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

Hello, and thank you for standing by. At this time, I would like to welcome you to the Kneat Q4 and Year-End 2024 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Katie Keita, IR Lead for Kneat. Please go ahead.

Thank you, operator, and welcome, everyone, to Kneat's Fourth Quarter and Year-End 2024 Earnings Conference Call. Today's call will be hosted by Eddie Ryan, Kneat's CEO; and Hugh Kavanagh, Kneat's CFO. Please note the safe harbor statement on Slide 2 and the forward-looking statements disclosure at the end of the earnings release, informing you that some comments made on today's call contain forward-looking information. This information by its nature is subject to risks and uncertainties, so 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 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. For your reference, we have filed our audited consolidated financial statements and MD&A on SEDAR, and they are available on our website. I will now pass the call to Eddie Ryan, CEO of Kneat.

Thank you, Katie. Good morning, everyone, and thank you for joining the call today. We look forward to reviewing 2024 with you, after which we will then open up the call for questions. We are pleased to report that we closed the year with fourth quarter numbers that are in keeping with 2024 as a whole, with both the 3-month and full year periods showing strong growth in revenue, gross and operating margins. For the fourth quarter, annual recurring revenue grew 60% year-over-year to $59.7 million. Revenue grew 40% year-over-year to $13.7 million. Gross profit grew 48% year-over-year to $10.4 million, while operating expense grew 10% over the same period. This strong close delivered on our goal for 2024, which was to grow into the investments we had already made coming into the year. We saw a record amount of ARR added in quarter 4, driven strongly by customer expansions. Deals through 2024 came from Europe, Asia, South America and the U.S. Since our last earnings call, we announced 4 strategic wins. These wins span the life sciences space in general, won a biopharma manufacturer, won the life sciences division of a consumer product giant, won a medical devices company and finally, a leading engineering and technology firm, ALTEN. ALTEN will digitize their own internal validation processes, as well as those of their customers across the life sciences space. As our pace of both new logos and customer expansions indicate, our sales team are good at harvesting their strong pipelines. We will add further to our sales and marketing teams in 2025 to further capitalize on the market opportunity ahead. Alongside these financial achievements, we also made significant operational and product progress. We recruited key talent and enhanced our internal business processes, including the addition of some AI tools across sales and marketing, quality, research and development, customer success and support. We launched and formalized our partner program, which had organically grown around us over previous years. The results have been encouraging as more partners sign up to our shared vision of connecting the industry for greater customer value. We also welcome the global systems integrator, Capgemini, as a partner. Capgemini is an asset to many global companies, several of which are already Kneat customers. These customers can now leverage Capgemini's services to realize greater value from their investment in Kneat. We continue to enhance the Kneat Gx platform, enabling us to further consolidate our leadership position across the full validation spectrum from equipment validation through to computer system validation. Customers now have greater control over permissions, greater ability to present to regulators, richer reporting dashboards, more connectivity to other enterprise systems and greater ability to transfer data from other systems into Kneat. It is exciting to see our team break new ground, and we are leaning into our momentum by adding strategic hires to our R&D team throughout 2025. These investments in our people and our platform give us confidence that we'll achieve our goals in 2025, which are to close the year with more new customer additions than last year, a customer base that is closer to their end goal of 100% digital validation on the Kneat platform and a team at Kneat that is larger and stronger than ever before. Thank you. I will now pass you over to Hugh to discuss the financial results in more detail.

