Kneat.com, Inc.

Thank you, operator, and welcome, everyone, to Kneat's earnings conference call for the third quarter of 2025. Today's call will be hosted by Eddie Ryan, Kneat's CEO; and Dave O'Reilly, 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 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, 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 our financial results and certain investors may use this information to evaluate our performance from period to period.

For your reference, we have filed our unaudited consolidated financial statements and MD&A on SEDAR, and they are also available on our website. I will now pass the call to Eddie Ryan, CEO of Kneat.

Good morning, everyone, and thank you for joining the call today. I will take you through an overview of the quarter and the year so far, what we are seeing and what we are planning.

Then Dave will share a high-level recap of the financials. After that, we will open the call for your questions.

The third quarter of 2025 reaffirmed Kneat's resilience as the market leader in digital validation. We continue on an expansion journey with our existing customers and continue to sign new logos at a strong pace.

As a result, our SaaS revenue grew 33% year-over-year, well ahead of the average for companies our size. This demonstrates the continued demand for our platform even in a more complex investment environment for the life sciences industry, who also have to deal with uncertainty around trade, pricing and funding.

While these dynamics are extending buying cycles somewhat, customers ultimately continue to invest in their digitalization journey. As such, our sales team continue to manage a robust pipeline into quarter 4 and beyond.

Kneat wins because it delivers compelling value for its customers. Our validation workflow platform, Kneat Gx, is configurable and absolutely no coding is needed.

It supports all validation workflows, and it meets strict data integrity requirements. That Kneat has been able to address what our customers need to do the way they want to do it has earned Kneat our excellent reputation as the leader in digital validation.

This market leadership was underscored this past quarter by the software review and comparison platform, G2. Its full report on pharma and biotech software awarded Kneat a satisfaction score of 98 out of 100, a full 20 points higher than the second-ranked company's score of 78.

We strive to expand this competitive lead by making the platform better all the time. Our engineering team continues to innovate in line with customers' needs and our strategic vision.

Our AI strategy is unlocking new possibilities for speed, intelligence and insight while maintaining the highest standards of compliance and integrity. Recent advancements include AI capabilities that enhance usability and global reach with upcoming near-term solutions designed to streamline content creation, content review and data-driven decision-making.

Based on the significant opportunity that lies ahead, we will continue to invest strategically in R&D and go-to-market in parallel with our focus on profitability in the year ahead. I will now hand it off to Dave, who will address the financials in more detail.

As I take you through the numbers for the third quarter, just a reminder that the figures are all in Canadian dollars, unless otherwise noted. I'm pleased to report that Kneat's healthy growth continued in the third quarter with annual recurring revenue up 37%, total revenue up 26% and gross profit up 25%.

Starting with revenue. For the quarter ended September 30, 2025, revenue came in at $16.1 million, up 26% from $12.8 million for the third quarter of 2024.

$15.2 million of that was SaaS license revenue where growth accelerated to 33% over the $11.5 million of SaaS license revenue in Q3 of 2024. The revenue from services of $0.9 million in the quarter compared with prior year services revenue of $1.2 million.

This decline indicates partners are stepping up to do more in services, allowing us to focus on our software. These Q3 results take us to $46.3 million in total revenue for the first 9 months of 2025, which is up 31% over last year.

SaaS license revenue of $43.2 million for the first 9 months was up 35% year-over-year. Cost of revenue in the third quarter of 2025 was $3.9 million, up 31% from $3 million in the same quarter a year ago.

Gross profit for the quarter was $12.2 million, 25% higher than the $9.8 million in Q3 of last year. Gross margin for the period was 76% compared with 77% for the same period last year.

For the first 9 months, cost of revenue was $11.5 million, up 31% from the prior year comparable period. Gross profit for the first 9 months of 2025 grew 32% over last year's first 9 months to $34.8 million, bringing gross margin for the 9-month period ended September 30 to 75%, which is even with the same period in 2024.

Operating expenses grew 43% in the third quarter of 2025 to $14.3 million versus $10 million in Q3 of 2024. R&D expense growth was 47% year-on-year, net of capitalized R&D.

Sales and marketing expense was up 45% year-over-year, and G&A expenses were up 32% year-over-year. Looking at operating expenses year-to-date through September 30, total operating expenses grew 34% over the first 9 months of 2025 to $42.3 million compared to $31.5 million for the first 9 months of last year.

R&D expense net of capitalized R&D grew 27% to $16.1 million for the first 9 months. Sales and marketing expense grew 38% to $17.0 million for the comparable period last year.

And G&A expenses were $9.1 million, up 42% compared with the first 9 months of 2024. We ended the quarter with total annual recurring revenue, or ARR, of $68.6 million, up 37% from $49.9 million as at September 30, 2024.

