Kneat.com, Inc.

Thank you, operator, and welcome everyone to kneat's earnings conference call for the first quarter of 2025. Today's call will be hosted by Eddie Ryan, kneat's CEO; and Hugh Kavanagh, kneat's CFO.

Please note the Safe Harbor statement on Slide 2 and the forward-looking statements disclosure at the end of the earnings release, informing you that some comments made on today's call may 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 SEDAR and on our 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 our performance. Management believes these non-IFRS measures provide additional insight into kneat's 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.

Thank you, Katie. Good morning, everyone, and thank you for joining the call today.

We will share what we saw in the quarter from our customers, what we're seeing in the broader space and our plans for 2025 and how they're coming along. After that, we'll open up the call for your questions.

The first three months of 2025 show steady momentum with annual recurring revenue up 51% over last year's first quarter, total revenue up 37%, SaaS license revenue up 42%, gross profit up 38% and operating expense up only 21%. In summary, we are sustaining strong growth as we move toward profitability.

Of the dozens of wins logged in the quarter, over two-thirds were expansions within existing customers. North America, Europe and Asia were all represented and several new partners signed on in the quarter also.

It is worth noting the variety of use cases represented by the strategic wins we announced so far this year. These include a maker of specialty therapeutics that is using kneat for commissioning, qualification and validation of its manufacturing processes, a global consumer products company using kneat in its health sciences division for computer system validation and a manufacturer of generic pharmaceuticals that will be using kneat to digitize its drawing management process.

The different ways that these new customers are using kneat Gx is testament to the power of the platform. In its simplest terms, it is a single platform configurable to digitize workflow processes where data integrity is critical.

This solid start to the year, coupled with a promising pipeline, indicate that tariffs have not deterred the larger life sciences companies from their drive for continuous improvement through digitalization. While this could change and while smaller companies may experience the changes differently, our enterprise and strategic accounts, which contribute the vast majority of annual recurring revenue, continue to invest at this time.

Enterprise and strategic accounts are looking for a single validation platform for all their validation needs done their way. Being able to satisfy this requirement is one of kneat's key differentiators.

While we grow increasingly confident in our position with every customer and partner we win, we are far from complacent about our leadership in digital validation. Every day, our dev teams continue to build out the kneat Gx platform for the many underserved areas in our space that could benefit meaningfully from the right enhancements to our platform.

kneat's Co-Founder, Kevin Fitzgerald, has guided our product to what it is today. We all know that kneat Gx has carved out a new space in the IT landscape for life sciences on the validation front.

But those who rely on our platform recognize is that kneat GX is our framework that deserves a much larger position within the quality management space overall. As Chief Innovation Officer, a newly created role that Kevin will assume next month, kneat can be confident that product will remain aligned with our vision as it develops into its full potential as an intelligent data-centric documentation process workflow platform.

With this expansion, Donald O'Sullivan will join our leadership team as Chief Product Officer. Donald is very well-suited to this role, having led product management at software companies, Corvil and PICO for years to deliver significant growth.

With experience across pricing, bundling solutions, sales enablement and product marketing, I have no doubt Donald's product management experience will be hugely beneficial for kneat. Before I pass the mic to Hugh, I want to take a moment to thank everyone who contributed to making last week's valid date the resounding success that it was.

Our marketing team did an excellent job in organizing all aspects of the event. Contributions from our sales teams, product teams, customers and partners brought it full circle as the place to be to learn anything and everything about digital validation for our industry.

My big takeaway was that customers and partners are very much aligned with our product development strategy and vision. That's a good place to be.

So with that, I'll turn it over to Hugh for a financial summary.

Thank you, Eddie. As I take you through the numbers, please keep in mind that all the numbers I will be discussing are in Canadian dollars unless otherwise noted.

We are pleased with our results for the quarter. Revenue for the quarter ended 31 March, 2025 was $14.7 million, up 37% from $10.8 million for the first quarter of 2024.

