kneat.com, inc. ($KSI)

Good day, and thank you for standing by. Welcome to Kneat First Quarter 2026 Earnings Conference Call.[Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker for today, Katie Keita, IR lead for Kneat. Please go ahead.

Thank you, operator, and welcome, everyone, to Kneat's earnings conference call for the first quarter of 2026. Today's call will be hosted by Eddie Ryan, Kneat's CEO; and Dave O'Reilly, Kneat's CFO. Please note the safe harbor statement on Slide 2 in 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 our relevant filings, which can be found on SEDAR and on our website at kneat.com. Also during the call, we might 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 our performance. Management believes these non-IFRS measures provide additional insight into our financial results, and certain investors may use this information to evaluate our performance from period to period. I will now pass the call to Eddie Ryan, CEO of Kneat.

Good morning, everyone, and thanks for joining us today. I'll keep things brief so we can get to your questions quickly. I'll cover the key highlights from the quarter. Dave will walk through the financials, and then we'll open it up for questions. Overall, we're pleased with how we started 2026. The quarter brought us a step closer to our strategic goals. We saw solid revenue growth and a stronger cash position. Revenue was up 22% year-over-year, in line with expectations and annual recurring revenue grew 20% -- as I mentioned in my shareholder letter, customer transitions to full digital validation take time. While we're confident in our strategy and execution and both are very well aligned with what the market needs, timing on the customer side can vary. That said, what gives us real confidence in expansion is what we've seen time and again. Customers recognize the value Kneat delivers, and they want to build on it. In fact, two significant expansions we had expected in quarter 1 actually closed in early April. We're also seeing this reflected more broadly in our annual state of validation study. 87% of respondents are still relying heavily on paper-based processes and the 80% say that validation workloads are increasing. That's simply not sustainable. The efficiency gains from digitization are clear, but what's really important is that the benefits go much further than that. And we heard this directly from customers at our user conference, validity. They talked about the Kneat for a single trusted system of record with high-quality compliant data, especially as they move towards AI and greater automation. As we've evolved our platform from being document-centric to data-centric, we are increasingly becoming the partner of choice for these kinds of workflows, including computer system assurance. As we continue to build out our data-centric capabilities alongside what we already do on the document side, customers are getting what they've been asking for, one platform they can trust, easy to use that helps them connect processes, collaborate more effectively and reduce repetition and errors. At VALIDATE, several customers also spoke about the importance of connecting what's happening digitally with what's happening on the factory floor, keeping those environments in sync is critical. And importantly, the message from our customers was very clear. They're all in on Kneat. They're aligned with our road map and are excited about what we can achieve together over the long term as we continue to modernize validation in life sciences. With that, I'll hand it over to Dave to take you through the numbers.

Good morning. As I take you through the numbers, a reminder that our results are presented in Canadian dollars. As Eddie mentioned, revenue came in about where we expected it to. $18 million was 22% higher than the $14.7 million we posted for Q1 a year ago. Annual recurring revenue grew 20% over the same period to $76.1 million. Relative to December 31, FX was a tailwind to our Q1 ARR of about $900,000. Conversely, year-over-year FX was a headwind of $950,000. Customers expanding their use of Kneat drove most of this growth with new customer ARR making up the balance. Incremental ARR is historically back-end loaded, and we expect that pattern to hold for full year 2026. So Q1 growth isn't a read-through to where we expect to land for the year. Year-over-year gross margin expanded in Q1 for 2 reasons. First, we're getting better cloud hosting economics as we scale. And secondly, services revenue grew compared to last year. Services typically run at lower margins than SaaS with disciplined delivery and continued improvements in how we execute meant we completed some projects sooner, which in turn lifted the service margin this quarter. Operating expenses increased 32% over last year's Q1. A substantial contribution to the growth was R&D and a reduction to what we capitalize. As we are capitalizing a smaller percentage of our R&D costs in the past, this translates to more of the R&D expense running through the income statement. In Q1, we capitalized about $750,000 less than we would have done in our previous approach. Of course, we have also made investments in R&D and sales and marketing over the past 12 months to develop our product capabilities as well as our sales and marketing reach, especially as our customer base expands. Being first and being integrated builds a durable competitive edge. We closed Q1 with a cash balance of $51.5 million compared with $48.7 million at December 31, 2025. With that, I'll turn it over to you for your questions.

[Operator Instructions] Our first question will come from the line of David Kwan of TD Cowen.

I was wondering if you guys have seen any material change in the sales cycles and deployment times over the last few months here, particularly since the start of the Iran conflict.

David, Eddie here. Thanks for your question. I would say that through 2025, the sales cycle slowed down a little bit in places in two the year. I think we're seeing more stability now going into '26 over later '25. But it's hard to measure it, and it's an ongoing thing. But deployment times are not effective. But I would say the sales cycles and the budget approvals are probably had been slower last year, but they're improving a bit this year.

That's helpful. And at the VALIDATE conference, can you maybe talk about some of the more common things that customers were talking about as to what they want you to help them with?

Yes. It's a great conference, David, and it's a conference we use every year to make sure we're aligned with our customers. The first day of the conference, which is only takes on board our custody Advisory Board, which is a lot of our key customers are invited to that, and they share all the details around what they want, what they would like, we share what we have, where we're going in detail with them. And I would say the one thing that I've taken away from this conference is we get stronger every year. Our alignment with our customers, we're listening, obviously, through the year, but also once a year. And our alignment with our customers is really great. And this year, we had the ability to show them where we are with AI, what we're doing in the product today, what we have today, what we're bringing forward in the next release and subsequent releases. And I must say I really feel positive about the alignment. Also, we talk to them about the ability for them to do more data-centric workflows in parallel with the doc-centric workflows, which is one of our key strengths, being flexible to allow either a doc-centric process or a data-centric process. They're really buying into that. We even had one customer come back and do a presentation of what he had done with our data-centric capabilities of his own accord, and it was really impressive. We have some of our big customers really talking about how they're getting deeper into Kneat and how they're rolling Kneat out to more and more sites and the plans are really very good to hear. So we're very happy with the VALIDATE conference, David, and very -- we're great and delighted to have that conference. The key conference for the company, and we learn a lot from it, and we get really aligned with our market. And I think the market continues to show why they like Kneat so much.

No, that's great to hear. And maybe one question for Dave. Just on the accounts receivable, saw a big jump there. I don't know if that was just a timing thing, maybe a lot of billing late in the quarter, but any commentary you can provide?

Yes. Thanks, David. Q1 until end of Q4 is when we do a lot of our large billing, it coincides when we see our large ARR growth. So what you will see is you'll see a spike in our ARR balance, but you'll also see a spike in our deferred revenue or contract liability balance as well. That ARR balance will be then cleared down in Q2. So one of the things that we continually reference is that H1 is typically where we see a lot of our cash inflows from our customers. This is just a timing aspect of when we bill and when we get the cash receipt.

Yes. It was just a lot bigger this year than what we've seen in prior years. So I didn't know, like I said, if there was something specific going on as it related to the timing of those billings.

It's purely timing. So like if you compare our ARR balance from Q1 '25 to the Q1 '26, it's substantially higher, but that's literally just due to a handful of customers that are due to pay us. And we're expecting that payment to land into Q2. Some of that has already been cleared down.

And our next question is coming from the line of Erin Kyle of CIBC please go ahead.

On the adjusted EBITDA side, the number in the quarter came in a bit below our expectations. And I know, Dave, you spoke to some elevated expenses in the quarter tied to R&D spending and sales and marketing, but maybe you can expand a little bit more on that. And then how are you thinking about balancing profitability with the free cash flow breakeven objective that you've called out in the past? And are you still aiming to hit that in 2026?

Thanks, Aaron. Great question. Just to answer the latter part of that question first, yes, we're still planning to be cash flow positive for the year. In terms of adjusted EBITDA, to the point that I made earlier around our R&D, we're capitalizing a little bit less now in '26 than we have done in prior year. So we're roughly seeing $750,000 in Q1 that would have been typically amortized or capitalized if we kept the same ratio as we did in 2025. So if I look back on to 2025, we capitalized on average 52% of our overall R&D expense. In Q1, that dropped to 44%. As you know, from a cash flow perspective, regardless of where it's within the income statement or on the balance sheet, it's not going to ultimately impact the cash flow. It's purely just the recognition between the income statement and the balance sheet addition.

The G&A expense was a bit elevated in the quarter as well. So just wondering if you could kind of expand on that as a percentage of revenue, it was quite elevated versus Q1 last year as well.

Sure. The G&A in Q1 includes roughly a onetime professional fee adjustment of about $300,000. We don't expect that to continue.

Okay. And then maybe just on the professional services side, revenue was higher in the quarter than it's been in the past. Just wondering if you can speak to what's driving that? Are you seeing partners doing less implementation work? Is Kneat doing more of it? Just what's driving the elevated professional services revenue?

Yes. Kneat is doing more professional services. We're not outsourcing our professional services to partners. The goal is that we complete that internally. We also delivered on some of our projects a little bit sooner than even we would have anticipated. So we're seeing improvement in delivery. We're also seeing disciplined management there by the professional services teams, and that's contributing to our increased gross margin.

Okay. And do you expect a similar level, I guess, not quite as high as Q1, but how should we expect the cadence for the rest of 2026 to look?

Yes. I would suggest that the professional services is going to be higher in '26 than we would have seen in '25. Gross margin should continue roughly around this level. But yes, from a professional services perspective, I would assume that it's going to be higher in '26 than we've seen in '25.

Our next question is coming from the line of Gavin Fairweather of ATB Cormark.

Maybe Just on your comments on the macro kind of improving so far in '26. I haven't quite seen it yet showing up in ARR bookings. I know there is seasonality there but maybe you could just characterize kind of your pipeline of expansions versus this time last year, which was maybe at the height of the trade uncertainty and how you found that your tenor of client conversations have shifted.

Yes. Gavin, so correct. I would say that the macros are definitely -- I guess the word has probably become more used to them. And I think that the sales cycles would have been longer budgets getting delayed and put off. We saw quite a bit of that at the end of last year. It's a bit early to judge the year right now, but I would say there's definitely a more positive posture coming from the customers on the cycles and on the budgeting -- and our -- a lot of this knowledge is based on our conversations with our customers. And as I say, we did have slippage last -- at the end of last year. Those deals are still in -- some of them are over the line and some of them are still in play. And I would point out a couple of deals that just barely missed the quarter. Dave is tough on the closing off the quarters and the sales guys, I'm not happy. But a couple of deals will get into Q2. But yes, generally speaking, I think I'll be more optimistic about the macro. Having said all of that, we never know which way it goes.

I appreciate that. And in your CEO's letter, you called out, I think it was the strongest new logo pipeline you've ever had. So maybe you can just comment on that a little bit and if there's any particular regions or segments where you're seeing an uptick in traction.

Yes. We had a strong logo -- new logo pipeline last year, Gavin. We have the same one again this year. Our marketing team is doing a great job at filling the top of the funnel, and that takes a year for it to kind of filter down through to deals and stuff like that. So yes, we definitely have that strong pipeline, and it's very enterprise and strategic orientated, the pipeline because that's what we focus on with our sales team and our marketing team. So yes, I'd say it's -- if you look at quarter 1, we had another good quarter of new logos and within our expectations internally and trending to what it was last year.

Appreciate that. And then you've chatted a lot with clients on AI over the past month or so, given the conference. I'm curious what you're hearing in general in terms of the client readiness for AI and if you're hearing from any of the customers that they might want to accelerate the rollout of digital to prepare.

Yes, I think it's a very good point. And I think customers are beginning to think how do we make good AI and how do we get good AI input in our business. And I think they're focused on data digitalization to make sure that they have the process and the connected systems that they can get at the data and stuff like that. I would say that our customers are definitely want to see AI in their business. They want to see more of it. But they're cautious, especially the larger companies, they're cautious about turning on native AI features easily. I mean they have to assess it quite clearly. And they won't turn on features if there's any sort of risk to data integrity or potential patient safety. So we've seen a warning letter in the marketplace as well from the FDA on some companies that used AI to generate a batch record, stuff like that. So there's going to be a lot of caution here, but the companies are going there. And I think what I'm really excited about is our customers are very aligned with us. They see what we brought and what we're bringing, and they're very happy with it, and they think it's being brought in a thoughtful manner, aligned with the way they think and the way they want to move.

That's great. And then just lastly for me on the strategic review, we'll see if the answer, but I'm curious if there is something that's kind of catalyzed that strategic review, whether it [ in ] inbound bid or just maybe your perception that the stock wasn't properly discounting the value of the business that you're building. Any commentary on that front would be helpful.

Well, I'd like to think of it like this, Gavin. Great companies get a lot of attention. That's the way I see it, and that's the way our people internally see it. And we've been getting inbound inquiries for quite some time. And obviously, it's culminated in where we are today. I would say that there's no guarantee of anything. There's discussions ongoing. There's a strong interest. There's no -- obviously, like we said in our letter, there's no guarantee of anything happening. And we have a strong vision for the company and any partner that's getting involved with Kneat will be aligned with that and all stakeholders will benefit to the maximum. That's the way we see it and -- but it's very early days. And no -- it's totally inbound.

Our next question is coming from the line of Justin Keywood of Stifel.

Maybe just a follow-up on the strategic review first. Any indication of timing on when it could conclude?

We don't have any timing on it right now, Justin, other than it's earliest in the process.

Understood. And then just in general, the pharmaceutical space has been pretty active as far as M&A, including some of your customers acquiring other companies. Does this impact Kneat's profile at all? Like is it a tailwind or potential headwind as far as onboarding new seats?

Absolutely. It's totally a tailwind. The tailwind may take a little bit of time to materialize in the sense that they have to -- if they acquire a company that may have an alternative product, and they already have Kneat and the acquiring company already has Kneat, then it just takes the time to switch out and stuff. But it's definitely -- if our customers are acquiring others, it's definitely and has proven all the time to be a tailwind for Kneat.

Good to hear. And then are we able to have any color on the net retention rate in Q1? I know it's disclosed annually, but just trying to see if there's any context for how existing customers are expanding with Kneat.

Well, just a top level there, I would say that it's trending similar to last year. At this time. And I will point out, Justin, that like we're in the enterprise software business, as you know. And it's -- quarter 4 is usually when we see a lot of our expansions and stuff, right, and the growth. So we -- for most of last year's, most of our growth, our increased revenue comes in quarter 4. But I will say that, yes, we're trending as we were last year.

Great to hear. And just a question for Dave. On the ARR, is there any concentration in that? Or is it diversified among your customer base?

It's diversified. It's usually going to be like our top customers make up a reasonably good portion of our revenue. It's linked to those customers, but there's never any issue with those. It's purely a timing related point at the end of Q1.

And there are no more questions in the queue. I would like to go ahead and turn the call back over to Eddie Ryan, CEO, for closing remarks. Please go ahead.

Thank you. Every quarter that goes by is getting us closer to our goal. Even if our goal of digitalizing life sciences can be as efficient as possible is an ongoing journey. Kneat is and always has been resilient and executes to a long-term vision. They say discipline is remembering what you want. We will maintain that discipline and continue to get bigger as we get better. Thanks to everyone for your support of Kneat on our journey.

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