Kneat.com Inc

TSX:KSI

Earnings Call Transcript 2022-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the kneat.com First Quarter 2022 Update and Results Conference Call. Please be advised that today's conference call is being recorded. Today's call will be hosted by Eddie Ryan, Kneat's CEO; and Hugh Kavanagh, CFO at Kneat.

Before we begin, I would like to draw your attention to the safe harbor statement on Slide 2 and the forward-looking statements disclosure at the end of the earnings release. Comments made on today's call may contain forward-looking information. This information, by its nature, is subject to risks and uncertainties, and as such, actual results may differ materially from the views expressed today. For further information on these risks and uncertainties, please consult the company's relevant filings, which can be found on SEDAR and on the company's website at www.kneat.com/investors.

Also, during the call, we may refer to certain supplementary financial measures as key performance indicators. Management uses both IFRS measures and supplementary financial measures as key performance indicators when planning, monitoring and evaluating the company's performance. Management believes that these non-IFRS measures provide additional insight into the company's financial results, and certain investors may use this information to evaluate the company's performance from period to period.

I will now pass the call to Eddie Ryan, CEO of Kneat.

[Edmund Ryan, executive]

Thank you, Sinead. Good morning, everyone, and thank you for attending today's call. I will begin with some high-level comments before passing the call to Hugh to provide a detailed financial update. At the end, we will open the call for questions.

I'm proud of our team as we continue to deliver strong year-on-year growth through the first quarter, highlighted by 156% growth in SaaS revenue and 134% increase in annual recurring revenue over quarter 1 2021. Our fast-growing and diverse customer base is proof that Kneat's platform is a preferred solution in the industry.

Quarter 1 marked a solid start to the year. Our investment in sales and marketing is driving robust new customer activity. Today, we have 57 contracted customers and the largest pipeline of potential customers in our history. Within this space, we count 8 of the top 10 and the majority of the top 20 biggest pharmaceutical companies, several top-tier consumer packaged goods companies and both large and small suppliers to these organizations.

These companies are selecting a system to manage their global validation, which is a critical regulated business function. They are making a long-term investment decision so they carefully evaluate relevant market offerings before selecting their preferred solution. We are proud to be trusted by these global leaders to help them deliver their highly regulated products to their customers efficiently and to the highest quality standard.

During the quarter, we signed a global agreement with another one of the world's top 10 biggest pharmaceutical companies. This resulted from an extensive evaluation process by a global cross-functional team who looked at all relevant market offerings before finalizing on Kneat.

We also announced that a European National Health Service selected Kneat for laboratory equipment validation management. Again, this involves an extensive evaluation between all relevant market offerings. We are proud that this prestigious National Health Service has chosen Kneat to support the delivery of high-quality care to their patients.

Other noteworthy wins announced during the quarter are a leading Canadian generics pharmaceutical manufacturer and the U.S. subsidiary of one of the world's top 15 consumer packaged goods companies. We estimate that our current customers, when fully scaled, can provide an annual recurring revenue of $50 million per year for validation processes only. Over time, we believe this opportunity is much greater as we move to other quality processes adjacent to the validation space.

Leveraging our fast-growing list of reference customers, customer offered success case studies and an expanding sales and marketing team, we are now also focused on driving adoption in the mid-market. Our strategy of partnering with professional services companies continues to show promise. Today, we have various relationships with close to 40 partner companies. We continue to see increased technical proficiency in our partner channel and several partners can now implement deployments with low-touch assistance from Kneat.

Over time, our goal is for our partners to provide an increasing share of professional services, allowing Kneat to focus on our key growth driver, the promotion of our SaaS platform.

Kneat Academy, which is used to train and certify partner and customer employees is seeing increased utilization. To date, the Academy team have formally trained and certified more than 2,000 individuals. Several of our larger customers have requested that their supply chain vendors input their data directly into Kneat, which creates additional channel partners and can also create new customers.

