kneat.com, inc. (OTCQX:FBAYF) Q2 2022 Earnings Conference Call August 11, 2022 9:00 AM ET
Company Participants
Eddie Ryan – Chief Executive Officer
Hugh Kavanagh – Chief Financial Officer
Conference Call Participants
Gavin Fairweather – Cormark
Christian Sgro – Eight Capital
Justin Keywood – Stifel
Rob Goff – Echelon
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the kneat.com Second Quarter 2022 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.
Before we begin, I would like to draw your attention to the Safe Harbor statement on Slide 2 and the forward-looking statements 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 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.
I will now pass the call to Eddie Ryan, CEO of Kneat.
Eddie Ryan
Thank you, Sinead [ph]. 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.
I am proud of our team as we continue to deliver strong year-on-year growth through the second quarter, highlighted by 126% growth in SaaS revenue and 104% growth in annual recurring revenue over quarter two 2021. Our fast-growing and diverse customer base is proof that Kneat’s platform is a preferred solution in the industry.
Momentum continued through the second quarter of the year as investment in sales and marketing drove robust new customer activity. Today, we have 62 contracted customers and the largest pipeline of potential customers in our history. Within this space, we count eight of the top 10 and the majority of the top 20 biggest pharmaceutical companies.
In addition, customers include several top-tier consumer packaged goods companies and a growing number of smaller FDA regulated manufacturers. These companies are selecting a system to manage their global validation, which is a critical business function. They are making a long-term investment decision, so they carefully evaluate market offerings before selecting their preferred solution.
We are proud to be trusted by these global leaders to help them deliver their regulated products to their customers to the highest quality standard. Kneat is committed to continuing this strong growth while also maintaining a focus on expenditure and financial flexibility.
During the quarter, we strengthened our leadership team by the addition of Jacob Michelsen, a proven sales leader, to head global sales. I’m excited to have Jacob on board and look forward to his leadership as he expands our global sales capability.
Leveraging our dominant position within the pharmaceutical top tier, we continue to expand our go-to-market capabilities across all tiers of the life sciences and consumer packaged goods industries. We estimate that our current customers when fully scaled can provide an annual recurring revenue of US$50 million for validation processes only. Over time, we believe this opportunity is much greater as we move to other quality processes adjacent to validation.
Our strategy of working with professional services companies continues to show promise. Today, we have relationships with 50 partner and service provider companies. We continue to see increased technical proficiency in this partner channel, and several partners can now implement deployments with low-touch 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 have formally trained and certified more than 2,300 individuals. Several of our larger customers have requested that their supply chain vendors input their data directly into Kneat, which creates additional channel partners and can also create new customers.
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. 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 the second half of 2022 is to continue to add and deploy new customers across all tiers to expand to new work processes and new sites within our existing customer base to further develop the Kneat Gx platform in close collaboration with our customers, and to leverage our partner relationships to expand global reach.
I will now hand you over to Hugh for a review of the financial results.
Hugh Kavanagh
Thanks, Eddie. For the financial review, please keep in mind that all the numbers I will be discussing are in Canadian dollars. I am happy to report that we have seen a strong year-on-year revenue growth trajectory continued through the second quarter of 2022, including our SaaS license revenues. Revenue for the quarter ended June 30, 2022, was $5.5 million. This is an increase of 76% from $3.1 million for the second quarter of 2021.
SaaS license fee are a key metric for Kneat. SaaS license revenue for Q2 was $3.9 million compared to $1.7 million for the comparative period in 2021. This is an increase of 126%. The increase in revenue primarily reflects the level of scaling by existing customers in their use of Kneat Gx, in addition to the purchase of new license subscriptions by new customers.
Cost of revenue for the second quarter of 2022 was $2.3 million, an increase of $0.9 million from $1.4 million in Q2 2021. This increase reflects additional salaries and benefits related to the higher headcount in the professional services and customer support teams, the recognition of a bonus accrual and increased hosting costs and consulting fees.
