Kinaxis Inc. (KXS) Earnings Call Transcript

Good morning, and welcome to the Kinaxis Inc. Fiscal Second Quarter 2026 Results Conference Call. [Operator Instructions] I'd like to remind everyone that this call is being recorded today. I will now turn the call over to Victoria Hyde-Dunn, Vice President of Investor Relations at Kinaxis, Inc. Please go ahead.

Thank you. Good morning, and welcome to the conference call. Joining me today are Razat Gaurav, Chief Executive Officer; Herb Yeh, Chief Financial Officer and Chief Strategy Officer; and Peter Yaraskavitch, Vice President of Financial Planning and Analysis. Before we begin, we have a couple of reminders. We will be discussing our second quarter 2026 results, which we issued after the close of markets yesterday. The earnings press release and slide presentation are available on the Investor Relations website at investors.kinaxis.com. Some of the information discussed on this call is based on information as of today, August 6, 2026, and contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set out in such statements. For a discussion of these risks and uncertainties, please review the forward-looking statements disclosure in the earnings press release and in our SEDAR+ filings. Additionally, we will discuss IFRS results and non-IFRS financial measures, including adjusted EBITDA. A reconciliation between adjusted EBITDA and the corresponding IFRS results is available in our earnings press release and MD&A, both of which can be found on the Investor Relations website and on SEDAR+. With that, it is my pleasure to turn the call over to Razat.

