Ladies and gentlemen, thank you for standing by, and welcome to the Kneat.com Q3 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's CEO, and Hugh Kavanagh, CFO at Kneat.
Before we begin, I would like to remind you that, except for historical information, the comments in today's conference call contain forward-looking statements, including statements regarding Kneat's future financial outlook and financial performance, market growth, the release date for and benefits from the use of Kneat's solutions, our strategies and general business conditions.
Any forward-looking statements contained in this presentation are based upon Kneat's historical performance and its current plans, estimates, and expectations and are not a representation that such plans, estimates, or expectations will be achieved. These forward-looking statements represent Kneat's expectations as of today. Subsequent events may cause these expectations to change, and Kneat disclaims any obligation to update the forward-looking statements in the future.
These forward-looking statements are subject to known and unknown risks and uncertainties that may cause actual results to differ materially, including our quarterly results and limited operating history, which makes it difficult to predict future results, our expectation for future growth of our revenues, unauthorized access to our customers' data, dependence on revenues from new customers, the rate of adoption of our SaaS model, acceptance of our applications and services by customers.
Loss of one or more key customers, adverse changes in general economic or market conditions, particularly in the life sciences industry, delays or reductions in information technology spending, particularly in the life sciences industry, including as a result of mergers in the life sciences industry.
The development of the market for enterprise cloud services, particularly in the life sciences industry, competitive factors including, but not limited to, pricing pressures, industry consolidation, entry of new competitors and new applications and marketing initiatives by our competitors, our ability to manage our growth effectively, and changes in sales that may not be immediately reflected in our results due to the revenue recognition criteria under International Financial Reporting Standards.
Further to these risks, these forward-looking statements do not include a full assessment or reflection of the unprecedented impacts of the COVID-19 pandemic occurring since the Q1 of 2020 and the ongoing and developing situation resulting in direct global and regional economic impacts. This has resulted in significant economic uncertainty. Even though the company has to date experienced no significant impact to its operations, any potential impact on our future is difficult to understand or measure at this time.
Further information on potential risks that could affect actual results will be included in other filings Kneat makes on www.sedar.com. The press release, the MD&A, and the unaudited, condensed interim consolidated financial statements are all posted on our website. If you wish to receive a copy of any of these documents, please do not hesitate to contact us. 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. We are pleased to report a strong Q3, where we delivered 276% growth in SaaS license revenue compared with the Q3 of 2020.
In addition, at 30 September , total annual recurring revenue grew to CAD 12 million, up 217% from CAD 3.8 million a year ago, and total revenue increased 91% over Q3 , 2020. The acquisition of new customers and the expansion of existing customers to additional processes and sites continues to drive growth. As customers expand their use of Kneat, our technology is becoming an integral part of their operations.
While our growth trajectory continues upward, these large-scaling events are somewhat unpredictable in their timing. Given the early growth stage of the company, they can result in period-to-period variability in annual recurring revenue growth rates. During the quarter, we added to our list of top-tier companies with another of the world's leading healthcare brands selecting Kneat as their enterprise e-validation platform.
This win is further evidence that the Kneat Gx platform is the leading validation solution on the market, replacing legacy solutions that are inefficient and error-prone with one that delivers speed, data integrity, and compliance. Our customer base is growing across all tiers, and more than half of the top 20 global pharmaceutical companies have selected Kneat as their enterprise e-validation platform. We are also adding new customers in the supply chain and in the mid-market. We expect these segments to also be contributing drivers of future growth.
Our strategy of partnering with professional services companies continues to show promise. Within our fast-growing vista of partners, we are seeing increased technical proficiency. Several are at 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 customers and partners, is seeing increasing utilization. The academy team have conducted almost 1,000 training sessions to date this year. Several of our larger customers have requested that their supply chain vendors input their data directly into Kneat, which drives further training to our Kneat Academy and creates new customers.