$13.8 million of the Q1 2025 revenue was SaaS licenses, which grew by 42% over the $9.7 million of SaaS license revenue we did in Q1 of 2024. As Eddie mentioned, most of this license growth came from existing customers scaling their use of kneat Gx.

On the service side, more partners are taking on kneat services. As a result, our services revenue now accounts for a smaller percentage of overall revenue than it did a year ago.

Cost of revenues for the first quarter of 2025 $3.8 million, up 35% from Q1 of 2024, $2.8 million. Gross profit for the 3 months ended March 31, 2025 was $10.9 million, 38% higher than the $7.9 million in the first quarter of 2024.

The increase in gross profit reflects the growth of SaaS revenues and the lower level of growth in cost of revenue. Operating expenses grew by 21% in the first quarter of 2025 to $12.3 million versus $10.2 million in Q1 of 2024.

The largest contributors to this growth include sales and marketing expense at $5.1 million in Q1 of 2025 versus $4 million in Q1 of 2024. R&D expense, net of capitalized R&D for Q1 2025 was $4.7 million compared to $4 million for Q1 of 2024.

We ended the quarter with total annual recurring revenue, ARR, of $63.5 million, up 51% from $42.1 million at the end of last year's first quarter. Our cash position as of March 31, 2025, was $74.1 million.

The increase in cash from $58.9 million at the end of December 2024 mainly reflects the timing of cash collections on annual subscriptions, the bigger portion of which occurs in the first half of the year. For your reference, we have filed our unaudited condensed interim consolidated financial statements and MD&A on SEDAR, and they are also available on our website.

I will now turn you over to our operator for your questions.

Congrats on the strong results.

Thanks, Kevin.

Thanks, Kevin.

Maybe just to start, the MD&A referenced some incentives to get customers to make long-term commitments, and we did notice the divergence in SaaS and ARR growth this quarter. So maybe, Eddie, can you provide some context around these incentives and the strategic rationale on kneat's part?

Yes, absolutely, Gavin. Thanks for the question.

So yes, that's a really good positive thing for kneat. And recently, in the last six to nine months, I guess, we've seen some of our larger customers looking to scale into enterprise license territory.

And these enterprise licenses are opportunities for them to expand over a three-year period and there would be contracts for three-year periods where they would be locked in. So the annual recurring revenue will be based on the final amount in the third year.

But there are incentives given to enable the customer to move faster and scale their license quicker. So for example, if you take year one, they have the ability to move into their license count in year one.

And if we model them out at a list pricing type structure, there'll be no difference in the pricing other than we would get it over a period of time and the customer would have the ability to scale the licenses. And that's good for us, and it's good for the longer-term scaling when you come to a further expansion, which would be on the second probably a year later they would come up against afterwards.

The one thing to remember here is that the customer is not out of pocket, and they're committing to long-term agreements here. So we would have seen some of those coming in the back end of last year.

So this is something that's as we scale the company is beginning to play in a little bit, I would say, Gavin.

Yes. That's helpful.

And I'm not sure who wants to take this, either you or Hugh. But from a modeling perspective, can you help us understand maybe the amount of ARR that's kind of staging into revenue over time?

Yes. So again, as Eddie mentioned, the objective here, and I'll get on to the specific of your question in a second, but the key objective here is that essentially, customers are getting their hands on licenses earlier than they would otherwise have done.

They might have planned that over time that they get them over a number of quarters, whatever. And essentially, this allows them to get the licenses into their hand earlier without being out of pocket.

So that's really the core thing that's going on here. And while at this point, I'm not going to give numbers on exactly how much is involved here.

But I think if you -- from doing the math perspective and a modeling perspective, I think the easiest way to look at it is if you look at ARR, which is the recurring revenue. So to the long-term recurring revenue, that's what we expect revenue over future years to be.

But in any one quarter, if you look at what the quarterly revenue is versus that ARR or a quarter of that ARR, it will give a sense of the sort of the difference between those two numbers. That makes sense, Gavin?

