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 Fiscal Year 2021 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 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 statement 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 supplementary financial 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.

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. 2021 was an outstanding year for Kneat, delivering excellent performance across all our key metrics. This is highlighted by a 109% full year revenue growth, up from $7.4 million in 2020 to $15.5 million in 2021. Our key metric, SaaS license revenue grew 201% year-over-year, up from $2.9 million in 2020 to $8.7 million in 2021. At the end of 2021, total annual recurring revenue was $13.1 million, up 174% over 2020. Quarter 4 2021 was another record quarter, delivering $6.3 million in revenue, a growth of 111% year-over-year. Our product is an enterprise application that captures and manages regulated data and records for critical business processes, all of which must be retained and readily available for regulatory audits many years into the future. As you would expect, gross revenue retention for a product addressing such a critical need is likely to be high. Kneat's gross revenue retention for 2021 was 100%. For the same period, net revenue retention was 245%, highlighting the strength of our land-and-expand business model. This strong net revenue retention demonstrates the large growth potential that is embedded within our existing customer base as our technology becomes an integral part of their IT landscape. We estimate that our current customers when fully deployed could provide an annual recurring revenue of $50 million per year for validation processes only. Of course, we intend to move over time to other quality processes adjacent to validation. At the end of 2021, we had close to 50 contracted customers who have chosen us as their global enterprise e-validation platform. Some of these customers are still in the initial deployment phase and will start contributing to revenue when they go live postdeployment. Our customer base includes the majority of the top 20 largest global biopharmaceutical companies, including 4 major COVID-19 vaccine manufacturers and 2 top-tier consumer packaged goods companies. Building on our industry-leading position within the life sciences industry, we are also driving adoption in the mid-market, supply chain and the adjacent vertical consumer packaged goods. Our strategy of partnering with professional services companies continues to show promise. Today, we have relationships with close to 50 partner companies. Within these companies, we are seeing increased technical proficiency and several are nearing the stage where they can implement deployments with limited 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 has formally trained and certified more than 1,600 individuals. Several of our larger customers have requested that their supply chain vendors input their data directly into Kneat, which creates additional channel partners, drives further training to our Kneat Academy and can also create new customers. Kneat made substantial progress during 2021 by continuing to expand recurring license revenue with existing customers in addition to winning and onboarding new customers. Throughout the year, we added significantly to our customer base by signing master service contracts with 6 top tier customers, including 2 top 10 biopharma leaders, 1 of the world's leading health care brands, a top 20 consumer packaged goods company, 1 of the world's leading engineering consultancy and design firms and 1 of the world's largest life sciences contract development and manufacturing organizations. More of our customers are writing industry case studies. And in December, Merck Sharp & Dohme offered a study detailing its journey from initial site deployment through to global rollout for 7 validation work processes across 27 sites within their manufacturing and research divisions. This study is a strong endorsement of our platform and our global service and support capabilities. In November, we began trading under Toronto Stock Exchange, completing our uplisting from the Toronto Ventures Exchange (sic) [ TSX Venture Exchange ]. In December, Kneat we was awarded the third place ranking in the prestigious 2021 Deloitte Ireland Technology Fast 50 list. In April, we closed a public equity financing of $20.125 million and the concurrent nonbrokered private placement equity financing of $2 million. We also strengthened our corporate structure in 2021. In May, Nutan Behki, VP of Core Network R&D at Nokia, was elected to our Board of Directors. Nutan has 25 years' experience leading large global teams and partner networks and global software development. In January, Carol Leaman, the CEO of Axonify, was elected to our Board of Directors. Carol has a proven track record of scaling innovative technology platforms and building fast-growing SaaS companies. 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. We continue to invest in sales and marketing, which will drive future growth, create value for our shareholders and help solidify the Kneat Gx platform as the leading validation solution on the market. Overall, 2021 was a transformative year for Kneat. I am proud of our dedicated employees, and I look forward to ensuring ongoing growth and value creation for our shareholders in the year ahead. Our plan for 2022 is to continue to add and deploy new SaaS customers through increased sales and marketing to the mid-market, to expand to new work processes and new sites within our existing customer base, to further develop the Kneat Gx platform, to build out our company structure and to leverage our partner relationships to expand our global reach. I will now hand you over to Hugh for a review of the financial results.

