Aug 9, 2017
Executives
John Sicard - Chief Executive Officer Richard Monkman - Chief Financial Officer
Analysts
Thanos Moschopoulos - BMO Capital Markets Robert Young - Canaccord Genuity Richard Tse - National Bank Financial Paul Treiber - RBC Daniel Chan - TD Securities Todd Coupland - CIBC Deepak Kaushal - GMP Securities Nick Agostino - Laurentian Bank Securities Suthan Sukumar - Eight Capital
Operator
Good afternoon, ladies and gentlemen. Welcome to the Kinaxis Inc.
Fiscal 2017 Second Quarter Conference Call. At this time, all participants are in a listen-only mode.
Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] Before beginning its formal remarks, Kinaxis would like to remind listeners that today’s discussion may contain forward-looking statements that reflect current views with respect to future events.
Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in these forward-looking statements. Kinaxis does not undertake to update any forward-looking statements, except as required.
I’d like to remind everyone that this call is being recorded today, Tuesday, August 8, 2017. I would now turn the call over to John Sicard, Chief Executive Officer of Kinaxis Inc.
Please go ahead, Mr. Sicard.
John Sicard
Good afternoon and thank you for joining us. Today we issued our second quarter results for fiscal year 2017, a copy of which is available for your to download on our website, kinaxis.com.
With me today is our CFO, Richard Monkman. As we reported in our press release, a large Asia-based customer, with whom we have been working with for a year, is in breach of its contractual obligations.
As a result, we did not recognize revenue from this company and have removed future revenue for this account from the subscription revenue guidance. Richard will discuss the financial implications of this change during his commentary.
As demonstrated by our financial results, our business remains very solid even after reflecting this challenge. Our second-quarter subscription revenues grew 21% over the prior year period, and we delivered a very strong 29% adjusted EBITDA, as well as very strong cash generation.
This growth has been supported by our growing network of global partners who have opened the door to a much broader and captive audience of potential customers. As in the first quarter, I commented on how the majority of new deals were influenced by our partners.
I'm happy to report that this trend has continued through Q2. Our investments in knowledge services and the uptake of partner certifications are paying off well ahead of schedule and well ahead of our expectations.
Partners in North America, Europe and Japan have all contributed to our success including our recent deal announcement with Nissan Motor Company. This rapid partner progress has also led to a dramatic increase in their role in deploying new customer projects.
And as a direct result, they are gaining the related professional services revenues for those projects. While this is the level of partner engagement we have been driving towards, the pace with which they have been able to take on new requirements has been higher than we had originally expected.
With this level of direct partner involvement and the resulting professional services revenues they secure, we have revised our full year revenue guidance accordingly. We maintain a long-term view of growth and strongly believe this near-term success of our partners will strengthen and support Kinaxis for many years to come.
We believe it is only appropriate that as they continue to build the Kinaxis practices they benefit from these new sources of revenue. This increase in the relative percentage of subscription to total revenue is well aligned with the model we have consistently presented to you since our IPO.
In the long-term, the benefits to scaling the business through our strategic partnerships will far outweigh the impacts today. I view these developments as a strong validation that we are on the right path with our partner strategy.
A growing partner network and its proven ability to identify and support new customer opportunities faster than we could otherwise do on our own is just one element of our growth plans. We are investing in technology ahead of growth providing us with the scale we need to take on larger customer engagements.
In particular, we are investing in the scale and depth of our applications and their ability to leverage developments in machine learning and IoT. In my opinion when it comes to machine learning there are far more academically interesting articles to read than there are practical use cases.
True to our pedigree we are taking measured steps towards the development of industry validated value propositions. Starting with something I call the self-healing supply-chain.
These initiatives together form a long-term strategy that we believe allow us to grow profitably as we continue towards the next inflection point in our business. With that, I’ll turn it over to Richard for an overview of the financials.
Richard Monkman
Thank you, John and good afternoon. As a reminder, all figures reported on today's call are in US dollars under IFRS.
Q2 revenue increased 14% to $32.9 million over Q2 2016. Total revenue growth was driven by our expanding base of subscription revenue, which increased 21% in the second quarter to $24.2 million.
As John noted, as of the second-quarter we are longer recognizing subscription revenue for one customer, who is in breach of their contract obligations. If the contract was in good standing, we would have been in a position to recognize approximately $1 million of additional subscription revenue in the second quarter.