Yes.

Yes. Yes, definitely.

And then I know you just got back from your Validate user conference, and Eddie, you provided some high-level comments in terms of your takeaways. But curious if you could provide any further color in terms of the takeaways that you got after you huddled with the team afterwards.

What kind of feedback were you hearing from customers on the R&D roadmap, which was presented? And what kind of pipeline generation did you see when you talk to the sales team afterwards?

Yes. I would say that it's a very positive event.

It's a great event for us actually. And recently, the 2025 event was the biggest ever and it was probably the most beneficial that we've had.

I mean we're the leading sort of -- we're the leading conference now for validation in our industry. And there's a huge amount of information sharing and intimate sharing of data and stuff like that.

And what I would -- what the biggest takeaway from me is that the customers are so well aligned with our vision, where we want to take the product and the strategy and the roadmap. The customers are very aligned with that.

That's what they want to. And that's something got reinforced to me in multiple dimensions.

Regarding pipeline, I would say there's I have site meetings with potential prospects at that event, and the prospects are very excited to have been there to be able to talk to all our existing customers. And one prospect sent me an e-mail after saying that more or less his decision was made that he's going to be now encouraging the company to go with kneat.

So I think our pipeline doesn't happen just based on one event, Gavin. It's running through the year, but we have a very strong pipeline.

It reinforces our pipeline and it enables our prospects to get intimate detail back from existing customers. And as you know, our customers are telling their case studies of how they're using kneat and how they're innovating with kneat and where they want to go with kneat.

So I think it's just a great event for kneat, and we get a lot out of it.

That's great. And then lastly for me before I pass the line.

If I think about the core kneat use cases in terms of equipment and computer system validation. I'm curious if you're starting to see a bit more diversity of use cases being configured on the platform?

Are you starting to see more diversity in terms of your existing customers thinking about new types of workflows, how is that breadth starting to trend in the existing customer base in the pipeline?

Yes. I think it's great.

And we are seeing the customers wanting our product to be in other places. And as I say, we are selling a platform, one platform for all your validation needs today, zero code and easy to set up and use.

And that's -- customers are telling us that. And so tomorrow, it's one platform for all your regulated data-intensive documentation processes, which for us means adjacencies.

So what I always tell and I've been telling everybody I talk to is we're building the future for today as we build out our leadership in validation. So we're also building for adjacencies.

And customers are spreading us beyond those two core areas that you spoke about being computer system validation and equipment validation. Customers are taking us to other validation areas, completing that picture of your one platform for all your validation needs.

And I'm very excited about that, and we continue to work closely with our customers. And bearing in mind, our focus is on consolidating our leadership position in the validation today.

Thanks so much and I pass it on.

Thanks, Gavin.

Hi, good morning. SaaS ARR growth, strong in the quarter.

But if I look at the net amount of new ARR in Q1 '25 versus Q1 '24, it was slightly down year-on-year. Just wondering if there's anything to call out either in the prior year or in the environment in the current year in terms of new ARR additions.

So Eddie, I mean, I can talk to that, if you like. So the first thing I'd say, Scott, is that I think you probably heard us say before that it's important to look at kneat on slightly longer than a quarter-by-quarter basis.

So any particular quarter can have higher or less high level of growth. So I certainly wouldn't be reading anything into one quarter versus the direct same quarter last year.

There can be things that drive one up or keep the other back a little bit. And it's really over the course of sort of the longer period or 12 months or whatever that is really probably the more important.

So there's nothing major that I would sort of point to between those two. I mean we have a strong pipeline and conversions are happening, and we're seeing continued strong growth.

Okay. That's fair enough.

On the -- just on -- it's great to hear that the tariffs don't seem like they're having an impact on the pipeline and the generation. But curious on the implementation time lines.

Are there any sort of delays there, customers waiting to go live just until they have a little bit more clarity? Anything on the implementation would be nice.

No, Scott, we don't see anything there on implementation time specifically. I mean the customers, once they buy and they set their minds to go to implement, they do that.