Thanks, Eddie. For the financial review, please keep in mind that the numbers I will be discussing today are in Canadian dollars. I'm happy to report that we have seen a strong revenue growth trajectory continued through 2021, including strong growth in our SaaS license revenue. Revenue for the year ended December 31, 2021, was $15.5 million. This is an increase of 109% from $7.4 million for the 2020 financial year. SaaS license fees are a key metric for Kneat. SaaS license revenues for 2021 was $8.7 million compared with $2.9 million for 2020. This is an increase of 201%. Revenue for the 3 months ended December 31, 2021, was $6.3 million. This is an increase of 111% from $3 million in the same period in 2020. SaaS license fees for the fourth quarter of 2021 were $3 million, an increase of 167% from $1.1 million in Q4 2020. The increase in revenue in the fourth quarter and throughout the year primarily reflects the level of scaling of existing customers in their use of Kneat Gx in addition to purchases of additional new licenses, subscriptions by new customers. Cost of revenue for the 2021 full year were $6.2 million, an increase of $1.7 million from $4.5 million in 2020. This increase reflects additional salaries and benefits relating to higher headcount in the professional services and customer support teams, the recognition of a year-to-date employee bonus accrual and increased hosting costs and consulting fees. Gross margin for the 12 months ended December 31, 2021, was $9.3 million, an increase of $6.4 million from $2.9 million in 2020. The gross margin percentage for 2021 was also increased to 60% compared to 39% in 2020. The increase in gross margin reflects an increase in revenue for the year ended 31 December 2021 over 2020, coupled with a smaller increase in the cost of revenue over the related periods. Gross margin for the 3 months ended December 31, 2021, was $4.4 million. This is an increase in gross margin from $1.6 million for the same quarter in 2020. Gross margin percentage has also increased to 71% compared with 54% in the fourth quarter of 2020. The increase in gross margin reflects the increase in revenue over the same quarter of 2020, coupled with a smaller increase in related cost of revenue over the same quarter in 2020 and includes a positive impact on gross margin from SaaS license revenues and license revenues from legacy on-premise customers in the fourth quarter. During 2021, we continue to invest in both product development and sales and marketing to support our future growth objectives. The R&D expense for 2021 was $8.3 million compared with $5.3 million in 2020 and sales and marketing expense was $3.8 million in 2021 compared to $1.7 million in 2020. Annual recurring revenue, ARR, is a key performance measure for Kneat. ARR includes SaaS license fee 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, 2021, to $13.1 million, a 174% increase compared to December 31, 2020. More specifically, ARR from SaaS licenses increased by 212% to $12.2 million. And ARR from maintenance fees increased by 6% from December 31, 2020. As a reminder, we have filed our audited consolidated financial statements and MD&A on SEDAR, and these are also available on our website. We are now ready to take questions, and we will give priority to sell-side financial analysts. [Operator Instructions] Please note that only attendees with a microphone, we'll be able to ask questions during today's session.

Okay. So I'll introduce the questions now. Could I ask people asking questions, just identify the organization that they're coming from for the benefit of other people on today's call. And the first question today comes from Gavin Fairweather.

Can you hear me?

We can indeed.

That's great. It's Gavin here from Cormark. Congrats on the strong results. I wanted to start out just on your thoughts around 2022. Obviously, 2021 was a year of big expansions from some of your big customers. You added about $8.3 million of SaaS ARR in the year. What are you hearing from customers on expansion plans looking into 2022? Do you feel like you'll be able to kind of match that pace of expansions that you achieved in 2021 or maybe exceed it over the course of this year?

Gavin, thanks for the question. Yes. So we are set to push every one of our customers to scale. And we can't guarantee when they will scale, that's why there's likely to be some volatility in the quarters regarding the revenues in that. But yes, they're -- all these customers are on that scaling journey, and we will see some -- different sizes along the way. So we can't guarantee any of those numbers, but we expect to push all these customers on scaling. And all customers are on that journey, and they are all addressing that. And that's the story they're giving us, and they're planning those.

That's great color. That's super helpful. And then I appreciate the updated estimate of the ARR potential within your customer base at USD 50 million. But just to clarify, that's just validation, is that right? And how many of your customers are speaking to you about processes outside of validation?

Yes, that's correct, Gavin. It's a -- validation processes only, of which there are many, up to 10 different subprocesses within the validation space. And our customers are looking to take us into other areas and exploring that, and we will go in there in due course. And there's work to be done in the back end to make sure we address those areas fully, but all that is part of the plan, for sure. And we do see that -- the total addressable market increasing substantially as we move into these memory adjacent quality areas within our existing customer base beyond validation.