Professional services revenue in the second quarter declined 2% on a comparative basis to $8.4 million. As previously noted, our partners continue to play an increasingly important role in the deployments of rapid response for new customers, and are therefore gaining this professional services revenue.
Gross profit increased by 14% in the second quarter to $22.9 million. Gross margin at 70% was consistent with the prior-year period.
We have continued to invest in the business in line with total revenue growth rates. We continue to make these investments as the believe they enable our long-term ability to profitably maintain consistent and sustainable growth.
Adjusted EBITDA in Q2 was strong at 29% of total revenue and increased to $9.6 million, $2.3 million above Q2 2016. This increase in adjusted EBITDA was a result of Kinaxis scaling its revenue growth at a higher rate than its cost.
Net profit was $5.6 million or $0.22 per basic and $0.21 per diluted share. The increase in profit was driven primarily by an increase in subscription revenue, partially upset by our investments in additional data centre capacity, research and development and an increase in share-based payments.
Cash generated by operating activities was a strong $7.5 million in the second quarter. Given our growth prospects we continue to invest in line with business growth for 2017.
For the full-year, our expectations are that sales and marketing expense will grow to support the business and be in the range of 22% to 24% of total revenue. We also expect net research and development expense to be in the range of 17% to 19% of total revenue.
These investments directly impact our long-term growth initiatives specifically channel partnerships and knowledge service as we scale the business through customer success. We believe that investors recognize the value of long-term business growth coupled with sustained profitability and strong cash flow.
Our revised guidance reflects both the impact on subscription revenue of the specific customer situation discussed earlier as well as the anticipated level of professional services revenue resulting from the expected continued trend of higher participation by partners. Reflecting the combined influence of these two factors, we are revising our full-year 2017 guidance as follows.
Total revenue guidance for fiscal 2017 is expected to be in the range of $131 million to $133 million. The midpoint represents a 14% growth over fiscal 2016 revenue.
Our long-term focus is sustained subscription revenue growth. We expect to continue this trend in 2017.
Our revised annual subscription revenue growth is projected to be in the range of 21% to 23%. we now expect annual adjusted EBITDA to be in the range of 26% to 28% of total revenue.
With that, I will turn it back over to John.
John Sicard
Thanks Richard. As I touched upon at the beginning of our call, our partners are playing an important role in securing new contract wins, and I fully expect that trend to continue.
With the success of the program we have entered into active discussions with new potential partners, who want to offer their global clients rapid responses, leading-edge concurrent planning capabilities. Though we are excited about the level of inbound interest that we have seen we remain adamant that we will only enter into projects with partners who are committed to building an internal rapid response practice.
This involves a significant investment of both time and funds in training their consultants to ensure the program is successful. While we are selective in which partners we choose to work with, we are committed to build out our overall ecosystem.
We expect that over the next few months we will be announcing new agreements with partners that over time will help us to expand our reach and broaden the addressable markets that we can serve. At Kinaxis, we are driven by the desire to revolutionize planning.
Our endeavor, our purpose is to build the most innovative and potent planning software in the world, and ultimately become the go to platform for partners to build upon. With that, I’ll turn the line over to the operator for Q&A.
Operator
[Operator Instructions] Your first question comes from the line of Thanos Moschopoulos with BMO Capital Markets. Your line is open.
Thanos Moschopoulos
Hi, good afternoon. Starting off with the Asian customer, just to clarify, I would assume that the contract breach is related to late payment, can you confirm whether that is the case?
And if so, has the customer stated their intention to whether or not they intend to pay you?
Richard Monkman
Thanos, this is Richard. There are a number of issues in the contract as you are aware, and there are a number of obligations from both parties.
Kinaxis has delivered on its obligations and the obligation of this customer have not been fulfilled. And yes, one of them is related to payment, but that is – we don't discuss specific customer situations and I think that is the color that we can provide to you at this time.
Thanos Moschopoulos
To clarify, there is a possibility that the customer could resolve the breach and the contract would continue just obviously [indiscernible] – would there be a possibility of the customer continuing the contract?
John Sicard
I mean, there is – we have at this point in time decided to appropriately reflect the customer situation, the best of the situation. We have had recent communication with the customer.
I don't want to at this point in time really get into a conjecture with regards to where that would lead. But we feel that this level of disclosure is appropriate, and it can help the market best understand the current situation.