Thank you, Eddie. As I take you through the numbers, please keep in mind that all the numbers I will be discussing are in Canadian dollars unless otherwise noted. Also, you will note that costs for 2023 have been adjusted to address immaterial errors related to the estimates in accounting for share-based compensation and related amortization. The adjustments can be found in Note 21 of our financial statements. Revenue continued to climb in Q4, expanding 40% over last year's Q4 to $13.7 million. SaaS revenue grew 41% year-over-year to $12.5 million, and ARR grew 60% year-over-year to $59.7 million. For the full year, total revenue was up 43% to $48.9 million from $34.2 million for all of 2023. Within this, SaaS revenue grew 48% to $44.6 million from $30.1 million a year ago. Professional services in quarter 4 grew 27% year-over-year, a rate that reflects the progress we've made pushing more of our services to partners. Directing more services to partners feeds the ecosystem, uses Kneat Gx to connect the industry and drives up the share of our revenue coming from pure SaaS, which benefits our gross margin. And gross margin did benefit in Q4. Cost of revenues was $3.4 million, up 20% from the cost of revenues in Q4 2023. For the full year, cost of revenues was $12.2 million, up 10% versus all of 2023. Gross profit for the 3 months ended December 31, 2024, was $10.4 million, 48% higher than $7 million in the fourth quarter of 2023. The full year 2024 saw gross profits grow 59% to $36.8 million. Gross margin percentage was 75% for both the fourth quarter and the full year. Operating expenses grew 10% in the fourth quarter to a $11.2 million versus $10.2 million in Q4 of 2023. Sales and marketing expense was up 7% year-over-year to $4.8 million in Q4 versus $4.5 million in the fourth quarter of 2023. R&D expense for the quarter, net of capitalized R&D was up 22% year-over-year to $4.5 million in the fourth quarter compared to $3.7 million in Q4 of last year. For all of 2024, operating expenses totaled $42.7 million, 15% higher than they were in the comparable prior year period. We ended the year with total annual recurring revenue ARR of $59.7 million, up 60% from $37.4 million at the end of last year's fourth quarter. ARR from SaaS license fees was $59.6 million, also up 60% from $37.3 million of SaaS ARR at December 31, 2023. So all in, a very strong year on the top line and controlled spending to help the bottom. This leaves us in a comfortable cash position to pursue our ambitions for the platform in 2025. This will require growing our team. I will now turn the call over to our operator for your questions.

[Operator Instructions] Our first question comes from the line of Doug Taylor from Canaccord Genuity.

Congrats on a very strong finish to the year. I'd like to start by asking about the near $10 million in ARR you added in the quarter, I kind of jumped off the page at me. We've seen some strong seasonal ARR build historically in Q4. But is there anything a substantial expansion or anything you want to flag that contributed to the Q4 bookings? Anything to flag there?

Yes. I'll take that one, Hugh. You may want to add to it there shortly. Doug, thanks. Nice to meet you again. Yes. So traditionally, the last quarter is usually strong for us. And again, this is a repeat of previous years. And like all quarters, there is variation to it, and there has been some strong finishes to the year in some customer quarters. So we would have seen some significant expansions with different customers. Hugh, do you want to add some color on the number there?

Yes. No, I mean, yes, I think it's a good observation, Doug. Yes, I mean we had a strong fourth quarter, a number of significant expansions in the quarter, which has helped that. And as Eddie mentioned, I suppose the pattern that we've seen is that fourth quarter tends to be a stronger quarter in the year, yes.

Okay. Well, I mean, you mentioned some substantial expansions. I know over the quarters and years, you've been asked about the level of penetration of your current installed base. I think at one point, you talked about $50 million or $60 million in potential ARR within your existing base. You've obviously surpassed that now. I guess my question is to once again, is there any way you can help us think about the remaining expansion potential within your existing customer base or the level of penetration you're at now? Anything you can help us with there, Eddie?

That's a very good question, Doug. All I can say is, there's a lot of white space ahead of us, not just in the -- if we talk about operating validation alone, but we do see opportunity in other areas and customers are already asking us to go there. We sort of backed off putting numbers on that because it changes, but it is significantly higher than what we did last put out there. But what I would say is that some of our customers are still, in my view, from a validation perspective, not halfway there yet, some of the strategics. And we -- the announcements we make, these are all strategic as well. So we all see them being several million in annual recurring revenue when they're scaled up on a -- from a validation perspective. So it's hard to put a number on it, but I think we're still early in that journey.

Okay. Well, then maybe I'll ask then the last -- the question about the other side of the growth story, the new logo expansion. I think last year, you claimed you expected to add a record number of new customers and you were successful at that. I see, as you referenced, you've got a very solid start here so far in 2025. I mean, do you want to potentially speak about the pipeline of new logo or the momentum? And do you expect to continue to accelerate that part of your growth story again here in 2025?

I do. I do, Doug. Nice to talk about that one as well. I mean there's 2 dimensions to our business. There's getting through our white space and adding new because the newer the white space of tomorrow and into the future. And we're very optimistic about our pipeline. And I would say that we've done a lot of work on sales process over the last 18 months, making sure that we're targeting the right customers and that we're also -- we don't -- as a company, directly, we target enterprise and strategic customers. And the quality of our pipeline has improved over the years as we got into a better discipline. So I'm very optimistic about our pipeline going into '25 as well for the quarters ahead.

Our next question comes from Gavin Fairweather from Cormark Securities.

Congrats on the strong numbers. Maybe just to start on product. I know a big focus has been on enhancing CSA and CSV offering over the course of the last year. Can you maybe just provide us with a bit of an update on kind of where you are on that journey? And then secondly, what kind of appetite you're hearing from your existing customers for moving these use cases onto your platform?

