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

Ladies and gentlemen, thank you for standing by, and welcome to the kneat.com's Second Quarter June 30, 2020, Update and Results Conference Call. Please be advised that today's conference call is being recorded. My name is Hugh Kavanagh, I am CFO with Kneat. I'm joined today on the call by Eddie Ryan, our CEO. At the conclusion of our comments, we will allocate some time to take questions from sell-side financial analysts. Eddie will begin with his comments, and then I will move on to some financial highlights. Before we begin, I would like to remind you that except for historical information, that comments contained in today's conference call contain forward-looking statements, including statements regarding Kneat's future financial outlook and financial performance, market growth, the release date for and benefits from the use of Kneat solution, our strategies and general business conditions. Any forward-looking statements contained in this conference call are based on Kneat's historical performance and its current plans, estimates and expectations and are not a representation that such plans, estimates or expectations will be achieved. These forward-looking statements represent Kneat's expectations as of today. Subsequent events may cause these expectations to change and Kneat disclaims any obligation to update the forward-looking statements in the future. These forward-looking statements are subject to known and unknown risks and uncertainties that may cause actual results to differ materially, including our quarterly results and limited operating history, which make it difficult to predict future results. Our expectation 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 spending, particularly 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 sciences industry; competitive factors, including, but not limited to price 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 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 since 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 has today experienced no significant impact to its operations, any potential impact on our future 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 all 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 only from sell-side financial analysts. Eddie will now start with his comments. Eddie?

Thank you, Hugh. Welcome, everybody. I'm very pleased to report on the progress that our team has made during the quarter ended June 30, 2020. We have achieved strong revenue growth, and in particular, our SaaS revenue is up 206% over quarter 2, 2019. New big pharma customers and the recently announced top-tier leading consumer products customer have all adopted a Kneat Gx SaaS platform. This focus on SaaS, combined with our maintenance revenue stream, has contributed to strong growth in our overall annual recurring revenue key metric. Our existing customers are expanding into new work processes and new sites, delivering great opportunity for growth and expansion of our software. Excellent customer references, coupled with a strong sales and marketing effort is driving a healthy sales pipeline. Despite the continuing pandemic, we are executing on our plans and continue to gather momentum in the markets. All of our employees continue to work remotely and all our operations from software development to product release, delivery and customer service continue to operate effectively. We are developing our company structure and growing our ability to deploy and support our global customers. It is very satisfying to be helping many of the largest global health care companies to digitize and become 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, supported by broad customer feedback, our R&D team continues to build out our technology, and we are excited about what they are delivering. We continue to enhance our SaaS delivery model, which is leading to its increasing adoption. Using the net proceeds of the $13.4 million raised back in March 2020, we continue to invest in building our team by hiring talented staff across many functions. Our plan for the rest of 2020 is to continue to add and deploy new SaaS customers, expand to new work processes and to new sites with our existing customers and continue to develop the Kneat Gx platform to deliver increasing value for all customers. This concludes my review and comments. I will now hand it back to Hugh and I will be back for the question-and-answer session and with my closing statements. Hugh?

Thanks, Eddie. For the financial review, please keep in mind that all the numbers I will be discussing are in Canadian dollars. Revenue for the 3 months ended June 30, 2020, was $1.55 million. This was an increase of 192% from $0.53 million during the same period in 2019. SaaS licensees, which are one of our recurring revenue streams were $0.64 million for the 3 months ended June 30, 2020. This was an increase of 206% compared with the second quarter of 2019. Gross margin for the 3 months ended June 30, 2020, was $0.51 million. This is an increase in gross margin from $0.13 million for the same quarter in 2019. Underlying the change in gross margin versus Q2 2019 is an increase in both revenues and cost of revenues. Cost of revenues, including professional services costs incurred during the second quarter were expensed during the period. This included costs associated with an additional professional services of $0.5 million build during the quarter, which will be recognized in future periods. The increase in cost of revenues and professional services costs from $0.39 million in the second quarter of 2019 to $1.03 million in the second quarter of 2020 reflects an increase in salaries and benefits related to additional head count in the professional services team and increased cloud hosting costs. Net loss for the second quarter of 2020 was $2.3 million as compared to a net loss of $1.75 million for the same period in 2019. The increase in net loss was due primarily to increased salaries and benefits related to higher head count in the professional services and development teams. And exchange losses on intercompany loans and other financial assets denominated in euros and U.S. dollars. Finally, some comments on the non-GAAP measure of annual recurring revenue, ARR, which includes SaaS, license fees and maintenance fees. The promotion of our SaaS offering, which added to our annual recurring revenue base is a key strategy for Kneat. Progress on this front is reflected in the growth in ARR at June 30, 2022, $3.3 million, a 215% increase compared to June 30, 2019. Breaking this down a little further. ARR from staff licensees increased by 271%, and ARR from maintenance fees increased by 108% from June 30, 2019. Focusing specifically on SaaS, ARR from SaaS has almost doubled from $1.29 million at December 31, 2019, to $2.55 million at June 30, 2020. 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 sell-side financial analyst questions.

