Today, and thank you for standing by. Welcome to the Kneat Q2 2025 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Katie Keita, IR Lead . Please go ahead.
Thank you, Operator, and welcome everyone to Kneat's earnings conference call for the second quarter of 2025. Please note the safe harbor statement on slide two and the forward-looking statements disclosure at the end of the earnings release, informing you that some comments made on today's call contain forward-looking information. This information, by its nature, is subject to risks and uncertainties, so actual results may differ materially from the views expressed today. For further information on these risks and uncertainties, please consult our relevant filings, which can be found on CDAR and on our website. 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 in planning, monitoring, and evaluating our performance.
Management believes that these non-IFRS measures provide additional insight into our financial results, and certain investors may use this information to evaluate our performance from period to period. I will now pass the call to Eddie Ryan, CEO of Kneat.
Good morning, everyone, and thank you for joining the call today. Over the next 10 minutes or so, I'll share my thoughts on our progress. Our new CFO, Dave O'Reilly, will guide you through the financials. Hugh Kavanagh, who is retiring from Kneat at the end of this week, is also here with us this morning. After our comments, we'll open up for your questions. We continued our solid growth in the second quarter of this year, where our team continued to set the pace for digital validation for life sciences. Our solid growth and path to profitability continues as year-over-year, annual recurring revenue is up 43%, total revenue for the quarter is up 32%, and gross profit is up 34%.
New customer wins this quarter reached new highs, putting us on track to exceed last year's total as more and more companies are starting their digital validation journeys. Expansions from existing customers continue at a steady pace, and our pipeline remains robust. Our winning record included several strategic accounts where we expect to see significant expansion for our software licenses in the years ahead. This includes three manufacturers: one of generic pharmaceuticals, one of clinical diagnostics, and one of medical devices. That none of these is a brand name pharmaceutical company illustrates how Kneat is being leveraged broadly throughout the life sciences space. During the quarter, we also added strategic hires throughout the company, including new leadership in product and engineering. We earned our leadership position in the shift to digitalization by providing a flexible, easy-to-use platform and first-class service teams to support our customers.
We will continue this trajectory through continuous value innovation. Last month, we released Kneat Gx version 9.5, opening up new pathways to enhance Kneat's value for its customers. Here, we have further advanced the data management capabilities of our platform. New features include greater management and control over discrete datasets, deeper functionality for defining, regulating, and tracing datasets to align with risk-based validation, and more advanced filtering and visibility for requirements, risks, and test evidence, critical pillars of effective and efficient validation. These features enable users to save time by leveraging data across more projects than ever before, empowering risk-based validation processes such as computer software assurance, and exerting greater control over traceability that adapts to any workflow. 2025 has brought some uncertainty surrounding trade and future investment decisions by life sciences manufacturers.
While it's hard to say to what degree this dynamic environment is impacting decision-making, what we believe is that the industry's shift to digital is an imperative, not just for efficiency and data integrity, but because it is the foundation for future innovation, including automation and AI. Generally, our customers are global, and we are global with them. We will be there to support them wherever they choose to do their manufacturing. As a leader in the digitalization of validation processes, we are well equipped to guide and support the industry on this journey. Before I hand you over to Dave, I want to thank Hugh for his stewardship over our finances for the past six years. Hugh is retiring from Kneat to pursue other interests, and we wish him the very best.
During his time at Kneat, Hugh contributed significantly to our success, helping the company to grow to its current level and building a strong finance team. We've all very much enjoyed working with him. Thank you, Hugh. Now let me welcome Dave, our new CFO. Dave served most recently as CFO of Ekco, a leading managed security service provider, which he helped scale to CAD 200 million in annual revenue. Before this, he led the international finance function for J2 Global, a CAD 4 billion business. I look forward to working with him. Welcome, Dave.
Thank you, Eddie. It's been quite a journey for you here at Kneat, and I'm thrilled to join you for the next leg of it. I'd also like to thank Hugh for his leadership and strong financial and operational foundations he's helped build. As I take you through the numbers for the second quarter, just a reminder that the figures are all in Canadian dollars unless otherwise noted. Starting with revenue, for the quarter ended June 30th, 2025, revenue came in at CAD 15.4 million, up 32% from CAD 11.7 million for the second quarter of 2024. CAD 14.1 million of this was SaaS license revenue, which grew 31% over the CAD 10.8 million of SaaS license revenue we did in Q2 2024. Revenue from services of CAD 1.2 million in the quarter reflects a continued solid flow of customer engagement.
