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

Ladies and gentlemen, thank you for standing by, and welcome to the kneat.com Fourth Quarter and Year-ended December 31, 2020 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. At the conclusion of the formal comments, we will allocate some time to take questions, and we will prioritize questions from sell-side financial analysts. Eddie will begin with his comments, and then Hugh will move on to some financial highlights. Before we begin, I would like to remind you that except for historical information, the comments in today's conference call contain forward-looking statements, including statements regarding Kneat's future financial outlook and financial performance, market growth, the release dates for and benefits from the use of Kneat Solutions, our strategies and our general business conditions. Any forward-looking statements contained in this presentation are based upon 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 future. These forward-looking statements are subject to known and unknown risks and uncertainties that may cause actual results to differ materially, including 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 customers' data; dependence on revenues from customers; rate of adoption of our a 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 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 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 reflection of the unprecedented impacts of 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 to date experienced no significant impact to its operations and a 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 audited consolidated financial statements are all posted on our website. And if you wish to receive a copy of any of these documents, please do not hesitate to contact us. Eddie Ryan will now start with his comments.

Thank you. Welcome, everybody. I am pleased to report on the progress that our team has made during quarter 4 and for the full year 2020. This is highlighted by an 88% year-over-year growth in total revenues. We had 243% year-over-year growth in SaaS license revenues. Additionally, we continued to see strong growth in our overall annual recurring revenue, which was up 149% year-over-year. It is also pleasing to see that our SaaS license fees now represent 72% of the total license revenue for 2020, compared with 35% for the previous year. The promotion of our SaaS offering is a key strategy for Kneat, and its continued strong growth illustrates how our team continues to execute well on our plans. Our existing customers are expanding into new work processes and to new sites, delivering a great opportunity for growth and expansion of our software. Excellent customer references coupled with a strong sales and marketing effort is driving a healthy shares pipeline. We continue to develop our company structure, and recently made this senior appointment of Mr. Keith Holmes as Chief Technology Officer. Kneat will benefit from Keith's considerable experience in product strategy and technical leadership as we continue to grow our operations globally. Our R&D team continues to build out our technology, and we are excited by what they're achieving. In addition, we continue to enhance our SaaS delivery model, which is leading to its increased adoption. In spite of COVID-19, we are executing on our plans, and we are very proud of all our team as they do so in a challenging remote environment. It is very satisfying to be helping many of the largest global healthcare 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 healthcare companies. Our plan for 2021 is to continue to add and deploy new SaaS customers, expand to new work processes and new sites with our existing customer base and continue to develop the Kneat Gx platform to deliver increasing value for all our customers. This concludes my review and comments. I will now hand over 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 December 31, 2020, was $2.96 million. This was an increase of 112% from $1.4 million in the same period in 2019. SaaS license fees are a key metric for Kneat. Compared with the fourth quarter of 2019, SaaS license fees of $1.14 million increased by 233%. Total revenue for the year ended 2020 was $7.42 million, which is an increase of 88% from $3.95 million in the previous financial year. This included $2.88 million in SaaS revenues, which increased by 243% from $0.84 million in 2019. The increase in revenue was driven primarily by new customers going live on the platform, existing customers scaling their use of Kneat Gx through the purchase of additional licenses and the growth of professional services revenue associated with services provided to customers by our larger professional services team. Cost of revenues of $1.36 million for the 3 months ended December 31, 2020, increased from $0.65 million for the fourth quarter of 2019 and the year ended December 31, 2020 was $4.54 million, an increase from $2.19 million for the year ended December 2019. These increases reflect additional salaries and benefits related to a higher headcount in the professional services team and increased hosting costs associated with the SaaS platform. Gross margins for the 3 months ended December 31, 2020 was $1.6 million. This is an increase in gross margin from $0.65 million for the same quarter in 2019. The increase in gross margin reflects an increase in revenue, in particular, the increase in license revenue and improved professional services margins associated with the increased contribution of recently added team members, as they completed training and come up to speed. Net loss for the fourth quarter of 2020 was $1.59 million compared to a net loss of $1.12 million for the same period in 2019. Kneat has continued to invest in building our team by hiring talented staff across many functions. The impact of increased revenues and gross margins is offset by unfavorable foreign currency movements and additional salaries and benefit costs related to higher headcount on the professional services and R&D teams as well as increased amortization costs relating to the intangible asset. Finally, some comments on the performance -- the key performance metric of annualized recurring revenue, ARR, which 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 ARR at December 31, 2020 to $4.8 million, a 149% increase compared to December 31, 2019. More specifically, ARR from SaaS license fees increased by 203% to $3.9 million and ARR from maintenance fees increased by 39% from December 31, 2019. As a reminder, we have filed our audited consolidated financial statements and MD&A on SEDAR, and they have all -- they are also available on our website. We are now ready to take questions. [Operator Instructions] Please note that only attendees with a microphone will be able to ask questions during today's session.