Gross margin for the three months ended June 30, 2022, was $3.3 million. This is an increase in gross margin from $1.75 million in the same quarter of 2021. Gross margin percentage also increased to 59% compared to 56% for the second quarter of 2021. The increase in gross margin reflects the increase in revenue over the same quarter in 2021, coupled with a smaller increase in related cost of revenue compared to Q2 2021.
As we continue to scale our license revenue and as the proportion of license revenue to professional services revenue continues to increase, we expect the gross margin percentage to continue to trend towards SaaS industry norms. During the second quarter, we continued to invest in both product development and sales and marketing to support our future growth objectives. Sales and marketing expense was $1.7 million in Q2 2022 compared to $0.8 million in Q2 2021. And R&D expense for Q2 2022 was $2.7 million compared to $1.8 million in Q2 2021.
Annual recurring revenue, ARR, is a key performance metric for Kneat. ARR 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 June 30, 2022, to $16.3 million, a 104% increase compared to June 30, 2021.
More specifically, ARR from SaaS license fees increased by 108% to $15.2 million, and ARR from maintenance fees increased by 55% to $1.1 million from $0.7 million at June 30, 2021. We are in a healthy financial position with a strong balance sheet and a growing customer base. We intend to continue to invest to drive our growth while also maintaining focus on expenditure and financial flexibility, allocating capital efficiently with a focus on sales and marketing to drive our growth and create ongoing value for our shareholders.
As a reminder, we have filed our unaudited condensed interim consolidated financial statements and MD&A on SEDAR, and they are also available on our website.
We are now ready to take questions, and we will give priority to sell-side financial analysts.
Question-and-Answer Session
A – Hugh Kavanagh
[Operator Instructions] The first question comes from the line of Gavin Fairweather. Gavin, I might ask you to just mention your organization. I’ll get everyone to do this as well, just for actually the people to know where you’re coming from.
Gavin Fairweather
Yes, great. Thanks, Hugh. It’s Gavin here from Cormark. Congrats on the strong quarter. Maybe just to start out, just given all the macro headlines that we’re seeing. Curious, Eddie, from your perspective on how resilient you think demand will be in the life sciences vertical. And also curious whether you’ve noted any shifts in tone from your customer base around kind of expansion plans and rollouts?
Hugh Kavanagh
Eddie, are you there? Maybe you need to unmute yourself?
Eddie Ryan
Okay. Thanks, Hugh. Yes, I can hear you. Hi, Gavin, how are you.
Gavin Fairweather
Good, thank you.
Eddie Ryan
Thanks, Gavin. And yes, so we are not seeing any adverse effect on our business from the macro environment at this time. There are soundings or a little bit of conservatism creeping in around price negotiations and stuff like that. So inflation, looking to push back a bit on the inflation, the yearly inflation costs and that type of thing. So while we don’t see any major impact on our customers’ budgets, there is – customers are, in places, looking for more value, looking to keep the cost down.
Gavin Fairweather
Yes. That makes sense. Maybe just on the ARR that you added this quarter, I mean, you increased the ARR bookings year-over-year and last year was kind of a strong comp. Curious if you had any kind of large Tier 1 scaling events included in the ARR that you added this quarter or whether it was maybe more broad-based?
Eddie Ryan
Yes, there’s a bit of both there. There has been some scaling events with our larger customers as the typical approach for our customers is to some scale faster and in smaller chunks and others will scale most steadily. So we’re seeing a bit of steady scaling with our customers and a little bit here and there on some of the larger customers. But yes, it’s what we sort of would have expected from conversations with our customers earlier in the year. And I think it’s generally broad enough, Gavin, just to clarify that.
Gavin Fairweather
That’s great. And then maybe just before I pass the line, I think version 9.0 is slated to be released this summer. I’m not sure if it’s out yet or not. And I know that there are being some kind of sought-after functionality in this release around kind of the API and kind of paperless handover. What kind of conversations is that driving in the base? Is the release out yet? Maybe just talk about the product side there for a second.