We continue to strengthen our corporate structure and build out our management teams. During the quarter, we announced the appointment of Carol Leaman, the CEO of Axonify, to our Board of Directors. Carol has a background in building fast-growing SaaS companies, and we look forward to her perspective and the invaluable experience she brings in scaling innovative technology platforms.

On the R&D front, we are building out our platform in close collaboration with our customers to drive faster time to customer value and to increase our addressable market. I am proud of our dedicated employees for their achievements to date, and I look forward to ongoing growth and value creation for our shareholders throughout 2022. Our plan for the remainder of this year is to continue to add and deploy new customers through increased sales and marketing across all tiers, to expand to new work processes and new sites within our existing customer base, to further develop the Kneat Gx platform in collaboration with our customers, to build out our company structure and to leverage our partner relationships to expand global reach.

I will now hand you over to Hugh for a review of the financial results.

[Hugh Kavanagh, executive]

Thanks, Eddie. For the financial review, please keep in mind that all the numbers I will be discussing are in Canadian dollars.

I am happy to report that we have seen a strong year-on-year revenue growth trajectory continued through the first quarter of 2022, including in our SaaS license revenue. Revenue for the quarter ended March 31, 2022, was $5.2 million. This was an increase of 121% from $2.4 million for the first quarter of 2021.

SaaS license fees are a key metric for Kneat. SaaS license revenue for Q1 was $3.3 million compared to $1.3 million for the comparative period in 2021. This is an increase of 156%. The increase in revenue primarily reflects the level of scaling by existing customers in their use of Kneat Gx in addition to the purchase of new license subscriptions by new customers.

Cost of revenue for the first quarter of 2022 were $1.9 million, an increase of $0.7 million from $1.3 million in Q1 2021. This increase reflects additional salaries and benefits related to higher headcount in the professional services and customer support teams, the recognition of a year-to-date bonus accrual and increased hosting and consulting fees.

Gross margins for the 3 months ended 31 March 2022, was $3.3 million. This is an increase in gross margin from $1.1 million for the same quarter in 2021. Gross margin percentage has also increased to 63% compared with 46% for the same quarter in 2021. The increase in gross margin reflects the increase in revenue over the same quarter of 2021, coupled with a smaller increase in related cost of revenue compared to Q1 2021.

As we continue to scale our license revenues and as the proportion of license revenues to professional services revenues continues to increase, we expect the gross margin percentage to continue to trend towards SaaS industry norms. During the first quarter, we continued to invest in both product development and sales and marketing to support our future growth objectives.

Sales and marketing expense was $1.3 million in Q1 2022 compared to $0.7 million in Q1 2021. And R&D expense for Q1 2022 was $2.5 million compared to $1.7 million in Q1 2021.

Annual recurring revenue, ARR, is a key performance metric for Kneat. ARR includes SaaS license fees and maintenance fees. The promotion of our SaaS offering which adds to our annual recurring revenue base is a key strategy for Kneat. Progress on this front continues to be reflected in the growth in our ARR at March 31, 2022, to $13.4 million, an increase of 134% compared to March 31, 2021. More specifically, ARR from SaaS license fees increased by 153% to $12.4 million. And ARR from maintenances increased by 22% to $1 million from $0.8 million at March 31, 2021.

As a reminder, we have filed our unaudited condensed interim consolidated financial statements and MD&A on SEDAR, and they're also available on our website.

We are now ready to take questions, and we will give priority to sell-side financial analysts.

[Hugh Kavanagh, executive]

[Operator Instructions] And the first question this morning comes from the line of Gavin Fairweather.

[Gavin Fairweather, analyst]

It's Gavin here from Cormark Securities. Congrats on all the progress. I thought I'd just start on the new top 10 that was, I guess, announced kind of later in the quarter or maybe kind of slightly after. Can you just remind us when they plan to go live? And what kind of scaling plans this customer has from what you're hearing on that front?

