Kneat.com, Inc.

Thank you, operator, and welcome, everyone, to Kneat's earnings conference call for the fourth quarter of 2025 and the full year. Today's call will be hosted by Eddie Ryan, Kneat's CEO, and Dave O'Reilly, Kneat's CFO.

Note that the safe harbor statement on Slide 2 and the forward-looking statements disclosure at the end of the earnings release inform 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. Also during the call, we may refer to certain supplementary financial measures as key performance indicators.

We use both IFRS and supplementary financial measures as key performance indicators when planning, monitoring and evaluating our performance. Management believes that these non-IFRS measures provide additional insight into the company's financial results, and certain investors may use this information to evaluate our performance from period to period.

With that, I will now pass the call to Eddie Ryan, CEO of Kneat.

Good morning, everyone, and thank you for joining the call today. In order to leave more time for your questions, we will keep our prepared remarks brief.

As I laid out in my letter to shareholders, 2025 was a year that proved the strength of Kneat's resilience. In a period of macro uncertainty, elongated buying cycles and new considerations presented by AI, we continue to gain share with software revenue up 33% for the full year, and we welcomed a record number of new customers.

These new customers were added to exceptionally stable base of existing large customers. Our net revenue retention was 115%, reflecting continued expansion with that base.

Customers come to Kneat today because we are a trusted domain expert in a field where confidence in the product is paramount. There is our highly regulated mission-critical environments where validation data needs to be attributable, traceable and auditable, all things for which needed has been purpose-built.

With this in mind, Kneat's advantage in leveraging AI to deliver business value for companies is clear. Over the last while, we have been building AI into our platform to accelerate the advantages Kneat already brings to validation.

We introduced AI-powered features designed specifically for environments adhering to good manufacturing practices. These include content review agents, a natural language process analysis expert, a user support expert and an instant language translation function.

Building in AI to improve the platform extends our competitive advantage, which was already considerable. With these tailwinds, we are excited about where we are heading in 2026.

Our platform is second to none. Our pipeline is strong and our land and expand model, which contains significant expansion potential and brings more with each new customer we add is proving to scale, putting cash flow profitability within line of sight.

This is a necessary milestone as we plan for the long game in pursuit of our mission that any regulated company can be confident they are developing, manufacturing and delivering their products to the highest safety standard. I will now turn it over to Dave, who will take you through the numbers.

Good morning. As you have the numbers and commentary in our materials that went out last night, I won't go through them in detail again.

However, before we turn it over to you for your questions, I do want to first highlight a few numbers on what drove them. First, ARR growth in the quarter year-over-year was 24%, solid, but not as high as we were expecting.

While changes to FX rates since Q3 added $1.1 million headwind, some of the delta came from expansions being pushed to a future period. This means we expect these same deals to materialize in 2026, if not in Q1, then in the subsequent quarter.

Incremental ARR is historically back-end loaded, and we also expect 2026 to be no different. Second, operating expenses in the fourth quarter came down from Q3 and for the full year were up 33%.

After 2024 in which we held headcount steady, we invest in key talent in 2025 to drive the platform forward, expand our presence within our growing number of customers and amplify our voice in the life sciences space. Finally, on our financial position and outlook, we ended the year with $48.7 million of cash on the balance sheet.

This, together with a fortified team sets us up for a pivotal year. As Eddie mentioned, we are targeting for 2026 to be cash flow breakeven.

Meeting this target is contingent upon meeting our own top line growth expectations for the year. With that, I'll turn it over to you for your questions.

I do show we have a first question in queue coming from the line of Doug Taylor from Canaccord Genuity, please go ahead.

Hi, thank you. Hopefully, you can hear me.

Yes, we do. Can you, Doug?

Okay. Thanks, Eddie and Dave.

I'll start with an AI question seems unavoidable these days. I appreciate all the commentary you provided on AI in your letter overnight in your prepared remarks.