We believe our recent investments in both sales and marketing will drive future growth, create value for our shareholders, and help solidify the Kneat Gx platform as the leading validation solution on the market. In addition to growing revenues, we continue to strengthen our corporate structure and build out our management teams.
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. Subsequent to quarter end, we received conditional approval to uplist to the Toronto Stock Exchange. We believe this listing will help broaden the company's visibility and access to domestic and institutional investors. Despite the challenges presented by the pandemic, we are experiencing no significant adverse effects on our business across customer acquisition, fulfillment, and operations.
Our customers tell us that our technology has aided their business continuity efforts during the pandemic because it allows them to manage a large proportion of their validation process remotely. In addition, Kneat is supporting their ESG goals by enabling them to reduce travel and remove large volumes of paper records and the associated printing, storage, and management costs.
I'm very proud of our dedicated employees as they continue to execute across all functions, ensuring ongoing growth and value creation for our shareholders. Our plan for the remainder of 2021 is to continue to add and deploy new SaaS customers, 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 all the numbers I will be discussing are in Canadian dollars. I am happy to report that we have seen a strong revenue growth trajectory from previous quarter continuing into the current quarter. Revenue for the three months ended 30 September 2021 was CAD 3.7 million.
This was an increase of 91% from CAD 2 million in the same period in 2020. SaaS license fees are a key metric for Kneat. Compared with the Q3 of 2020, SaaS license fees of CAD 2.6 million increased by 276%. The increase in revenue is driven primarily by existing customers scaling their use of Kneat Gx through the purchase of additional licenses.
Cost of revenues of CAD 1.7 million for the three months ended 30 September 2021 increased from CAD 1.2 million for the Q3 of 2020. This increase reflects additional salaries and benefits related to higher headcount in the customer support teams, the recognition of a year-to-date staff bonus accrual and increased hosting costs and consulting fees.
Gross margin for the three months ended 30 September 2021 was CAD 2 million. This is an increase in gross margin of CAD 0.7 million for the same quarter of 2020. Gross margin percentage has also increased to 54% compared with 37% in the Q3 of 2020.
The increase in gross margin reflects an increase in revenue over the same quarter of 2020, coupled with a smaller increase in related costs of revenue over the same quarter in 2020. Although there has been some volatility in gross margin, the underlying trend since the Q3 of 2020 has been an upward trajectory.
Annual recurring revenue, ARR, is a key performance measure 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 30 September 2021 to CAD 12 million. A 217% increase compared with 30 September 2020.
More specifically, ARR from SaaS licensees increased by 274% to CAD 11.3 million. ARR from maintenance fees decreased by 10% from 30 September 2020. 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 give priority to sell-side financial analysts. To ask a question, please use the hands-up feature available on your GoTo Webinar control panel. There should be a slide showing the image of the Hands-Up speaker on your GoTo Webinar control panel now. Once you have selected the hands up icon, I will introduce you and you can ask your question using the microphone on your computer system.
Please note that only attendees with microphones will be able to ask questions during today's session. As you raise your hand, I will unmute your line, but you might also just make sure that you've unmuted it from your side. I will introduce you and, if you wouldn't mind, you might mention the group or the company that you are with, just for the benefit of other listeners. The first question comes from the line of Gavin Fairweather. Gavin, your line is unmuted now if you want to go ahead.
Oh, hey there, it's Gavin from Cormark. Eddie, Hugh, congrats on another set of strong results.
Thanks.
Thanks, Gavin.
I wanted to start out just by digging in a little bit on the ARR kind of growth in the quarter. You know, obviously, you know, CAD 4 million, a big number. Maybe just starting out on the tier one set of clients that you have. Was that kind of the driving force? Obviously, you noted, you know, some large scaling events that were included. You know, was there, you know, one or two kind of large bulk purchases, or was there also kind of a broader set of maybe license purchases that were more distributed across the tier one base?
Yeah. Hi, Gavin. Thanks for your question. Yeah, that's a good question. You know, over the last while, we have had some scaling events or scaling steps with our larger customers. These are the continuous, you know, expectation we have from them to scale at different rates as they go forward. They would have created a strong growth in our ARR.