[Operator Instructions] Okay.

Hi. Martin. Eddie here. Martin Toner.

Sorry, yes. Yes. The first question today is from Martin Toner.

Great quarter. Can you guys talk a little bit about what the pipeline looks like for future customer and revenue growth?

Yes. Thanks, Martin. So yes, the pipeline -- as we go forward, we continue to build our pipeline. And so you'll notice from our announcements that we have made in the last number of months that you'll see we're adding to that as we go forward. And these will come through the system once these customers go live, and we'll recognize the revenue at that time. So we continue to build a good pipeline, and we continue to scale with our existing customers to partner with us.

Great. And have there been any -- have you -- have customers raised the location of the data as an issue as you guys transition to the cloud? And if not, what issues do come up the most?

Yes, that's a good question, Martin. So that -- we're seeing more and more of that. We go through a very rigorous process of data security with all our customers. We've got to go through quite a severe audit regarding that. So the first thing to say is that most of the customers we're dealing with are global customers, and they're putting all their data about European global employees into the same instance of the system. So by and large, it's not an issue, but it is becoming more and more of a discussion point. And it's rare that we have a customer that can't live with a global system. But it is conceivable in the future that we would have potentially instances for European customers that may be separate from U.S. customers, but it's not materializing anywhere fast in that area yet.

Okay, super. And are there any other notable objections you hear from them?

Regarding their data?

No, just regarding the cloud offering.

Well, the first thing -- first and foremost, it's security. Candidate trust their provider being Kneat to manage their systems in the cloud, in our cloud. So we go through very rigorous audits around all of that, data security, security of our application and how we address all of that and our infrastructure, et cetera. So it's always a topic of conversation. It's always a big question, especially with these big Tier 1 companies.

And our second question today comes from Gavin Fairweather with Cormark. Gavin, we're not hearing you. Okay. Sorry, actually -- try to just unmute yourself again there, Gavin all good now. You go ahead.

Can you hear me now?

Yes, I can hear you now. Please go ahead.

Great. So curious, just on the pace of scaling kind of within your client base. Any change that you're seeing there? Have you seen any clients kind of slowing down the rollout of the software? Are you seeing others kind of wanting to go faster or any kind of pausing within the client base? Just curious if you've seen any kind of change in that pace over the past few months?

Yes. No, that's a good question, Gavin. How are you? So -- no, the scale. All our customers, they have an approach, whether they scale fast or scale slow. Sometimes, customers are driving to get done quicker than others, and it often depends on their priorities and their bandwidth internally. But by and large, all our customers are scaling to some extent, some are going faster than others.

Okay. So still a mix there. But overall, you haven't really noticed any change in the trend. It sounds like.

No, there was no change. Generally speaking, on average, it's -- some are growing faster than others, and we do see more moving into that brackets as we go forward. And we do see more customers coming in with more of a scaling mentality as we go forward. But at the moment, it's not materializing in underground fully.

Okay. Great. And then I thought I'd just check in on kind of your largest client, the one that you announced in September. Obviously, it's an on-prem client, so we can kind of look at your license sales and a portion of those will be attributed to them. But how is there kind of rollout and experience kind of progressing? And where would they sit on that trend of -- or within the range of the ones that are going faster versus slower?

Yes. So our -- generally, overall, the on-prem customers are not going as fast as SaaS customers because of the house audit within the move under IT side internally. But yes, those customers are scaling as well, but we would say, I'm trying to remember if I understand that customer that you're talking about now. They are moving forward as well, but not as fast as some of our other customers.

Got it. Yes, obviously, the SaaS definitely makes things a little bit easier. Okay. And then...

Yes, that's good question, Gavin. SaaS is something that we are noticing. The ability for everybody to scale from our perspective and from their perspective is faster.

Okay. Great. And then I wanted to dig in just a little bit on the services revenue. Obviously, in Q1, you did a bunch of work that was kind of invoiced but not kind of collected or accounted for as revenue. And then this quarter, I think it was about $500,000 where you had done the work, you'd invoiced the customer but you hadn't received the cash or recognize the revenue. So maybe this is for Hugh. Can you just run me through the payment terms and kind of how it works in terms of how frequently are you billing the customers? What are the payment terms after they receive the invoice, and that will just help me think about the cash flow and revenue from services work going forward.