[Edmund Ryan, executive]

Yes. Thanks, Gavin. Yes, so that's a Tier 1 top 10 customer, and they have a lot of sites globally. And initially, we expect to go live with the first phase in mid this year. And then move on to other phases over the next couple of years, culminating in many, many sites with over 40 sites. So yes, so there's a lot of opportunity in that particular customer, and we're moving through the deployment phase right now, and it's going according to plan.

[Gavin Fairweather, analyst]

Have they shared kind of a time line to you in terms of the rollout? I mean, I'd imagine that they're thinking kind of end-to-end across the 40 sites here, but have they shared time lines with you or...

[Edmund Ryan, executive]

Yes, Gavin, yes. At this stage, the time line will be high level with -- as goals. And then as they get closer, they would finalize them. But yes, the first phase is we're looking at initially, I think, 3 sites moving to -- correct my memory here on this one, but moving to about 6 after that. And then moving quite aggressively through 2023 into all the other sites.

[Gavin Fairweather, analyst]

That's helpful. And then maybe just from a high level, we've seen quite a bit of M&A and divestitures in the life sciences sector of late, including some customers, I believe, of yours. Are you seeing any kind of positive or negative impact given those kind of corporate actions that are taking place here?

[Edmund Ryan, executive]

Yes, they're not affecting us in a negative way at all, Gavin. If anything, it's positive because sometimes when a lot of smaller companies will be acquired, we acquire customers through that, but we have never had a situation that has negatively impacted us from a license perspective.

[Gavin Fairweather, analyst]

Okay. That's helpful. And then just on the Q1 here, it looked like the growth in ARR was a little bit kind of slower than what we saw on the back half of last year. Would you just kind of chalk that up to normal seasonality? Maybe just kind of discuss that? And what are you hearing from kind of the overall customer base on their expansion plans this year?

[Edmund Ryan, executive]

Yes, I definitely see that seasonality. And as we look at last year, there was a couple of really strong quarters in the middle of the year. And I also see and hear from our customers as we work through this year with them that there's -- these opportunities are coming throughout the year, so across many of our customers. So yes, definitely it's a seasonal effect. And I also think, traditionally, we have always -- if you look back over all our quarters, traditionally, our quarter 1 has been slow relative to the year. Traditionally, we move up as we go through the year.

[Gavin Fairweather, analyst]

That's helpful. And then just lastly, before I pass the line, maybe from kind of a higher level. You've captured a lot of the Tier 1 logos that are out there. And so from a new logo perspective kind of looking forward, I'm curious whether you're most bullish on Tier 2s or supply chain or some adjacencies like CPG to help drive kind of new logos in the pipeline and ARR growth?

[Edmund Ryan, executive]

Yes. We're adding on a significant number of customers every quarter. They're growing up. And our pipeline is -- potential customers is stronger than it has ever been to date. So yes, and a lot of this is in the mid-markets, Gavin, within life sciences primarily, a good amount of supply chain as well. And then we call it the adjacent markets such as med device and consumer parts.

[Gavin Fairweather, analyst]

Okay. So it sounds like you're excited about all of them versus kind of one which you think might be like the big driver?

[Edmund Ryan, executive]

Well, regarding mid-market, there's still a lot of brand names and large customers that we have to win yet. In the larger space, we come to strategic-type customers, customers with more than 5,000 employees. But below that, life sciences is our primary at this point in time. Most of the excitement comes from there, Gavin, just to kind of that point out.

Just to clarify that point as well, we're also getting customers in the National Health Services, for example, which are -- wouldn't have even factored into our original TAM over the years. So there's other areas beginning to come to the floor, but I still consider them life sciences.

[Hugh Kavanagh, executive]

Thanks, Gavin. And the next question comes from the line of Christian Sgro.

.

[Christian Sgro, analyst]

I'll ask 1 question. It's a follow-on of Gavin's, and maybe instead of forward looking, more backward looking. The customer account jumped from 48 to 57 this past quarter, which is a lot of new logos for a single quarter. So just wondering, again, instead of looking ahead, looking backward, what would you say the composition was of these 9 new logos? And is it fair to say that it was about mid-market life science concentration that you highlighted?