As we look forward, it's hard to understand exactly when they land in the future but y ou know, obviously, all our customers are scaling to one extent or another. Some of the early customers are beginning to scale t he earlier newer customers will scale a bit later than the older ones. I think the best way to look at our ARR growth is year-over-year i t's probably a more even way to look at it.
Yeah, that's fair. You know, I think we've chatted about the buying patterns before, right? It tends to be, you know, some of these larger tier ones will buy in bulk and then kind of use up the licenses and then come back perhaps in the next year. Are we thinking about that then correctly?
Yeah. Some are. They're all scaling. The good news is they're all scaling in line with what we expect. You know, some going faster than others. A customer may have multiple scaling events, depending on what processes they're scaling to, how many users are going to be needing licenses in that period. There can be different size scaling steps, we could call them, really, as we go forward with those big customers, you know. It's safe to say that none of our big customers are fully scaled, but we can expect them to be in the longer term.
That's great. You know, the press release also referenced increasing success both in tier two's and the supply chain. My sense is that, you know, while you often press release kind of the tier one wins, you know, what's going on with the tier two's and the supply chain is a little bit more kind of under the radar maybe can y ou know, talk about how meaningful of a contribution that's becoming.
You know, how things are progressing, you know, both down market and within the supply chain and perhaps, you know, whether those two verticals are providing kind of a baseline of ARR growth for you that perhaps is, you know, maybe a bit less visible.
Yeah, that's a good question. Definitely we see the mid-market, we'll say, you know, we'll call it the mid-market w e see the mid-market being, you know, contributing to our ARR, our revenues and ARR growth into the future. We have a lot of activity in that mid-market. We are signing a good number of customers in that mid-market, and we have a robust pipeline. We are seeing that pipeline developing as a result of the recent investments we've made in sales and marketing as well. We're also seeing the supply chain being directed towards Kneat by our bigger customers.
Bigger customers asking the supply chain to put their data directly into the Kneat system as part of any work or any equipment or any services they're providing to Big Pharma, to put their data directly in. they're then coming to Kneat to be trained and we're also getting customers through that referral type situation as well. We definitely see mid-market being instrumental going forward in growth as well as the larger companies.
Just on supply chain, to dig in a little bit further on that dynamic. I think that you're working on some functionality which would allow, you know, the supply chain to put their data into Kneat and then, you know, transfer that, you know, seamlessly over to the life sciences clients i s that now live and is that being kind of a catalyst towards, you know, some of the life sciences companies, you know, asking or requiring that the supply chain, you know, use Kneat to for the validation data?
Yeah. There's a number of ways where they can work together in the same system, so the bigger customer can ask them to put their data directly into Kneat, in a controlled manner where they can give them access. That's one way of doing it. Another way is if the supply chain has Kneat itself, they can do their services and their work in Kneat and then supply handover to the actual big customer's system afterwards. Yes, that handover capability is there. It probably isn't being used at this time in a great way, you know, but we expect it to start getting used now as we go forward.
That's great. Then, just before I kind of pass the line, it's kinda interesting to see, you know, the professional services revenue line flat despite the growth and, you know, your recurring revenue base and your client scaling. Maybe you can just talk about-
-you know, the amount of services load that's now being taken up by the channel and just provide a general update on, you know, your partner network, how that's growing and the profile of some of your partners are this l ike, are these still mostly kind of boutiques, independents, or are you starting to get any attention from, you know, some of the larger players in your space?
Yeah. I'll take the first part of that, and I'll hand it over to you then, Hugh, on the financial side of it. The partner channel is developing very well for us. As I said, the Big Pharma is sending a lot of potential partners to Kneat. The success primarily is in the boutique space in the sense of, you know, companies that could have up to 500, maybe 1,000 engineers t hey would be the larger ones.