Thank you, Victoria, and thank you, everyone, for joining us today. Before I begin, I'd like to welcome Herb to his first earnings call with Kinaxis. Welcome, Herb. We also recently welcomed Kristin Russel as our Chief Marketing Officer. We're excited to have Herb and Kristin onboard as we scale and build Kinaxis for the next phase of innovation and growth. I will start today's call with my observations on the quarter, then turn it over to Peter to discuss financial results, and then to Herb to review guidance before the Q&A session, as many of the world's largest enterprises turn to Kinaxis to manage growing demand, volatility and uncertainty. Second, our vision for operational orchestration and our continued investments in core Maestro capabilities reinforce our commitment to innovation and to supporting the world's most complex supply chains. Third, our second quarter performance builds on the strongest first half in Kinaxis' history, and we are very pleased to raise our full year guidance for total revenue and SaaS revenue growth. Our continued commitment to product innovation, investments in growth initiatives and focus on customer and partner success remain our North Star. Let me discuss these topics in more detail. Beginning with second quarter results, SaaS revenue increased by 20% year-over-year. ARR grew by 19% year-over-year. And adjusted EBITDA margin of 26% is in line with our full year guidance. Our strong performance reinforces our position as a trusted enterprise partner for the world's most complex supply chains, reflecting continued customer demand for AI-enabled planning and orchestration as organizations navigate an increasingly volatile and unpredictable operating environment. Companies are facing multiple sources of disruption simultaneously, trade and tariff uncertainty, geopolitical conflict, energy prices, sourcing challenges and shifting customer demand, are all happening at the same time. Given this fluid operating environment, organizations need an enterprise platform that can rapidly scenario plan and help them make better decisions across their concurrent supply chain. We saw global scenario planning activity on our platform increase every month from April through July this year, with July up 30% year-over-year. We are seeing this momentum with customers as we unlock value within a $66 billion addressable market. It was another strong second quarter for new business in total, including business from new customers and expansions with existing customers. Our average deal size was almost double what we experienced in the second quarter last year. Once again, we continue to see strong momentum with contracts with $1 million plus in average ACV, winning 3x more than a year ago. Our pipeline conversion rates grew very well. Our partners are sourcing new opportunities and co-selling with us, having contributed a record number of new deals in the second quarter and providing pipeline for the second half of the year. Sales to existing customers have also accelerated. We set a new company record in ACV bookings for quarterly expansion from existing customers with over 70% year-over-year growth. These customer expansions were driven by innovative new capabilities, including agentic AI, machine learning based demand forecasting, advanced inventory optimization, enterprise scheduling and other supply chain optimization use cases, all part of our Maestro platform. We're also seeing early traction with our Maestro activity unit usage-based pricing structure. All new proposals to customers and prospects now include MAUs. Beginning in July, select renewals started incorporating MAU pricing bundles. We've been thoughtful in our phased approach to align pricing with the value we create for our customers. Now let me share some notable customer wins and use cases. In consumer manufacturing, Lacoste, one of our -- one of the world's most iconic premium fashion and sportswear brands, selected Maestro to modernize production planning across its manufacturing operations, improving service levels, reducing lead times and increasing operational agility. In life sciences, Gedeon Richter, one of the Central and Eastern Europe's largest pharmaceutical companies, selected Maestro to replace fragmented planning processes with a single concurrent planning platform, improving visibility, collaboration and decision-making across its global business. [ Dechra ], a global leader in veterinary pharmaceuticals, animal and animal health, selected Maestro to modernize demand, supply and inventory planning as part of its SAP S/4HANA transformation, creating a unified planning platform across its global operations. [ Sumura], a leading Japanese pharmaceutical company, has become a new customer, and Ecolab is expanding their footprints with [ NACO Water and Europe ]. In industrials, Rockwell Automation, a global leader in industrial automation and digital transformation has become a new customer, and we have a new Fortune 500 company for the machinery sector. We are seeing a significant uptick in needs driven by the surge in data center build-outs. Many customers across the high-tech value chain, including tooling, equipment, storage, semiconductor, power and energy companies use our Maestro solution already. [ Ansaldo Energia ], one of Europe's leading power generation equipment manufacturers, selected Maestro to modernize end-to-end planning across its complex manufacturing operations, supporting the growing demand for energy infrastructure, in part driven by AI and data center expansion. Turning to Kinexions North America. Our flagship conference was a great success. We had record attendance from global customers, prospects and strategic partners and received very positive feedback on our new operational orchestration vision. This includes interoperable, composable and extensible building blocks that can supplement Maestro and enable broader operational orchestration solutions, leveraging the latest in semantic architectures and agentic AI. Our partnership with Databricks for Data Fabric is live in Maestro, enabling outside-in-signal ingestion and data cataloging. It ingests data from sources like social sentiment, weather and news feeds, combining it with structured enterprise data. Since our launch at the end of last year, Maestro agents have progressed from [ softer ] trials to early adopters to paid customers. Approximately 10% of our installed customer base is on a paid or trial subscription. We have a significant opportunity to bring the power of Maestro platform and AI agents to a much larger pool of customers. While still in early days, we've seen a broad range of use cases. For example, our data integrity agent has helped identify and prioritize data quality issues. The inventory excess analysis agent compares 2 scenarios to identify the largest shifts. The demand-at-risk analysis agent can pinpoint late purchase orders that risk demand and revenue. Our forward-deployed engineering capabilities and ongoing platform investments will unlock new opportunities for Kinaxis. Kinaxis is moving beyond just being a system of record for planning and decisioning to becoming a continuous system of intelligence, action and learning. FDEs will work directly with customers to solve complex, unique, high-value business problems on our platform. We have a growing list of customers actively engaging with us on AI-driven supply chain transformation. We are beginning discovery with these customers to determine what the FDEs will build and the outcomes to be achieved. We expect these engagements to actively expand through the end of this year and into 2027. Looking ahead, we are very pleased with the strong year-to-date results and momentum heading into the second half of the year. We are raising our guidance for full year total revenue and SaaS revenue growth. We are building depth, scale and performance into the foundation of planning and decision-making for Maestro and building a composable agentic AI platform to realize our vision for operational orchestration. Importantly, we are managing the business for long-term durable growth and profitability. As we shared at Kinexions, we are focused on 5 key strategic initiatives to drive long-term growth. First, continue investing in core Maestro platform. Second, building an agentic framework for operational orchestration. Third, executing on our new FDE customer engagement motion. Fourth, doubling down on training and enablement of our growing partner ecosystem. Lastly, and most importantly, continuing to stay focused on customer success and delivering value. We believe AI is making our core strengths more valuable, not less. As the market shifts from experimentation to adoption, customers need trusted intelligence, explainable decisions and measurable outcomes. That's exactly where Kinaxis is investing and where we are seeing growing demand from customers and continued business momentum. As I wrap up, thank you to my Kinaxis colleagues, our customers, partners and shareholders for your support. Let me turn the call over to Peter.