You framed this as additive versus competitive to your platform. I guess I'd like to ask what -- if you could provide anything you've heard, like what your customers are saying on the subject?

Are they building things with AI that sit on top of your data and your infrastructure? Is there evidence of that?

I'm just looking for some anecdotes to wrap around the subject.

Yes. Good question, Doug.

Yes. So we're not seeing anybody sitting on top, right, doing anything like that.

And look, we're dealing with the biggest pharmaceuticals in the world, as you know, and we've been dealing with them for for over 10 years, 15 years. And one of the things that is really critical to them is data integrity and compliance.

And Kneat is a system of record for that data integrity and compliance. And when I talk about data integrity in the compliance world, I'm not talking about data in the database being managed and protected there and secure.

I'm talking about the interaction with that data and the audit trail on that data and who put that data there, when they put it there, when they changed it, no matter how small that data is. So everything is attributable, it's auditable and it's traceable.

So this is the kind of data integrity that this industry requires, right? And -- so we see that as a real moat from our perspective.

We accept, yes, that there has to be additional AI to support that, and we would see AI from our perspective is doing the heavy lifting as part of the workflow processes and that type of thing for the customer and bringing value to that way. And over time, where it may go to the next level.

So just back to your point, Doug, on the customers today, we have very intimate relations with these customers, and we would be sharing our road map and we'll be sharing what we have in AI already with them. And they're aligned with us, very much aligned with us in what use cases they want AI to support them in and what part of the workflow they want it to be present in and how they don't want it to be -- it's a human aid at this point in time.

So -- does that answer your question, Doug?

Yes. I mean it does.

And so taking the AI as being additive and not in any way competitive with your solution as if we set that aside, the ARR growth in this last year was slower than in prior years, partly because you're lapping some larger numbers, but also you've referred to these deferred expansion plans for a few quarters now. And I think some of that was attributed to the uncertainty as it relates to global trade and things like that.

And that's no less confusing today than it was maybe last quarter. So I guess I'd like to refresh our understanding of the duration of those deferrals.

When do you see those start picking up again and perhaps returning your NRR to some of the levels that we've seen Kneat enjoy earlier in 2026 and beyond.

Yes, we definitely expect it to go up. And what I would say is it's only when you look back on the year, you can see how the year panned out fully, right?

And we are back end of the year type where we do a lot of our ARR addition traditionally. And what I would say is quarter 2, we began to see the macro environment, Doug, as you know, and the uncertainty and what we will have seen that follow through to the year -- the full year.

Our budgets were deprioritized in certain areas where they were cut and frozen temporarily. So that's what we've seen.

All of those, what we call deferred expansions, they're all still in our pipeline, as Dave said in his earlier notes, and they're all being worked on and the engagement is ongoing on all of those. So I expect them to come through for us as well through 2026.

Do I know exactly what the year ahead is like from a macro perspective? There's still uncertainty from last year, but I think it's beginning to stabilize more in that perspective.

Other things are coming into play like AI and stuff like that.

So the message there being you'd expect ARR to rebound from the 2025 level -- sorry, NRR, I should say, based on what you said?

Absolutely.

Okay. And then I guess, a similar comment or question about what was definitely clear last year was a very strong pace of new customer additions, new logo wins.

Is the setup in the pipeline this year for you to extend that streak?

Yes. We added, I think, net new -- there was a bit of churn in there as well.

But net new, we had 20-odd percent new customers in '25. And as you know, in recent years, we focus more on strategic and enterprise.

So very, very happy with that delivery from our sales team. And we're seeing these deals being more and more matured and for that reason, going through more diligence and more competitors involved and more RFPs, and we're winning the majority of these RFPs.

So very excited about that. And that puts in a great platform for the future, as you know.

And I would say the marketing team has done a great job of building the pipeline, and we see a similar and better pipeline for the year ahead and beyond.

Okay. One last question for me and perhaps this one for Dave.