Thanos Moschopoulos
Okay, were there any accounting adjustments in the quarter related to this as far as balance sheet items or expense items that have been adjusted?
Richard Monkman
Yes. In that regard as we noted, on a conservative basis we have only recognized revenue to the extent of cash received, and as such we did not recognize revenue in the quarter.
It would also therefore have a corresponding impact on deferred revenue, receivables and other balance sheet items.
Thanos Moschopoulos
Okay, and then finally, guidance implies that professional services will be relatively flat in 2017 versus 2016, as we look out ahead, should we think about PS revenue remaining stable at these levels, or over time as the partner channel ramps, could we see declines longer-term?
John Sicard
Yes, Thanos, as we have stated in the past, we do believe that a good healthy mix that we are driving towards is, call it an 80:20, between subscription and professional services, and we looked at the partner ecosystem, our partner investments and the knowledge services investments as motive to drive towards that ultimate level. So, at least the way we are looking at the business, over the – call it the mid-term, we would be driving towards that kind of a mix.
Even the larger projects that our partners are leading, we are still engaged. We have a, call it a solution assurance program that all of our partners must adhere to.
So that is not a situation where partners run off on their own without supervision or involvement of our solution architects. And so we are still very much engaged with every new customer win.
We are just as I noted seeing a much more rapid pace at which they can take on a leadership role and have us take on the, call it, the solution assurance role.
Thanos Moschopoulos
Great. Thanks a lot.
Operator
Your next question comes from the line of Robert Young with Canaccord Genuity. Your line is open.
Robert Young
Hi, can you hear me okay?
John Sicard
Sure, can Rob.
Robert Young
Great. Okay, on the customer breach, are they still using the software – had they gotten to the point – I mean it is over a year, have you deployed the software and were they using it, and if so, are they continuing to use it or have you blocked access given it is offered the service access through the internet?
John Sicard
We are pleased to say that we have provided a working solution for this customer. We continue to meet our obligations under the contract, and again we can't comment really any further with regards to individual customer arrangements Rob.
Robert Young
Okay, and then I would assume that this is one year paid upfront and so, if it was over a year, then this issue as far as the revenue impact would have just started the renewal. So could you give us any additional color on when the issue started to come to light, when did it become clear that the customer was going to be in default?
Is it just now or was there something that would have come – you have been aware of a little while now?
John Sicard
With regards to payment, our model is – you are correct. Our models are generally annual payments in advance.
The appropriate accounting is also if there is a concern with regards to collectability to not recognize revenue in excess of receipts in that type of situation. We did provide just in our earlier comments that the impact in the quarter, it was about $1 million with regards to the subscription revenues for the quarter, and it is reflected in our guidance moving forward.
We have had recent discussions and this is the situation that we are reporting that we have is we think the best communication to the market, and again Rob, that is the extent of the characterization that we can provide at this point.
Robert Young
Okay, and then I guess my last in the three questions would be the – I guess, that $1 million impact in Q2 to subscription revenue, I think was what you said before, and so would this be an annualized – and would it be an annualized $4 million subscription impact, or would the timing of this sort of would it actually be higher on an annual basis, then I will pass it on.
Richard Monkman
So, Rob the characterization in the disclosure we are giving, it was – the impact was a quarter and – I am sorry. It was a million in the quarter and I am sorry but it is – it has been reflected in the subscription guidance, but you can see that even with the challenge, we have very, very strong subscription revenue growth.
We do have very, very strong long-term contracts as you know. And John has commented on the strength of the funnel and the growth of the partner.
So, our view remains very much focused on the long-term. We understand that individuals need to – or have a desire to focus on what does it mean for the quarter, even for the year.
But our focus is very much how do we continue to build this business, how do we continue to work with customers, how do we continue to build a strong employee base and community of partners. And so this is – we view this as a long-term growth business.
Robert Young
I was just trying to get a sense of the – like the midpoint in the guidance has dropped about $10 million, so if I think of it, is it about $4 million from the default, and then about $6 million from professional services, is that kind of roughly the way to think of it?
Richard Monkman
So, Rob, the best guidance we can provide and we have provided. So I have given the characterization for the quarter, we have talked about the subscription revenue range.
We have talked about how and you have seen how actually it is. It is down slightly, the professional services level.