The strong year-over-year growth there is more of a result of an easy compare than any change to our partner engagement strategy. In fact, services accounted for about the same percentage of overall revenue as it did a year ago. These Q2 results take us to CAD 30.2 million in total revenue for the first six months of 2025, CAD 28 million of which is SaaS license revenue, reflecting growth of 34% and 36% respectively year-over-year. Cost of revenue in the second quarter of 2025 was CAD 3.8 million, up 27% from CAD 3 million in the same quarter a year ago. Gross profit for the quarter was CAD 11.6 million, 34% higher than the CAD 8.7 million in Q2 of last year. Gross margin for the period improved from 74% to 75% as we scaled the SaaS revenue.
For the first six months, cost of revenue was CAD 7.6 million, up 31% from the prior comparable period. Gross profit for the first six months of 2025 grew 36% over last year's first six months to CAD 22.6 million, bringing gross margin for the period up to 75% from 74% for the first half of 2024. Operating expenses grew 38% in the second quarter of 2025 to CAD 15.6 million versus CAD 11.3 million in Q2 of 2024. While R&D expense growth was only 20% year-on-year, net of capitalized R&D, sales and marketing expense was up 40% year-over-year, reflecting our VALIDATE CONFERENCE, which was held in Q2. G&A expenses were up 73% year-over-year, driven in part by costs in the period that will not repeat in Q3. Looking at operating expenses over the first half gives us a view of expenses at a more typical level.
Total operating expenses grew 30% over the first half of 2025 to CAD 28 million, compared to CAD 21.5 million for the first six months of last year. R&D expense, net of capitalized R&D, grew 18% to CAD 10.4 million for the first six months. Sales and marketing expense grew 34% to CAD 11.2 million over the comparable period prior year. G&A expenses were CAD 6.3 million, up 47% compared to the first half of 2024. We ended our quarter with total annual recurring revenue of CAD 64.8 million, up 43% from CAD 45.4 million as of June 30th, 2024. With a cash position at June 30th, 2025, of CAD 66.8 million and a product and operational roadmap that we expect to carry us to break even and beyond, I'm coming into the company at an excellent time as we're ready to scale from here.
With that, I will turn the call over to our Operator for your questions.
Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Gavin Fairweather of Cormark. Your line is now open.
Oh, hey, good morning. Thanks for taking my questions. Maybe just to start, you mentioned the digitization push in life sciences, and we've seen that with some of your peers and in your numbers and bookings. We also have the elevated tariff uncertainty. I know it's hard to predict, but I'm curious if you've seen any impact to customer behavior in terms of sales cycles, CapEx decisions, or deployment pace, and curious what you're hearing from customers.
Yeah, there's no clear evidence of that out there being spoken about, Gavin, but you do detect maybe some budgets being a bit slower and stuff like that here and there, but nothing that affects our business in general. We see that all our customers have expansion events planned with us, and we're quite clear that they will happen over time. It's hard to read that situation right now, but I would expect that certainly companies that are shipping into the U.S. will be concerned about that over time.
Yeah, understood. Thanks for that. The strategic customer you announced recently.
Starting with that, Gavin, that's, you know, Kneat is global with our customers and something that's very important. We, you know, where they do their manufacturing, we're there to support them with our validation.
Yeah, thanks for that. The strategic customer you announced recently is starting with both equipment and computer system validation, which, you know, from my recollection, is a bit unusual. Curious if you can hear me? Can you hear me?
Go ahead, Gavin.
Yeah, the strategic customer you announced recently is starting with both equipment and computer system validation, which I think is a bit unusual. Do you think that could become a trend, and do you think you could see customers starting to bite off, you know, a bit more in terms of use cases initially?
Yeah, that's varying a lot. In that particular case, yes, that's a great win for the company. Strong evaluation between all the players in the marketplace. One area of the business is starting in CSV. I'm just trying to remember the detail. The other area of the business is starting in CQV. It's a great win from that perspective that both are starting at the same time. It doesn't always happen that way. It's normally one or the other. We would see more CSV coming into the pipeline these days than CQV.