You've stuck to the cash breakeven bogey for this year, and we're in this year now. So I do want to give that a little more attention.

To start with, just to confirm, once again, you're talking about free cash flow or operating cash flow breakeven as being the target you expect to eclipse this year given the capitalized R&D. And if so, I mean, in any event, it's a big lift from where you were over this past year.

So I just want to maybe walk through some of the assumptions, not necessarily the revenue, but the margin assumptions and spending and budget for OpEx that would get us to that objective.

Thanks, Doug. Yes, it's still very much our objective for 2026 is to be cash flow breakeven.

To your point, we can get into some of that detail. But what I would say is that the messaging that we've given before, certainly in Q3 about the adjusted EBITDA margins, I still expect that to hold true for the next 12 months.

I expect our capitalized R&D, I would expect that to be relatively static year-over-year. I still expect a little bit of growth on our OpEx, and I expect improvement on our gross margin lines.

And so just to be clear then, to be cash flow, you would have adjusted EBITDA that would surpass your capitalized R&D, I mean, that would be necessary for free cash flow breakeven. And just maybe sharpen my understanding there.

To an extent, yes, Doug. It should cover the vast majority.

There's a couple of other levers on the balance sheet that will help us hit that number in '26, such as our R&D tax credits. And so it's not just the adjusted EBITDA that will get us there.

As I mentioned, there's another couple of levers on our balance sheet that will help us in the pursuit of cash flow breakeven.

All right. I appreciate the answers to my questions.

I'll pass the line.

Thank you. And I show our next question in the queue comes from the line of Gavin Fairweather from ATB Cormark.

Hey, thanks for taking my questions. Eddie, in your letter, you called for an expansion of incremental ARR in 2026 versus 2025.

I think that's the first time you've kind of provided that type of guidance. So maybe you could just flush out what you're seeing in the macro and the pipeline that kind of gives you that confidence to hang that out there in your letter.

Yes. So I'm trying to remember that statement.

But, yes, so for -- we -- as I said, we put in a lot of strong customers over the last couple of years into the pipe -- sorry, into our customer portfolio. So as you know, Gavin, we focused on enterprise and strategic a couple of years ago, and they are beginning to show fruit now, the ability for them to expand into the future.

They take a year, maybe 2 years to get going, and we're seeing that playing in as well. We're also having these great conversations with our customers around new potential areas that we will bring value for them.

So outside of validation, adjacencies areas, and we expect to be delivering to some of these areas as well in '26.

Yes, that kind of flows into my next question. I mean, I was looking for a bit more detail on how conversations are going in the base around CSA and adjacencies and how you're thinking about potential adoption in 2026?

Like how many customers would be speaking to you about moving into some of these new areas?

Yes. We would say that we are already deploying in some of these areas with some of our customers.

We have some really engaging opportunities under discussion with some customers. And we see us being able to capitalize on that further.

And these are couple of the biggest customers in the world, right, who are talking about looking at these new adjacencies. So we're really upbeat about that.

And we will hope to announce them in due course, Gavin. But I would say, just to give you a flavor, they're more deeper in the manufacturing space adjacent to validation, where we've already earned the right to be there.

We've proven our ability to be great at data integrity in a validation environment. And now we can take that same capability to adjacent areas.

And the one thing I would say is that I think our ability to be great at data is going to enable more processes in the future because of the -- if you've got this great data integrity underpinning your AI, then you'd be more inclined to put processes in there that can give you that quality. And I think great AI is going to be great data integrity.

And as I said, it's not just data and databases, data is managed and [ police], and that's what I think will be great as well.

Appreciate that. And then maybe a couple for Dave.

The gross margins seem to be increasing faster than your mix would kind of imply. So maybe you can just discuss where you're getting some leverage on the COGS line, whether it's still coming through in SaaS or also if you're starting to make a bit of money on the services line?

Yes. So in Q4, there's a couple of credits that we booked to our P&L in Q4 related to year-end accrual releases.