Then you have smaller ones that might have, you know, 50, 60, 100 engineers, that type of thing. That's where the success is right now t hese companies tend to be very close to the pharmaceutical manufacturers in the validation space. They tend to have a lot of interaction with them and so w e're seeing that has been very strong.
Today, this year alone, we've probably I think or we said we had almost 1,000 training sessions, and these are primarily with mostly more than 50% of these are with the supply chain, with partners. The partner model is doing well.
The partners are becoming more proficient in using this, and we're seeing them with that we're now able to. You know, we're moving them from working with seconded into Kneat's professional services to work on projects with us, to where now they're getting to the point where they can lead projects with customers and with oversight from Kneat to ensure the quality is maintained into the future as they go into the world more on their own. I hope that answers your question, Gavin.
Yes. Absolutely.
Yeah. I suppose just in terms of the financial piece of it, yeah, so for sure the professional services. I mean, this quarter has increased a little bit over the previous two quarters. You know, the timing of recognition of the professional services revenue, there's an element of variability there relating to, you know, when projects get completed and all the rest o bviously some of that is determined by, you know, the customer and, you know, the resources that they apply to a project and et cetera.
I know, for example, in previous year that we've seen, you know, a strong Q4, with customers trying to close out projects before the end of the year. I mean, you know, so it's that's an example of the, of the type of variability that is possible.
Great. I'll pass the line.
Okay. Thanks, Gavin. The next question comes from the line of Rob Goff. Rob, if you want to go ahead there.
Good morning, and congrats on a strong set of results coming forth. My question would be on the distribution partners. To what extent are the professional services companies or the supply side companies that are being referred to you by large pharma, are they just users of the platform? or can they be sales agents of the platform? And can you also talk to where you are independently signing up distribution partners? Talk to the traction. And do you see distribution partners being, you know, 20% of your new sales 18 months out, or can you just give us a bit more of a picture here?
Yeah. Thanks, Rob. The partners are just to say that there would not be resellers right now t hey're implementation partners right now. There’s a number of sort of situations here. One is the partner becomes proficient at Kneat because Kneat is the, you know, the new way of doing validation activities in the big pharma companies. They need engineers to be coming to work on these projects and they can be there for quite some time.
The partners have been trained to provide that service, and they themselves would generate revenues by seconding our engineers and doing projects on behalf of big pharma companies. That's one aspect of partners. Then there’s partners who want to deliver their services, be it deploy an ERP system on behalf of a big pharma company. They want to use Kneat themselves to be able to deliver their services and hand over the information to the big end, the big pharma company at the end. It doesn't have to be a big pharma company i t could be a mid-tier pharma company as well.
The sales capability and relationship comes through referral and comes through, you know, close collaboration, you know, where partners invite us in to companies they know where they think, you know, Kneat will be beneficial to them and they're involved in the deployment of Kneat once we sign a license agreement with the big pharma company or the mid pharma company, whatever the case may be.
The license agreement today is still between Kneat and the end users of the pharma company, but partners can be implementation partners to support that. Reseller, which you asked about and what percentage of that would be applicable in the future, we don't have a number on that, Rob, and, you know, we don't have that model evolved to reseller status yet. I hope that gives you some color, Rob.
That does help. Could you perhaps talk to your pipeline, if you would, in terms of activity on RFPs, any change that you have seen or foresee in terms of the competitive dynamics?
Yeah. We continue to engage with customers and on RFPs, and we're signing customers on an ongoing basis and I'm optimistic about our pipeline. The recent investments have made our pipeline more robust, and there's a lot more activity going on. Regarding our competitors, we have not seen anything in the marketplace to suggest that there's any competitor you know changing anything at this point in time.
Okay. Thank you. Cheers.
Thanks, Rob. Sorry, excuse me. The next question comes from the line of Christian Sgro. Christian, over to you.
Hi, good morning, Hugh and Eddie, and congrats on another really good quarter.
Thank you.
