Thank you for standing by, and welcome to the Kneat.com Q4 and fiscal year 2021 update and results conference call. Please be advised that today's conference call is being recorded. Today's call will be hosted by Edmund 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 statement disclosure at the end of the earnings release. Comments made on today's call may contain forward-looking information. This information, by its nature, is subject to risks and uncertainties and as such, actual results may differ materially from the views expressed today. For further information on these risks and uncertainties, please consult the company's relevant filings, which can be found on SEDAR and on the company's website at www.kneat.com/investors.
Also, during the call, we may refer to certain supplementary financial measures as key performance indicators. Management uses both IFRS measures and supplementary financial measures as key performance indicators when planning, monitoring, and evaluating the company's performance. Management believes that these supplementary financial measures provide additional insight into the company's financial results, and certain investors may use this information to evaluate the company's performance from period to period. I will now pass the call to Edmund Ryan, CEO of Kneat.
Thank you, Sinead. Good morning, everyone, and thank you for attending today's call. I will begin with some high-level comments before passing the call to Hugh to provide a detailed financial update. At the end, we will open the call for questions. 2021 was an outstanding year for Kneat, delivering excellent performance across all our key metrics. This is highlighted by a 109% full-year revenue growth, up from CAD 7.4 million in 2020 to CAD 15.5 million in 2021. Our key metric, SaaS license revenue, grew 201% year-over-year, up from CAD 2.9 million in 2020 to CAD 8.7 million in 2021. At the end of 2021, total annual recurring revenue was CAD 13.1 million, up 174% over 2020.
Q4 2021 was another record quarter, delivering CAD 6.3 million in revenue, a growth of 111% year-over-year. Our product is an enterprise application that captures and manages regulated data and records for critical business processes, all of which must be retained and readily available for regulatory audits many years into the future. As you would expect, gross revenue retention for a product addressing such a critical need is likely to be high. Kneat's gross revenue retention for 2021 was 100%. For the same period, net revenue retention was 245%, highlighting the strength of our land and expand business model. This strong net revenue retention demonstrates the large growth potential that is embedded within our existing customer base as our technology becomes an integral part of their IT landscape.
We estimate that our current customers, when fully deployed, could provide an annual recurring revenue of CAD 50 million per year for validation processes only. Of course, we intend to move over time to other quality processes adjacent to validation. At the end of 2021, we had close to 50 contracted customers who have chosen us as their global enterprise e-validation platform. Some of these customers are still in the initial deployment phase and will start contributing to revenue when they go live post-deployment. Our customer base includes the majority of the top 20 largest global biopharmaceutical companies, including 4 major COVID-19 vaccine manufacturers and 2 top-tier consumer packaged goods companies. Building on our industry-leading position within the life sciences industry, we're also driving adoption in the mid-market, supply chain, and the adjacent vertical consumer packaged goods. Our strategy of partnering with professional services companies continues to show promise.
To date, we have relationships with close to 50 partner companies. Within these companies, we are seeing increased technical proficiency, and several are nearing the stage where they can implement deployments with limited assistance from Kneat. Over time, our goal is for our partners to provide an increasing share of professional services, allowing Kneat to focus on our key growth driver, the promotion of our SaaS platform. Kneat Academy, which is used to train and certify partner and customer employees, is seeing increased utilization. To date, the academy team have formally trained and certified more than 1,600 individuals. Several of our larger customers have requested that their supply chain vendors input their data directly into Kneat, which creates additional channel partners, drives further training to our Kneat Academy, and can also create new customers.
Kneat made substantial progress during 2021 by continuing to expand recurring license revenue with existing customers in addition to winning and onboarding new customers. Throughout the year, we added significantly to our customer base by signing master service contracts with six top-tier customers, including two top 10 biopharma leaders, one of the world's leading healthcare brands, a top 20 consumer packaged goods company, one of the world's leading engineering consultancy and design firms, and one of the world's largest life sciences contract development and manufacturing organizations. More of our customers are writing industry case studies, and in December, Merck Sharp & Dohme authored a study detailing its journey from initial site deployment through to global rollout for seven validation work processes across 27 sites within their manufacturing and research divisions. This study is a strong endorsement of our platform and our global service and support capabilities.