We have shared with everyone quite frankly our excitement that this pace of acceleration is picking up and not to steal any thunder from John, but again the majority of new business that we closed in the quarter was partner influence. And we have this growing network of qualified partners that are taking up and playing a significantly increasing role in – qualified role in those deployments, and as such are gaining the revenue.
Robert Young
Okay, thanks.
Operator
Your next question comes from the line of Richard Tse with National Bank Financial. Your line is open.
Richard Tse
Yes, thank you. I understand there are sensitivities around the contract, but what are they claiming that you are not doing to sort of withhold payments?
Just it would be useful to get a bit of color in terms of that perspective here?
John Sicard
So, Richard, first, I wouldn't characterize this as withholding of payments. We have characterized it because we feel that it is a – there are a number of elements, and we have talked about in breach of their contract obligations.
And that is the extent of the disclosure. We have appropriately reflected this in our results and guidance, and I can understand the desire to try to do this – get a little more detail.
You do know and I know you have talked to a number of our customers, you do know our strong track record with customers and that's really all we comment on at this time.
Richard Tse
Okay. I just looking for are there any other contracts potentially at risk to a similar breach?
John Sicard
Richard, no.
Richard Tse
Okay. I appreciate that.
And I guess, on the positive side here and the pipeline is as you said very active. Can you give us some of the perspective in terms of the size of that funnel given the active partner channel today versus what it have been last year?
John Sicard
Yes. We're it's almost fascinating to see how partners influence the markets as we gain traction with them.
We were particularly excited to see in fact the uptick in Asia. Our recent announcement with Nissan, we've broken into the Life Sciences' Space in Japan with Santen.
We have some great progress in Europe with European based partners. We are well on track to having a fully functional and call production hardened data center in Europe before the end of this calendar year.
So, we're definitely seeing great progress in the areas outside of North America, and it's not by any stress to suggest North America is softening. It's quite the contrary we're seeing some significant uptake in Asia and in Europe.
The other thing I might add some color is for the first time and this changes every quarter but for the first time we've seen Life Sciences as a percentage of revenue for the company out pays our previous call it beach head of hi-tech electronics. We have talked quite a bit about Life Sciences is an emerging space driving towards excellence in supply chain planning and concurrent planning.
So, not just with this recent win with Santen but others in that space. We're definitely gaining traction.
The other area I would, I mentioned this I'm sure in the last earnings call is the area CPG, we announced that this is now a formal space for us and we continue to make investments in R&D to on our analytics engine side to meet the markets needs there. And I can say that pipeline the CPG specific pipeline I would call exceptionally healthy.
Richard Tse
Okay, great. That's great, thank you.
John Sicard
Thank you.
Operator
Your next question comes from the line of Paul Treiber with RBC. Your line is open.
Paul Treiber
Alright, thanks very much. Could you, I was hoping could you elaborate a bit on the win with Nissan, just in regards weather was there any revenue this quarter from the deal the potential size of it and scope and maybe get some background on it, how long you've been working on it and how involved the partners in that deal?
John Sicard
Well, that was definitely a partner influenced deal. This was definitely one of those situations where we might not have made it as far as we had without the influence of this larger partner.
And again as usual we can't specify or discuss this specific use cases we are targeting with them or any of the financial elements associated with them. I will say on previous earnings call, I've talked about our invigoration if you will and our focus on the Asia Pacific market and this inside of I'd say inside of the last 12 months has manifested itself.
I can't tell you that revenue for Nissan was recognized in this current quarter.
Paul Treiber
Okay, thank you. Just in regards to the outlook more so on the operating expense side, sales and marketing it seems like you're getting leverage there.
Is that attributable to partners or partners also are able to make better use yourselves in marketing spending as s result, partners?
Richard Monkman
Well, yes we are. We are getting leverage but solely through the partners.
We are also increasing our footprint of on the sales side of things. So, we have now an increased number of sales professionals distributed throughout the world.
And we are working jointly with our team and the partners. We can get leverage that way and so that's the trend that we anticipate continuing, Paul.
Paul Treiber
Just two follow-ups on that. Just on European you got a market starting Europe, how you explain the direct sales there.
and then just in regards the large Asian customer, are there any claw backs or potential claw backs related to commissions or any sort of other sales and marketing spending related to that deal that you could potentially get back? Thanks very much.