That's great. And then maybe I thought we could dig in on professional services revenue at $1.8 million this quarter. I mean in previous quarters, you've kind of been trending between $700,000 to kind of $1 million per quarter. So can you just provide some color on whether there were any large milestones achieved in Q4? Maybe you can speak as well just on the utilization of your services team, just to help us understand how we should be modeling or expecting professional services in future quarters.

Yes. So I would say Hugh may have an opinion on this as well. But just initially, the quick answer for that is that in quarter 4, we saw a lot of ongoing projects coming to completion, a lot of the work have been done prior to that. And you will have seen, we don't go -- we don't recognize those revenues until the go light has happened. So we would have seen a bit of that happening, and that would have contributed to the increase in professional services. The other thing is that, yes, we will continue to optimize our professional services unit and the value is increasing as we go forward. But as you recall, we will still continue to put some more cost in that, but not at the same pace as we have done. And we do see professional services partners can come and contribute there and get some of those revenues as well as we go forward. So I don't know if you have anything else to add to that there, Hugh.

No, I think you've covered probably pretty much most of the points there. Yes. No, I don't really have anything to add.

Okay. Maybe just before I pass the line, can you touch on your headcount kind of exiting 2021? And maybe discuss the extent to which you're planning to hire in 2022, what kind of headcount additions we can expect this year.

Yes, yes. So again, yearly, we continue to grow our sales and marketing capabilities, and that's probably at the order of 10% to 12% of the company now. We will continue to increase that as we go forward and as we address our existing customers and the expansions with both customers and continue that journey, but also, too, as we go down market into the smaller companies to address that. So that's ongoing, and you will see more spending in sales and marketing as we go forward, Gavin. R&D, you'll also see more spending there to build our technology to meet all the requirements that we're getting back from our customers to support them and also add more value to that business and increase our TAM. So you'll see also spend in the R&D space. As I said, professional services, not to the same extent, but we'll level off a bit as we go forward.

Okay. I mean I guess I asked because you were flirting on the cusp of kind of breakeven this quarter. I know you had a lot of onetime revenue come in, but I guess I just -- I feel like you're going to have a hard time growing your expenses at the same pace as revenue. So...

Yes. No, I mean as -- I suppose the comment to that is you -- I think you put your finger on the fact that there's a -- probably a couple of tailwind items in our revenue. I mean the -- we have the on-premise revenue obviously coming in there, which as I think I've said before, I'd take revenue in any form, but I'd most prefer it came in the form of SaaS revenues. So that's obviously a plus that has helped us at this quarter. And obviously, the professional services that you identified earlier as well is obviously -- is that -- the tailwind in this quarter. But yes -- so yes. So that's the comments I'd make.

I suppose just another point to make, Gavin, we're just at the point where that -- there's a huge market opportunity here, and we will be consistent in going after that market opportunity. That's the key thing to message here as well.

Okay. The next question comes from the line of Christian Sgro. Christian, again, you might say for the benefit of everyone, just identify your organization as well.

For everyone's benefit, this is Christian Sgro of Eight Capital. Congrats on the record quarter and a strong close to the year. The first question I wanted to ask about today is about the gross margin strength. And so there's a couple of items in there. Maybe some timing on flow services. The on-premise licenses, I think, can be high margin as well, but the 71% is a record, for me, from the quarter. Is there anything else you'd unpack for us to help us understand the strength there and anything we could expect to last for its optimization of the partner channel or any other color you'd have?

So Eddie, do you want me to take that first, then you can comment -- some comments afterwards, if appropriate?

Yes.

So yes, Christian, I think you're -- you have sort of identified some of the key features and drivers in terms of this quarter's gross margin. [ By the phase ], we're continuing to grow our gross margin quarter-on-quarter by virtue of the fact that's not the gross revenues and license revenues, in general, but particularly SaaS revenues are becoming a bigger proportion of the overall total revenue. So that's -- and those being the higher margin versus professional services is driving that, the ongoing growth in gross margin. However, this quarter, there is a little bit of a spike, which is probably out of character with our normal trend, which is driven by the factors that you identified. Number one, the on-premise revenue set in there, which are very high margin, obviously. And then also the fact that we had additional revenue recognized for professional services, association with the completion of those projects as Eddie was talking about earlier. So yes, I mean, in general, I suppose, in terms of gross margin, if you look back to history and the general trajectory and the mix of revenues, that's probably the way to sort of go about gross margin and getting an understanding of it. You are not going to add more to that?

