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Good morning, ladies and gentlemen. Welcome to the Kinaxis, Inc. Fiscal 2021 Second Quarter Results Conference Call. [Operator Instructions] I'd like to remind everyone that this call is being recorded today, Friday, August 6, 2021.I will now turn the call over to Rick Wadsworth, Vice President of Investor Relations at Kinaxis Inc. Please go ahead, Mr. 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 is based on information as of today, August 6, 2021, and contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in the earnings press release as well as in our SEDAR filings. During this call, we will discuss IFRS results and non-IFRS financial measures. A reconciliation between IFRS results and non-IFRS financial measures is available in our earnings press release and in our MD&A, both of which can be found 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 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 up 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.
Thank you, Rick, and good morning, everyone. Thank you all for joining us today. I'm going to start on Slide 3. I'm pleased to report the progress Kinaxis has made in the second quarter, including SaaS revenue growth of 18% to $42.3 million, total revenue of $60.1 million and an adjusted EBITDA margin of 12%. These results keep us well on track towards our previously communicated guidance for the year.Moving to Slide 4. We continue to experience tremendous momentum in our business. We won a record number of new customers for a second quarter. And year-to-date, we have more than doubled new wins compared to the same period last year. Roughly half of new customers have adopted our rapid start, our accelerated deployment package, and the majority continue to be partner influenced. Approximately half our new customers came from the mid-market, a segment that views RapidStart as a very appealing approach.While we're seeing great contributions from all of our vertical markets, life sciences and pharmaceuticals and CPG have been notably strong so far this year. As always, the list of new customers we welcomed during the quarter is humbling and includes companies like Subaru of America, the world-class automaker; Clariant, a global specialty chemical manufacturer; and Johnson Outdoors, an innovator in top-quality recreational products that Inspire people to experience the great outdoors. You would have also read our recent announcements naming Viant and Advantest as Kinaxis customers. Additionally, Kinaxis and our customer Bell Textron, an 85-year-old global aircraft manufacturer, were recognized by supply and demand chain executive for delivering one of the top supply chain projects of 2021. The awards spotlights successful and innovative transformation projects that deliver bottom line value to enterprises.Our RapidResponse platform strategy continues to gain traction as we announced the new solution extension partnership with Levadata. Levadata's Supply Risk Navigator will be integrated with RapidResponse to help companies assess the impact of supplier risk, provide mitigation recommendations and engage suppliers to execute an updated plan, valuable functionality in times marked by such disruption.On to Slide 5. With 3 consecutive quarters of strong results, our confidence continues to gain momentum for our return to accelerated growth. To further demonstrate a more accurate view into the health of our business, we are introducing a new metric, annual recurring revenue, or ARR, for short. At the end of Q2, our ARR reached the key milestone of $200 million, up approximately 24% from Q2 last year, and is the highest growth rate in any period we've measured going as far back as 2018. This outstanding achievement drives our confidence in a return to accelerated SaaS revenue growth in 2022 and the midterm to the 23% and 25% range, with potential to be even higher. Blaine will go into more details on how we calculate ARR later.We fully believe that we are now benefiting from the extra attention that has been brought to our market in general, and to the unique value Kinaxis brings to it, in particular. I'll now ask Blaine to discuss the results in more detail for Q2. Blaine?
