one has -- that one might be gaining some momentum, I'll just say. And I'll -- we'll share more as things progress here. But that would be one, that we might see.

The other I'll tell you has more to do with the geographies that we're tackling. And we've traditionally been, sort of north America, Asia, largely Japan and Europe focused. But through the VARs, it's getting us in every geography that we're not and quite frankly and that's been very exciting. I don't think that our VAR, the VAR contribution, and tackling the markets that they have some, I'd say, access to that we don't, I don't think we'll see a major contribution in 2022. But 2023 and 2024, we will. I really do think we're going to start to see some significant contributions from our VAR program.

But back to your question, which I love, the only one I might point to as being really interesting and perhaps warming up, is the energy sort of oil and gas sector.

Nick Agostino

Okay. Thank you for that.

Operator

The next question -- excuse me -- the next question is from Martin Toner with ATB Capital Markets. Your line is open.

Martin Toner

Hey, everyone. Thanks so much for taking my questions. Congrats on some great numbers. My question is around Planning.AI, how is that being received? To what extent is it contributing to winning the customers growing with existing customers? And maybe can we begin with the acquisition there with the group cloud last year? It's been a year or so. Actually maybe a little more, valuation of success of that deal.

John Sicard

Yeah. No, absolutely. So Planning.AI, obviously we're thrilled to have won that award even though it was released very recently. And it was release released, while we were piloting Planning.AI with existing customers. So, it wasn't just a release with a hope that this would fit some use cases. We worked very closely with a few of our customers. And so, we're in that process right now of deploying Planning.AI with a subset of our customers. And so, stay tuned. Obviously, we're pretty excited. This is extremely innovative. The fusing together of heuristics optimization and machine learning within an existing, one holistic brain, if you will, is quite unique.

And so, if you recall, one of the -- one of the thesis around group cloud was increasing our bench strength around machine learning. And so that's definitely played a -- it's played a role in our acceleration in that particular -- on that particular front. And obviously with Planning.AI, there's a sizeable machine learning component to it.

Martin Toner

Okay. Super. Can you comment on your strength in the retail vertical?

John Sicard

Yeah. So, we continue to maintain the relationships in retail that were adopted, and we've won some additional accounts in retail. And obviously, some were very much looking forward to announcing as soon. We're working on one particular one at the moment. And hopefully in the next short while, we'll be able to announce. So, we continue to see some progress there, and obviously leveraging our investments in demand sensing for the retail market, as well as, moving into replenishment. And so, this is going to be a thesis that will yield another very strong vertical for us.

Martin Toner

Fantastic. Thanks for that color. Appreciate it. And all my other questions have been answered.

John Sicard

Thank you.

Operator

We have no further questions at this time. We'll turn over to Mr. Wadsworth for any closing comments.

Rick Wadsworth

Great. Thanks operator. Thanks everyone for participating on today's call. We appreciate your questions as always, and your ongoing interest in support of the Kinaxis. We look forward to speaking with you again when we report our third quarter results. Thanks very much. Bye-bye.

Operator

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

For further details see:

Kinaxis Inc. (KXSCF) CEO John Sicard on Q2 2022 Results - Earnings Call Transcript