My first question, maybe just to dig a little deeper on what visibility you could give, CAD 2 million of ARR added in Q2 and then CAD 4 million this past Q3. We recognize the potential for some lumpiness quarter- to- quarter, of course. I'm just wondering, looking out from here, if there's any visibility that you guys have into the near term. I'm wondering, you know, how conversations are going with your direct sales force and with partners? and even if there's anything you offer qualitatively there.
Hi, Christian. I suppose the key thing is, you know, this scaling or these scaling steps we call them our scaling events, whether they happen or don't happen in a quarter, it's difficult to know. You know, the customers are moving towards that b ut I know for sure that there's, you know, scaling events in the future, but I can't say what quarter they'll land in, right?
Even some of the customers that have scaled in these past couple of quarters, they'll still scale again i mean, there are still scaling step left, lots of scaling steps left within that customer cohort, you know. Unfortunately, it's very difficult to put a timestamp on them.
Safe to say that they are out there and we have new customers that are scaling along as well, and they usually take a bit of time before they get to the stage where they're now saying that, "Okay, Kneat is well-embedded now i t's an integral part of our operations. We need to get a lot more licenses because we have a lot more users that want to use it."
T hat time comes along and you know, we saw that in the last you know, six months or so. And that was a great response to our what we're providing, the value we're providing to the customer. And I suppose you know, you could call this.
Some of these scaling events are approaching enterprise license agreements, right? They're, you know, looking out into their next couple of years, how many licenses they're going to need, and they're looking to buy bulk licenses. Unfortunately, I can't put a time on it, Christian. Safe to say that, you know, we're confident that they're there and they're coming, right?
That's helpful, Eddie. I'll ask if it is more granular t here was a new disclosure this quarter. The ARR rebuild was provided there. Maybe this is a question for Hugh. From a first glance, it looks like that could help us understand some of the new versus expansion split in the future i s there anything else to read into in that rebuild there, Hugh? Or is that more, just supplemental data to help us reconcile everything?
Yeah. Yes. You're referring to essentially the reconciliation between revenue and ARR. Yeah s o, I mean, that's really meant to provide some additional disclosure, because essentially ARR is not an IFRS measure. You know, we felt it is appropriate that, you know, given that we have included ARR, a non-IFRS disclosure that we would do that reconciliation a nd it's also, you know, s o I think it's useful in terms of providing information to users, as to, you know, how the two sort of marry up with each other.
Okay, got it. That's helpful. The on-premise revenue was zero this quarter. I think the response there is the congratulations on the transition to SaaS. You know, not in the financials, but more broadly, I wanted to ask how that transition is going with the last couple of customers who are on-prem. Is that moving ahead or behind schedule for you guys?
I'd say it's about on schedule, Christian. Still very optimistic that a lot of it will be done this year. We probably have, you know, less than a half dozen customers that we see transitioning that are left, and we see them transitioning over the next 12 to 18 months.
Okay, great. There'll still be the potential for a little bit of revenue to trickle in if some of those customers expand their on-prem licenses. Is that correct?
Yeah, that's possible, but that's. It's quite unlikely because the conversations are on regarding transition over and, you know, it's unlikely there'll be expansions, but you could see some, yes.
Awesome. Okay, just one more question from myself, and this is on opportunities in healthcare and CPG and other verticals. Does the core Kneat Gx platform need to be retooled or reconfigured at all to attack those markets? Is that something in the works? Or would you say, you know, the core product, the core code right now is already suitable to, you know, start going after those markets more aggressively if you wanted to?
Yeah, that's a great question. Everything we do is about building the platform so that it's an intelligent, data-driven workflow process, right? We're confident that, you know, the way it is is to be applicable to other industries without too much overhead. Really, Kneat is a configurable system y ou don't code to set it up, you don't have to code anything.
Thank you, Eddie. Thank you, Hugh. I'll pass the line here.
Thanks.
Thanks, Christian. The next question comes from the line of Martin Toner. Martin, over to you.
Hey, guys. How are you?
Hi, Martin.
Hi, Martin.