And our cash position as at September 30, 2025, was $59.8 million. So all in, a solid quarter that sets up for a strong finish to 2025.

And with that, I will turn the call over to our operator for your questions.

Congratulations on another quarter for new customer signings, a strong quarter. I'd like to start by, I mean, asking you about both the macroeconomic headwinds that you referenced in your prepared remarks and in your disclosure and also the reference to some increased competition that you talked about in your materials.

I just wanted to unpack those a little bit. So first, starting with the macroeconomic, the challenges you speak about as it relates to tariffs and trade uncertainty.

I mean, can we talk about the directionality of that in this quarter? Is that improving or getting more challenging?

And perhaps you can speak to the pipeline for expansions as you discuss that with some of your installed base?

Doug, good question. Yes.

So speaking to the pipeline, first of all, I guess, to date, we have -- we are ahead of where we finished last year from a new company customer perspective. So that speaks to our competitive strengths that I'm really proud of in the marketplace today.

Looking at the -- looking back over the last 9 months and looking at the macros, I would say there's definitely been an impact there around customer budgets and uncertainty from that perspective and where they do their investments and all of that. I believe from recent information that you know that it's beginning to stabilize from that perspective, especially around the tariff side of things.

And there's a lot of optimism, especially state side in the U.S. around new spending and additional spending on new facilities and expansions.

And of course, a lot of those customers that are in that space are our customers. So I expect we'll benefit from that as we go forward as well in the coming years.

So while it's not huge, the macro, it has had an impact, and we have seen some deals moving out a little bit, still there in the pipeline, still working on them, not closed out or anything like that. So, yes.

And we have a very robust -- when I look at the pipeline ahead, we're been very robust on the pipeline ahead as well.

And so just to maybe go one step further with that, would you say that those macro and the deal slippage, I mean, it clearly doesn't appear to be related to new customer signings. So is that more about expansion plans?

And maybe you could tie in your recent changes to some of your pricing models around delayed growth in the initial deal signings in relation to that?

Yes. So the initial deal signings, I think you're referring to the incentives around the ARR, which is the leading indicator.

I would say that has -- Dave can talk a bit on that as well, but that has come down, and it remains similar to what we would have sort of messaged to the marketplace over the last number of months in the single mid-digit type territory from that perspective. So on the -- what was the question on the macros again, Doug?

Well, I mean, let me -- I think I got the answer I was looking for there. So let me just circle back then on the competition comments you made in your disclosure overnight here.

I believe you're referring to Veeva, maybe some new market entrants or perhaps ValGenesis. I mean maybe you could expand on why you included that, what you're seeing and whether that's impacting -- it doesn't seem to be new customer signings, but is there a pricing impact?

Is it impacting expansion plans to any significant degree?

No, not to any significant degree. There is definitely new entrants coming into the marketplace.

Veeva is looking to get traction with its technology. But by and large, Kneat is still winning all the key deals.

There is a bit maybe competition has the ability to slow deals down a little bit, but they still -- Kneat is still winning them in general. So nothing significant there.

But yes, for sure, something that I would be concerned about or not concerned about or would be vigilant about into the future.

I just wanted to follow up on one of the questions that Doug asked there, just on expansions. I think I believe last quarter, we mentioned -- you mentioned the deferral of some expansions out of the quarter and ARR growth of 37%, while strong, it was still below our expectations for the quarter.

So maybe you can just comment on whether you've seen more deferrals in customer expansions or just what you're seeing in that context?

Yes. I think I missed the first part of your question, Erin, but I can speak a to the latter part, at least.

So as I said, the -- we would have seen -- if we look back over the 9 months, we would have seen some slowdown in budgeting and that type of thing, but it's nothing significant. We -- the customers continue to expand, and we're working -- we typically end the year with stronger expansions.

And I'm optimistic that will happen again this year. We don't know the end of the year yet.

So yes, there's nothing unusual there. Just we have to continue to expand our customers, and they are on that journey with us.

They just -- deals, move around from quarter-to-quarter. It can be lumpy.

The first part of my question there was just whether there were any deferrals out of Q3 specifically?

Deferrals out of Q3. I don't have -- Dave, do you have an answer to that?

It's more so have any deals that were due to close in Q3, have they moved into Q4. I think the answer is to that is...

Yes, that's true. Correct, Dave.

There would have been some deals that would have moved into Q4.

Okay. And then I just wanted to also follow up on any FX impact on ARR and revenue in the quarter.

If you can quantify that, that would be helpful.