[Operator Instructions] So our first question today comes from Gavin Fairweather.

Can you hear me now?

Yes, good.

Okay, great. Yes, it's Gavin here from Cormark. Congrats on the quarter. Maybe, Eddie, just to start out, can you just touch on the sales funnel? You've obviously done some great work capturing kind of the top 20 clients there. I guess, I'm just kind of curious if there is -- if you could speak from a high level to any kind of RFP activity going on or any kind sales processes going on within those Tier 1s that you haven't yet captured?

Gavin, it's a good question. So yes, so at this point in time, we're at the same stage, I would say, we are continuing with a very strong healthy pipeline. The team continued to execute well on the front end. And we expect to continue in the same vein with that. There are always RFPs going on and sales process going on with some of these customers and includes a number of those large customers, like you said.

Okay. Great. And then maybe just on the SaaS era. It was a really nice jump this quarter. It jumped about $900,000. And if I look at kind of previous quarters, it's being kind of increasing by $500,000 or $600,000 a quarter. Can you just talk to kind of the activity that you're seeing in the base? How many of your clients are expanding and what you're hearing from your SaaS clients in particular in terms of their rollout plans?

Yes. It's just a very good observation there. And it is all about SaaS for us now. We're transitioning our existing customers over to SaaS. That's ongoing and conversations with those who aren't already transitioned over is ongoing as well. And the key dimension to that increased growth was existing customers expanding, and we would hope to see that going forward as a trend in the sense that that's where we expect to see our growth. And all the customers that we have in our base are expanding to 1 extent or another. Some slower, some faster than others.

Would it be fair to say, though, that maybe some are really accelerating their pace of expansion, just given that jump in ARR [indiscernible].

Yes. There are some that are going faster than others, Gavin, for sure. That is correct.

Okay. And then I'll lob in one more before I requeue here. Can you just give us an update on the partner channel, how many partners you now have kind of trained and ready to support customers? And are those partners kind of primarily focused on implementation and support, or are they starting to get to the point where they're getting ready to start selling for you as well?

Not selling, but influencing potentially sales through their network and to their sort of referred. So these partners fall into a couple of different categories. Gavin, there are a number of them. We're seeing a lot of interest coming through from partners now because of our presence in the marketplace, especially with the big pharmaceutical companies. And -- so what we're seeing is that there's partners that can use Kneat to help them to deploy their services to the industry. There's partners who can supply people understand and know how to use Kneat into these big pharma companies where they can now perform consultancy for them. And then, there's partners who can help us to deploy our software as we go forward. So I would say that a number of these partners are customers as well and since they are buying licenses to deliver their services. Also, we're seeing big pharma requesting the supply chain to use Kneat when it comes to large capital projects. So there's a lot of positive in that whole area. And it's early days regarding running at scale, but there is a lot of interest. There's a lot of them being trained. I would say we have a couple of people training on the Kneat academy training almost full time between training customers, trading partners and training our own internal staff.

But when you say that partners are buying licenses, so are they kind of acting as ISVs, or are they kind of white labeling your platform? I guess I just wanted to dig into that a little bit more.