Having said that, CQV is still strong, especially from an expansion perspective. When you look at new logos, there tends to be a lot more CSV coming through.
That's great to see. Just on the VALIDATE CONFERENCE, it was obviously very well attended. Can you discuss kind of pipeline generation coming out of that event and how the sales team was feeling post the event in Boston?
Yeah, we were very upbeat after that. It was a really positive engagement with our partners and our customers. We would have a lot of pipeline activity as a result of that. A lot of prospects were invited there, even from new geographies that we traditionally don't cater for. In Latin America, in this case, there's some good opportunities that have come out of being present and talking to our prospects, talking to our existing customers, and getting confidence that we're the company, the leader in the marketplace and the company that can really deliver the mission of all your validation workflows on one platform your way. It was a really good, really good event, and we're glad we do it, and we will continue to give it a lot of energy.
That's great. Lastly, for me, maybe for Dave, operating expenses including the Cap R&D was up about CAD 3 million from Q1. I know there's a bit of FX impact in there, you had your user conference, but maybe you can help us kind of understand how much of this increase would be permanent versus tied to the user conference or any other one-timers you would call out.
Yeah, hi Gavin. FX is probably about CAD 300,000 of that uplift. To your point, VALIDATE CONFERENCE probably accounted for, I would say, 60%- 70% of the quarter-over-quarter uplift on sales and marketing. We also have the uplift in G&A. I would estimate roughly 80% of that is non-recurring. It's due to professional fees, some recruitment, and as you know, we've expanded out the executive team. R&D, there's some small non-recurring costs in there, but it's very minor. It's maybe CAD 100,000.
Appreciate that. I'll pass the line, and Hugh, all the best with what comes next. It was nice working together.
Thank you very much, Gavin. Yeah, I know it's been great working with you, and obviously, I'll be following the company and listening to these calls from the other side in the future.
One moment for our next question. Our next question comes from the line of Doug Taylor of Canaccord Genuity. Your line is now open.
Thank you. Good morning, and I'll echo the congratulations to Dave on the appointment and Hugh on a well-earned retirement.
Thanks, Doug.
I'd like to start by talking about the strong pipeline you referenced, the record new customer signings, and new strategic customer wins in the quarter, and reconcile that with what was a bit of a slower sequential ARR build and the translation to revenue growth in the quarter as well. You spoke about the tariff impact. I know that's one factor. Can you maybe talk about some of the other factors that might be impacting that in the near term, either the changing regulatory landscape, if there's been any churn or some increased scrutiny by customers in response to some of the evolving competitive landscape? If you could maybe expand on some of the other factors that could be impacting a near-term ARR build.
Yeah, thanks, Doug. You're right. We have a very strong pipeline, and we've had probably one of the record, we've had a record quarter from signing of new customers, and most of all of these customers are in the strategic and enterprise space. When I look at our early signals, the sales and marketing team is doing a great job at filling the top of the funnel with new opportunities, and we have a very strong, robust pipeline coming through to capitalize on that further. I'm very optimistic about the end of this year and into the following years from the pipeline perspective. Regarding, we've had a strong year-over-year. Quarter and quarter isn't as strong. There's been a big FX impact there as well, as you know.
What I would say also is that there are deals that we are negotiating with customers, and sometimes the timing just doesn't land where we would want it to. We've had that in the past, and we've managed to recover from things like that. I think that all the opportunities that we would have been targeting for Q2 are all going to be fulfilled through the year, quarter three, quarter four. I'd be really optimistic about all of that. What I also like about the pipeline is that we're seeing a lot of customers. It's a very diverse pipeline outside of our core, what you call bio-pharma manufacturing and the supply chain to pharma. We're also seeing more medtech coming in, and that's a real positive thing. I think that's down to the fact that our products are becoming more suitable for them.
In parallel with that, getting back to the tariff thing, I mentioned that earlier on. Tariffs, I would have seen maybe one impact of that where a customer never managed to fulfill the go live and had to churn out because I think that we know actually the fact that they were shipping product into the U.S. market and that they were contract manufacturing. The use of Kneat was dependent on building a new facility, and that facility never went ahead. That's very explainable. Other than that, I don't see, maybe on the smaller customers, there's always budget issues, and especially when the macro, the budget gets hit down there first, but not on our enterprise and strategic. They all tend to be moving in the right directions from our perspective.
