Kneat.com, Inc.

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 2 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 SEDAR 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 on 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.

Then 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 3 manufacturers, one of generic pharmaceuticals, one of clinical diagnostics and one of medical devices.

But none of these is a brand-name pharmaceutical company, illustrates how Kneat has been 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 digitization 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 the discrete data sets, deeper functionality for defining, regulating and tracing data sets 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 the 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 you for his stewardship over our finances for the past 6 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 have 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 $200 million in annual revenue.

Before this, he led the international finance function for J2 Global, a $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 30, 2025, revenue came in at $15.4 million, up 32% from $11.7 million for the second quarter of '24.

$14.1 million of this was SaaS license revenue, which grew 31% over the $10.8 million of SaaS license revenue we did in Q2 2024. Revenue from services of $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 takes the $30.2 million in total revenue for the first 6 months of 2025, $28 million of which is SaaS license revenue, reflecting growth of 34% and 36%, respectively, year-over-year. Cost of revenues in the second quarter of 2025 was $3.8 million, up 27% from $3 million in the same quarter a year ago.

Gross profit for the quarter was $11.6 million, 34% higher than the $8.7 million in Q2 of last year. And gross margin for the period improved from 74% to 75% as we scale the SaaS revenue.

For the first 6 months, cost of revenue was $7.6 million, up 31% from the prior comparable period. Gross profit for the first 6 months of 2025 grew 36% over last year's first 6 months to $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 $15.6 million versus $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 $28 million compared to $21.5 million for the first 6 months of last year. R&D expense, net of capitalized R&D grew 18% to $10.4 million for the first 6 months.

Sales and marketing expense grew 34% to $11.2 million over the comparable period prior year. And G&A expenses were $6.3 million, up 47% compared to the first half of 2024.

We ended our quarter with total annual recurring revenue of $64.8 million, up 43% from $45.4 million as at June 30, 2024. With a cash position at June 30, 2025, of $66.8 million and a product and operational road map that we expect to carry to breakeven 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.

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, but we also have the elevated tariff uncertainty. And I know it's hard to predict, but 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?

Yes. So 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 that is here and there, but nothing that affects our business in general. We see that all our customers are -- have expansion events planned with us, and we're quite clear that they will happen over time.

So yes, 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.

Yes. Understood.

And then the strategic customer you announced.

It's important to point out, Gavin, that need is global with our customers and something that's very important. And we -- where they do the manufacturing, we are there to support them with our validation.

Yes. The strategic customer you announced recently is starting with both equipment and computer system validation, which from my recollection is a bit unusual.

Can you hear me? Can you hear me?

Go ahead, Gavin.

Go ahead, Gavin.

Yes. 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 a bit more in terms of use cases initially?

Yes, that varies a lot. And in that particular case, yes, that's a great win for the company, strong evaluation between all the players in the marketplace.

And yes, so, one -- I guess, one area of the business is starting in CSV. I just want to remember the detail.

And the other area of the business is starting in CQV. So that's -- it's a great win from that perspective for them 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 in into the pipeline these days than CQV. Having said that CQV is still strong, especially from an expansion perspective.

But when you look at new logos, there tends to be a lot more -- a lot of CSV coming through.

Yes, that's great to see. And then just on the Validate user conference, it was obviously very well attended.

Can you just discuss kind of pipeline generation coming out of that event and how the sales team was feeling post the event in Boston there?

Yes. 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 are 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 to -- that can really deliver the mission of all your validation workflows on one platform your way.

So it was a really good event, and we're glad we do it, and we will continue to give it a lot of energy.

That's great. And then lastly for me, maybe for Dave.

Operating expenses, including the cap R&D was up about $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 timer as you would call out?

Yes, Gavin. So FX is probably about $300,000 of that uplift.

And to your point, the VALIDATE conference probably accounted for, I would say, 60% to 70% of the quarter-over-quarter uplift in sales and marketing. We also have the uplift in G&A, I would estimate that roughly 80% of that is nonrecurring.

It's due to professional fees, some recruitment. And as you know, we've expanded out the executive team.

R&D, there is some small nonrecurring costs in there, but it's very minor. It's maybe $100,000.

Hugh, all the best with what comes next. It was nice working together.

Thank you very much, Gavin. Yes, 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.

And I'll echo the congratulations to Dave on the appointment and Hugh on a well-earned retirement. So 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.

So I mean 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 near-term ARR build.

Yes. Thanks, Doug.

So yes, 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 them -- all of these customers in fact are in the strategic and enterprise space.

So -- and when I look at our early signals and 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. And I'm very optimistic about the end of this year and into the following years from a pipeline perspective.

So regarding -- we've had a strong year-over-year quarter-on-quarter isn't as strong. There's been a big FX impact there as well, as you know.

And what I would say also is that there are deals that we are negotiating with customers and sometimes to time, it just doesn't land where we would want it to. And we've had that in the past, and we've managed to obviously recover from things like that.