Congrats on another great quarter. You know, most of my questions have been answered, but I'd love to hear from you just what you think you need to do over the medium term, say, two, three years to continue to support growth. What kind of additions and building do you need to put into sales and marketing part of the organization?
Yeah, that's a good question, Martin. I think, you know, since we raised our financing earlier this year, we have been building the three pillars of our business, I guess, R&D, sales and marketing. We see ourselves continuing there. You know, probably there will be some R&D spend for sure to accelerate the development of our platform to the vision where it is scalable to all these new adjacencies and that. I think it's more of the same and, you know, it's a question of how aggressively we push that.
Great. Well, that's all for me. Thanks.
Thanks, Martin.
Thanks very much, Martin. Gavin, I see that you've raised your hand again. Oh, okay, I'll hand over to you then now.
Yeah, just a quick follow-up just on gross margins y ou know, obviously you're gaining a lot of scale on your SaaS revenue line, w e've talked about, you know, in the past, you know, your gross margins on that line being perhaps lower than what we would expect for kind of a scaled platform. Can you just give us a sense of kind of where your SaaS gross margins are trending now and, you know, how you see those playing out over the next year as you gain some more scale?
Yeah. Eddie, do you want me to take this, yeah?
Sorry. Yeah, go ahead, Hugh.
Yeah. Okay. yeah, so, I mean, if you look at our gross margins in the current quarter, it's 54%, which obviously is a mix of both the license, particularly the SaaS license margins, and then the professional services and the professional services margins. As we've talked about previously, you know, our objective for professional services is much more about driving the license revenue rather than being a high-margin contributor.
Obviously, you know, the overall gross margin is a reflection of the mix of those two elements of revenue and the weighting of those within that overall revenue. I mean, if you're to take it from even the numbers we have there, you know, if you take the professional services as being pretty low margin, well, then, you know, by default, you can sort of conclude that our SaaS margins are not unreasonable at the moment.
You know, as we continue to scale, you know, we would expect those to continue to move up. Ultimately that we will, as we talked about before, our margins will move towards industry norms for SaaS companies.
Got it. Maybe just a quick clarification, just on the pro serve margin a re you now modestly profitable on that line?
Yes. Our objective in terms of professional services is to break even or a little better. You know, so, you know, it can vary a little bit from quarter to quarter but y eah, that's where we are generally, yeah.
Great. Thanks so much.
Thanks very much, Gavin. Martin, I think probably your hand is still up i 'm not sure if you have another question. Okay, grand. Thank you very much. Okay. I'm not seeing any other hands at this point in time. Sorry, I see another hand going up here. There's a question from the line of John Kim. John, I will hand over to you.
Thanks, Hugh. Just a private investor. I was just wondering, you know, just following up on, I believe it was Christian that was asking about other verticals, 'cause you won a CPG client a while back. Just wondering if you can update that and if you are making any more headway into the CPG space.
Thanks, John, for the question. That customer is moving along nicely, and we do have others in our pipeline that are, you know, in that space as well. While we're not targeting it aggressively, they are there and we are working with them. Some of our key big companies also have consumer product divisions whom we're also talking to and actually working with.
Okay. John, I know, if you've self-muted yourself, I'm not sure if you?
Okay. No, that was it. Just wanted a quick update on that space. Thanks.
Lovely. Thanks very much, John... Okay. In the absence of further questions, we will conclude today's question and answer session. I'd like to now hand it back to Eddie for his closing remarks. Eddie, over to you.
In summary, we are very pleased with the progress we've made in the Q3 of 2021, and we're very proud of all our employees 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, among our many customers across all tiers, we can count seven of the top ten global pharmaceutical companies who have chosen Kneat as their corporate solution. It gives us great pleasure to be trusted by this industry to support in its mission to bring life-enhancing and life-saving therapies to its customers. Before I finish, thanks to 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 all for your attention. Back to you, Hugh.
Okay. On behalf of Hugh, thanks, everybody. That ends our call today.