One thing, getting back to the other question you had there, Doug, on the competitive landscape, I'm really excited about that, and the quarter talks to that as well. All these wins are competitive opportunities. We're not the only ones looking for those customers. That's a real positive thing to take away here. I would say that we're building a product that's, I keep reiterating this, it's a platform, easy to use and zero-code platform for all your validation workflows. We're the only company that can claim to be able to do that. That's a huge thing. Are you going to go on a little bit? Because I'm in dragging mode now, but I'm just talking about what the engineering team and the product team have delivered. Recently, I've seen a demo of it, and it's really hitting those milestones towards completing that vision for us.
Did I cover everything there, Doug?
I think so. Based on what you're saying there, you had maybe some of these larger deal signings or implementations getting pushed to Q3, Q4. You've got the strong pipeline, the new customer adds. All that to say, is it fair to say, like we've seen last year and in other years, you expect a stronger ARR build profile in the second half of your fiscal year than what we saw in Q2? Is that a fair expectation?
You can't guarantee anything here, but what I would say is that we can explain, you know, where we would have liked customers wouldn't have scaled on this particular quarter, and we can see them coming through to the end of the year, right? That would be a fair expectation, but to the quantity of that, I don't know, Doug. I can't say that for now.
All right. Thanks for all that color. I'll pass the line.
One moment for our next question. Our next question comes from the line of Erin Kyle of CIBC. Your line is now open.
Hi. Good morning. It's Erin Kyle on for Scott Fletcher here. Just building on that last question a little bit, the SaaS growth in the quarter was lower than we had expected, and it diverged from the ARR growth again this quarter. I just want to dig into if that's again related to the incentives that you've been offering to the larger customers to scale licenses quickly, or how should we think about that divergence in the SaaS growth and the ARR growth?
Want to take that one, Dave?
Yeah. Hi, Erin. I think first, the way I would think about it is I would look at our Q1 ARR. We were impacted by FX in the quarter. You know, USD to Canadian dollar kind of dipped about 5% over the quarter on average. For us, the impact true to ARR is roughly somewhere in the region of 3%- 3.5%. We do have our kind of mid to low single digit incentive rate. I think if you take the FX adjustment and our incentive rate, you should be able to get to a rough quantum of our revenue on that basis. Looking at the ARR growth, what I would say is that the ARR growth that came in did come in toward the end of the quarter, which would typically have a very low impact to our actual revenue recognition in that period.
Okay. Thank you. That's helpful. It was about a 3%- 3.5% FX impact on the ARR last quarter, you said?
Yes.
Okay, yeah, that's helpful. Thank you. Maybe I'll just switch gears and go back to product investment. You've been investing in improving the computer system validation product. Maybe if you could just give us an update on how that process is going and what you've been seeing from the product development team and when you expect to roll out the improved offering there.
Yeah. Thank you, Erin. Just to say that I had a demonstration of our recent release in Kneat 9.5, and I'm very excited about what I'm seeing. The team is delivering to a very solid milestone in our vision, and that's a solid milestone that's valued to customers, right? It's really moving our product where we want it to be to enable it for the future and to enable it for more workflows that can be configured on the platform more completely. I would say that we're well on track to our vision of consolidating our leadership position in the validation space. That's the product, the positioning that we own in the marketplace, which is one easy-to-use, flexible platform for all your workflow that you have. It's your way. There's nothing forced on you, and customers love that.
They love the fact that they can configure their process on the platform, but they don't have to take a process that you're giving to them. That's critical because the industry varies in the way it addresses the regulations. I think we're making great progress there, and I'm excited. We've done a lot of work on our product team as well. We've evolved our product team further, and we brought fresh ideas in, and the engineering team has also had more leadership brought into it. I'm really excited about how things are working in that space.
Thank you. I'll pass the line.
One moment for our next question. Our next question comes from the line of Justin Keywood of Stifel. Your line is now open.
Hi. Thanks for taking my call. Nice to see the strong growth continue. Just some earlier comments about some elevated expenses in the quarter, and then also what sounds like some leveling off of the R&D given the new product is ready for market. How should we look at operating leverage, you know, given that there's an expectation of that solid growth to continue? Should we start to see an inflection on EBITDA and perhaps cash flow?