In November, we began trading on the Toronto Stock Exchange, completing our up-listing from the TSX Venture Exchange. In December, Kneat was awarded the third place ranking in the prestigious 2021 Deloitte Ireland Technology Fast 50 list. In April, we closed a public equity financing of CAD 20.125 million and a concurrent non-brokered private placement equity financing of CAD 2 million. We also strengthened our corporate structure in 2021. In May, Nutan Bhogal , VP of Core Network R&D at Nokia, was elected to our board of directors. Nutan has 25 years' experience leading large global teams and partner networks in global software development. In January, Carol Leaman, the CEO of Axonify, was elected to our board of directors. Carol has a proven track record of scaling innovative technology platforms and building fast-growing SaaS companies.
On the R&D front, we are building out our platform in close collaboration with our customers to drive faster time to customer value and to increase our addressable market. We continue to invest in sales and marketing, which will drive future growth, create value for our shareholders, and help solidify the Kneat Gx platform as the leading validation solution on the market. Overall, 2021 was a transformative year for Kneat. I am proud of our dedicated employees, and I look forward to ensuring ongoing growth and value creation for our shareholders in the year ahead.
Our plan for 2022 is to continue to add and deploy new SaaS customers through increased sales and marketing to the mid-market, to expand to new work processes and new sites within our existing customer base, to further develop the Kneat Gx platform, to build out our company structure, and to leverage our partner relationships to expand our global reach. I will now hand you over to Hugh for a review of the financial results.
Thanks, Eddie. For the financial review, please keep in mind that the numbers I will be discussing today are in Canadian dollars. I'm happy to report that we have seen a strong revenue growth trajectory continue through 2021, including strong growth in our SaaS license revenue. Revenue for the year ended December 31, 2021 was CAD 15.5 million. This is an increase of 109% from CAD 7.4 million for the 2020 financial year. SaaS license fees are a key metric for Kneat. SaaS license revenues for 2021 was CAD 8.7 million, compared with CAD 2.9 million for 2020. This is an increase of 201%.
Revenue for the three months ended December 31, 2021 was CAD 6.3 million. This is an increase of 111% from CAD 3 million in the same period in 2020. SaaS license fees for the Q4 of 2021 were CAD 3 million, an increase of 167% from CAD 1.1 million in Q4 2020. The increase in revenue in the Q4 and throughout the year primarily reflects the level of scaling of existing customers in their use of Kneat Gx, in addition to purchase of additional new licenses subscriptions by new customers.
Cost of revenue for the 2021 full year was CAD 6.2 million, an increase of CAD 1.7 million from CAD 4.5 million in 2020. This increase reflects additional salaries and benefits relating to higher headcount in the professional services and customer support teams, the recognition of a year-to-date employee bonus accrual, and increased hosting costs and consulting fees. Gross margin for the twelve months ended December 31, 2021 was CAD 9.3 million, an increase of CAD 6.4 million from CAD 2.9 million in 2020. The gross margin percentage for 2021 was also increased to 60%, compared to 39% in 2020.
The increase in gross margin reflects an increase in revenue for the year ended December 31, 2021 over 2020, coupled with a smaller increase in the cost of revenue over the related periods. Gross margin for the three months ended December 31, 2021 was CAD 4.4 million. This is an increase in gross margin from CAD 1.6 million for the same quarter in 2020. Gross margin percentage has also increased to 71%, compared with 54% in the Q4 of 2020.
The increase in gross margin reflects the increase in revenue over the same quarter of 2020, coupled with a smaller increase in related cost of revenue over the same quarter in 2020, and includes a positive impact on gross margin from SaaS license revenues and license revenues from legacy on-premise customers in the Q4 . During 2021, we continued to invest in both product development and sales and marketing to support our future growth objectives. The R&D expense for 2021 was CAD 8.3 million, compared with CAD 5.3 million in 2020. Sales and marketing expense was CAD 3.8 million in 2021 compared to CAD 1.7 million in 2020. Annual recurring revenue, ARR, is a key performance measure for Kneat.
