Ladies and gentlemen, thank you for standing by, and welcome to the Kneat.com first 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.
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. I am proud of our team as we continue to deliver strong year-on-year growth through the first quarter, highlighted by 156% growth in SaaS revenue and 134% increase in annual recurring revenue over Q1 2021. Our fast-growing and diverse customer base is proof that Kneat's platform is the preferred solution in the industry. Quarter one marked a solid start to the year. Our investment in sales and marketing is driving robust new customer activity. Today, we have 57 contracted customers and the largest pipeline of potential customers in our history.
Within this base, we count eight of the top 10 and the majority of the top 20 biggest pharmaceutical companies, several top-tier consumer packaged goods companies, and both large and small suppliers to these organizations. These companies are selecting a system to manage their global validation, which is a critical regulated business function. They are making a long-term investment decision, so they carefully evaluate relevant market offerings before selecting their preferred solution. We are proud to be trusted by these global leaders to help them deliver their highly regulated products to their customers efficiently and to the highest quality standard. During the quarter, we signed a global agreement with another one of the world's top 10 biggest pharmaceutical companies. This resulted from an extensive evaluation process by a global cross-functional team who looked at all relevant market offerings before finalizing on Kneat.
We also announced that a European National Health Service selected Kneat for laboratory equipment validation management. Again, this involved an extensive evaluation between all relevant market offerings. We are proud that this prestigious national health service has chosen Kneat to support the delivery of high-quality care to their patients. Other noteworthy wins announced during the quarter are a leading Canadian generics pharmaceutical manufacturer and the U.S. subsidiary of one of the world's top 15 consumer packaged goods companies. We estimate that our current customers, when fully scaled, can provide an annual recurring revenue of $50 million per year for validation processes only. Over time, we believe this opportunity is much greater as we move to other quality processes adjacent to the validation space.
Leveraging our fast-growing list of reference customers, customer-authored success case studies, and an expanding sales and marketing team, we are now also focused on driving adoption in the mid-market. Our strategy of partnering with professional services companies continues to show promise. Today, we have various relationships with close to 40 partner companies. We continue to see increased technical proficiency in our 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 2,000 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. We continue to strengthen our corporate structure and build out our management teams. During the quarter, we announced the appointment of Carol Leaman, the CEO of Axonify, to our board of directors. Carol has a background in building fast-growing SaaS companies, and we look forward to her perspective and the invaluable experience she brings in scaling innovative technology platforms. 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 for their achievements to date, and I look forward to ongoing growth and value creation for our shareholders throughout 2022. Our plan for the remainder of this year is to continue to add and deploy new customers through increased sales and marketing 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 collaboration with our customers. To build out our company structure 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.
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 continue through the first quarter of 2022, including in our SaaS license revenue. Revenue for the quarter ended March 31, 2022 was CAD 5.2 million. This was an increase of 121% from CAD 2.4 million for the first quarter of 2021. SaaS license fees are a key metric for Kneat. SaaS license revenue for Q1 was CAD 3.3 million compared to CAD 1.3 million for the comparative period in 2021. This is an increase of 156%.
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 first quarter of 2022 were CAD 1.9 million, an increase of CAD 0.7 million from CAD 1.3 million in Q1 2021. This increase reflects additional salaries and benefits related to higher headcount in the professional services and customer support teams. The recognition of a year-to-date bonus accrual and increased hosting and consulting fees. Gross margins for the three months ended March 31, 2022 was CAD 3.3 million. This is an increase in gross margin from CAD 1.1 million for the same quarter in 2021.
Gross margin percentage has also increased to 63%, compared with 46% for the same quarter in 2021. The increase in gross margin reflects the increase in revenue over the same quarter of 2021, coupled with a smaller increase in related cost of revenue compared to Q1 2021. As we continue to scale our licensed revenues and as the proportion of licensed revenues to professional services revenues continues to increase, we expect the gross margin percentage to continue to trend towards SaaS industry norms. During the first quarter, we continued to invest in both product development and sales and marketing to support our future growth objectives. Sales and marketing expense was CAD 1.3 million in Q1 2022, compared to CAD 0.7 million in Q1 2021.