John Sicard
Yes, sure. So, just with regards to, we are a global company and we work with global enterprises and it's interesting the nature of the deals draws the comment further is fairly uniform, I mean there are obviously cultural context and different theatres.
But the way we team with the partners, the way we move in and then demonstrate proof-of-concept and then deploy, is as quite common throughout the world. From a compensation, sales compensation, I know that we take a very conservative view and that we currently fully expand sales compensation, the customer acquisition cost upon the commencement of the revenue.
And so, as a transaction occurred in a prior year, that was expense to that point in time. And we're not going to get into discussions regarding sort of some of the administrative elements of plans, claw backs and so on and so.
Again we take this conservative view cost are recognized and state it that way.
Paul Treiber
Okay, thank you.
Operator
Your next question comes from the line of Daniel Chan with TD Securities. Your line is open.
Daniel Chan
Hi, guys. I just want to make sure that the situation with the Asian customer, that's not due to any kind of competitive displacement or anything like that?
John Sicard
Dan, it's as we've noted, it's related to not fulfilling contract obligations. It's as simple as that.
Daniel Chan
Okay. And then I wanted to get some clarification on the guidance and some of the things you're seeing.
So, I get similar numbers to what Rob was getting. Your guidance seems to be down $10 million with subscription down four and ProServe down six.
But if we look at the quarter, this current quarter is impacted by $1 million. So, that would imply another $3 million or so of impact from this one customer.
When you sign on these your partners, you're saying they're taking more professional service revenue. But then you'd assume that there would be subscription revenue attached to that.
So, kind of curious why we're seeing both those numbers come down with higher partner contribution. When we see some sort of offset on a subscription revenue line as your partners accelerate here?
John Sicard
Well said, Dan. Dan, first I want to just reiterate that we are talking about forward guidance, I mean we are still growing subscription revenues 21% to 23%.
So, that is guiding to increasing subscription in the second half of the year. Arrangements as you know, the level of subscription revenue depends upon timing.
So, for instance a deal that is closed in to December, we are only going to recognize the best 1/12th of the annualized revenue but it sets up that subscription revenue for 2018 and going forward. So, it's not, we're still guiding to very strong and profitable growth.
The guidance, yes, and the midpoint it is down about $10 million. And there is a factor that relates to both the subscription and this situation that we discussed.
And the professional services revenue plays a key role. But the subscription arrangements start immediately and then the deployment is it's generally time and material at least for the Kinaxis arrangements.
So, I think we need to take it forward view and not sort of just straight what's happening in the rear view mirror.
Daniel Chan
Okay. And then your margin guidance is up again this quarter, so just maybe give some color on that.
Is it mostly driven by the change in mix?
Richard Monkman
It's a number of factors, Dan. It is we've tighten now, our sales and marketing.
The thing about this small that we have, while we start the year with 80% forward visibility just because of the mathematics I explain on subscription revenue as we move forward in the year. We can with confidence tighten that range.
Similarly from an expense perspective when we model it, we can provide greater clarity. And so, yes we have increased our guidance for EBITDA performance.
And it's also with the noted investments that we're making including the expansion of the sales team, expansion of the R&D team and also having our data center in Europe fully operational at the end of the year.
Daniel Chan
Alright, thank you.
Operator
Your next question comes from Todd Coupland with CIBC. Your line is open.
Todd Coupland
Yes, good evening everyone. One of the things we'd seen for the last few quarters, couple of quarters anyway is sub growth about 30%.
I know this has been a goal of the company and you've talked qualitatively about a few things that should help you get back to that. Is that something that is a goal within the next year or so or we're a couple of years away as you transition from the professional services base?
Richard Monkman
So, we are very bullish on the and focused on long term growth. We do only provide 2017 guidance, Todd.
But the nice thing is that this model provides especially with the partner participation leverage on a number of points. On total revenue growth as well as expansion of margins.
Aspirationally, absolutely, we are focused on growing Kinaxis in the sustainable way, a profitable way. And we believe again and know it's a common here but it is we believe that the best way to scale the organization to capture new business and to execute on that business is by the partners.
And we remain excited and we will be providing guidance as we normally do for '18 at the beginning of '18.
John Sicard
I might just add, Todd, to that commentary that while we're definitely seeing all of these positive effects of our partner program, and this has come up in previous questions is this notion that what will partner somehow diminish the overall sales cycle. And as you know rapid response, it becomes mission critical for our customers, it becomes part of their business fabric.