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. Moving on to Slide 6. Total revenue in the second quarter was down 2% to $60.1 million, as healthy growth in SaaS and professional services revenue was offset by a normal cyclical decrease in subscription term license revenue. SaaS revenue grew 18% to $42.3 million, driven by new customer wins and the expansion of existing customer subscriptions. Subscription term license revenue was $0.6 million, down from $10 million in the comparable period. This result was expected as fluctuations in this revenue item are tied to the normal renewal cycle of our customer-hosted software subscriptions, and such renewals are at the low point of the cycle this year.Our professional services activity was strong again, resulting in $14 million in revenue or 13% growth over the corresponding quarter of 2020. This revenue varies from quarter-to-quarter based on the number, size and timing of customer projects underway, as well as the proportion of work assumed by partners.Maintenance and support revenue for the quarter was $3.1 million, largely in line with the result in Q2 2020. We continue to be pleased with the diversity and strength of our total revenue base. For the quarter, our 10 largest customers account for 27% of our total revenue, with no individual customer accounting for greater than 10% of total revenues. Gross profit decreased by 12% to $40.3 million, representing a gross margin of 67% compared to 75% in Q2 2020. The change in margin largely reflects a couple of items. First, the significantly lower proportion of subscription term license revenue in Q2 2021, which contributes nearly 100% gross margin. And second, significant investments in headcount and data centers made last year and to date this year, which are helping Kinaxis support our ever-increasing base of customers.Adjusted EBITDA was $7.1 million for a margin of 12% compared to 37% in the second quarter last year. Again, this reflects the impact of the natural cycle of subscription term license revenue and important investments in all of our operating teams across the organization globally, most notably throughout 2020. These investment initiatives are helping to create a scalable base to support much higher revenue for Kinaxis in the future.We recorded a profit of $3.1 million in the quarter compared to $9 million in Q2 2020. During Q2, Kinaxis received $7.9 million in non-refundable government grants related to the pandemic, of which $1.9 million was applied against cost of revenues and benefited gross margin by 3 percentage points. The remaining $6 million was applied against operating expenses. The amounts were excluded from our adjusted EBITDA calculation.Q2 cash flow from operating activities was $15 million compared to $30.8 million in the second quarter of 2020. At June 30, 2020, cash, cash equivalents and short-term investments totaled $232.9 million compared to $213.1 million at the end of 2020. We remain pleased with our outstanding track record of cash generation.Looking at Slide 7, our backlog or what we're now referring to as remaining performance obligation, or RPO, remains very strong. It grew to $381 million, up 14% from June 30, 2020. This amount includes $358.9 million of SaaS revenue RPO, which represents a 19% increase from the comparable period. $94 million of our RPO will be recognized as revenue in 2021, of which $86.3 million relates to SaaS business. Further details can be found in the revenue note to our financials.From the change in RPO over the period and adjusting for revenue recognized, you can calculate that total bookings in Q2 were $43.1 million, of which SaaS bookings were $40.4 million. Going forward, we won't be discussing the bookings figure, though it is easily calculated from our disclosures. The bookings amount has limited value as an indicator of business momentum as it includes both bookings of new business that generates future revenue growth and renewals of existing business that simply maintain the revenue base. In other words, a quarter with very high bookings may not be as exciting as it seems if it's predominantly comprises 0 growth renewals. As an example, in Q2, the vast majority of our bookings were incremental and renewals were very low.On to Slide 8. You can see we are introducing a much more useful KPI for you to follow annual recurring revenue or ARR. ARR provides a more timely view into growth in our subscription run rate. And as such, is a very strong indicator of momentum in our business. We define ARR as a total annualized value of recurring subscription amounts for all subscription contracts at a point in time, whether the software is delivered from our cloud as is the case in the vast majority of our customers, or hosted by customers on their premises. Ultimately, these subscription amounts are recognized as SaaS, subscription term licenses and maintenance and support revenue, but ARR normalized for the varying revenue recognition treatment under IFRS.Annualized subscription amounts are determined solely by reference to the underlying contracts and excludes onetime fees, such as the non-recurring professional services. Given the stickiness of Roper response in our installed base, ARR assumes that customers will renew the contractual commitments on a periodic basis as those commitments come up for renewal, unless that renewal is known to be unlikely.For the second quarter, our ARR accelerated to $200 million or 24% higher than in Q2 2020, which is the highest growth rate in any period we measured era, going back to 2018. We see this result and the recent trend in ARR as a good indicator of the strong momentum we're experiencing currently.A couple of things to consider. We fully expect that ARR growth will fluctuate between quarters. So we caution you not to read too much into small periodic changes. Growth is tied to the timing of booking new business, which doesn't always follow a predictable pattern. We encourage you to focus on longer-term trends. We will only be disclosing total ARR, representing all of our contracts, but SaaS ARR growth is higher than for our relatively small group of on-premise customers and also higher than growth in total ARR. We expect that to remain the case ahead.Looking at Slide 9, based on our track performance so far this year, healthy RPO, outstanding recent momentum in ARR and healthy outlook for our business and the market in general, we continue to have full confidence in our guidance for fiscal 2021. To reiterate, we expect total annual revenue for 2021 to be in the range of $242 million to $247 million, 2021 SaaS revenue growth to be between 17% and 20%, subscription term license revenue to be between 3 and $5 million in 2021, and an adjusted EBITDA margin of 11% to 14% for 2021. We're also very confident that the positive trend in our ARR supports our assertion that 23% to 25% SaaS revenue growth is a sustainable target over the midterm, including for 2022, and we look forward to giving specific guidance ahead.With that, I will turn the call back over to John.