Thank you, Razat. Let me start with our second quarter 2026 results compared to the prior year. Unless otherwise noted, all figures reported are in U.S. dollars under IFRS. Starting with revenue, total revenue was $158.8 million, up 16%, driven by strong SaaS revenue and professional services revenue. Foreign exchange rates negatively impacted total revenue by approximately $900,000. SaaS revenue was $106.5 million, up approximately 20%. This represents 67% of total revenue, up from 65% a year ago. Growth was driven by momentum from new customers, strong net expansion among existing customers and healthy retention rates. Foreign exchange rates negatively impacted SaaS revenue by approximately $600,000. Subscription term license revenue was $5.7 million, up 13% and above expectations. This was driven by several expansion deals with existing on-premise customers. For the full year, we now expect subscription term license revenue to increase 85% year-over-year, with the bulk of the remaining revenue recognized in the fourth quarter. This represents an improvement over our previous year-over-year revenue growth estimate of 60%. Professional services revenue was $42.1 million, up approximately 12% and ahead of expectations. This is due to higher-than-expected realized rates reflecting our premium services. Given our outperformance in the first half of the year, we now expect mid-single-digit annual growth for the full year, an increase from our prior low single-digit estimate. Additionally, as a direct result of our strategy to shift more implementation and support work to our systems integrator partners, we now expect lower professional services revenue in the second half of the year compared to the first half. This remains a positive development for Kinaxis as our services partners are an important go-to-market channel and services are an attractive business for those partners. Maintenance and support revenue was $4.4 million, down 20%, as expected, due to on-premise to SaaS migrations. As we noted last quarter, we continue to see interest among on-premise customers looking to migrate to our SaaS offerings. These migrations provide us with the opportunity to modernize our customers and grow our SaaS business. Since migrations are driven by timing and customer schedules, we now expect maintenance and support revenue to trend slightly lower in the second half of the year. Turning to remaining performance obligations. SaaS and total RPO balances and growth both remained robust. SaaS RPO was $940.3 million, up 19%, and total RPO grew to $983.4 million, up 18%, highlighting the strength and visibility of our recurring business. Over the last 3 years, SaaS RPO has a cumulative average growth rate of 20% and total RPO has a CAGR of 19%. Next, annual recurring revenue increased to $465.6 billion, up 19%. ARR grew 21% year-over-year on a constant currency basis, excluding a negative impact of approximately $1 million from FX in the quarter. As Razat mentioned, ongoing strength in our $1 million-plus ACV contracts and net expansion with existing customers drove net new ARR growth of $75 million year-over-year and $19 million sequentially. Most of the customer growth came from enterprise or large enterprise customers, reflecting our upmarket focus. Now I'd like to move on to our second quarter profitability metrics. Gross profit grew 19% to $104.4 million. We delivered a gross margin of 66%, up 1.6 percentage points. This was driven by higher professional services margin and a more favorable revenue mix as professional services as a percentage of total revenue declined. Our subscription software margin was 78%, down from 80% a year ago. This change is partially due to increased hosting costs as we migrate from private data centers to the cloud. A quick update on this. We're exiting our private European data center by the end of 2026. Meanwhile, our North American data center migrations are underway and expected to be completed by the end of 2027. Once completed, Kinaxis will be able to realize the full benefits of cloud infrastructure. Professional services gross margin was 32%, up significantly compared to 23% a year ago, reflecting higher realized rates in the quarter. Operating expenses were consistent with expectations. Adjusted EBITDA was up 23% to $41.4 million, reflecting strong revenue growth, healthy gross margins and efficient operations. Adjusted EBITDA margin was 26%, up 1.3 percentage points, positioning us well to deliver on our full year outlook. Profit was up 15% to $21.2 million, with an effective tax rate of 28.8% for the quarter. During the last -- during the second quarter, we repurchased over 450,000 shares for approximately $47 million. Since the program started last November, through the end of the second quarter, we repurchased 1.2 million shares for approximately $134 million. This reduced the total outstanding share count on a net basis by 2.9%. We will remain opportunistic in share repurchases for the remainder of the year. We ended the second quarter in a strong cash position. Cash flow from operating activities was $30.7 million, up 36%. Cash, cash equivalents and short-term investments were $310.7 million, down from $324.7 million at the end of last year, even with $108 million from share repurchases. Free cash flow margin for the second quarter was 18%, up 3.8 percentage points year-over-year. Trailing 12-month free cash flow margin was 25%. The combination of higher revenue and reduced share count led to diluted earnings per share of $0.76, up 19% year-over-year. That sums up the Q2 review. For full year modeling purposes, I would like to provide some additional details. First, we expect foreign exchange rates to remain a headwind for the rest of the year given the strengthening of the U.S. dollar against the euro, the British pound and the yen. For the full year, we estimate increased FX-related headwinds to total revenue between $4 million and $4.5 million and to SaaS revenue between $2.5 million and $3 million. Second, we expect full year basic weighted average shares outstanding to be approximately 27.3 million shares and diluted weighted average shares outstanding to be approximately 27.7 million shares. These share forecasts do not include the impact of any share repurchases that we may pursue in the future. Now let me turn the call over to Herb.