And as a result, the projects and the lead times in getting deals to close but they haven’t changed much even with their influence. We're definitely involved in more opportunities and some take shorter, some quite frankly depending on the size of the company, can take substantively longer.
So, it's not necessarily something that is easily forecasted for us. But as Richard said, the aspirationally and our targets obviously leveraging partners is ultimately set an army if you will of sales people on our behalf.
Todd Coupland
And if I just want to follow-up on that. I mean, we talked about this sort of moving up in a gradual way which had had then with the larger emphasis on partners, do you still see that gradually coming in or is there a step function, how are you thinking about that?
Richard Monkman
So Todd, we -- I think what's pulling us now that we approach things with certain discipline and focus. We had started with a smaller set of strategic partners.
We wanted to make sure we tested this model and refined it appropriately. We are now expanding that and have indicated that will be announcing additional partners.
And so, it's picking up the easy jump toward pace, not only with regards to existing partners but the number of the partners. And so, we're going to continue to refine this as we move forward.
And so, that absolutely is again the basis that we see to drive growth.
Todd Coupland
Okay, that's helpful. And then the last question is, it's more of an observation for me, I mean I suppose this is self evident, but I’ll just say it.
Lot of questions on the aging customer issues, it’s difficult for us to look through that with limited visibility to competitive questions, what actually is the problem etcetera. So, I am sure you understand that and you have made the comments that you had but I’ll just state that for the record.
Thanks very much.
Operator
[Operator instructions] Your next question comes from the line of Deepak Kaushal with GMP Securities, your line is open.
Deepak Kaushal
Hi guys, thanks for taking my questions. The first one, sorry to have to do this, but I’m going to have to beat the dead horse on this customer contract.
So in the past you talked about being very selective with your customers and you talked long proof of concept periods. It certainly not the first example where we’ve heard of Kinaxis and certain customers are not ideal customers parting ways in the past for variety of reasons.
So let me more generalize this, is this a surprise, is it situation surprise or is this something you experienced in the past or is this a new experience for management team related to new region of world or new type of model?
John Sicard
I don’t think the characterization of customers parting in the past is correct. We’ve over a 100% net revenue retention, we’ve very much and continue to execute in land expand, yes some customers due to their changing business maybe have not renewed.
But I don’t think that I just for the listeners on the call wouldn’t characterize it as parting ways. This is a not theater issue and it is customer specific, it’s focused on contract obligations.
We’ve fulfilled our obligations, we’ve been working with this customer just as we do in terms of the sales cycle and deployment. And we’re in a situation now in where it is appropriate that both parties fulfill their respective obligation that is in part and element of working together and having that long term relationship and executing upon the land and expand.
But also the capabilities and functionality and the ROI that you have with rapid response and it’s just unfortunate that this is related to those contract obligations not being fulfilled. And we fully understand and with respect to Todd’s comment fully understand that you would like to get a little more color.
But, it’s important for us to focus on the strength of our existing customers. And we’ve to respect the confidential nature of these types of situations and I need to reinforce that look at the strength and the robustness of the business model that even taking this view that we’ve reflected in the statement, it is very strong revenue growth and subscription in particular very strong cash and bottom line driving.
Again our view remains long term focus but I’d hope that you and the other analysts appreciate the resiliency of the Kinaxis model and I’d hope that the straightforward nature of our communication.
Deepak Kaushal
Thank you, I appreciate that and thank you for allowing me that question hopefully that horse now be dead. Moving on, by our math over the last five years, we kind of estimate you have been adding about nine net new customers per year.
Could you give us a sense of what your customer count is today versus a year ago and if new systems integrators partner allow you to accelerate the pace of onboarding new customers annually?
John Sicard
Well, I think by one business measure where we’ve now shared that approximately two-thirds of our incremental subscription revenues coming from new named customers and the one-third from that land expand components, so this is the expansion of existing customers and then just by the growth in the revenue it should be clear that the pace and the size of these deals are growing. We focus more on that forward visibility and the overall backlog, we can sign a customer contract 4 or 5 million a year, we can sign a contract 400,000 or 500,000, so we don’t focus on the number of accounts.