[Edmund Ryan, executive]

Yes. It's definitely a lot of this is mid-market. There is some -- they are mostly life sciences or life sciences related. There are a few of the -- maybe bordering on above mid-market, and then there's some supply chain in there as well, Christian. So primarily focused around life sciences.

[Christian Sgro, analyst]

Okay. So a good mix. Life sciences has been a good mix.

[Edmund Ryan, executive]

Yes. Including the NHS customer's in there as well, which will be one that I would be -- outside of -- and there's much more of that as well that we should be exploiting as we go forward.

[Christian Sgro, analyst]

That's helpful. And then with a lot of these new wins, some of the larger ones that were press released, the announcements, most of the press releases specified that the deployments would be in the back half of the year. You called out some seasonal trends as well. So does this all give you a lot of confidence that the ARR ramp could be stronger Q2, Q3, Q4? Do you have as much visibility as ever before, would you say?

[Edmund Ryan, executive]

Absolutely. Yes. So we have -- with all our large customers, we have an element of clarity about what they're doing. And we know -- we're confident that there is -- we call them scaling events with these customers as we go through the year. And there's other features and products we're bringing out to enable that scaling and upgrading them and transitioning into SaaS and these type of things. All of these factors are playing into their scaling criteria.

[Christian Sgro, analyst]

Okay. Perfect. And then the CROs, you expand the sales team, maybe refocus how you think about the go-to-market, internationally and all. Are there different ways you're thinking about going to new customers or going to new partners, maybe getting the sales team oriented? As you grow through the $13 million ARR and further and grow internationally, are there different ways you're thinking of structuring the team or going to market, organizing things?

[Edmund Ryan, executive]

Yes. So as it happens, right now, we're beginning to evolve our sales structure, and we're moving internally our sales structure. From an internal perspective, we're moving towards the direct hunters and the farmers and the business development reps and also then appreciating customer success management. So we're looking to make sure we have very strong functions across all those spaces right now.

We're also looking, and we're having success, to our partners, leveraging our partners on a joint go-to-market strategies, where the partners are introducing us to customers who they know have a need. And that is beginning to bear fruit also. So right now, we're primarily focused on U.S. and Europe. And as we go forward, we'll look at outside of that as well. But right now, it's going to be through direct and then partners going forward as we move forward.

[Christian Sgro, analyst]

Okay. That's very helpful. And just one last question, a little bit related. But as you think of hiring needs across the business, I know last year was a big year in terms of customer support, sales and the like. But this year, I mean, what are your hiring plans? And is there one area through the back half of the year that you're looking to fill out more than others?

[Edmund Ryan, executive]

Well, we're -- a number of things that we are focused on right now is building our R&D team to build out the features in collaboration with our customers. And our customers are working really intimately with us on that, addressing sort of -- we're addressing exactly what they need and also making sure that what they need is applicable to the industry and it's building to our platform for everybody.

So that's making sure that we build the right features and product and each division as a product. So we have -- we are investing in this, Christian. Also investing -- continuing to invest in our sales capabilities as -- like I spoke about earlier on, the different functions, building out those functions more robustly and across the different geographies. And that's a focus for us -- a big focus for us at the moment as well.

And by and large, customer success as well and professional services, we have done quite a bit of building there, and we see that tapering off throughout the year. So general employment, large sales, with R&D and R&D tapering off as we go through the year.

[Hugh Kavanagh, executive]

Thank you, Christian. And the next question comes from the line of Rob Goff.

[Robert Goff, analyst]

My question would be on the competitive marketplace. Are you seeing any trends there in terms of pricing sensitivity, specific features, functionality that are supporting your wins?

[Edmund Ryan, executive]

Yes. I suppose I don't see anything at the moment that is negatively impacting us, Rob. So I do see the fact that we have put in a lot of work into marketing as being a competitive advantage as we go forward, and it's beginning to manifest itself as we go through this year. So -- and obviously continue to build our sales to make ourselves continue to be more competitive. But very optimistic around the competitive landscape at the moment. And as we build out our vision, we see ourselves getting stronger and stronger there as well.