ARR includes SaaS licenses and maintenance fees. The promotion of our SaaS offering, which adds to our annual recurring revenue base, is a key strategy for Kneat. Progress on this front continues to be reflected in the growth in ARR at December 31, 2021 to CAD 13.1 million, a 174% increase compared to December 31, 2020. More specifically, ARR from SaaS licenses increased by 212% to CAD 12.2 million, and ARR from maintenance fees increased by 6% from December 31, 2020. As a reminder, we have filed our audited consolidated financial statements and MD&A on SEDAR, and these are also available on our website. We are now ready to take questions, and we will give priority to sell-side financial analysts.
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 feature 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. Please note that only attendees with a microphone will be able to ask questions during today's session. Okay, I'll introduce the questioners now, but could I ask people asking questions just to identify the organization that they're coming from for the benefit of other people on today's call. The first question today comes from Gavin Fairweather. Good morning, Gavin.
G ood morning. Can you hear me?
I can indeed.
That's great. It's Gavin Fairweather here from Cormark. T hanks for taking the questions, and congrats on the strong results. I wanted to start out just on, you know, your thoughts around 2022. Obviously, 2021 was a year of big expansions from, you know, some of your big customers. You know, you added about, you know, CAD 8.3 million of SaaS ARR in the year. You know, what are you hearing from customers on expansion plans looking into 2022? Do you feel like you'll be able to kinda match, you know, that pace of expansions that you achieved in 2021, or maybe exceed it over the course of this year?
Hi, Gavin. Thanks for the question. Yeah. We, you know, we expect to push every one of our customers to scaling, and we can't guarantee when they will scale. That's why there's likely to be some volatility in the quarters regarding, you know, the revenues in that. They're all these customers are on that scaling journey, and we will see some to different sizes along the way. We can't guarantee any of those numbers, but we expect to push all these customers on scaling, and all customers are on that journey, and they are, you know, all addressing that, and that's the story they're giving us, and they're planning those.
That's great color. That's super helpful. I appreciate the updated estimate of the ARR potential within your customer base at $50 million. But just to clarify, that's just validation. Is that right? How many of your customers are speaking to you about processes outside of validation?
Yeah, that's correct, Gavin. It's all validation processes only, of which there are many, up to 10 different sub-processes within the validation space. Our customers are looking to take us into other areas and exploring that, and we will go with them there, in due course. There's work to be done in the back end to make sure we address those areas fully. But all that is part of the plan for sure. We do see the total addressable market increasing substantially as we move into these many adjacent quality areas within our existing customer base beyond validation.
That's great. Maybe I thought we could dig in on professional services revenue at CAD 1.8 million this quarter. I mean, in previous quarters, you'd kind of been trending between CAD 700,000 to kind of a CAD 1 million per quarter. Can you just provide some color on whether there were any large milestones achieved in Q4? Maybe you can speak as well just about the utilization of your services team just to help us understand how we should be you know modeling or expecting professional services in future quarters.
Yeah. I would say you might have an opinion on this as well, but just initially, as a quick answer to that is that, you know, quarter four saw a lot of ongoing projects coming to completion. A lot of the work would have been done prior to that. You would have seen, you know, we don't recognize those revenues until the go live has happened. So we would have seen a bit of that happening, and that would have contributed to the increase in professional services. The other thing is that, yes, we are continuing to optimize our professional services unit. You know, the value is increasing as we go forward.
As we go forward, we will still continue to put some more costs in there, but not at the same pace as we have done. We do see that professional services partners can come and contribute there and get some of those revenues as well as we go forward. I don't know if you have anything else to add to that there, Hugh.
No, Eddie, I think you've covered probably pretty much most of the points there. Yeah. No, I don't really have anything to add.
Okay. Maybe just before I pass the line, can you touch on your head count, you know, kind of exiting 2021 and maybe discuss, you know, the extent to which you're planning to hire in 2022 and what kind of head count additions we can expect this year.