Thank you, Blaine. We're pleased with our progress to date and remain firmly on track for the year. More importantly, we're excited to see significant momentum return to our business and to provide you with increased visibility into those trends. As always, thank you for taking the time to join us on the call. And with that, I'll turn the line over to the operator for Q&A.
[Operator Instructions] Today's first question comes from Richard Tse with National Bank Financial.
Thanks for sharing those new metrics. Those are actually really helpful. In terms of the RapidStart, I just wanted to sort of ask, last year, you had a number of notable wins there, understandably. I'm kind of curious to know how many of those wins from last year have sort of converted into what would a full deployment be of RapidResponse?
Well, the intent of RapidStart-- and essentially, RapidStart was born from understanding the implications of COVID, where many of our customers said to us, look, we need to find some cure to what ails us inside of a very short window here. And so RapidStart was intended to provide that go live state, from project start to go live inside of a 3-month window, and then extend from there. So I will say that we have experienced very successful RapidStarts inside of that window with existing accounts that were closed in prior periods and have seen already extensions begin from those starting points. So you're essentially at a live state with concurrency inside of a 3-month window and extending from that point forward. So it's working exactly as intended. The other thing that RapidStart has done for us, while they tend to start smaller and faster, we're seeing, I would say, a return to a more normalized land and expand type of percentage contribution to subscription growth. When we went public, we were close to 50% subscription growth through net new wins and 50% of subscription growth through expansions. We're closer to that now than we were in previous years, which is extremely healthy and exactly what we intended. So it's great to see RapidStart and the strategy that we've taken with RapidStart work this way. One, it is driving record number of net new wins, and two, we're seeing exactly what we expected to see, which is a return to a more normalized percentage breakdown between net new wins and customer expansion. Hopefully, that answered your question, Richard.
Yes. No, that's helpful. Sort of just switching gears here a little bit. You're just over your past Rubikloud. Can you maybe give us a sense of how that's been integrated in Kinaxis and how they've been contributing to the RapidResponse platform?
So we have-- if you recall, the 3 main pillars for Rubikloud, the acquisition around Rubikloud, first and foremost, was that they had solved use cases that we could resell into markets that we currently serve, predominantly the CPG space, to some extent, life sciences. And so we have been successful in achieving that-- achieving success in that particular pillar, selling their value into the CPG customers that we have existing. The second element was their bench strength in machine learning. And so they essentially more than doubled the size of our machine learning bench. And so we are actively working this year at merging the technologies so that we have exactly one machine learning platform. And that is going exceptionally well. The third pillar was their entry, their successful entry into the retail space. And so today, we have retail customers. In fact, we had retail customers speaking at one of our conferences recently. And so I'd say their contribution is still early in the segment here, early in the cycle of that investment. But everything that motivated us to acquire them is manifesting itself quite well.
And just last one quick one here. In terms of OpEx, I totally understand what you're doing in terms of setting up for growth. So as we move into 2020, do you think that those investments will start to level off as you kind of harvest that growth from the current round of investment?
Yes. Good question. And we definitely see that the investments we made will level off a little bit. As we've told you before, we've invested heavily in data centers. We've invested in our headcount to ensure that we were able to scale appropriately with the increase in customers that we are seeing. If you had asked me 3 quarters ago, what are you expecting, we would just keep on saying, we're going to have a record customers, record customers, record customers every single time we get on these calls. I don't think I would have been as confident as now seeing where the numbers are at. So we're pretty happy with the investments we've made. But you're absolutely right. This will level off. What we have talked about is that on an adjusted EBITDA margin perspective, in the midterm, we will be back to that 20% range in the midterm.
Our next question today comes from Thanos Moschopoulos with BMO Capital Markets.
John, just in terms of the traction in the mid-market, can you clarify the go-to-market share? Do you have an overlay sales force? Or is it the same sales force targeting the market as enterprise? And are you seeing a good mid-market traction across all verticals and geographies? Or are there some in particular that you would call out where the traction is more pronounced?