Yes. Good question, Gavin. Good to meet you again. And yes, we're making great progress in that whole space. I mean, I would say that we've always been strong in CSV if you look at it from a waterfall-type perspective. But when you look at it from an agile perspective, we haven't been as strong there. And as you know, over the last while, we've been enhancing that. And we just released 9.4, and I had a demo over the weekend, and I'm really happy with where they've come. The team is doing a great job. And our customers are -- also we're talking to our customers very closely, and they're all -- they're very excited about what we're doing as well. So on the journey, Gavin, like I said, it's going to take a few releases to get to where we want to be, but we're making really good progress there. I'm very optimistic about that.

That's great to hear. And then maybe secondly for me on partners. We've seen some kind of larger system integrated type partners kind of join the program recently. Can you remind us what kind of requirements there are to join your partner program at that level? What do you ask of those partners to have to build dedicated teams to meet? Or how does that look?

Yes. So there's multiple dimensions to it, and there's different types of partners. But if you look at -- there is a partner that's a customer -- they're customer of Kneat, they become a customer to use Kneat in their business, but also deploy Kneat on behalf of their customers. So if you take -- I look at ALTEN as an example, ALTEN is a big engineering firm and systems integrator and IT provider. And their goal is to use Kneat within their business to help them deliver their services to the life sciences, but also to integrate Kneat within the life sciences. So some of the key things is if you want to become a partner of Kneat, I like if you want to become a customer first, that's great. And then you get to know Kneat and you can resell it or refer it or whatever the case may be. Systems integrators, the larger ones don't tend to be resellers. They're product integrators. But we have partners in -- we've boutique partners who really understand the customers' domain and they're in there with the customer all the time on the business side. We have the systems integrators who are talking to our customers and the customers are saying they'd like to scale their validation solution faster, and then they can help them to do that. So that's the kind of where we come together. Then we have engineering companies who are involved in the engineering procurement and construction side of things who are building facilities and new lines, and they're looking to use Kneat to catch the data earlier and deliver value to their customers faster through that process. So there's multiple dimensions to it. We see partners -- the key from our perspective, from a partner's perspective is that their referrals and integrators, they're the biggest things we see and users of our software in the space. I hope that's a long way around there, Gavin, but I hope I got your question there?

Yes, appreciate it. That's great. And then in the letter, you talked about how AI can be used to make you more efficient, but also how AI can be used by customers in the workflow. Can you just discuss what some of the use cases would look like and whether that will be monetizable for you?

Yes. So AI within the product and deliver more efficiencies for the customer is very important. And we see positions there. There's a number of different types of areas. But -- so areas where you can auto create documentation based on content, depending how much you open up the AI -- the agent to the data, auto generating documentation, being able to create data which reports from the data, being able to create test cases and stuff like that. So there's all of those things. And one thing you have to be careful about is access to the data and who has access to stuff like that. But that's something where we see value down the road a bit.

Our next question comes from Scott Fletcher from CIBC.

I wanted to ask just on the pipeline and the sales team. Just obviously, you're coming off an excellent 2024. You added significant amount of ARR. Do you see the pieces in place right now with the pipeline and the sales infrastructure to sort of in 2025 at a similar or greater amount of ARR just on a dollar value?

Yes. So we're very strong on where we are posture right now, our team, our competitive positioning and the pipeline we have, Scott. So yes, the short answer to that is we're optimistic about our future in the short and medium-term and long-term for that matter.

Okay. Fair enough. And then on the competitive piece, I do want to ask sort of -- it's obviously an evolving market, lots of white space. But just curious what you're seeing from a competitive standpoint? Is there any changes in how competitors are going to market and how their products are evolving and how you're responding to those changes?

Yes. So I mean, first and foremost, Kneat has a very strong positioning in the marketplace. Our message to our customers is one platform for all your validation needs, whether it's cleaning validation, computer system validation, equipment validation, you name it. And that's a real strong. And we're saying to the customers, which is very clear, it's your validation process, your way on our platform. It's a 0 code platform. That's something no other offering in the marketplace can claim. And that's based on many, many years of development from the ground up with the compliance capabilities built in. So we're -- there's no question about our leadership position in the validation space. We are seeing -- beginning to see new competitors follow us into the marketplace because we created a new category here, and it is a big category, and they're seeing opportunity there as well. But right now, today, there's -- when it comes to a final competitive situation, there's probably 3 companies being seriously evaluated at this point in time. And generally speaking, Kneat is the leader, and we're winning the key deals.