As you know, during the year we continued to grow our sales and marketing capability, and that's probably of the order of 10%-12% of the company now. We will continue to increase that as we go forward and as we address our existing customers and the expansions with those customers and continue that journey, but also too as we go down marketing to the smaller companies to address that. That's ongoing, and we will see more spending in sales and marketing as we go forward, Gavin. R&D, you'll also see more spending there to build out our technology to meet all the requirements that we're, you know, getting back from our customers to support them and also add more value to their business and increase our TAM.
You'll see also spend in the R&D space. As I said, professional services, not to the same extent. That will level off a bit as we go forward.
Okay. I mean, I guess I ask 'cause you were flirting on the cusp of kind of breakeven this quarter. I know you had a lot of, you know, one-time revenue come in, but yeah, I feel like you're gonna have a hard time growing your expenses at the same pace as revenue. It'll be.
Yeah. No, I mean, I suppose the comment to that is you I think you put your finger on the fact that there is probably a couple of tailwind items in our revenue. I mean, you know, we have the on-premise revenue obviously coming in there which you know as I think I've said before you know I take revenue in any form but I'd much prefer it came in the form of SaaS revenues. That's obviously a plus that has helped us this quarter and obviously you know the professional services that you identified earlier as well is a bit of tailwind in this quarter. Yeah, so yeah.
I suppose that's the comment I'd make.
Okay.
I suppose just another point on that, Gavin. You know, just as a point, there is that, you know, there's a huge market opportunity here and, you know, we will be consistent in going after that market opportunity. That's the key thing to message here as well.
Understood. I'll pass the line. Thank you so much.
Thanks very much, Gavin. Okay. The next question comes from the line of Christian Sgro. Christian, again, you might for the benefit of everyone, just identify your organization as well.
G ood morning, Hugh and Eddie. For everyone's benefit, this is Christian Sgro of Eight Capital. Congrats on the record quarter and strong close to the year. The first question I wanted to ask about today is about the gross margin strength. There's a couple of items in there, maybe some timing on pro services. The on-premise licenses I think can be high margin as well, but you know, the 71% is a record for the quarter. Is there anything else you'd unpack for us to help us understand you know, the strength there and anything we could expect to last, whether it's optimization or the partner channel or any other color you'd add?
Eddie, do you want me to take that first and then you can come in with some comments afterwards, if appropriate? Yeah, Christian, I think you have sort of identified some of the key features and drivers in terms of this quarter's gross margin. What I'd say is we're continuing to grow our gross margin quarter on quarter by virtue of the fact that, you know, the SaaS revenues and license revenues in general, but particularly SaaS revenues are becoming a bigger proportion of the overall total revenue. That's, you know, and those being the higher margin versus professional services is driving that ongoing growth in gross margin.
However, you know, this quarter there is a little bit of a spike which is probably you know out of character with our normal trend, which is driven by the factors that you identified. Number one, the on-premise revenues that are in there which are you know very high margin obviously. Then also the fact that you know we had additional revenue recognized for professional services associated with the completion of those projects that Eddie was talking about earlier.
Yeah, I mean, in general, you know, I suppose in terms of gross margin, if you sort of look back to history and, you know, the general trajectory, and you know, the mix of revenues, that's probably the way to sort of go about gross margin and getting an understanding of it. Eddie, I don't know if you've anything to add.
Yeah. Just to add to this. Thanks, Hugh. Just to add to that there, you know, the gross margin as we continue forward is gonna continue on this trajectory, you know, as we don't increase our professional services in line with revenues and, you know, optimizing our professional services, but also leveraging our partners to do more of the professional services should also benefit that.
That's helpful, Eddie. The trend's absolutely the right way. A couple items to call out in the quarter, but with SaaS expanding, a lot of confidence in that continuing to go up and to the right. I'll ask one more question on a more mechanical item. On the on-premise expansions in the quarter, I wanted to ask about how this could impact any transition to SaaS. You guys aren't signing any new customers on on-prem, so these would be existing on-prem customers expanding. I mean, does this mean they could push out their transition to SaaS or do you see them as just expanding their licenses and those conversations are still moving in the background?