[Robert Goff, analyst]

And in terms of building out your sales capabilities and your R&D, can you sort of guide us to where those run rates may be heading? Are we 80% of the way to where we need to be or 90% of the way towards where you see us exiting?

[Edmund Ryan, executive]

Yes. So it's -- on the current plans, it's -- right now, we are, I would say, coming to the R&D spend will be flattening out on that as we go into the back of the year. I see sales will continue to grow and some more marketing as well. But other than that, I think professional services is also beginning to taper off, Rob. So does that answer your question?

[Robert Goff, analyst]

Yes, it does.

[Hugh Kavanagh, executive]

Okay. Rob, thank you very much for those questions. Some of our previous questioners have had their hands up. So I'll just circle back around to you and see if anyone wants to ask more. So Gavin, I'm just -- I'm using your line again there if you have further questions?

[Gavin Fairweather, analyst]

It's Gavin from Cormark again. I did have a follow-up. Eddie, can you just give us an update on the migration of some of your on-prem customers to SaaS? What are the time lines looking like for that? And should we think about like a lift in recurring revenue as they move from maintenance to subscription? Or will the lift come from them just kind of moving through implementations faster?

[Edmund Ryan, executive]

Yes. So I think the conversations we're having, there's probably 3, 4 main customers or 3 main customers that we want moved over to SaaS and these discussions are evolving. One of the things is that we see an uplift in licenses with most of them prior maybe one or so at that juncture. Because they move to SaaS as part of a consolidation business milestone for them, and they're looking to get to a new version of our software as part of that process and also to enable more users in their organization.

So with a couple of the customers, large customers, that would be the conversation we're having. By the end of this year, Gavin, I think when I call it, I'm confident that there's going to be only 1 impactful customer still remaining on-premise. And we have audits for them. They're auditing in our SaaS environment later this year with a view to going to SaaS very soon afterwards. So other than that, I think impact of our meaningful customers, there'll only be one left in 2023, hopefully.

[Gavin Fairweather, analyst]

Sorry, you said that, that one was the one that was currently doing work on auditing?

[Edmund Ryan, executive]

Yes, they are due to do audit later this year. In fact, they're booking in 3 days for an order of our SaaS environment from a security and on the operational perspectives around that.

[Gavin Fairweather, analyst]

Okay. Helpful. Just maybe going back to the Tier 2s, and obviously, this has been a focus for you and you've been building up your channel. How have your win rates been trending as you've kind of worked to get the product right for a down market and build up the channel? How have those win rates been trending for you?

[Edmund Ryan, executive]

They've been very good, Gavin. Really all the meaningful ones were doing very well, and we're having great success there.

[Hugh Kavanagh, executive]

Thanks, Gavin. And Rob, I noticed you still have your hand up there. So if you have a few further questions, please go ahead.

[Robert Goff, analyst]

And that's just me failing to put the hand down, sorry.

[Hugh Kavanagh, executive]

Okay. Very good. Thanks, Rob. Okay. No problem.

Okay. That is the questions. Yes. Okay. So thank you then. And this concludes today's question-and-answer session. I'll now turn it back to Eddie for his closing remarks. Eddie?

[Edmund Ryan, executive]

Thanks, Hugh. In summary, we are very pleased with our progress in this first quarter of 2022, and we are very proud of the new team as they continue to develop quality compliance software in collaboration with our customers. They focus on growth initiatives to win and scale customers across all tiers, and they provide excellent end-to-end customer service. At Kneat, it gives us great pleasure to be trusted by our customers to help them manage their highly regulated processes to the highest quality standards.

Before I finish, thanks to our shareholders, our partners and our team for their ongoing support and belief in what we do. Thank you all for your attention today. Bye for now.

[Hugh Kavanagh, executive]

Thank you. And that ends today's call.