Okay. Sounds like things are good on that front. And then I'll just ask one more on the expense trajectory. I mean, now that you've had a little more time to digest the equity raise and how you plan to use it, is there anything you can sort of share as to what expense growth might look like in '25 with the equity raise proceeds in hand?

Yes, well, it's great. The equity raise is great. It's given us a strong posture going into '25 and beyond. And so we have lots of opportunity in the marketplace, and we would be evaluating all of those. But the way we see '25 panning out, there will be some hires in the sales and marketing and strategic hires in the R&D side of things. So there's going to be no -- I would say, no step change here, steady strategic hiring through '25. And we're also considering options around other areas. But for now, that's where our view would be.

Our next question comes from Justin Keywood from Stifel.

Nice to see the momentum continue. We saw at least one announcement related to a consumer products leader selecting Kneat. I know there was also a large customer that signed on last year. Just wondering the outlook for the consumer products segment, given some potential inflationary impact, if that's meaningful at all? Or are you still seeing a robust outlook in that area?

Yes, Justin. We would say, yes. The first answer to that one is, yes, we're seeing demand in that space and when we talk about some of these companies, it's the areas where they're subject to validation, subject to good manufacturing practice. So where they make products that come in contact with the human body, such as cosmetics, toothpaste, the likes of that. So -- but we're seeing those as -- yes, the demand is there for that in that space. Traditionally, though, with the larger ones, we probably wouldn't see it with the smaller versions of those at this point in time, and we're not really marketing to it at this point in time.

Understood. And then is there any implications for potential tariffs to the business? I know it's still a fluid situation. There has been some talk on a digital services tariff. But is this impacting any conversations with your customers or how you see the business going forward this year?

Yes, Justin, I suppose this is certainly a topical topic. And I mean, as you identified, it's continuously evolving. So I mean, as to where things stand at the moment, I mean, typically, tariff supply to physical goods as they enter country. So clearly, we're not in that space. We have been looking at it. And as of where things stand at the moment, we don't see any direct impact on ourselves. But I mean, obviously, the rule book is subject to editing and changing. And if that happens, certainly, we will continue to monitor and watch that and see what the potential impacts are there.

Our next question comes from Steven Li from Raymond James.

When we -- in previous discussions, when we think of TAM, we kind of used like 10% of employees. And I was just curious, like your recent wins, whether it's ALTEN or the most recent one, the food and beverage one, would that still -- that potential still be 10%? Or would there be additional factors you would have to consider?

Steven, yes, 10% really is to -- applies to the core biopharma-type manufacturing space, right? I mean when you get into the consumer products divisions, companies and divisions of some of the big pharma companies that are consumer products as well, it's less because -- not all the products are subject to validation processes and good manufacturing practice processes. So you're already carving out a lot of the people that may not be involved. So if you look at that recent one, it's a very big company. And I'd say you're looking at -- I'm thinking out loud, maybe 10% of that is subject to this, right? It's the health care division within that organization. Still a very big organization, and there's still opportunity maybe for crossing over in due course, but nothing in the short term. So it would be a different calculation. And when we develop our own TAM internally, we would take that into account. And the 10% is really associated with the pure-play biopharma-type manufacturers, medical device manufacturers, that type of market.

Got it. Perfect. And maybe a question for Hugh. So Hugh, you have positive EBITDA, but you also have capitalized R&D. So if I'm thinking on a free cash flow basis, but inclusive of what you expense on your capitalized R&D, should I think you can be breaking even in 2025? Or is that something more in 2026?

Yes. So, yes, I think your question is very perceptive in terms of the capitalized R&D. So it's important to take account of that in terms of looking at sort of from a, as you say, a free cash flow perspective. So I think over the course of 2025, I think we're going to see a situation where the first half of the year, as you know, the cycle sees us invoicing and collecting a higher proportion of our revenue in the first half of the year. So we will probably be in positive territory in the first half of the year. But overall, for the year, we probably -- we -- I don't expect that we'll be positive overall for the year. But certainly, we'll be moving in the direction of being positive towards the end of the year and into '26. So yes, so I think, yes, I mean, clearly, the trajectory is the right way and assuming that we can continue to perform from a top line perspective, then certainly, '26 should see us in a good position.

There are no further questions at this time. Mr. Eddie Ryan, I turn the call back over to you.

I'll close the call by thanking you all for your valued support through this journey, some of you who have been here from the very beginning. We could not have come this far without you and the confidence you place in us. As a result, today, Kneat is very well positioned to continue our growth, growth of our team, growth of our platform and most importantly, growth of important benefits we're bringing to the quality space in the life sciences. Thank you all.

Thank you.

This concludes today's call. Thank you for joining. You may now disconnect.