Yes. A great question. We have actually been in the mid-market for quite some time, I'd say. Perhaps it was by accident. People would come to us from the mid-market. Of course, in the verticals that we served, we would gladly accept them. It's different now because I would say it's tackling mid-market on purpose. RapidStart is a key element to that. It's extremely-- something extremely positive for mid-market customers when they can engage with us and see time to value inside of a 3-month window. We have, in fact, applied mid-market-specific sales force to tackle this market. So that is under way. And it's, again, in combination with RapidStart. That essentially, is what we're leading with. But I'd say roughly 50% of our net new wins in this past quarter were as a result of that strategy. And so I fully expect to see the continuation, if you will, of that land expand percentage split continue as we roll out that-- as we roll forward with the strategy. As it relates to TAM, across our 7 verticals, it's quite meaningful. And this is to say, this is an end strategy. We're by no means stepping away from large enterprise accounts as I relayed with companies like Subaru, America. And so by no means are we stepping back from that. But again, it's just a-- it's an and strategy, where we're applying energy, investment, product packaging to tackle mid-market on purpose. And so this is definitely having an impact on the momentum that we're experiencing today. And what we're seeing, obviously, is whether companies are $1 billion in revenue, or $75 billion in revenue, they're being impacted by this global pandemic in precisely the same ways. They're hurting in precisely the same ways. And so it's wonderful to see that RapidStart is having the desired effect. And look, there's something else. I haven't mentioned, but we've been monitoring this very, very closely. And it is the overall sales cycle. We-- as long as you've noticed Thanos, it's a measure that I've been looking at. And so there's a part of me that said, when we exercise this strategy of RapidStart, and we talk to the mid-market, will we see some reduction in overall sales cycle? And while it is early, it's early, we are-- we have seen-- we have definitely seen net new wins in sales cycles that are significantly lower than that 18-month type of threshold we've been talking about. In fact, there was 1 that was measured in weeks. Not months, weeks. And so again, very early. It's super early to say, yes, that's going to be a trend. But I sort of think about it this way, Thanos, it's the thesis behind our investments into RapidStart and tackling the mid-market. And by the way, in some cases, these are benefiting very large enterprise accounts also. I also don't want people to think that RapidStart is a mid-market strategy. Not at all. We've been very successful with that strategy with extremely large enterprise accounts as well, that are just looking to say, look, I want to be a hero in 3 months. We need to be live in 3 months. I need to feel better in 3 months, and then we'll extend from that point. So I would-- again, just to close off the question, I'd say it's had a pretty meaningful impact to our overall pipeline. And our pipeline is larger now than it was 3 months ago.
The sales cycle question was going to be my next question. I got a quick in for Blaine, which is, I know the sales commissions were lower this quarter despite the very strong net new bookings. Is there anything to call out there, any change to commission structure? Or is that just a timing issue or supportively noise?
Yes. It's a timing issue. There's a good reason why we gave ARR. When I went back and I first got on this call, I think, 3 quarters ago, I said the health of the business has never been stronger. We had just talked about where-- our pipeline was over 40%, we were doing quite, quite well with bringing on new customers. And ARR was really kind of the thing that was kind of, in my mind, saying, why don't people understand this because once they understand this, they'll know exactly what our future is going to look like. The-- when you look at our commissions and that figure, it has so many different, I guess, factors that could change it. #1, we changed the way that we look at our commissions on an annual basis. That can change on an annual, I guess, momentum. And then the other thing is that we have certain contracts that will fall off because they've been on the balance sheet at a certain point in time. And so it will change as well. And when we think about where it is today, I'm-- I look at it, and I make sure that it's following IFRS. But at the same time, as far as where I'm thinking about the growth of the company, ARR is what I'm going to be looking at because it's showing us a pretty clear vision of some really green fields for us right now.
Our next question today comes from Daniel Chan with TD Securities.
Thanks for the ARR metric. I do recognize that bookings is not the perfect one out there. But I did want to dig into that a little bit. We've seen strong bookings out of many large enterprise software players recently, but your SaaS book-to-bill this quarter came in under 100%. Just wondering if you believe the low book-to-bill is just the result of timing around the renewals that you mentioned or if there's something else?
That's exactly it. I have a different chart we haven't shown you, but it shows like the incremental and shows of renewals and what we have for total bookings, and it's almost-- this quarter is the first quarter I've ever seen where incremental bookings almost fills up the full gross bookings amount. The renewals are a very small amount. And it just happens that Q2 of 2021 is not a big renewal quarter for us. Once we have a bigger contract coming up for renewal or a number of contracts come up for renewal, that will help that gross bookings number. But again, incremental bookings are phenomenal. They're the vast majority of what you're seeing in that figure we've shown you. Renewals are a very small amount in Q2 of 2021.
That's good to hear. And then CapEx was also higher this quarter. What was that going to?
So the biggest item we have is-- and we're very, very excited, we have our new headquarter that we can actually see from our building that we're in right now. I was-- we were looking at the building outside of our window and it's looking fantastic at this stage. So the large amount went into that.
And then final one for me. Talent continues to be a constraint on growth for many software companies. Is this something you're seeing? And do you anticipate any kind of wage inflation to creep up?