And in fact, we also have this capability of once per in to further expand so when we’re doing – when we’re in the sales cycle we actually look not just the initial arrangement, but we look to see ultimately where we can arrive with the customers we continue to expand the footprints on. We’ve also disclosed and this is what we say fractionally say approximately it's over 100 customers but we are saying approximately 100 customers because part of the message there is that we want to stress that we have identified about 2,000 perspective customers and we believe we are working really with early adaptors.
We believe that there has a lot of long term potential and our goal is very much to try to directly and in concert with our partners to continue to expand into that market and what’s happening is confluence of events that increase our outlook and these confluence are as John touched on more and more machine learning the internet of things IoT. Increasing complexity of supply chain, increasing sophistication of customers as they have pain in their supply chain has accelerating that.
So we believe that all these elements will help us continue to execute with broader base of customers.
Deepak Kaushal
Okay. Thank you.
That's very helpful. And if you allow me my third question maybe we can focus now on some new verticals.
We heard some evidence of entry into the financial services vertical. Curious as to what might be the application or use of RapidResponse in a non-manufacturing type of vertical like that?
John Sicard
Well, you might have heard me talk a lot about when I describe as our prime value proposition and it's solving the simple equation where there is volatile demand or supply for something that is constrained. And we have mastered that in the area of supply chain perhaps the most complex planning theater in the world.
The number of associated business practices that occurs that our supply chain is nothing short of staggering. So we have this single unified planning engine that concurrently plans from the highest level of demand call it a shift in demand in a theater all the way down to the nuts and bolts and labels and stickers and any – right down the lowest level of manufacturing.
And when we think about that and I have made this point before about RapidResponse as platform that ultimately in the long term we call this short term but in the long term similar to what salesforce.com did with force.com you can envision a RapidResponse platform that would allow others, third parties to invent and innovate planning solutions that are modeled based on that very simple equation. So again we can't talk specifically about unique customers and unique customer value propositions.
But I think it's important to note that our underlying philosophy and underlying technology is ultimately designed around a ubiquitous formula. The other thing I would add and this definitely is I believe a huge leverage for Kinaxis is that we have exactly one piece of software.
I mean, while we serve aerospace and defense, automotive, CPG, the former space, high-tech electronics. Everyone's using the same object code.
And this is coming from a market that was used to having very unique products for every unique market segment. So, there is something to be said about just that simple fact that with one product rapid response, we're able to sell his ubiquitous supply chain problem across so many market segments.
And people will often ask me so what's your next market vertical. And I answer the same way, there's going to be one, that's a certainty.
Today it's CPG, okay. But we believe that there are 1000s of customers out there outside of the market segments that we serve today.
That all share in a common supply chain planning challenge. And that's volatility of supply or demand for something that is constrained.
Long winded but it's a passionate topic of mine.
Unidentified Analyst
Thank you. And I appreciate the time again.
Thanks, again.
John Sicard
Thanks.
Operator
Your next question comes from the line of Nick Agostino from Laurentian Bank Securities. Your line is open.
Nick Agostino
Yes, good evening. I guess just to go back to, I think you've already alluded to no change in the sales cycle right now with your system innovators.
The fact that you indicated on the MD&A that the deployment activity from your SI is probably faster or happen and earn your time that what you anticipated. Can we read into the fact that you're starting to tighten your sales at marketing expenditures that possibly you guys are anticipating an acceleration of the sales cycle as a result of more activity from your SI's?
John Sicard
First, let me categorize something for you. It's not uncommon for our customers to undergo a phased approach to their deployment.
And that's a Phase I. And that phase might start with the geography, might start with the product line, it might start with the certain area of with this pain that they're dealing with.
And often what is most common is we will lead that one with partner in tow. Phase II, same customers, not a new customer but that same customer may pick up Phase II with the partner that's lead and not us.
So, it's I think about professional services uptake with partners is not necessarily being strictly from new named accounts. In some cases it's the picking up Phase II, Phase III, Phase IV, of existing accounts that we have own with them.
So, that's one thing I will say. I'll let Richard comment on the financial element of your question.
Richard Monkman
Yes. From a financial perspective, what we wanted to signal is that there is this ongoing activity which is very positive.
We again we've stated that the majority of our new customers arrangements continue to be at a majority of partner influence. And they we say partner influence because as John noted, in some cases it could start as a team effort, it could start off as we do Phase I.
But there are now more and more situations whereby the partner with our element of assurance in it, are taking the lead right out of the gate. And that is a testament to the Mills services to the certification of the training to the broader interest of -- quite frankly, our recognition by Gartner as assisted.