Like you said, Hugh, I mean, revenue is revenue and the economics are all the same, but just wondering if that maybe pushes out the transition or changes things.
It generally won't affect that. That is the short answer, Christian. The customers by and large are discussing the transition with us. They still, you know, for them, it's quite a move for them, the bigger customers. In the meantime, they need to get on with their business, and they need to expand the use of Kneat. That's a very good thing, but we'd like them to be doing that on SaaS. You know, the goal is to, and they are focused on getting to SaaS as soon as they can because they know they're expanding, and they don't want to go too far.
Also they want to get the new versions of Kneat, you know, 'cause we have discontinued supporting on-premise, and then they're at a less version, and they cannot go to the next version. They have to be on SaaS for that. The conversation's on with most of them, and I expect, you know, either the transition projects will be complete or ongoing by the end of this year, maybe one or two laggards into the following year.
Okay, awesome. Also think of that as those are proper expansions all one time, and those customers just needed to expand their usage for now, and those conversations are still moving. That's helpful. I'll move on.
Yeah.
The last questions I had here, on something more qualitative. I saw the Kneat Go branding and solution all over the company website. I wanted you guys to talk about the Kneat Go initiative. For me, it looks like a lighter version of the product built for the mid-market. Is that the right way to think of it?
Yeah, that's exactly it. Not actually built, it's just, you know, a subset of almost what's there. It's how it's delivered, more so, you know. It enables the smaller customers who are more agile by their nature and their size. It allows them to, you know, minimize the professional services needed to deploy Kneat and get Kneat into their hands quicker, with other sort of providers around that. The bigger companies, they have stronger, more, you know, complex procedures with regard to software deployment, et cetera, and they take a little bit longer, and that adds cost to the whole thing. It's really compressing that delivery capability and, you know, still using the same Kneat capable features.
Awesome. Okay, one more question from my end. This one's similar to the last. Would you say, you know, as Kneat matures into more verticals, into more big-name customers, would you say in general you're seeing sales cycles shorten a bit? Are customers, you know, either understand Kneat better or able to sign on or implement Kneat quicker? Or would you say those sales cycles are still in the 4-6-month range that you kind of always had? I'll pass the line.
On the sales cycles, there's two sales cycles. There's the expansion sales cycle, you know, when they want to move on to and add on more users and that. Definitely, you know, that's coming down due to the quality of the software, the ease of use of Kneat, and how the customers and the users like Kneat, and they want to expand it themselves. And also the top-down decision to go digital across all sites and not have sites on different versions of it or different, you know, one on paper, one not on paper. You have the smaller customers, definitely the sales cycles are coming down there as well. By and large, sales cycles are coming down, and they're down to the drive in the industry to become digitized.
The clear business case that's there created by Kneat, you know, largely, and a solution that's come along that addresses the challenges and the maturity of Kneat and the also the maturity of the product and the company. And, you know, especially when they're articulating case studies like the Merck one and others, that are, you know, that's great referenceability too, and they share this information amongst themselves. Definitely the sales cycles are coming down, Christian.
Okay, perfect. Congrats again on the quarter. That's a lot of helpful color, guys, and I'll pass the line here. Thank you.
Thanks.
Good. Thanks, Christian. The next question comes from the line of Rob Goff. Again, Rob, I might just get you to identify your organization for the benefit of other people listening.
Thank you. It's Rob Goff from Echelon.
Rob, you're a little hard to hear. You sound like you're away from your speaker or your microphone.
Okay. Is this better, Hugh?
That's better. Yeah, thanks.
Okay, good. It's Rob Goff with Echelon Wealth Partners. Could I ask, with respect to your reference to a CAD 50 million run rate, is that something we should look at exiting 2023, or is it more of a 2024 timeline? Just how might we frame that?
Well, I suppose the big thing to say about that, Rob, is that that's, you know, with our existing customer base, when they're fully scaled, we see that as an annual recurring revenue from that base of customers. Obviously, we have a very strong pipeline as well, and we're building in our sales and marketing, so we expect that to continue to grow. The combination when we reach that CAD 50 million will be a combination of both, obviously. Some of these customers scale to different speeds. You know, one customer might scale over three years and be fully scaled for the validation portion of their business. Others might take five years.