Yes. It's-- I think it's an obvious challenge that a lot of people are facing with sort of the work from anywhere opportunities. At Kinaxis, we have a phenomenal culture that we nourish every single day, anchored on 3 simple words, people matter here. We continue to experience, I'd say, a normal acceptance rate of new hires. We continue to be hiring. We ended the second quarter with over 1,000 full-time equivalents, but that does not tell the whole story. We have an extremely, extremely healthy co-op program. And so the number is significantly higher than that as we include the co-op team, and we continue to hire and-- so it is something that we monitor. But our attrition rates and our acceptance rates of offers at the moment continues to be as healthy as it was in prior periods. Now we're obviously going to continue to monitor that. And we are extending our, I'd say, our R&D footprint through that acquisition of Rubikloud. So we now have a pool of talent in the Toronto area as well as in Ottawa. And then again, the culture and everything we do, I focus a lot of attention on making Kinaxis and magnet, making it a destination for new grads and fresh talent. And so we're-- like everyone else, we're going to compete based on our merits.
Our next question today comes from Robert Young at Canaccord Genuity.
Through the beginning of the pandemic, you talked about user activity on the platform surging and a lot of your customers finding new ways to use RapidResponse. Maybe now revisiting that, have you seen engagement sort of remain higher? Or has it calmed down? And then a second part to that would be the mix shift back towards 50% new and expansion, is that some of the-- some older customers who come back on the platform through the pandemic, looking for RapidResponse already installed and running to sort of solve the problems?
Yes. So the-- as it relates to activity, that continues to be steady. Through the pandemic, we definitely saw a lot more scenarios being run, and we continue to see that trend. And of course, as Blaine just said, this is the third quarter of record net new customer wins. 3 quarters in a row, record number of net new customer wins. And so obviously, that drives the activity in our data centers as well, especially with RapidStart, they're looking to apply the value and the benefits of concurrent planning in a very, very swift manner, in a live setting, a production setting. So we're continuing to see that-- very healthy numbers there. And the second half of your question, can you repeat that again, sorry?
Yes, just curious to see if some of your older-- have any of your OEM customers come back more engaged in the past?
Yes. It's really a combination of both. But again, when you think about RapidStart being go live within 3 months, essentially 1 quarter, and 3 quarters of record-level net new accounts, and you combine that with a statement of sort of a return to roughly 50-50, you can see that the blend is obviously a function of both, right? It's a function of net new customers expanding inside of a very tight window. And it's also a combination of existing customers that continue to expand, some of which we've been working with for many years. And I think I mentioned this during the last earnings call, when we talked about Mars as a net new customer. That didn't start as a giant enterprise end-to-end kind of a project, but that's where it ended, right? So that's where we're at now. And so that expansion is an example of a past customer catching up and expanding well beyond their starting point.
Great. And then I think you said just a couple of minutes ago that the pipeline was bigger quarter-over-quarter. I want to make sure I heard that-- and any other color on the pipeline relative to the different end markets, different geos? Any help you can provide will be great.
Well, I look at the pipeline every 24 hours. Every 24 hours I receive a pretty detailed report on what we're staring at. And yes, I did say it, and it is factually correct that the pipeline is larger today than it was 3 months ago today. And it continues to be very healthy in all of the geographies. I don't see a concentration issue. I'll add this as potentially some added color. We continue to see the warmest areas being life sciences, no surprise. And we're hopeful to be able to announce some exciting names there in the not-too-distant future. In the CPG space, I'd say. Second, an area that we haven't really talked about for a while that is seeing some added excitement, I'd say, in the pipeline, is aerospace and defense. And so those are the 3 areas I might draw attention to in that sequence.
Maybe a last little quick sneaky one would be just an update on the product road map. I mean there's a lot of new stuff coming out this year. Maybe just sort of give us a sense of where command and control is, the user experience, all of that, has that all rolled out on plan? No pass line.
Yes. We're really excited about command and control, about the new user experience, mobile-first user experience kind of investments that we're making. And all those things continue to be on track in development. And we're also focused, as I mentioned earlier, in the integration and unification of our cloud platform for machine learning and AI, which is the combination of the Rubikloud technologies in combination with the Kinaxis technologies. We're also working quite a bit on the demand sensing side, the platform side. We're really excited with our solution extension investments and RapidResponse as a platform. We now have 6 announced solution extension providers. I would tell you, we anticipate having tens of them in the years to come. This is the force.com for Salesforce kind of strategy, right? I think about RapidResponse as a platform, is a similar strategy as what Salesforce did when they announced force.com, to allow a third party to implement their own intellectual property on top of RapidResponse. That's the strategy. It's-- and it's working exactly as we had planned it to.