These large SI's are and other partners are seeing us with their accounts. And so, it's a confluence of events again and we're just excited to see this was what we anticipated.
We've just are pleasantly surprised to see the uptake and yes it does have you could view it as short term negative impact on revenue, the glass half empty if you will. We look at it as this is great, our partners are gaining an ROI out there in investment.
They're increasing their knowledge base. They are seeing that this as a great thing to be partnered with Kinaxis and let's see what comes of next year and 2019 and 2020.
Nick Agostino
Okay. So, ultimately we can say that it is an indication that your partners are just taking a more active lead role.
Keyword being "Lead."
Richard Monkman
Absolutely.
John Sicard
Yes.
Nick Agostino
Okay, that was it. Thank you.
Richard Monkman
Thank you.
Operator
Your next question comes from the line of Suthan Sukumar with Eight Capital. Your line is open.
Suthan Sukumar, your line is open.
Suthan Sukumar
Thank you. Good evening guys.
You were talking about a growing list of potential partners. Can you speak to some of the progress that you’ve been making on expanding your third party certification program and any trends on uptick from that expanding partner ecosystem?
John Sicard
As I noted earlier, we’re quite selective, we’ve more people ringing our door bells and we led into the house let’s just say. It is very important for us that our partners take this seriously, we don’t want to spend our [indiscernible] of energy on some of the visit series.
And the certification program in fact, we’ve had a berth of knowledge services program at the beginning. It was entirely motivated by preparing partners to lead in deployments and obviously do assisted sales.
We’re continuously investing in that certification program, think of it as going from a level 1, level 2, level 3 master, we become architect level if you will and at the speed which we’re producing these certifications, we’re getting our partners to participate and attempt to get the accretive aging. I would tell you these exams are not easy to pass, I hear from Sarah that it’s no better than 70% will pass exams they take and that’s on purpose.
They’re not supposed to walk in the park and so these are tough exams that require training and often they have to be tested more than once. So I think what happens with our partners in general is you start to get a bit of groundswell, it starts to swell, you might have a partner with a large group with only two certified eventually you get a bit of a groundswell where an entire of certified individuals can start on to a particular project.
Today we have three levels of certification, but the team isn’t going to stop there.
Suthan Sukumar
Okay, great, thank you. And just kind of shifting gears a bit here, in the past you talked about how some of your R&D focus has been on the machine learning segment.
Could you speak to some of the more recent progress that you have been making on this front and whether your efforts have been strictly focused internally or if there has been involvement from partners or select customers on this front?
John Sicard
Thanks for that question. In fact, it’s a topic that’s very near and dear to me, I think as I stated there I’ve read countless articles that are quite fantastical and when I speak to customers and I really go to customers first.
I even as a scientist I’m really intrigued by the technology, but I’m more intrigued with value propositions that a practitioner would gain by leveraging such techniques. And so, I have been speaking with high level executives, practitioners of our customer base around machine learning and AI in fact, instead of artificial intelligence I call it automated intelligence.
In many ways our customers are saying, look supply chain is a machine, it’s a machine, we design that machine, units design it, it’s very complex, it would be great if there was some software written by programmers that could continuously monitor the health of that machine. Monitor the vibrations, where is it vibrating to give it like a machine.
And if you discover why it’s vibrating, can you self heal, can you adjust my design, can you automate that intelligence a human might be able to do it. But when you’re talking about tens of thousands of variables that are moving at extremely high velocity this is where machine learning preemptive design adjustments become valuable and what our customers want to pay for.
And so this is where we focused our attention, there are a lot of platforms out there that are all their age my opinion and this is just my opinion that many of them are not steeped in value propositions where science and we’ve taken a value proposition inward approach to our investments of machine learning. So that’s what I can share with you at the moment.
Suthan Sukumar
Okay, great, thank you for that. I guess that’s it from me guys, thanks for taking my questions.
Have a good evening.
John Sicard
Thank you.
Operator
There are no further questions at this time, I’ll now turn the call back over to John Sicard.
John Sicard
Well, thank you for participating on today’s call, we appreciate your questions as well as your ongoing interest and supporting Kinaxis. We look forward to speaking you again in November when we report our Q3 2017 results.
Thanks again.
Operator
This concludes today’s conference call, you may now disconnect.