Ladies and gentlemen, thank you for standing by, and welcome to the Kneat.com Q2 2022 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 CEO, and Hugh Kavanagh, CFO at Kneat. Before we begin, I would like to draw your attention to the safe harbor statement on slide two 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 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. I am proud of our team as we continue to deliver strong year-on-year growth through the Q2, highlighted by 126% growth in SaaS revenue and 104% growth in annual recurring revenue over Q2 , 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 Q2 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 base, we count eight of the top ten and the majority of the top twenty 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 am 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 $50 million for our 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 H2 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.
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 Q2 of 2022, including our SaaS license revenues. Revenue for the quarter ended June 30, 2022 was CAD 5.5 million. This is an increase of 76% from CAD 3.1 million for the Q2 of 2021. SaaS license fees are a key metric for Kneat. SaaS license revenue for Q2 was CAD 3.9 million compared to CAD 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 Q2 of 2022 was CAD 2.3 million, an increase of CAD 0.9 million from CAD 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 CAD 3.3 million. This is an increase in gross margin from CAD 1.75 million in the same quarter of 2021.
Gross margin percentage also increased to 59% compared to 56% for the Q2 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 Q2, we continued to invest in both product development and sales and marketing to support our future growth objectives. Sales and marketing expense was CAD 1.7 million in Q2 2022, compared to CAD 0.8 million in Q2 2021.
R&D expense for Q2 2022 was CAD 2.7 million compared to CAD 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 CAD 16.3 million, a 104% increase compared to June 30, 2021.
More specifically, ARR from SaaS license fees increased by 108% to CAD 15.2 million, and ARR from maintenance fees increased by 55% to CAD 1.1 million from CAD 0.7 million at June 30, 2021. We are in a healthy financial position with a strong balance sheet and growing, 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. 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 laptop. Please note that only attendees with microphones will be able to ask questions during today's session. 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 so that people know where you're coming from.
Yeah. Great. Thanks to you. 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, for your perspective on, you know, how resilient you think demand will be, you know, 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 roll-outs.
Eddie, are you there? Maybe you need to unmute yourself.
Okay. Thanks.
Can you hear me?
Yeah, I can hear you. Hi, Gavin. How are you?
Good, thank you. Good, good.
Yeah. Thanks, Gavin. While, you know, we're not seeing any adverse effect on our business from the macro environment at this time, there are, you know, soundings of a little bit of conservatism, you know, creeping in around price negotiation and stuff like that. You know, inflation, you know, looking to push back a bit on the inflation, the yearly inflation costs and that type of thing. While we don't see any major impact on our customers' budgets, there is, customers are in places looking for more value, you know, looking to keep the cost down.
Yeah, yeah, that makes sense. Maybe just on the ARR that you added this quarter, I mean, you know, you increased the ARR bookings, you know, year-over-year, and last year was kind of a strong comp. Curious if you had any kind of large tier one scaling events, you know, included in the ARR that you added this quarter or whether it was maybe more broad-based.
Yeah. There's a bit of both there. There has been some scaling events with our larger customers, as you know, the typical approach for our customers is to, you know, some will scale faster and in smaller chunks, and others will scale more steadily. We're seeing a bit of steady scaling with our customers and a little bit here and there, you know, on some of the larger customers. Yeah, you know, it's what we sort of would have expected from conversations with our customers early in the year. You know, I think it's generally broad enough, Gavin, just to clarify that.
That's great. Then maybe just before I pass the line, I think version nine point zero was slated to be released this summer. I'm not sure if it's out yet or not, and I know that there have been some kind of sought-after functionality in this release around kind of the API and kind of paperless handover. You know, 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.
Yeah. 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 you know from on-prem to SaaS and also with that, some scaling. Yeah, that is a factor for us, and everything we're bringing out is in close collaboration with the customers. We're very happy with that, what the development team is delivering for the customers this quarter.
That's great. Over to you. Thank you.
Thanks.
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.
Hi, 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, you know, a single standardized unified solution across your entire base?
Hi, Christian. Yes, the quick answer to that is we don't customize for anybody. It's a market platform. The customers like it that way because they don't want to be, you know, on their own versions and being maintained separately. Yes, it's a broad platform, and it's holistically developed for all customers.
That's perfect. That makes your life easier, and that's probably the answer we all wanted to hear, which is good on what's in the 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 wanna go into, you know, vertical or size of customer, geography. Just anything you'd share around the types of customers you're talking to.
Yeah. I would say it ranges from small, you know, early-stage biotechs, service providers, equipment suppliers to the industry, mid-tier and, you know, and big pharma and medical device companies. So it's very broad, Christian .
Yeah. Perfect. 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 a year. Wondering how that transition's going, sort of who's left to move over and, you know, how talks around that conversation are with those customers.