Yes, just to add to that -- thank you. Just to add to that there, the gross margin as we continue forward, it's going to continue on this trajectory as we don't increase our professional services in line with revenues and optimizing our professional services, but also leveraging our partners to do more professional services should also benefit us.

That's helpful color, Eddie. And any transaction where -- a couple of items to call in the quarter, but with the SaaS expanding, a lot of confidence in not continuing to go up into the right. I'll ask one more question on more mechanical item. On the on-premise expansions in the quarter, I wanted to ask about how this could impact any transition to SaaS. So you guys aren't signing any new customers on on-prem, so these would be existing on-prem customers expanding. I mean does this mean they could push out their transition to SaaS? Or you see them as just expanding their licenses and those conversations are still moving in the background? Like you said here, I mean, revenue is revenue and the economics are all the same, but just wondering if that maybe pushes up the transition or changes things.

So it was -- generally, that is the short answer, Christian. The customers, by and large, are discussing the transition with us. They still -- for them -- it's quite a move for them, the bigger customers. And in the meantime, they need to get on their business and they need to expand the use of Kneat. And so that's a very good thing, but we'd like them to be doing that on SaaS. And they're -- the goal is to -- and they are focused on getting the SaaS as soon as they can because they know they're expanding, and they don't want to go too far. But also, they want to get the new versions of Kneat because we have discontinued supporting on-premise and that -- they have been there at the last version, and they cannot go to the next version, they have to be on SaaS for that. So the conversation's happening with most of them, and I expect either the transition projects will be completed or ongoing by the end of this year, maybe 1 or 2 items into the following year.

Awesome. Also, to think about is those are proper expansions on one time and those customers just needed to expand their usage for now and those conversations are still moving. That's helpful. I'll move on here. The last questions I have here, I'm assuming more qualitative. I saw the Kneat Go branding and solution all over the company website. I wanted you guys to talk about the Kneat Go initiatives. For me, it looks like a lighter version of the product just for the mid-market. Is that the right way to think of it?

Yes. So that's exactly it. Not exactly built, it's just a -- some sort of -- almost what's there. It's how it's delivered more so, and it enables the smaller customers to be -- who are more agile by their nature and their size, will allow them to minimize the professional services needed to deploying these and get these into their hands quicker and with other sorts of providers around that. The bigger companies, they have stronger, more complex procedures with regard to software deployment, et cetera, and it takes a little bit longer and that adds cost to the whole thing. So it's really compressing that delivery capability and still using the same Kneat capable features.

Awesome. Okay. And I have one more question from mine, this one some similar to the last. Would you say [ there's any matures ] into more verticals, into more big name customers. Would you say, in general, you're seeing sales cycles shorten a bit? Are customers either understanding it better or able to sign on or implement any quicker? Or would you say their sales cycles are still in the 4- to 6-month range that they've always had? And then I'll pass the line.

So the -- under sales cycles, there's 2 sales cycles. So the expansion sales cycle, when they want to do -- want to add on more users than that. So definitely, that's coming down due to the quality of the software, the ease of use of this and how the customers and users like Kneat and they want to expand it themselves. And also the top-down decision to go digital across all sites and not have sites on different versions or they're different -- one on paper, one not on paper. And then we have the smaller customers. Definitely, their sales cycles are coming down there as well. [ The buying out sales are coming down and down to the drive ] industry to become digitized. The clear business cases there, created by Kneat, will largely again -- and the solution [ is coming on the rest of the challenges and the maturity of Kneat ] and also the maturity of the product and the company. And especially when -- actually, in case studies like the Merck one and others that are -- that's great referenceability, too, and they share this information amongst themselves. So definitely, sales cycles are coming down, Christian.

Okay. Perfect. Congrats here on the quarter. It's a lot of helpful color, guys, and I'll pass the line here.

And the next question comes from the line of Rob Goff. Again, Rob, I'd like -- just need you to identify your organization for the benefit of other people listening.

And it's Rob Goff from Echelon.

Rob, you're a little hard to hear. You sound like you're away from your speaker -- or your microphone.

Okay. Is this better here?

That's better, yes. Thanks.