Yes. Sure, Gavin. In fact, actually, I know you've asked about payment terms. But in fact, what's been really referred to there, the new recognition versus the billing. And it's really to do with whether professional services relate to on-prem or SaaS. So revenue recognition for professional services follows the license recognition. So for example, an on-prem professional services will be recognized at the point where the on-prem goes live whereas those comments that you're referring to last quarter and $0.5 million this quarter are really related to -- mostly to, I wouldn't say exclusively, but mostly to work on SaaS customers, where the professional services are working on the implementation and go live for those customers. And the revenue then will only start to be recognized at the point where the customer goes live and would be typically recognized over a 12-month period from the point where that customer goes live. That's the rest of the question?

So wait a minute, just to be clear. So if you're doing a bunch of services work to turn on a new plant for a SaaS customer, you can't recognize the revenue until after it goes live by 12 -- sorry, I was.

Okay. So let me restate that. The -- so for SaaS customer, the professional services to do with deployment -- the deployment professional services are recognized over the same period as the SaaS license. So, for example, if the professional services have done $100,000 worth of work -- let's take $120,000 worth of work. And then when the customer goes live in January 1, then that revenue will be recognized, $10,000 per month over the following 12 months.

Okay. That's a nuance that I wasn't aware of. So I guess then going forward, I mean, we're going to be seeing this kind of each quarter. Is that the way to think about it as you continue to turn on these new customers, where you're incurring the costs kind of ahead of the revenue?

Exactly, yes. So obviously, it will be -- at this early stage, it's more notable in its impact. But obviously, as time goes on and as we continue to roll out the SaaS model, then we will have the revenues coming through from professional services that would have been providers on deployment in earlier -- in earlier months and quarters are coming through. And then in current months and quarters, the equivalent will be happening where there's working done and been recognized in future quarters.

But then from a pure kind of cash flow perspective, let's say that you turn on a new plant and then the revenue from that services will accrue into the top line over 12 months, but when do you actually receive the cash? Do you tend to get the cash a lot faster?

Absolutely, cash is faster, yes. So it would -- cash is associated with invoicing, and invoicing can typically be done either associated with milestones or with go live, et cetera. So that's really on normal credit terms based on invoices. The revenue recognition is really tracking the revenue recognition for the SaaS license.

Okay. So we'll just look at billings as a better metric. And then maybe one for Eddie. Can you just give us an update in terms of your services team and the head count that you have there? And I'm trying to think about what is kind of the billing capacity of that team or kind of how much revenue would be associated with them if they're running kind of full out.

Yes. So we don't disclose the numbers in the different functions, Gavin, but we have built that team up considerably over the last year. And it's a sort of a plateau right now. We are fairly well resourced in that area of professional services and well-trained up at this stage. And in the short term, we have overcapacity there to deal with the pipeline that's ahead of us. And as we need, we will encourage more to come on board, and then we're also enabling partners as we go forward to support that side of the business, too.

Okay. Makes sense. And then kind of outside of the services team, are there any other kind of planned hires, maybe R&D or sales or I'm just curious there.

Yes. So we're generally outside of professional services, which we are still adding a little bit to. We're putting people into R&D to build out our technology vision. And we're also going to be putting in some more sales and marketing individuals in the short term.

Martin, I know that you still have your hand up. I'm not sure if that's -- if you have another question? Or it's just still up from earlier?

No. I put it back up. Thanks. That worked. Similar to Gavin's question. Just wondering if there are any -- what the constraints on your business and its growth are and what you're doing to build the business and alleviate those constraints.

Yes. So the -- I suppose the consensus would be what any business would have, the ability to respond to our customers' needs, especially from a services and from a support perspective and also deliver features for areas of the business that the customers are looking to use our technology in. So we get all of these things, and there's always conflicted priorities. But we believe that we're in a very good situation where we're addressing them all in a curtailing view.

Awesome. What about size of the sales force?

The sales force is quite -- it's not very big right now. We have 3 salespeople in the company and 1 marketing person, but we're going to now focus on that again and build that up a little bit more.

Gavin, I see that you have your hand up. I'm not sure again if that's up from the last time or you have put it up again, so over to you.

Yes. Sorry, I forgot to take it down after I ask my questions. I think I'm good.

Okay. And Martin, I just see that yours is still up, I presume that's -- again that you forgot taking it down?

Correct. Yes, I'm done.

Okay, that's fine. Okay. There seems to be no further questions. So okay. So thank you, everyone. And this concludes today's question-and-answer session. I would now like to turn over to Eddie for his closing comments.

Thanks, Hugh. In summary, we are very pleased with the progress we have made in the second quarter of 2020, and we are very proud of the Kneat team as they continue to develop quality compliance 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're 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 their ongoing support and belief in what we do. We look forward to the journey ahead. Thank you for your attention.

Thank you, and that concludes today's call.