Thank you, Peter, and thank you, Razat. As a new member of the Kinaxis team, I'm delighted to be here today. Before I address our guidance, I'd like to share why I joined Kinaxis. Supply chain planning and decision-making is one of the most complex and mission-critical challenges facing global enterprises. Kinaxis has already built a market-leading platform, deep domain expertise, a strong culture and an exceptional team with a proven ability to create value for both customers and shareholders. But what excites me the most is the opportunity ahead. AI has the potential to expand the scope of what we do, moving beyond planning into a much broader set of decisioning and orchestration opportunities. That expands the value we can deliver to customers, increases our market opportunity and strengthens our ability to drive sustained long-term growth and shareholder returns. Now turning to guidance. As you heard from Razat and Peter, we delivered better-than-expected top line results in the first and second quarter. With this in mind, guidance for the full year ending December 31, 2026 is as follows. We now expect total revenue to be in the range of $625 million to $640 million. This represents approximately 14% to 17% year-over-year growth. We now expect SaaS revenue year-over-year growth to be in the range of 18% to 20%. This equates to a range of approximately $427 million to $434 million. We're reaffirming our previously issued adjusted EBITDA margin guidance of 25% to 26%. With respect to our balance sheet, we will remain disciplined in capital allocation. We'll maintain a prudent cash and liquidity position to fund day-to-day operations and to navigate any macroeconomic or industry volatility. We will also make thoughtful, ROI-driven investments in product innovation and go-to-market initiatives that support strong organic growth while maintaining strong sales efficiency and attractive payback metrics. Any inorganic activity will remain tightly aligned with our product, technology and go-to-market road maps, delivering clear and actionable revenue synergies. Finally, we will opportunistically return excess capital to shareholders through share repurchases. I expect 2026 to be a pivotal year for Kinaxis, and I'm thrilled at the opportunity to be a part of the journey. Thank you to our global team for delivering another strong quarter. I look forward to meeting with analysts and shareholders in the weeks to come. Operator, we're now ready to take questions.

[Operator Instructions] Your first question from the line of Thanos Moschopoulos with BMO Capital Markets.

Congrats on the strong quarter, and Herb, congrats on your new role at Kinaxis. Razat, can you provide some color on the nature of the pipeline and how it's evolved over the past quarter? It sounds like you're seeing broad-based strength across a number of verticals, but just anything in particular you'd call out in terms of pipeline composition and how that's evolved? And then secondly, just given the accelerating growth you're seeing, could implementation capacity become a potential bottleneck at some point? Or do you see sufficient capacity in the partner ecosystem to handle further acceleration?

Yes, Thanos. Yes, our pipeline continues to trend very positively as we look ahead in the future quarters. We look at the [ forwarding ] quarter pipeline very frequently. We're executing on several campaigns to continue to add to the pipeline. What we're finding is that customers are definitely seeing a sense of urgency in their prioritization for supply chain planning, decisioning investments. We are seeing a significant surge in demand across the high-tech value chain just given what's happening with -- particularly with the data center build-out. We're also seeing increasing interest in the aerospace and defense industry that is seeing surging demand with fairly limited capacity and a very complex bill of materials. We're also seeing changing dynamics in the product portfolios of our consumer products and consumer manufacturing customers as well. So really, we're seeing increasing demand in a lot of different industry verticals, and we're executing on those campaigns. In terms of your question around the implementation capacity, look, this is something that's really important for us. And coming into this year, just to remind everyone, we doubled down on our investments in training and enablement, right? And that was all geared towards further building out the trained and the skilled talent pool across our platform, across our partner ecosystem. That is a very strategic priority for us, and we're continuing to do that. Of course, in addition to that, we have our own professional services team that supplements what our partners do for us. And we're continuing to scale the overall partner ecosystem with talented and skilled resources across the Kinaxis platform.

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

Congrats on a strong quarter. This is Richard on for Kevin. Just had a quick question on Maestro agents. So you noted that it's installed in 10% of the customer base. So how do you see that evolving over the next several quarters and year-end? And do you have any targets on that?