Okay. Good. It's Rob Goff and -- Echelon Partners. Could I ask with respect to your reference to $50 million of run rate, is that something we should look at exiting 2023? Or is it more of a 2024 time line? Just how might we frame that?

Well, I think the big thing to say about that, Rob, is that, that's -- with our existing customer base, when they're fully scaled, we see that as an annual recurring revenue from that base of customers. Obviously, we have a very strong pipeline as well, and we're building in our sales and marketing, so we expect that to continue to grow. So the combination -- when we reach that $50 million, it would be a combination of both, obviously. And some of these customers scale to different speeds. One customer might scale over 3 years and be fully scaled for the validation portion of their business. Others might take 5 years. So it's hard to put an actual time line, Rob, and I don't want to evade the question, but the -- others are going to come in as well and the current base when fully scaled, but it's hard to say exactly when they would be fully scaled. There's always continuous opportunity. Some will go faster. But they're all invested in the journey, that's the key thing.

And if I may ask, when you do -- on a time line towards full depletion of -- or deployment, what percentage of revenues would you see from additional services? Just trying to get an idea for your look at expansion beyond your current markets.

On validation, I think the marketplace -- today, we estimate the total adjustment market for validation in Europe and the U.S. are of the order of $600 million annual recurring revenue in U.S. dollars. I can see that being -- the opportunity for that is 3, 4x that, if we scale to all the opportunities that are available -- are potentially available. Of course, we have to win some market share there as well along the way. But there's that type of order of magnitude opportunity within life science.

One last one, if I may. It wouldn't be a quarter if we didn't ask you for additional perspective on your pipeline and any RFPs in the marketplace.

Yes. So we're -- and continue to -- we're building marketing. Marketing is delivering more opportunity as well. And so I'm very optimistic about our pipeline, Rob. It's very robust, and there's a lot of activity going on with large and small customers and in between.

And let me share in saying congrats on the quarter.

Thank you, Rob.

Thank you very much, Rob. At this point, I'm not seeing any further hands. Okay. Oh, okay. So I -- Gavin, I see you put your hand up again. Yourself -- you set a moment there, so try to go ahead.

Just quickly, can you provide any update or any color on what you're hearing about Veeva? Obviously, after they announced, I guess it was in the fall, their work on a validation product, have you heard any industry scuttlebutt? Are you hearing anything from clients? Any color there would be helpful.

We haven't heard anything that's material, Gavin, since the last update. There's no news on that. There's no solution in the marketplace. We haven't heard of any, seen or anything like that. And we're expecting one to be there. I thought it has been, but we haven't seen anything yet.

Got it. And then maybe just to build on Rob's question around the sales pipeline. Can you just touch on the traction or trends that you're seeing in CPG and supply chain within that pipe?

Yes. So there's a significant proportion of supply chain in that pipe as well, small and larger pipeline. In the course with our announcing criteria, they wouldn't probably be announceable wins in some of the pipeline but they'd be more down market companies. We're also seeing a lot of activity in the mid-market and small market on the pharmaceutical manufacturing space. We will also be seeing some CPG opportunities coming through. But we're not focused on the CPG at this particular point in time, but we see that evolving as we go forward.

Got it. Yes, you're not focusing on it, but you're announcing some nice wins, so it's good to see the progress there.

So the only thing about it, Gavin, they're coming to us. They have some needs to their customers we're really focused on. It doesn't mean we're not focused on them, we are focused on them, for sure. But they are making themselves -- they're driving us, really, is all I'm going to say there.

Congrats on all your progress.

Thanks.

Thanks, Gavin. Rob, your hand is still up. I'm not sure if you've -- if you have an additional question or if you just have it up from the last time. Back to you.

It was just last time.

Okay. Very good. Okay. Thanks very much. And okay. And at this point, I'm not seeing any further questions. Okay. In that case, thank you and that will conclude today's question-and-answer session. I'll now turn the call back to Eddie for his closing remarks.

Thank you. In summary, we're very pleased with the progress we have made in '21. And we're very proud of the Kneat team as they continue to develop quality compliance software, focus on growth initiatives to win and scale customers across all tiers and provide excellent end-to-end customer service. Today, most of our many customers across all tiers, we can count 7 of the top 10 global pharmaceutical companies who have chosen Kneat as their corporate solution. It was a great pleasure to be trusted by this industry, to support them it in its mission to bring life-enhancing and life-saving therapies to its customers. Before I finish, thanks to all 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. This ends our call today. Thank you very much.