R&D expense for Q1 2022 was CAD 2.5 million compared to CAD 1.7 million in Q1 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 our ARR at March 31, 2022, to CAD 13.4 million, an increase of 134% compared to March 31, 2021.
More specifically, ARR from SaaS license fees increased by 153% to CAD 12.4 million, and ARR from maintenance fees increased by 22% to CAD 1 million from CAD 0.8 million, at March 31, 2021. As a reminder, we have filed our unaudited condensed interim consolidated financial statements in MD&A on SEDAR, and they're 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 GoToWebinar control panel. There should be a slide showing the image of the Hands Up feature on your GoToWebinar 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. As I introduce those with questions, I might ask you to just maybe mention the organization that you represent for the benefit of other listeners to the call. The first question this morning comes from the line of Gavin Fairweather. Good morning, Gavin. How are you?
Morning, Hugh. Good morning, Eddie. I'm well, thanks. How are you?
Good. Good.
Good. It's, yeah, it's Gavin here from Cormark Securities. Congrats on all the progress. I thought I'd just start on the new top ten that was, I guess, announced, you know, kinda later in the quarter or maybe kinda slightly after. Can you just remind us, you know, when they plan to go live and, you know, what kind of scaling plans this customer has, and what you're hearing on that front?
Yeah. Thanks, Gavin. Yes, that's a, you know, a tier one top ten customer, and they have a lot of sites globally. Initially, we expected to go live with their first phase in mid this year, and then move on to other phases over the next couple of years, culminating in, you know, many, many sites, well over 40 sites. Yeah. There's a lot of opportunity in that particular customer, and we're moving through the deployment phase right now, and it's going according to plan.
Have they shared kind of a timeline to you in terms of the rollout? I mean, I'd imagine that they're thinking kinda end-to-end across the 40 sites here, but have they shared timelines with you or?
They have, Gavin, yeah. At this stage, the timelines would be high level, you know, as goals. Then as they get closer, they would finalize them. Yes, the first phases we're looking at initially, I think three sites moving to. I have to correct my memory here on this one, but moving to about six after that. Then moving quite aggressively through 2023 into all the other sites.
That, that's helpful. Then maybe just from a high level, we've seen quite a bit of, you know, M&A and divestitures in the life sciences sector, you know, of late, including, you know, some customers, I believe, of yours. Are you seeing any kind of positive or negative impact, you know, given those kinda corporate actions that are taking place here?
Yeah, they're not affecting us in a negative way at all, Gavin. If anything, you know, it's positive, because sometimes when, you know, a lot of smaller companies are being acquired, we acquire customers through that. We've never had a situation that has negatively impacted us from a license perspective.
Okay, that's helpful. Just on the Q1 here, it looked like the growth in ARR was a little bit kinda slower than what we saw on the back half of last year. Would you just kinda chalk that up to normal seasonality? Maybe just kinda discuss that. What are you hearing from kind of the overall customer base on their expansion plans this year?
Yeah. I definitely see that as seasonality. You know, as we look at last year, there was, you know, a couple of really strong quarters in the middle of the year. I also see and hear from our customers as we work through this year with them that there's these opportunities are coming throughout the year. You know, from across many of our customers. Yes, definitely it's a seasonal effect. I also think, you know, traditionally we have always, if you look back over all our quarters, traditionally our quarter one has been slow relative to the year. Traditionally, we move up as we go through the year.
That's helpful. Just lastly, before I pass the line, maybe from kind of a higher level, you know, you've captured a lot of the tier one logos that are out there. From a new logo perspective, kinda looking forward, I'm curious whether you're, you know, most bullish on, you know, tier twos or supply chain or some adjacencies like CPG to help drive kinda new logos in the pipeline and ARR growth.
Yeah. We're adding on a significant number of customers every quarter. They're growing up, and our pipeline is also potential customers is stronger than it has ever been to date. Yes, a lot of this is in the mid-market, Gavin, within life sciences primarily. There's a good amount of supply chain as well, and then we'd call it the adjacent markets such as med device and consumer parts.
Okay. It sounds like you're excited about all of them versus kind of one which you think what might be like the big driver.