I'll step in on that one. So from a quarter-over-quarter perspective on ARR, we have a tailwind of approximately $1 million on our ARR, but the impact on revenue is a lot less in the quarter, the revenue impact is a tailwind of about $130,000.

Maybe just to start on the product. I know a big initiative has been to build in agile processes and workflows into the product.

Curious if you're starting to see some adoption in your existing customers on those approaches and how you think about that as a driver for 2026 expansions?

Yes. We think it's very important going forward.

And especially when we're bringing on other technologies, Gavin, around the AI and all of that to have a very robust agile data-centric platform underpinning it all. And that journey continues, and that is something that will take a number of releases.

And I would say we're going to see -- the customers are -- early customers are using it and giving feedback on it, and there's iterations on it and -- but it's coming through very strong at the moment, and we're really excited about what it's achieving.

That's helpful. And then maybe just on the G2 report and related to competition.

I mean, really nice to see you ranking so well compared to some of your peers. But you did kind of call out increased competition in the MD&A.

But so it kind of begs the question. Do you think that your technological edge with all the R&D you're doing is widening?

Or do you think that it's stable or shrinking? How would you characterize where your platform sits versus competition?

I think we sit in a very good place, Gavin. And I think the plans that we have and what we're bringing through on the platform are also going to be very, very innovative and it's going to put further distance between us and the competition.

Notwithstanding that competition have their own journeys and they're working on their things. One of the key things about Kneat is I keep reiterating, Kneat is a platform.

On that platform, you can configure multiple workflows, and if you look at all feedback from the marketplace, including the G2, all you're going to see is happy customers, people who love using Kneat, easy to use, easy to set it up, easy to get the business value and everyone actually articulates that business value to us. So it's a huge competitive advantage, the fact that users love using Kneat and that it's really a strong market product fit.

So yes, I'd be very upbeat about what we're doing. It's hard to see it in real time, but it takes time for it to materialize.

But I believe what we're doing is very positive and very powerful as we go forward, and we'll continue to put -- to reinforce our leadership position.

Appreciate that. And then lastly for me, just on the sales and marketing expense line.

It is up a decent amount year-over-year. So can you just discuss where you're investing more in terms of the team and the marketing spend?

And how should we think about the time lines to productivity on that increased spend and driving some additional ARR growth?

Yes. So on the sales and marketing front, we would be expanding from sales account managers would be responsible for expanding existing customers, sales directors and sales support functions, including internal salespeople.

So that's where the investment is going there. And that is continuing to give return, and we've seen more of it going into '26.

The other thing to say is R&D. And from that perspective, we would put in strategic hires.

And we have a strong journey ongoing around AI and doubling down on that data and agile capabilities of the platform. So there's a lot of work ongoing there, along with addressing ongoing customer requests for features as we go along.

So when we talk about these additional things like the data centricity, we've also got to keep the product working very well for other areas of the business. There's multiple products in our platform, as you know.

So -- and when I look back at the numbers for sales and marketing and R&D, we're tacking down relative to revenue, and we expect that to continue through '26 as we focus in on profitability and cash flow breakeven later in '26.

Congrats on the results.

Just on the margins, the adjusted EBITDA was up quite substantially year-over-year. And assuming the growth continues into 2026, that could suggest substantial operating leverage, assuming OpEx moderates.

I'm just wondering if we're able to get some bookends on what the margin profile could be going into next year?

I'll give you a high level. Yes, the adjusted EBITDA margin has improved.

We expect it to continue to improve. Where we see that going is to a kind of typical SaaS type company profitability, late 20s, early 30s type range.

That kind of coincides with our overall view of breakeven from a cash flow perspective on a full year basis.

Just to clarify, did I hear 20% to 30% adjusted EBITDA margins could be a target for next year?

The next 18 months, I would say overall periods, yes.

Okay. Still very healthy expansion.

That's helpful. And then just on capital allocation.

Obviously, the balance sheet remains in very strong shape, net cash position. Are you able to outline the capital allocation priorities, be it M&A, share buybacks or other uses?

Yes. Thanks, Justin.

So there's no plans to spend any of that balance sheet right now. I mean, as I said, the goal right now is to continue on and target profitability for next year.

And as we go into the new year, we will -- we're constantly looking at our options and all of that. But right now, we believe a strong balance sheet is a very positive thing, especially when you're dealing with the large customers and the large partners that we are dealing with.

But there's nothing on the short-term horizon, but there's always a discussion around these things.

Thank you. Kneat was founded with a single mission to help life sciences develop, manufacture and deliver therapies to their patients to the highest safety standard.

While we have come a long way since our founding, we are still in the early innings, and our customers remind us of this every day. We are energized by their enthusiasm, and we are grateful for your support as we continue on our journey.

Thank you very much.