It's hard to put an actual timeline on, Rob, and I don't want to evade the question, but the, you know, others are gonna come in as well and the current base when fully scaled, but it's hard to say exactly when they would be fully scaled. There's always continuous opportunities. Some go faster, but they're all on that scaling journey. That's the key thing.
If I may ask, when you do on a timeline towards full deployment, what percentage of revenues would you see from additional services? Just trying to get an idea for your outlook for expansion beyond your current market share.
Beyond validation, I think the marketplace today we estimate the total addressable market for validation in Europe and the U.S. of the order of $600 million annual recurring revenue in US dollars. I can see that being the opportunity for that is 3-4 times that if we scale to all the opportunities that are available or potentially available. Of course, we'd have to win some market share there as well along the way. There's that type of order of magnitude opportunity within life sciences.
Very good. One last one, if I may. It wouldn't be a quarter if we didn't ask you for additional perspective on your pipeline and any RFPs in the marketplace.
Yeah. We're, you know, we're hiring and continue to, you know, we're building marketing. Marketing is delivering more opportunity as well. I'm very optimistic about our pipeline, Rob. It's very robust, and there's a lot of activity going on with you know, large and small customers and in between.
Very good. Thank you. Let me just join in saying congrats on the quarter.
Thank you, Rob.
Thank you very much, Rob. At this point, I'm not seeing any further hands. Okay. Okay, sorry. Gavin, I see you put your hand up again. You're self-muted at the moment there, so if you want to go ahead.
T hanks for taking the follow-up. Just quickly, can you provide any update or any color on what you're hearing about Veeva? Obviously, after they announced, I guess it was in the fall, you know, their work on a validation product. Have you heard any industry scuttlebutt? Are you hearing anything from clients? Any color there would be helpful.
We haven't heard anything that's material, Gavin, since the last update. There's no news on that. There's no solution in the marketplace. We haven't heard of anybody that has seen a demo or anything like that. We're expecting one to be there, but we haven't seen anything yet.
Got it. Maybe just to build on Rob's question around the sales pipeline, can you just touch on, you know, the traction or trends that you're seeing in CPG and supply chain within that pipe?
There's a significant proportion of supply chain in that pipe as well. Small and larger pipeline. In accordance with our announcing criteria, they wouldn't probably be announceable wins in some of the pipeline, but they'd be more downmarket companies. We're also seeing a lot of activity in the mid-market and small market on the pharmaceutical manufacturing space. We would also be seeing some CPG opportunities coming through, but we're not focused on the CPG at this particular point in time. We see that evolving as we go forward.
Got it. Yeah, you're not focusing on it, but you're announcing some nice wins, so it's good to see the progress there.
I suppose the only thing about those, Gavin, is they're coming to us. They have similar needs to the customers we're really focused on. It doesn't mean we're not focused on them. We are focused on them for sure. They are making themselves, you know, they're driving us really, is what I would say, like to say there.
Thanks so much. Congrats on all your progress.
Thanks.
Very good. Thanks, Gavin. Rob, your hand is still up. I'm not sure if you had additional question or if you just have it up from the last time. Back to you.
It was just left up, Hugh.
Okay, very good. Listen, thanks very much. At this point, I'm not seeing any further questions. In that case, thank you. That will conclude today's question and answer session. I'll now turn the call back to Eddie for his closing remarks.
Thanks, Hugh. In summary, we're very pleased with the progress we have made in 2021, and we're very proud of the Kneat team as they continue to develop quality compliance software, focus on growth initiatives to win and scale customers across all tiers, and provide excellent end-to-end customer service. Today, amongst 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 it in its mission to bring life-enhancing and life-saving therapies to its customers. Before I finish, thanks to all our shareholders, our partners, and our team for their ongoing support and belief in what we do. We look forward to the journey ahead. Thank you for your attention. This ends our call today. Thank you very much.