You do hear of companies expanding back in the U.S. from a pharma perspective, and this is all a new opportunity for kneat.

Most of these customers that are making these announcements are actually kneat customers. So we see opportunity there.

There might -- in the smaller customer side, there might be a little bit more apprehension and there might be slowing down deals a little bit. But by and large, we don't see this.

All right. That's great to hear.

I'll just finish with a quick one for you probably. Can you quantify the foreign exchange impact on the revenue or the ARR growth in the quarter?

Yes. I mean the exchange rates haven't moved a lot over the course of the quarter.

If you look at ARR probably being the bigger one given that it's a 12-month number as opposed to just a quarter. So yes, I mean, foreign exchange on ARR is few hundred thousand dollars, the 300-ish type area.

That's a tailwind by the way.

Okay.

Thanks for that. Hugh, just to clarify on that comment on ARR.

So you said when the FX -- when you said the FX impact a few hundred thousand, is that when you're looking year-over-year or sequentially?

No, that's quarter-over-quarter. The exchange rate year-over-year is a much bigger impact.

No, that's looking versus Q4, yes.

Because when I look -- like the USD was pretty strong in the March quarter, like 1.4 something. And then December was below 1.4.

So -- but still, the impact was only a few hundred quarter-over-quarter.

Yes, for the quarter, it's yes, in the 300 type range for the year. I actually I haven't got the number in front of me, but it will be much bigger over the course of the year because -- has been a lot bigger, yes.

Got it. Okay.

And then just a quick one on your G&A. It had a good jump -- size jump from Q4 to Q1.

Was there any onetime in there? Or that's a good baseline going forward?

Yes. No, I think it's a reasonable baseline.

I mean in terms of across the board looking at expenses, obviously, Q1 reflects a couple of things, including at the point in the year where we do annual reviews and pay increases and so on and so forth. And so I mean, I think if you look back over the quarters over the course of '24, actually Q4 was probably a little bit low and there's probably a little bit of timing of expense Q4 and Q1.

But yes, no, I think go forward, I think Q1 is reasonable enough, yes, on a go-forward basis, yes.

Okay, thank you.

Okay.

Good morning. Thanks for taking my call.

Nice to see the results. On the partnership with Capgemini, I believe that's relatively new.

And that followed up with another partnership announcement last quarter. Are you able just to describe the partnership path and how we should be looking at that as far as impacting the future financials?

So the partnership with Capgemini is relatively new and it's early stages, and it's beginning to show green shoots where we're working with customers. So we will have a go-to-market approach with Capgemini on certain customers.

And their goal is to expand kneat across the organization. So to accelerate expansion of kneat within these larger companies.

So we see that delivering value over time, I think, is the right way to look at that, but not immediately.

Understood. And then just on the expansion of the leadership team.

I know there was a new promotion or hire or two. Are you able just to describe the dynamics around that?

And do you feel that you have the right team in place right now for the scale in the near and medium term?

Yes. We have a very strong team.

And I would say we're bringing in a new CPO with broad varied product management experience from end-to-end. And that's to strengthen up our management team and to really allow us to be innovative on the product side.

So Kevin is going to become Chief Innovation Officer and is going to be responsible for building out the strategy and the vision of the product and making sure that everything we do is aligned with all that. So there's -- as a product-led company, we're investing strongly in making sure we build for the future here.

Great. Thank you very much.

Thanks, Justin.

Those of you who have followed us for a while know that we are very serious about executing on our plans to consolidate our leadership position in the validation. I reiterate here our commitment to continuing that journey.

We can't control the economy. We can't control competition, but we can direct and develop our platform for continuous customer value.

Digitalizing validation is becoming table stakes as the go-to-platform where companies are keeping this critical data and where they plan to keep it well into the future, we are optimistic about our future. We get even more excited when we see what our customers are achieving with kneat Gx.

So we're glad you're with us, and we look forward to connecting when we report again in July. Thank you.