And our next question today comes from Christian Sgro with Eight Capital.
My first one here might be for Blaine. And it's to help us better understand the ARR metric. Is there the potential, maybe not this year been in the future for term license revenues to skew that? But is that where maybe you'd encourage us to look at ARR and RPO at the same time? Or is there any other color you have there on how much SaaS comprises and how it term license bookings backlog can affect the ARR metric?
Good question, and I'm happy you asked it in case there's anyone who has any confusion on it. The way that we've defined our ARR was to normalize IFRS, or normalize the contracts to their subscription term license. So we would recognize it over the term of the contract rather than what IFRS 15 requires us to recognize the amount upfront. So there should be no difference. There are-- and I'm not going to point out, but there are companies that will sometimes choose one ARR that hand picks the SaaS amount and doesn't include the subscription term license for whatever reason. And you can kind of bake your number a little bit because of that by switching the buckets of where they're going to fall under revenue. But for us, what we've done, we've-- I've tried to make it as simple as possible. If we were just recognizing revenue over the contract that we have in place, that's what you're going to get for ARR. And so it's-- hopefully, as simple as-- and it makes the most sense to most people that if you have a subscription term license where we would usually recognize 60% of it upfront in just over 3 years, we've said, let's back that up, we're going to recognize it over the full 3 years for the purpose of how we recognize ARR. And so we shouldn't see any spikes over time. It should be a very smooth ARR that we should see.
I'm glad to hear that. You guys have sincere accounting nuances for this one, switching B 22 lumpy as it grows. My other question was on the business on RapidStart. That is just becoming more and more popular. I was just wondering if there's a way to think of the gross margin or operating margin impact of RapidStart, let's say, absent any expansions, or does it require less headcount labor sales to sell and deploy? Would you characterize maybe the margin impact as neutral? Or could it shift margins one way or the other?
Yes. So when we think about RapidStart, and when we started looking at what this could look like over the long term, we realized, obviously, we would have in the near future, we would have extra cost, a lower gross margin in the early beginnings of rapid start because we would get used to scaling up, making sure we understood how to make it as efficient as possible. But on the lifetime value of that customer, we expect that, that will be something we're going to get a couple of extra points on the operating margin and gross margin as it becomes something more that we have like a template, something that we can create very, very efficient processes to repeat and rent, and we think that that gross margin will be a stronger gross margin than we will see in the long-term that we would have had for what we had in the past with RapidResponse.
And our next question today comes from Stephanie Price at CIBC.
John, I was hoping you could talk a little bit about what you're seeing from your traditional enterprise sales cycle. It sounds like you've had a few enterprise wins recently. Is the traditional enterprise sales cycle starting to normalize there?
I would say the last 3 quarters-- some of this is related to RapidStart as an average. We are seeing some, I would say, positive movement there. As I mentioned, I'd say that overall, especially as it relates to RapidStart deals, they tend to be closed at a faster rate than I'd say the larger global end-to-end transformation projects in the past. And as I mentioned, one of the RapidStart, one of them was measured in weeks, shockingly. But again, I think it's early to suggest that this is going to be a sustainable trend. It's something that we watch very carefully. And as I like to tell the Board, I've got red glasses, but not rose-colored lenses. So I don't want to suggest that this will be systemic. Although the thesis would suggest that lower entry cost much faster return on investment, return on investment inside of 12 weeks, and that is very, very appealing. And so the thesis so far is holding. I believe that the result, as we extend RapidStart through the quarters ahead of us that we'll see some improvement in the overall sales cycle.
And then in terms of partner execution in the quarter, just curious if you could comment on that. And also whether you've seen any SI partners do solution extensions as part of an RFP process yet?
So the answer to your second question is absolutely. And the beauty of our solution extension and RapidResponse as a platform in some cases, the intellectual property being produced by a partner is the lead into an account. In other words, that's the-- the prerequisite value is the solution extension IP that leads us into an account, which is, again, extremely exciting. And I do believe that that trend will ultimately continue. As it relates to partner influence, it continues to be at par with previous quarters. We signed many, many new partners in this last quarter. And they continue to be influencing the vast majority of the net new wins that we're closing. I'd say the big story, though, at least in my mind, the big story is around the solution extension partners and the intellectual property that they're bringing to the table. And the fact that in some cases, their intellectual property were the catalyst of us closing that new business.