Yes. Look, Maestro agents are getting a lot of good traction within our customer base, both through trials and paid customers now. And we have a sort of a dual approach there. We've embedded Maestro agents within our platform, within the Maestro platform itself. And there, we have developed agent skills that are packaged agents that now are getting good usage. In addition to that, we've got Maestro Agent Studio, which provides a composable approach to really being able to compose agents based on different use cases that our customers have, while it has access to all the data and resources across Maestro. So that's really leading to all kinds of permutations and combinations of use cases. And as our engagement model with our customers grows around agents, we are seeing all kinds of creative agents being designed and developed and composed within Maestro. Now beyond Maestro, we've also been investing in our orchestration platform where we have an extensible data fabric, we have an extensible semantic and ontology layer, and we have the same composable agent infrastructure that can stitch together agents across different outcome threads or outcome flows. And that's also going to lead to further transformation in the ways of working for our customers and create even further value. So while it's early days for us, we are definitely seeing a lot of interest and a lot of traction. Of course, this forms a very important part of our innovation road map as well.

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

Just a question for Herb. Just given your background, your strategic advisory background, how do you see yourself, your skill set contributing uniquely to what Kinaxis has had in the past?

Yes, Paul. It's a great question. The way I would think about it is this. I will partner certainly very closely and obviously, with the entire management team, Razat, product, go-to-market to identify what are the areas of potential inorganic activity that could accelerate what is already a part of the plan, the strategy of the company, and then to tie it together with the financial outcomes and the shareholder value. So I think of it all in the context of my comments around capital allocation. The company has already year-to-date returned more than the free cash flow that they generated in the first half of the year. We'll continue to evaluate what we do with the balance sheet cash, all with the lens towards value creation and sustainable growth. Does that help?

Yes, it does.

Your next question from the line of Mike Stevens with National Bank Capital Markets.

This is Mike on for Doug Taylor. Congrats on a very strong quarter here. Just wondering on the EBITDA margin guide, the back half does imply a bit of a step down. Just wondering the drivers behind that. Is that kind of continuing investment in R&D? Is that a bit of a conservatism here? Or just any color around that?

Yes. I think there are 2 things. One is if you look at the first quarter, EBITDA margins were obviously higher than, I'll call "normal" because we did have a strong STL revenue recognition in that quarter, okay? The second thing is given the very strong go-to-market momentum that we have as well as the receptivity from our customers on what we are doing with agents in Maestro as well as the operational orchestration platform that Razat spoke about earlier, we want to continue to capture that momentum and that opportunity and make sure that we are investing behind that appropriately to capture the market opportunity and the sustainable growth opportunity. So for that reason, we're maintaining the EBITDA margin guidance for the full year.

Okay. No, that's pretty helpful. And then just another one around the enterprise. It seems like ARR is being lifted quite noticeably by the enterprise motion in the last couple of quarters. Just wondering any early learnings on that with regards to sales cycles and what the strength is reflecting and whether you think that this could be sustainable in the quarters ahead?

Yes. Look, our enterprise motion continues to gain a lot of momentum and ground. As you know, we've been significantly transforming our go-to-market motion, our sales organization, our demand gen plans and how we're executing on those, both in terms of sales cycles, but also in terms of delivering successfully to the customers. One of the things that was very noticeable in Q2 was the tremendous traction we had with existing customers. As we've added additional capabilities to our platform, our cross-selling motion and our expansion opportunity is becoming very prominent, and that's very encouraging. At the same time, in terms of net new logo wins, we are continuing to see opportunities both with customers that are looking to put foundational end-to-end planning and decisioning capabilities in place, but also future-proofing their transformation with a platform that can really bring them into the agentic era, right? And that's where the capabilities we've developed, our strong, single, unified Maestro platform, combined with all the agentic capabilities and the operational orchestration footprint that we are leaning in with, is becoming a very strong differentiator. So our win rates were very high in Q2 and the first half. Our pipeline conversion rates are higher than ever before. And we're not stopping at that. We're just starting, and I expect that we'll continue to improve and execute globally.

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

It's Sam Schmidt on for Stephanie Price. Can you talk through puts and takes to the increased revenue guide as well as your confidence and visibility into the back half? More specifically, the SaaS growth in the first half was strong versus the guide. How should we think about SaaS growth in half 2?