And I think that all the opportunities that we would have been targeting for Q2 are all going to be fulfilled through the year, quarter 3, quarter 4. So I'll be really optimistic about all of that.

And what I also like about the pipeline is that there's a -- we're seeing a lot of customers, it's a very diverse pipeline outside of our core, what you call biopharma, pharma manufacturing and the supply chain to pharma. We're also seeing more med tech coming in, and that's a real positive thing.

And I think that's down to the fact that our products are becoming more suitable for them. And in parallel with that, so getting back to the tariff thing, and I mentioned that earlier on, tariffs, I would have seen maybe one impact of that where a customer never managed to fulfill go-live and had to churn out because I think that we know actually, in fact that they were shipping product into the U.S.

market and they were a contract manufacturer. And the use of Kneat was dependent on building a new facility and that facility that went ahead.

So that's very explainable. So that's -- other than that, I don't see -- maybe on the smaller customers, there's always budget issues and especially when the macro, the budgets get hit down there first.

But not on our enterprise and strategic. They all tend to be moving in the right direction 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. So that's a real positive thing to take away here.

And 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.

And we're the only company that can claim to be able to do that. And that's a huge thing.

And we are -- I'm going to go on a little bit because I'm in bragging mode now, but I'm going to talk 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 that -- completing that vision for us.

Did I cover everything there, Doug?

Yes, I think so. And so based on what you're seeing 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?

Well, you can't guarantee anything. But what I would say is that we can explain 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?

So that would be a fair expectation, but to the quantity of that, I don't know, Doug. I can't say that for now.

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. So 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?

Do you want to take that one, Dave?

Yes. So, 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. USD to Canadian dollar kind of dipped about 5% over the quarter on average.

For us, the impact through to ARR is roughly somewhere in the region of 3% to 3.5%. Then we do have our kind of mid- to low digit single-digit incentive rate.

So, 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. And looking at the ARR growth, what I would say is that the ARR growth that came in did come in towards the end of the quarter, which would typically have a very low impact to our actual revenue recognition in that period.

Okay. That's helpful.

So it was about a 3% to 3.5% FX impact on the ARR last quarter, you said?

Yes.

Okay. Yes, that's helpful.

Maybe I'll just switch gears and go back to product investments. You've been investing in improving the computer system validation products.

So 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 then when you expect to roll out the improved offering there?

Yes. Thank you, Erin.

And just to say that I had a demonstration of our recent release 9.5, and I'm very excited about what I'm seeing. And the team is delivering to a very solid milestone in our vision, and that's a solid milestone that's value to customers, right?

So 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. So I would say that we're well on track to our vision of consolidating our leadership position in the validation space.

And 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. And 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 that they don't have to take a process that you're giving to them.

And that's critical because the industry varies in the way it addresses the regulations. So, I think, we're making great progress there.

And I'm excited, and 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 is also -- has more leadership brought into it.

So I'm really excited about how things are working in that space.

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 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 breakeven or positive cash flow.

I think more around cash flow considering the capitalization of R&D, and that plan is still solid.

And 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 and around 75%. I don't see it increasing massively beyond that.

And 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 cash flow positive in 2026 or certainly breakeven, at least.

Okay. And then 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?

So I'll just take that there, 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. So 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.

And 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.

But right now, there's no decision on this.

Understood. If I could just slip in one more.

I believe I heard there was a new customer in the area of generic pharmacy. Would that be compound pharmacy?

And if so, what -- just as far as a context, if you could quantify that opportunity at all?

So this was the customer in Q1 or Q2, Justin?

Q2.

Q2. No, there's -- no, it's not a compounding opportunity.

No. It's -- this is -- one is the diagnostics, the medical device manufacturer and the other is pharmaceutical manufacturer.

Can you guys hear me?

Yes, Steven, go ahead.

Okay. I may have missed it, but on the G&A, the sequential increase in G&A, is there some onetime in there?

Or is it here to stay?

It is. There's a good portion of that, that's onetime quarter-over-quarter.

We had a substantial uptick in some professional fees, recruitment. As you know, we've expanded the executive team.

So I would expect 80% of that number is onetime and not to recur.

Sorry, how much you said 80%?

It's in the region of about $800,000 quarter-over-quarter.

Okay. Okay.

Perfect. Okay.

And I guess on the -- and just to confirm what you said on the sequential impact for the FX. So on the ARR 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? So 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 line?

It's across all of the revenue lines.

Yes. Okay.

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?

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.

So I would expect that H1 is going to be on the higher side than H2.

I'll just jump in there as well, Steven. Just -- I mean, our first quarter was particularly strong this year.

So if you look back, we had a very strong Q1 in terms of cash flow. So -- but overall, from an annual perspective, things look consistent with where we'd expect them to be and all the rest.

But obviously, that cyclical sort of nature is typically the strong end of it is typically in Q1 or Q2, particularly in Q1 this year. But yes, so there will be cash burn over the course of the remainder of the year.

Those of you who have been following us know that we set out to solve the big problems for the industry when we founded Kneat. Starting from 0 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.