That's great to hear. And then just finally from me in terms of M&A, just curious about what you're thinking here. It's been a while since the last acquisition. Obviously, you've got a good cash position.
So yes, we're continuing to exercise that muscle, so to speak, and being a lot more thoughtful about our M&A strategy. And we are constantly evaluating, I'd say, buy versus build as it relates to our road map. Kerry Liu, who was the CEO of Rubikloud, is running that program for me. And so I'd say there may be some potential in the quarters ahead for some tuck-in opportunity. I wouldn't say-- I wouldn't classify our M&A strategy to be looking for large, I'd say, acquisitions at this time, but we are evaluating opportunities against our near and midterm road map and looking to accelerate value through potential acquisitions.
And our next question today comes from Nick Agostino with Laurentian Bank Securities.
John, a few questions here. First, when we think about the value proposition that RapidResponse and now RapidStart as well, deliver to customers, when you think about, say, the headwinds that you were dealing with-- or resistance to adoption if there were any, before the pandemic and at the start of the pandemic, can you speak about maybe how RapidStart and how the pandemic, as it continues to play out here, how maybe some of those resistances have-- maybe you've been able to take down those walls and convert some of the old way of thinking to more of the new way of thinking when it comes to adoption and your value proposition?
Yes. It's a great question, Nick. First, I would say-- I would categorize, if you will, the events at the start of this pandemic as being less so the state where people weren't adopting the new technique. It was more companies turning inward for survival. And so I had nothing-- well, I fundamentally do not believe it had anything to do with the belief that concurrent planning and changing their protocols was the viable option. Again, it was much more turning inward, cash preservation survival, and understanding the new world order, how do we survive? The one thing I've had about 60 or 65 one-on-one conversations now with Chief Supply Chain officers over the last 12 months. And there's one thing I've heard almost consistently, okay? And it is that things that you could trust, absolute trust in your supply chain from one day to the next, things that you could trust could no longer be trusted. And lines were-- transportation lanes would open on one day and close the next. And so that's how I would categorize the state of affairs when I look back at Q2 and Q3 of 2020. I'd say today, there is a recognition that what governed supply chains for the past 30 years won't survive the next 3. That is another narrative that I'm hearing. What governed supply chains for the last 30 years will not survive the next 3. Every Board is asking every CEO, what will you do next time. And so this, if anything, is driving the desire to rethink the governance model. And I always say this, right, it's far less about technology. It's all about technique. Technique informs technology, not the other way around. And so it is drawing a lot more conversation around the technique of concurrency as being the model of the future. And of course, that leads to, well, what technologies enable concurrency. Well, we invented it. So it does bring us to the table. But the conversations I have always been and will continue to be about technique first. And so I do think what happened with this global pandemic, if I were to describe it without talking about technology, just about every supply chain learned what it felt like to have an agility muscle atrophy. That's the way I think about it. If you had no agility, this is what it would feel like. And so obviously, our value proposition around concurrent planning is all about bringing forward hyper agility to supply chains. And so the technique today in this dialogue, this narrative around optimizing time, speed to detect leading to speed to correct. All of these types of narratives are really, really relevant now more than ever.
And Blaine, a couple of questions for you. When I look at your EBITDA margin guidance, you're maintaining that 11% to 14% range. I believe on the last call, there was-- it was mentioned that the expectation that first half margins would be greater than the second half. And I think in the first half, the numbers are at 14%. And then just looking at the comments earlier about how as we go into 2022, do you expect, I guess, spending to kind of start to level off here. So I'm just wondering for the second half of this year, should we still expect, say, a margin and therefore, spending to increase versus the first half? Or should we start to expect more of a tapering and maybe look at second half margins to be more in line with the first half?
Yes. So you're absolutely right. We came in at 13.7% for the first half of the year for adjusted EBITDA, which is normal for us in the first half of the year, where it's generally a bit stronger. We think that we will still end up in the 11% to 14% for the back half of the year, probably very comfortably in there. Obviously, a big thing that depends on that, and that's going to help change what we're going to look at in 2022 is subscription term license. So if we landed some large subscription term licenses, any time in the back half of the year, that will change what our adjusted EBITDA margin would look like. And then when you think about that and you think about 2022, we know that 2022 is expected to be a very strong year for subscription term licenses. So you should expect, as a result, we're going to have some points that are going to start adding up on top of the numbers we have right now to get us closer to that 20%. Now the other factor that we've talked about, obviously, is that we have slowed down the hiring because we hired in advance of this kind of rush in of extra new customers. And we think that we're in a pretty good space where we're at right now with respect to headcount. So I think that will all help kind of gradually get us back to that 20% number in 2022. But to kind of answer your question, we should be in the 11% to 14%. There is always a chance that something like a subscription term license could always throw that off when we might be a little bit higher.