I'll jump in on this one. I think what I would look at is the plan is in 2026 that we should see, and we've communicated this before, that we should have somewhere in the break-even or positive cash flow. I think more around cash flow considering the capitalization of R&D. That plan is still solid.
As far as margins, any indication of what we should expect?
I think from a gross margin perspective, I think we're going to continue to see that gross margin in around 75%. I don't see it increasing massively beyond that. Like I said, I think from a cash flow perspective, timing aside, because a lot of our bookings will be in Q4, where we see a higher cash flow inflow in H1, we will be, you know, cash flow positives in 2026 or certainly break-even at least.
Okay. Thank you. On capital allocation, obviously very strong balance sheet. How should we be looking at the use of capital as far as perhaps share buybacks, M&A, or internal investments?
I'll just take that, Dave. By and large, there is no dedicated activity for the cash at this point in time. The balance sheet is very important to us when we engage with the type of customers we're engaging with and the partners in the space. We want to have a strong buffer on our balance sheet at all times. That doesn't mean we have optionality here, and we would be considering that at the moment, Justin. It's not that we don't have some plans to consider. We do. Some of those things, there is no on the horizon short-term M&A activity for sure, but there may be other options that we do there. Right now, there's no decision on it.
Understood. If I could just slip in one more, I believe I heard there's a new customer in the area of generic pharmacy. Would that be compound pharmacy? If so, just as far as a context, if you could quantify that opportunity at all. Thank you.
Was this the customer in Q1 or Q2, Justin?
Q2.
Was it Q2? No, there's not a compounding opportunity. No, this one is a diagnostics, the medical device manufacturer, and the other is a pharmaceutical manufacturer.
Okay. Maybe I misheard. Thank you very much for taking my questions.
Yeah, okay. No problem, Justin. Yeah.
One moment for our next question. Our next question comes from the line of Steven Lee of Raymond James. Your line is now open.
Thank you. Hey, guys. Can you hear me?
Yes, Steven, go ahead.
Okay. I may have missed it, but on the G&A, the sequential increase in G&A, is that from one time in there, or is it here to stay? Thanks.
It is. There's a good portion of that that's one-time quarter over quarter. We'd substantially taken some professional fees, recruitment. As you know, we've expanded the executive team. I would expect 80% of that number is one-time and not to recur.
Sorry, how much you said? 80%?
It's in the region of about CAD 800,000 quarter- over- quarter.
Okay. Perfect. Okay. I guess, just to confirm what you said on the sequential impact for the FX, on the Q1 to Q2, 3.5% headwind. How about on the SaaS revenues?
The SaaS revenue and total revenue, because the majority of our revenue inflows is USD-based, right? It's across all of the revenue lines.
Okay. You broke up there at the beginning. Did you say it wasn't much on the revenue lines?
It's across all of the revenue lines.
Okay. And then just last question, the free cash flow in the second half, seasonally, is it better than the first half, like based on your renewals and so on? Thank you.
H1 cash flow is generally better due to the ARR bookings that come in in the second half of the year. Traditionally, a lot of the ARR growth is going to be in the second half of the year, and that will translate into higher cash flow in H1 of the following year. I would expect that H1 is going to be on the higher side than H2.
I'll just jump in there as well, Steven. Our first quarter was particularly strong this year. If you look back, we had a very strong Q1 in terms of cash flow. Overall, from an annual perspective, things look consistent, which we're expecting to be in all the rest. Obviously, that's cyclical sort of nature. It's typically, the strong end of it is typically in Q1 or Q2. It's particularly in Q1 this year. Yes, there will be cash burn over the course of the remaining year.
That's best. All the best, Hugh. Thanks.
Thank you. Thanks very much.
I am showing no further questions at this time. I would now like to turn it back to Eddie Ryan, CEO, for closing remarks.
Those of you who have been following us know that we set out to solve a big problem for the industry when we founded Kneat. Starting from zero meant we could build in, at the core of the platform, data integrity and configurability, i.e., flexibility. With these as foundational features, customers recognize that the platform can evolve to deliver far more value than it does today, and it already delivers a lot of value today. It is this alignment with our customers and our shared vision for what's possible that energizes us as we continue to build through validation and beyond. We are committed to keep building out this vision for the years ahead. Thank you very much.
Thank you for your participation in today's conference. This concludes the program. You may now disconnect.