Eddie Ryan
Yes, so just 9.0 is due out and it brings out a lot of features that customers are asking for that enable them to move forward with their plans. In some cases, it’s allowing them to move from on-prem to SaaS and also without some scaling. So yes, that is a factor for us. And everything we’re bringing out is in close collaboration with the customers. So we’re very happy with that, what the development team is delivering for the customers this quarter.
Gavin Fairweather
That’s great. [Indiscernible] Thank you.
Eddie Ryan
Thanks.
Hugh Kavanagh
Thanks, Gavin. The next question comes from the line of Christian Sgro. Good morning, Christian. Again, I might ask you also to mention your organization for the benefit of other listeners.
Christian Sgro
Good morning, Hugh and Eddie. And this is Christian Sgro at Eight Capital. For the first question this morning, I want to build on Gavin’s most recent question around the product. When you work with customers around developing the product, updating the solution, do you or would you ever do any customizations for a certain customer? Or is the Kneat SaaS platform, a single standardized unified solution across your entire base?
Eddie Ryan
Hi, Christian. Yes, the quick answer to that is we don’t customize for anybody. It’s a market platform. It’s the customers like it that way because they don’t want to be on their own versions and be maintained separately. So yes, it’s a broad platform and it’s holistically developed for all customers.
Christian Sgro
That’s perfect. It makes your life easier and that’s probably the answer we all want to hear, which is good, one single product. Moving on to the pipeline, which congrats – you had mentioned it’s at record levels. I was just wondering if there’s any color you could add around the composition of the pipeline and whether you want to go into a vertical or size of customer or geography? Just anything you’d share around the types of customers you’re talking to.
Eddie Ryan
Yes. I would say it ranges from small early-stage biotechs service providers, equipment suppliers to the industry mid-tier and big pharma and medical device companies. So it’s a very broad, Christian.
Christian Sgro
Yes, perfect. And then moving to sort of the shift from on-prem to SaaS. It sounds like there’s one or two customers that sort of migrate each quarter or a year. But wondering how that transition is going sort of who’s left to move over and how talks around that [indiscernible] with those customers?
Eddie Ryan
Yes. So of the – we’ll call them the larger customers, probably there are three customers to move over. And 1 of them is – the discussions are ongoing and they’re in transition. Probably, there will be two of them falling into 2023.
Christian Sgro
Perfect. Thank you, Eddie for taking my questions. I’ll pass the line.
Eddie Ryan
Thanks, Christian.
Justin Keywood
Hi. This is Justin Keywood calling from Stifel. Thanks for taking my question. I was wondering about the vertical outside of pharma. There was mentioned in the press release that there’s several Tier 1 customers in the consumer packaged goods. I’m just wondering if you can quantify what that is today and what the opportunity could be. Thank you.
Eddie Ryan
Hi, Justin. So yes, that area is, I say, is not the primary focus for Kneat. The primary focus for Kneat is life sciences. But yes, we are also working with companies in that space, and there are a number of these customers in our pipeline as well.
Justin Keywood
Okay. And I know there is an opportunity to expand ARR just with existing customers. I believe the target is $50 million. Has that target changed at all? And what I’m getting at, is there any new customers that were added that could potentially increase that goal?
Eddie Ryan
Yes, I suppose the short answer there, Justin, is every customer that gets added increases that sort of TAM within our customer base. And the larger they are, the more potential they have to increase that. So yes, we’re adding customers, and we have a lot of customers in our pipeline who can move the needle on debt over time.
Justin Keywood
Great. Thank you for taking my questions.
Eddie Ryan
Thank you.
Rob Goff
And it’s Rob Goff here with Echelon. Can you hear me?
Eddie Ryan
Rob, yes, we can hear you. Eddie here.
Rob Goff
Very good, Eddie. Can I ask about the messaging within the strength of the professional services, if you could dive into perhaps the composition of that? And to what extent that is foreshadowing of ongoing momentum?
Eddie Ryan
I’m sorry, I didn’t quite catch your question there, Rob. You’re asking about the professional services team. Could you just clarify that a little bit for me, please? Thank you.
Rob Goff
Sure. I know within professional services, there are different categories. Could you talk to the composition of the professional services? And to what extent should we look to the professional services line and say, yes, you mentioned is continuing, accelerating when we look ahead.
Eddie Ryan
Yes, it’s a good question, Rob. So there are some, what we would call, reorganization within the company around building customer success, and some of that is bordering on professional services, partner success, these type of roles. But the professional services as – working directly with customers, that is – we don’t expect that to rise very high in the future relative to revenues. We expect that to taper off. And that we also expect to leverage our partner channels more to provide these provisional services to our customers so that we can focus on building great technology and getting it consumed through channels into the marketplace.
Rob Goff
And, if I may, on the – both the sales and marketing at $1.7 million, R&D at $2.7 million, can you describe the trend lines that you see in both of these areas are – as you are investing to grow?
Eddie Ryan
Exactly. So we continue to invest in our go-to-market. And we brought on a head of sales recently, Jacob, and we’re pushing forward with our structure there and building out our sales teams globally. So we’ll continue to invest in that line, Rob, and it will continue to rise. And also marketing, in parallel with that, will also be improved or increased to deliver on the outcome of more customers and greater ARR.
Rob Goff
Okay. Thank you and congratulations.
Eddie Ryan
Thank you, Rob.
Hugh Kavanagh
Thank you very much, Rob. Okay. I’m not seeing any other questions at this – sorry, Gavin, I’m just going to open up your line again there. So Gavin, yes, you can go ahead again.
Gavin Fairweather
Yes, thanks. Maybe one for you, Hugh. Subscription revenue looks quite strong relative to kind of period ending ARR this quarter. Is that due to kind of shifting FX movements? And maybe you can help us just understand some of the currency exposures of the business in terms of the billing in Euros versus USD and reporting in Canadian and then the cost base, just given the volatility we’ve seen in rates.
Hugh Kavanagh
Yes, absolutely. I suppose the first thing I’d say, Gavin, is I’d probably just pointed to the financial statements, one of the notes of the financial statements, which sort of addressed this a little bit. I think it’s – if I remember right, it’s note 17, there’s a piece there on exchange rates where it gives the impact of movements in exchange rates. So – but in broad terms, our – the majority of our revenues are in U.S. dollars. Not all, there some Euros and some in some other currencies as well, but the majority are in dollars. The majority of our expenses are in Euros.
So essentially the expense side, the – where the exchange rate has been moving has been, I suppose, held to little bit of, I suppose, headwind on the revenues per se. So I think you note that, that note 17 is probably a good place to reference in terms of the size of impacts of – it refers to the 5% movement and then you can work from there.
Gavin Fairweather
Got it. And then maybe just lastly, Veeva, I guess it was about a year ago announced that they’re coming up with their digital validation product in the back half of this year. Have you heard any more scuttlebutt on that product? Any more – anything you can add on the competitive front given that we should be around the time that they should be releasing this product around now?
Eddie Ryan
No, we haven’t seen anything from Veeva or heard anything regarding their product, Gavin, at this time. We obviously assume there’s something coming, and we expect it in due course, but we’ve heard nothing at this point in time.
Gavin Fairweather
Okay. That’s helpful. Thanks so much.
Eddie Ryan
Thanks, Gavin.
Hugh Kavanagh
Very good. Thanks, Gavin. And at this point, I’m not seeing any further questions. Okay, I think that concludes this question-and-answer session, yes. So I’ll hand back to Eddie for his final closing remarks.
Eddie Ryan
In summary, we are very pleased with the progress we’ve made in the second quarter of 2022, and we are very proud of the Kneat team as they continue to develop quality compliance software in collaboration with our customers, selectively focused on growth initiatives to win and scale customers across all tiers and provide excellent end-to-end customer service.
It gives us all at Kneat great pleasure to be trusted by the largest global life sciences companies to support them in their mission to bring life-enhancing and life-saving therapies to their 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.
Hugh Kavanagh
Thank you. And that concludes today’s call.
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