And then one other question, which is in part tied to the ARR. When I look at your professional services number, I think it was a record this quarter, $14 million. And part of that growth ties to expand into surface offerings, which you guys have talked about in the past. My question is, is there a sustainable run rate when you look at those expanded services? And is there a predictable run rate that you can speak to that maybe you also include as part of your ARR?
Yes. So I think what you're touching on is on professional services, we now kind of have almost 2 different revenue streams that come in, one of them being sustainment, which we just talked about. Sustainment can be sometimes looked at as a SaaS-type of business. We are not considering that, and that is not being included in our ARR. So anything that you have in ARR only come from SaaS, subscription term license and the maintenance and support. The sustainment business that could be a recurring revenue to a certain extent that's within professional services is not something that we're considering at this stage. Perhaps in the future, we may consider that. But at this stage, we're not.
Our next question today comes from Martin Toner with ATB Capital markets.
Quick follow-up on the gross margin discussion of mid-market customers. You talked a bit about gross margin impact. Is there a similar impact on the operating margin or EBITDA margin volume for those mid-market customers at scale?
No. I think what you're going to see is the gross margin is going to flow down to the operating margin overall. Our sales and marketing is still going to be the same. The one thing that we might see, though, a little bit differently is that I think that for mid-market or especially RapidStart, we're going to see a lot of partners that are going to be very, very interested in getting involved with those types of deals because it is a very similar, I guess, product that they'll be selling, that they can, again, rent and repeat over and over again, and it will make them very, very efficient along the way. So overall, I think the operating margin will be fairly similar. I think we will have a couple of points that will be nice, but that will come from the gross margin side.
Our next question comes from Paul Steep at Scotiabank.
John, just quickly, could you reconcile a little bit, lots of talk of new customers, new wins and maybe the shift somewhat to mid-market. How should we think about the cadence of ramping on those customers, I guess, over time, given the mix that you're talking about shifting within the business, is it significant? Or are we going to see this over the next year or so in terms of that cadence? I'm just trying to align that with some of the comments around growth.
Yes, Paul, it's-- a lot of that has to do with the size of the enterprise itself. Ramping a global concurrent transformation governance model for a $40 billion enterprise that's in every geography that matters will take longer than ramping that same footprint for a company in fewer geographies doing $1 billion in revenue. The intent here, I'd say that the lifetime value of a customer regardless of their size and complexity, we don't believe that RapidStart will diminish that number whatsoever, at all. So that's the way I would categorize it. We-- what I am-- what I suggested earlier was that I do believe we'll continue to see a healthy mix between land and expand, revenue harvested from existing customers versus revenue harvested from net new. And in the past, that number had been skewed mostly towards the net new. And so I do think our RapidStart-- one of the side effects of RapidStart is seeing a much healthier mix between those 2. And I think that trend is absolutely going to continue.
Three quick hits for Blaine. First one, just on ARR, just to confirm the point in time that's referenced in the definition here. I'm assuming the point in time is the end of the period such that if we think about this metric as if you never did anything else for the rest of the year, ARR would effectively be what fell out, excluding the sort of more variable items. Second would be just what the CapEx left to do the headquarters is for this year.
Sure. So for ARR, point in time, you're right, it's the end of the period. So if you think about it, we make our decision at that point based on any incremental bookings that have come in as well as any contracts that are currently active as to whether or not they should be considered an annual recurring revenue. We will also, at that same point in time, take a look at any of our contracts to say, are there any that are in jeopardy for not recurring. And so we do, on a quarterly basis, take some out at that time. So June 30 was the last time that we provided where we hit the $200 million in ARR. With respect to CapEx, we expect that we'll be, I guess, active in the new location starting February -- middle of February right now. And so we expect that CapEx to continue to come in until that period. But it should be in line with the guidance that we provided at the very beginning of the year.
And the right-of-use should already start moving up since it sounds like it's-- you're already on for 2021, even though you said February move, correct?
Yes. So I would say, look, get ready for that in Q3, Q4.
And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks.
Great. Thanks, operator. Thank you, everyone, for participating on today's call. We appreciate your questions as always and your ongoing interest in and support of Kinaxis. We look forward to speaking with you again next time when we report our Q3 2021 results. Bye for now.
Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines.