kneat.com, inc. (KSI) Earnings Call Transcript & Summary

[Audio Gap] Our expectations for future growth of our revenues; unauthorized access to our customer data; dependence on revenues from new customers; the rate of adoption of our SaaS model; acceptance of our applications and services by customers; loss of one or more key customers; adverse changes in general economic or market conditions, particularly in the life sciences industry; delays or reductions in information technology spend, in particular, in the life sciences industry, including as a result of mergers in the life sciences industry; the development of the market for enterprise cloud services, particularly in the life science industry; competitive factors, including, but not limited to pricing pressures, industry consolidation, entry of new competitors and new applications and marketing initiatives by our competitors; our ability to manage our growth effectively and changes that may not be that -- changes in sales that may not be immediately reflected in our results due to the revenue recognition criteria under International Financial Reporting Standards. Further to these risks, these forward-looking statements do not include a full assessment or a reflection of the unprecedented impact of the COVID-19 pandemic occurring in the first quarter of 2020 and the ongoing and developing situation, resulting in direct global and regional economic impacts. This has resulted in significant economic uncertainty. And even though the company have has to date experienced no significant impact to its operations, any future impact on our operations is difficult to understand or measure at this time. Further information on potential risks that could affect actual results will be included in other filings kneat makes on www.sedar.com. The press release, the MD&A and the consolidated financial statements are posted on our website. If you wish to receive a copy of any of these documents, please do not hesitate to contact us. And finally, take note that we will take questions from sell-side financial analysts. Eddie will now start his comments. Eddie?

Thank you, Hugh, and welcome, everybody. I'm very pleased to report on the progress that our team has made during quarter ended March 31, 2020. This is highlighted by our revenue growth, which is up 130%, and particularly our SaaS revenue, which is up 528% over quarter 1 2019, and our continuing success in winning new and scaling within our existing customer base. We are executing on our plans and continue to gather momentum in the market. It is very satisfying to be helping many of the largest global health care companies to digitize and become fully paperless with some of their critical business processes. As we progress, we are becoming trusted by more and more of the largest global health care companies. To date, we have signed a significant number of large global companies, including a significant number of top 10 big pharma companies. Within this current base, we have more than 400 sites into which our current software can be scaled. Customers who have gone live are expanding Kneat Gx to new work processes and new sites. And as reflected in our revenue and our recent announcements, an increasing number of customers are adopting our SaaS platform. Success is breeding success and excellent customer references, coupled with a strong sales and marketing effort, is driving healthy sales pipeline. Leveraging intimate customer feedback, our R&D team continues to build out our platform, and we're very excited about what they are delivering. We continue to enhance our SaaS model, which is leading to its increasing adoption. During the first quarter of 2020, we continue to hire with a strong focus on development and professional services to support our increasing number of customers. In December, we signed a lease agreement to expand our head office footprint within the National Technology Park in Limerick, Ireland. The additional office space will accommodate up to 100 Kneat employees, complementing the existing Kneat offices also located within the National Technology Park in Limerick. At the beginning of March this year, we closed a short form prospectus offering including the full exercise of an over-allotment option, resulting in aggregate gross proceeds of $12.65 million. In addition, we also completed a nonbrokered private placement for gross proceeds of $1.83 million. The company intends to use the net proceeds of the offering and the private placement for growth initiatives, working capital and general corporate expenses. The long-term impact of COVID-19 is difficult to fully assess at this time. Today, we are seeing a small proportion of companies deferring their purchasing decisions temporarily, while others are accelerating their decisions to go paperless because of the increased business continuity benefits that it can deliver. We have received messages from several customers highlighting the business continuity benefits of Kneat Gx during this pandemic. Kneat Gx is enabling their staff to continue many aspects of their validation activities remotely and allowing global contributors to collaborate in the process in real-time. This has reinforced the many benefits of Kneat Gx over the manual paper-based systems that it has replaced for these customers. Our plan for the remainder of 2020 is to continue to add and deploy new customers and to expand to new work processes and new sites within our existing customer base with a particular focus on our best platform. This ends my review and comments. I will now hand you back to Hugh, and I will be back for the question-and-answer session and my closing statements later. Hugh?

Thanks, Eddie. For the financial review, please keep in mind that all numbers I will be discussing are in Canadian dollars. Revenue for the 3 months ended March 31, 2020, was $0.95 million. This was an increase of 130% from the $0.41 million in the same period in 2019. SaaS license fees, which are one of our recurring revenue streams, were $0.41 million for the 3 months ended March 31, 2020. This is an increase of 528% compared with the first quarter 2019. Gross margins for the 3 months ended March 31, 2020, was $0.05 million. This is consistent with the same period in 2019 though underlying this gross margin versus Q1 2019 is an increase in both revenue and cost of revenue. Cost of revenue and professional services costs incurred during the first quarter were expensed during the period, including costs associated with additional professional services of $0.7 million billed during the quarter, which will be recognized in future periods. The change to the cost of revenue reflects an increase in salaries and benefits related to additional headcount in the professional services team and increased hosting costs. Net loss for the first quarter of 2020 was $0.47 million as compared to a net loss of $1.97 million in the same period in 2019. The decrease in the net loss reflects favorable foreign currency movements resulting in foreign exchange gains of $1.4 million in the first quarter of 2020. Annualized recurring revenue, which includes SaaS license fees and maintenance fees was $2.62 million at the 31st of March 2020. This is an increase of 294% compared to the ARR at the 31st of March 2019. Breaking this down a little further, ARR from SaaS licensee fees increased by 502% and ARR from maintenance fees increased by 110% from March 31, 2019. As a reminder, we have filed our financial statements and MD&A on SEDAR, and they are also available on our website. We are now ready to take questions from sell-side analysts.

[Operator Instructions] Our first question comes from the line of Nik Thadani from Mackie.

Can you hear me okay?

Yes, indeed.

Okay. Perfect. So Eddie, I wanted to go back to some of your comments and also your shareholder letter in terms of some of your customers who are working on solutions and treatments for COVID, using your platform to streamline some of the processes. Do you have any examples or use cases that you might be able to share with us? And as a corollary to that, once these customers' operations are somewhat back to normal, do you anticipate a rise in deployments for other processes with these customers?

Yes. Nik, thanks for your question. So yes, so we have -- I suppose we have a number of customers. And I think 90% of customers out there today are searching for solution for COVID, and they all have initiatives afoot and we're working with quite a number of them actually. Some of them are more advanced than others. So yes, we are working with them. And like I say -- I want to say in my letter really that it's -- we're seeing it sort of more or less business as usual. There are impacts on manufacturing and supply chain to some extent, but not huge. But we do see some customers deferring their decisions because they're busy with a lower sort of employment base, and they're managing the risks from a business continuity perspective. So -- but we are also seeing others, as I said, speeding up their decisions and speeding up their deployment requirements so we can see the benefits of an automated paperless solution. So I would say, yes, I do expect these decisions to ramp up again, the ones that are on the negative side. And I also see the ones that are going forward to continue at a faster pace as well.

Got it. And from a professional services point of view, in terms of onboarding new processes onto the platform towards more deployments, how should we think about that in the near term? And again, should we expect some kind of catch-up, specifically in professional services perhaps in the summer when things start to normalize, also, I guess, combined with the usual summer seasonality that some customers might have?

Yes. So our professional services teams are busy, and there is a lot of work going on, and we're also building out a structure to cater for the pipeline that we have and expect to increase. So you're right in your assessment. We do expect professional services to get busier as we go into the later part of the year. There are also opportunities for partners to get involved in the professional services side of the business that we would look to cultivate a bit more in the future as well.

Great. And just one last one before I pass the line. In terms of pricing, I think we spoke about this last quarter as well. I just wanted to check in again, make sure that or ask, if you're seeing anything different from a pricing standpoint, and if we should sort of be thinking about any changes there or nothing to report?

I would say nothing to report at this time on that, Nik. There's variations that some customers are a little more price-sensitive than others and others are less so. And they appreciate quality stuff. So there's always like any business a mix of that, but nothing changed significantly.

And the next question comes from the line of Gavin Fairweather from Cormark.

So maybe just to start, I was hoping to clarify. I think last time we talked, you mentioned that all customers that you'd won were live except for the customer won in late March, correct me if I'm wrong. And I was hoping you could just give us an update on whether that customer is now live.

I would say that -- just to be fair -- say that again, you're saying all customers that were signed in Q1 are live, Gavin, is that what you said?

Yes. I think last time we talked, you mentioned that all customers were live, except for the one kind of -- one right at the end of Q1, the Tier 1. So I was just hoping for an update on whether that one is now live.

I think maybe I referenced quarter 4, all customers on quarter 4 were live, Gavin. I think that's a clear sort of assessment of it. There are some customers that are still in the process of going live in the coming months that would have been signed in quarter 1.

Got it. Got it. And then on on-premise licenses, you guys had a really strong second half of 2019. A good number in Q1, but kind of a little bit lower than those run rates. How should we be thinking about that kind of revenue stream over the course of 2020? Do you see kind of further new plant additions or expansions to new processes among your on-prem client base?

Yes, we do. And I would say that the key thing is we're -- most of the customers that we are signing now are SaaS customers. So there's less of the on-prem revenues with those customers. But obviously, the SaaS grows considerably, and that's what we're beginning to see. It's not going to be like that all the time, Gavin. There will be some lumps in the quarters. But by and large, yes, we do see all the customers that are -- that we have signed are scaling to one extent or another. Some of it faster than others and some are increasing their pace.

Got it. And then just on that point. I mean some of your earlier kind of on-prem clients, I think we've talked in the past about how you're starting to have conversations about switching to SaaS. Can you just give us a sense of kind of what that process looks like and whether you think those will start to happen later this year or whether that's kind of a longer-term phenomenon?

Yes. I would say, first of all, it's a bit of a longer term. So some of them are big companies, and the switch doesn't happen overnight for them. So I would say, within the next 2 years, I will be optimistic that we should be -- have switched everybody. And the question I would say there is that the process for them is that there is a commercial aspect to it because they have adopted one licensing model and are switching to another. And then there's security and all these other risk mitigation concerns that they would have. But by and large, yes, we would -- over the next 2 years or so, I'd say, Gavin, we will -- we should have switched most of them.

But is it an arduous process on their end to kind of migrate the data and then implement the new -- the SaaS system? Does it require a lot of effort? Or would you characterize it as being a little bit more frictionless?

I would say the actual doing of us is not very difficult to move into our SaaS environment. It's more the -- preparing themselves and derisking whatever concerns they may have, their security audits and stuff like that. So there'll be a bit of auditing in proprietary for us. But the switching over is not as -- not very onerous, no.

Nik, I think your hand up again there with another question. So Nik Thadani from Mackie.

Great. In terms of your product road map, given that we've been in this work-from-home situation for about 2 months now how do you see that playing out in the near term? Because I think it was Google that said recently that these things are fine as long as you're working on stuff that's already in the funnel. But if you're thinking about new products and features and whatnot, things might start to get a little challenging. Are you seeing that as well? And how have you sort of adapted to this remote paradigm that we seem to be in?

I must say, Nik, that I'm very happy with the team and how they are functioning remotely. Every aspect of our business is working well remotely. And regarding new products and new features, I mean, ours is one key product, and there's many backlog, technology improvements, enhancements and growing of the vision of it happening. So everybody is well joined up and aware of where they're going and there's very rigid management of our development process. So I'm very comfortable with this. We've been there since early March now. And while we look forward to getting back into the office and having some face-to-face time, it wouldn't hurt us too much if we didn't get back in the short term, and it's working well just to summarize that.

Okay, great. And then since we last spoke about a month ago, in terms of the second half of the year, has your overall thinking evolved in terms of what that trajectory might look like? Any major changes there? Or is it still as per plan from like a month ago?

Well, as I said, there has been no significant change in the month and what I expect to see is that we are slowly transitioning to -- not slowly, maybe faster than we think, but we're transitioning over to a SaaS-only environment. And as per Gavin's question, it will take a couple of years to complete customers that are already on-prem. But -- so that's the only change really is that it's SaaS first all the way now.

Gavin, I feel that you still have your hand up. So I'm not sure whether that's -- you have an additional question or whether it's just from the original question.

Can you hear me now?

Yes, indeed. Yes.

Yes. So I've got a couple of follow-ups. So can you just provide us with an update on kind of your headcount at maybe December versus end of March versus kind of today and kind of run us through your plans on the hiring side?

Yes. So Gavin, the hiring is increasing as we go forward with a focus on professional services and developing out the platform technology towards this vision. So it is steady growing. We will see more added on. And we -- and when we look at that, we will see most of it is in professional services and product development, SaaS and product development.

Okay. But you don't have kind of headcount numbers off the top of your head, do you?

Yes. Well, we don't give out the numbers, but it's increased from the last time.

Okay. That's fair. Maybe one for Hugh. So kind of your costs were pretty much kind of what I was thinking about. I guess the allocation was a little bit different. There was more kind of in COGS than kind of your SG&A. So is that just kind of an allocation between kind of the 2 buckets, is that?

Yes. No, I think the -- what you see in Q1 is reflective of sort of the baseline for where we will be going forward. The increase in the COGS there is really reflective of the size of the professional services team. And there's been additional headcount, obviously, as Eddie talked about, into professional services team. So I think what you see there is probably reflective of the baseline for the go forward.

And obviously, you'll get some kind of leverage on that as services activity ramps up.

Exactly, yes. That would be correct, yes.

And then I was hoping, just lastly, that you could provide a bit of an update on kind of the Kneat Academy. Have you been able to shift that to like remote training model and maybe just an update on kind of how the uptake of that is being among partners and customers?

Yes. So that's been very successful, Gavin, and it's fully remote. Up to recently, it was 3/4 remote. On that whole, there's 4 different courses within that. And now it's 100% remote. And yes, there's an uptake on -- partners are engaging in that, as are customers, and we're using it internally for our own internal certification as well. So it's a certification program and that we don't just train them and say you're trained. We test them to make sure they understood what they learned. So very happy with that program, and we are driving that program -- pushing that program aggressively at the moment.

Thank you. And this concludes today's question-and-answer session. I would like now to turn over to Eddie for his closing remarks. Eddie?

Thanks, Hugh. In summary, we are very pleased with the progress we have made in the first quarter of 2020, and we are very proud of the Kneat team as they continue to develop quality compliant software, continue to win top-tier customers and continue to provide excellent end-to-end customer service. At Kneat, it gives us great pleasure to be trusted by some of the largest global health care companies, to support them in their mission to bring their life-enhancing and life-saving therapies to their customers. We are very proud of the relationships we are building with these global companies. Before I finish, thanks to our shareholders, our partners and our team for the ongoing support and belief in what we do. We look forward to the journey ahead, and thank you all for your attention. Hugh?

Thank you. And that concludes today's call.