Well, you know, regarding mid-market, there's still a lot of brand names and large customers out there that we have to win, yes, in the larger space, we call them strategic type customers. Customers with, you know, more than 5,000 employees. Below that, you know, life sciences is our primary, at this point in time. Most of the excitement comes from there, Gavin, just to clarify that point.
Got it. I'll pass the line. Thanks so much.
Also just to clarify that point as well, we're also getting customers in the National Health Service, for example, which wouldn't have been factored into our original TAM, you know, over the years. There's other areas beginning to come to the fore, but I still consider them life sciences.
Got it. Thanks for the color.
Thanks, Gavin. The next question comes from the line of Christian Sgro. Good morning, Christian.
Good morning to you. Can you hear me okay?
Yes, indeed.
Yes.
Perfect. Good morning. I'll ask one question. It's a follow-on of Gavin's, and maybe instead of forward-looking, more backward-looking. The customer account jumped from 48 to 57 this past quarter, which is a lot of new logos for a single quarter. I was just wondering, again, instead of looking ahead, looking backward, what would you say the composition was of these nine new logos? And is it fair to say that it was that mid-market life sciences concentration that you highlighted?
Yeah, it's definitely a lot of it's mid-market. There's some. They're mostly life sciences or life sciences related. There are a few of the, so maybe broader on about mid-market, and then there's some supply chain in there as well, Christian. Primarily focused around life sciences.
Okay. A good mix. Life sciences, but a good mix.
Including the NHS customers in there as well, which will be one that I, you know, would be outside of. There's much more of that as well that we should be exploiting as we go forward.
Okay. That's helpful. With, you know, a lot of these new wins, some of the larger ones that were press released through the announcements, most of the press releases specified that the deployments would be in the back half of the year. You called out some seasonal trends as well. Does this all give you know, a lot of confidence that the ARR ramp could be stronger Q2, Q3, Q4? Do you have as much visibility as ever before, would you say?
Absolutely, yeah. We have, with all our large customers, we have an element of clarity about, you know, what they're doing. We know we're confident that there is, we call them scaling events with these customers as we go through the year. You know, there's other features and products we're bringing out to enable that scaling and upgrading them and transitioning to SaaS and these type of things. All these factors are, you know, playing into their scaling criteria.
Okay, perfect. This year, as you expand the sales team, maybe refocus how you think about the go-to-market internationally and all. Are there different ways you're thinking about going to new customers or going to new partners, maybe getting the sales team oriented, you know, as you grow through CAD 13 million ARR and further and grow internationally. Are there different ways you're thinking, Eddie, of structuring the team or you know, going to market, organizing things?
Yeah. As it happens, you know, right now we're beginning to evolve our sales structure, and we're moving, you know, internally our sales structure. You know, from an internal perspective, we're moving towards, you know, the direct hunters and the farmers and the business, you know, development reps and, you know, also then pre-sale and customer success management. We're looking to make sure we have very strong functions across all those spaces right now. We're also looking and we're having success through our partners, leveraging our partners on a, you know, joint go-to-market strategies where the partners are introducing us to customers whom they know have a need. You know, that is beginning to bear fruit also. You know, right now we're primarily focused on U.S. and Europe.
As we go forward, we'll look at outside of that as well. Right now it's going to be through direct and then partners going forward, as we move forward.
Okay, that's very helpful. I'll ask just one last question, a little bit related. As you think of hiring needs, across the business, I know last year was a big add year in terms of, you know, customer support, sales and the like. But this year, I mean, what are your hiring plans and is there one area through the back half of the year that you're looking to fill out more than others?
Well, you know, we're a number of things that we are focused on right now is building our R&D team to build out the features in collaboration with our customers. Our customers are working really intimately with us on that, you know, addressing so that we're addressing exactly what they need and also making sure that what they need is applicable to the industry and is built into our platform for everybody. That's making sure that we build the right features and product and reach the vision of the product.
We are investing in that, Christian, also investing, continuing to invest in our sales capabilities, like I spoke about earlier on, the different functions, building out those functions more robustly and across the different geographies. That's a focus for us, a big focus for us at the moment as well. By and large, you know, customer success as well. Professional services, we have done quite a bit of building there and, you know, we see that tapering off toward the year. By and large sales with R&D tapering off as we go through the year.