Yeah. Of the, we'll call them, the larger customers, probably there are three customers to move over. One of them is, you know, the discussions are ongoing, and they're in transition. Probably there will be, you know, two of them falling into 2023.
Okay. Perfect. Thank you, Eddie, for taking my questions. I'll pass the line, yeah.
Thanks, Christian.
Hi, this is Justin Keywood calling from Stifel. Thanks for taking my question. I was wondering about the vertical outside of pharma. There was mention in the press release that there's several tier one 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.
Hi, Justin. Yes, that area is not the primary focus for Kneat. The primary focus for Kneat is life sciences. Yes, we are also working with companies in that space, and there are a number of these customers in our pipeline as well.
Okay. I know there's an opportunity to expand ARR just with existing customers. I believe the target is CAD 50 million. Has that target changed at all? What I'm getting at is there any new customers that were added that could potentially increase that goal?
Yeah. I suppose the short answer there, Justin, is every customer that gets added increases that sort of TAM within our customer base. You know, the larger they are, the more potential they have to increase that. Yes, we're adding customers, and we have a lot of customers in our pipeline who can move the needle on that over time.
Great. Thank you for taking my questions.
Thank you.
Thank you. It's Rob Goff here with Echelon. Can you hear me?
Hi, Rob. Yes, we can hear you. Eddie here.
Very good, Eddie. Can I ask about the messaging within the strength of the professional services? Like, if you could dive into perhaps the composition of that and to what extent that is foreshadowing of ongoing momentum.
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.
Sure. Thanks. I know within professional services, there are different categories. Could you talk to the composition of the professional services? To what extent should we look to the professional services line and say, "Yes, the momentum is continuing, accelerating when we look ahead?
Yeah, it's a good question, Rob. There are some, you know, what we would call reorganization within the company around, you know, building, customer success, and some of that is bordering on professional services, partner success, these type of roles. You know, the professional services as in, you know, working directly with customers, that is, we don't expect that to rise, you know, 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 professional services to our customers so that we can focus on, you know, building great technology and, getting it, you know, getting it consumed through channels, into the marketplace.
Cool. If I may, on both the sales and marketing at CAD 1.7 million, R&D at CAD 2.7 million, can you describe the trend lines that you see in both of these areas as you are investing to grow?
Exactly. We continue to invest in our go-to-markets. You know, 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. We'll continue to invest in that line, Rob, and it will continue to rise. Also marketing in parallel with that will also be improved or increased to deliver on the outcome of more customers and greater ARR.
Okay. Thank you, and, congratulations.
Thank you, Rob.
Thank you very much, Rob. Okay. I'm not seeing any other questions at this. Oh, sorry, Gavin. I'm just gonna open up your line again there. Gavin, yeah, you can go ahead again.
Yeah, thanks. Maybe one for you, Hugh. Subscription revenue looked quite strong relative to kind of period-ending ARR this quarter. Is that due to kind of shifting FX movements? 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 Canadian and then the cost base, just given the volatility we've seen in rates.
Yeah, absolutely. I suppose the first thing I'd say, Gavin, is I'd probably just point you to the financial statements. One of the notes in the financial statements, which sort of addresses 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. You know, but in broad terms, you know, the majority of our revenues are in U.S. dollars. Not all. There are some euros and some in some other currencies as well. But the majority are in dollars. The majority of our expenses are in euros.
Essentially, the expense side, you know, the way the exchange rate's been moving has been, I suppose, a little bit of headwind on the revenues. Yeah, no, I think that, you know, that Note 17 is probably a good place to reference in terms of the size of impacts of, you know. It refers to a 5% movement and then, you know, you can work from there.
Got it. Maybe just lastly, Veeva, I guess it was about a year ago, announced that they're planning on coming out with their digital validation product, in the back half of this year. Have you heard any more scuttlebutt on that product? 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?
No, we haven't seen anything from Veeva or heard anything regarding their product, Gavin, at this time. You know, we obviously assume there's something coming and we expect it in due course. We've heard nothing at this point in time.
Okay. That's helpful. Thanks so much.
Yeah. Thanks, Gavin.
Very good. Thanks, Gavin. At this point, I'm not seeing any further questions. Okay, I think that concludes today's question and answer session. Yeah. I'll hand back to Eddie for his final closing remarks.
Okay. Bear with me one second there, Hugh.
Yeah.
In summary, we're very pleased with the progress we've made in the Q2 of 2022, and we are very proud of the Kneat team as they continue to develop quality compliant software in collaboration with our customers. Selectively focus on growth initiatives to win and scale customers across all tiers and provide excellent end-to-end customer service. 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.
Thank you. That concludes today's call.