Yes. So some of the partners will be suppliers into the -- in the supply chain, and they would be delivering services such as deploying ERP systems into pharma. And they are using Kneat to help them deliver their services, installing, managing the documentation and testing the software before they go live within the customer.

So on the CSV side?

On the CSV side, especially, yes. So there's other dimensions to it as well, but that would be the key thing. So integrators that are deploying software, they're able to cut back on their man hours, they're able to save a lot of time. We have a case there that hopefully will come from shortening in a white paper, where it greater saving, a huge amount of money by using Kneat to deploy their services.

Thanks, Gavin. And the -- our next question comes from Martin Toner. Martin, over to you.

Can you give us some stats around the increased usage of Kneat university, just to kind of give us a flavor for how that's helping and how that's helping build the pipeline?

Yes, that's -- I don't have stats specifically on -- with me right now, Martin, but I would say that just following on from my answer to Gavin there that we have some full-time staff doing training. And a lot of that is to the supply chain and to the partner channels. So -- even two customers also, of course. But yes, we've seen, I would say, in the last 3 months, we've seen a marked increase in that, and I expect it's going to keep going that way. And the partners vary from sort of smaller partners to medium-sized partners and also discussions with the larger type integration partners.

So I know your customers have a lot of cross-functional teams and a lot -- and they're organized globally. I'm just wondering, are there some Kneat users who would be -- who would work on product line -- some product lines that use Kneat and others that don't. And is that a good sort of mechanism for growing internally at your customers?

Yes. So the situation, I'm just trying to understand the question fully. Is that -- do you mean, Martin, where one site may be using Kneat and other sites may not be at this particular point in time on a different line or something that affects this?

Right. Yes. But you could have employees that who touch multiple sites based on the way the farmers are organized.

Yes, absolutely. So I think this is very much a global solution. It's a single instance. And the beauty of Kneat is when you install on your first process or your first line or your first application, then you can expand to multiple applications and multiple processes and multiple lines. But a lot of the people who are a part of the overall quality infrastructure could be overseeing multiple different sites and multiple processes and that discipline across multiple sites. So there's a huge -- that's part of our -- our growth strategy is the expansion of the Kneat -- the lend and expand methodology for the platform.

Super. And last question for me. Can you remind us about how we should model gross margins for SaaS in order to kind of help model gross margin overall going forward?

Yes. So the gross management for SaaS is -- It has gone up in the back end of last year, and that's due to the fact that our professional services would be -- we're not hiring as aggressively in professional services, we would have spent ahead in that area. And as the sales go up, we're achieving more with our professional services team, more sales. The other thing to say is that the people that would have -- when they start, they are not up to speed straight away and takes a bit of time. And as they get up to speed, they become more chargeable and all of that. So...

Yes. I just want to add, Eddie. So in terms of specifics, Martin, I anticipate that we will be achieving industries -- normal sort of gross margins for the industry into the 70s for sure as we start to scale, et cetera. And then overall gross margins will tend to trend in that direction as the ratio of SaaS revenue to professional services revenue, that ratio moves strongly in favor of the SaaS revenues over time. So our professional services revenue would probably grow a lot less quickly than our SaaS revenue. So hence, sort of trending towards normal SaaS margins -- industry SaaS margins.

Just to add to that, Martin, the other thing is that it's for the business as a whole versus the SaaS aspect of it, everything is fast going to SaaS. So a lot of the on-prem stuff will be sort of moving out over the next couple of years.

Okay. Great. One last question on R&D. I think growth rate year-over-year, it was around 50%. Is that a good number going forward? Can you give us just a little bit of color there?

Again, I would say regarding R&D, we've spent on that. We've created the asset. Obviously, we continue developing it towards vision, but the R&D will not go up as fast as it has been going up relative to the revenues either. So you'll see net improvement in the raw margins as well.

Yes. And the additional comment I would make there is while the team may not grow as fast, there's obviously -- we're depreciating the intangible assets, and that's part of the increase that use over the last year.