Perfect. That's tons of helpful context. These will be my questions.
Thanks, Christian.
Thank you, Christian. The next question comes from the line of Rob Goff. Good morning, Rob.
Good morning, and thank you for reaching out with the question. My question would be on the competitive marketplace. Are you seeing any trends there in terms of pricing sensitivity, specific features, functionality that are supporting your wins?
Yeah. I suppose I don't see anything, you know, at the moment that is negatively impacting us, Rob. You know, I do see the fact that we have put in a lot of work into marketing as being a competitive advantage as we go forward, and it's beginning to, you know, manifest itself as we go through this year. Obviously continue to build our sales to make ourselves continue to be more competitive, but very optimistic on the competitive landscape at the moment. As we build out our vision, we see ourselves getting stronger and stronger there as well.
Thank you. In terms of building out your sales capabilities and your R&D, can you sort of guide us to where those run rates may be heading? Are we 80% of the way to where we need to be or 90% of the way towards where you see us exiting?
Yeah. It's on the current plans. It's right now, you know, we are. I would say, you know, coming to the R&D spend, we will be flattening out on that as we go into the back of the year. I see sales will continue to grow, and some more marketing as well. Other than that, I think professional services is also beginning to taper off, Rob. Does that answer your question?
Yes, it does. Thank you, Eddie.
Okay, Rob, thank you very much for those questions. Some of our previous questioners still have their hands up, so I'll just sort of back around to see if they wanted to ask more. Gavin, I'm just unmuting your line again there if you have further questions.
Yeah. It's Gavin from Cormark again. I did have a follow-up. Eddie, can you just give us an update on the migration of some of your on-prem customers to SaaS? What are the timelines looking like for that? Should we think about like a lift in recurring revenue as they move from maintenance to subscription, or will the lift come from, you know, them just kind of moving through implementations faster?
Yeah. I think the conversations we're having, there's probably, you know, three or four main customers that we want moved over to SaaS, and these discussions are evolving. One of the things is that we see an uplift in licenses with most of them, bar maybe one or so, at that juncture because they moved to SaaS as part of a consolidation business milestone for them, and they're looking to get to a new version of our software as part of that process and also to enable more users in their organization. With a couple of the customers, large customers, that would be the conversation we're having.
By the end of this year, Gavin, I think when I call it, you know, I'm confident that there's going to be only one impactful customer still remaining on-premise. We have audits for them. They're auditing our SaaS environment later this year with a view to going to SaaS very soon afterwards. Other than that, I think of impactful or meaningful customers, there'll only be one left in 2023, hopefully.
Sorry, you said that one was the one that was, you know, currently doing work on auditing.
Yeah. They are due to do audit later this year. In fact, they're booking in three days for an audit of our SaaS environment from a security and all the operational perspectives around that.
Okay. Helpful. Just maybe going back to the tier twos. Obviously this has been, you know, a focus for you, and you've been building up your channel. How have your win rates been trending as you've kind of worked to get the product, you know, right for a down market and build up the channel? How have those win rates been trending for you?
They've been very good, Gavin. Really, you know, all the meaningful ones, we're doing very well and we're having great success there.
Awesome. That's it for me. Thanks so much.
Thanks, Gavin. Rob, I note that you still have your hand up there as also. If you've a further question, please go ahead.
Oh, that's just me failing to put the hand down. Sorry.
Okay. Very good. Thanks, Rob. Okay, no problem. That seems to be it on the questions. Yeah. Okay. Thank you then. This concludes today's question and answer session. I'll now turn back to Eddie for his closing remarks. Eddie.
Thank you. In summary, we are very pleased with our progress in this first 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. They focus on growth initiatives to win and scale customers across all tiers, and they provide excellent end-to-end customer service. At Kneat, it gives us great pleasure to be trusted by our customers to help them manage their highly regulated processes to the highest quality standards. Before I finish, thanks to our shareholders, our partners, and our team for their ongoing support and belief in what we do. Thank you all for your attention today. Bye for now.
Thank you. That ends today's call.