So there's probably 0.5% on our gross margin because of that in Q4. But to your point, sales mix is still beneficial to us.

We are eking out a little bit more margin on RPS. I think historically, that's been running at around 15%.

I expect that to increase over the next 12 months. SaaS is continuing to be an 80% kind of level.

And that will flow into '26.

Great. And then just lastly, on debt.

If I remember correctly, I think some of that debt on the balance sheet, the penalties for prepayments start to roll off over the course of 2026. So just on capital allocation, maybe you can discuss your plans.

Obviously, you have more cash on the balance sheet than you have debt. So should we be thinking about some of that debt starting to move off the balance sheet there?

You're exactly right. '26, there are -- there's a couple of tranches that will roll out of penalty zones if we were to clear those tranches.

But it's certainly not in our short-term projection. We're talking about cash flow neutrality in the year.

If we do make that call, we'll certainly amend it. But right now, we're just probably going to let them continue to pay.

If we see the opportunity to clear them down sooner, we absolutely will.

Thanks a lot, I'll pass the line.

Thank you. And I show our next question comes from the line of Justin Keywood from Stifel.

Please go ahead.

Hi. Thanks for taking my call.

Just circling back on the outlook and the expectation for incremental ARR in 2026 over 2025. Doing the math, does that imply there's an expectation for $15 million in additional ARR this year?

So yes. So we don't put a number on it, Justin.

But when we look at the add-ons and for this year, they will include the delayed expansions from '25, and we see also outside of that cohort, we see expansions from the other cohort of customers we have. And today, we service over 130 customers.

And we also see that the new customers kicking in, they would be the ones outside that cohort of the deferred expansion. So yes, we see those definitely in the number increase on '25.

Okay. Good to hear.

That's helpful. And then just circling back to the AI discussion.

I'm wondering if there's an opportunity to deploy some of the AI tools that are out there, particularly around coding within Kneat's own business, the R&D expense continues to appear to be increasing at a decent rate. And is there an opportunity to perhaps replace some of those functions with AI?

Absolutely. And our team has been doing automated enhancements for quite a while.

I would say, Justin, at the beginning -- like in the last 6 months, they really begin to see tools that can really add value. And I think we are hearing about in the news, and it's true.

And we are acknowledging it. Our team is acknowledging it quite well.

So we have dedicated AI teams in place now looking to enhance everything. And we're seeing some really good improvements in productivity in certain areas, right?

I mean, we're still building features into a big platform and coding is one part of it, understanding what you're doing from your domain experience is a huge part of this, articulating those requirements to any tool, whether it's an agent or whether it's a human that actually codes it is a good part of the work. And we're getting -- I would say the tools helping us across the board, not just in the coding itself.

There's value there. There's good stuff happening there.

There's ability to reverse engineered pieces of code and reengineer them again and a lot of good things happening. So I expect we will be focused -- we are focused on that, Justin, and I expect we will, over time, start bringing that down.

The goal now is to get more out of the team we have. And any of those hires that are going in this year are primarily related to that AI for the product, for our Kneat GX platform, but also AI to improve our productivity in the organization.

Very interesting. So would it be fair to assume the R&D or additions to intangible assets to be leveling off at this level?

And perhaps that's where to Dave's outlook on breakeven free cash flow. Is that where the operating leverage is going to show up with that R&D level normalizing?

Do you want to take that, Dave?

Yes. Just there will still be some growth in the R&D function.

To Eddie's point, it's probably going to be around the AI team and helping accelerate the development. But we're also going to see that shift.

I mentioned this one in the prior quarter that we're going to probably see a little bit more R&D expense to the income statement as we capitalize less. And I would imagine that what we will see being capitalized year-over-year being very static.

Very helpful. Thanks for taking my questions.

No problem. Thank you.

And I show our next question comes from the line of David Kwan from TD Cowen. Please go ahead.

Hey, everyone. Dave, maybe I just wanted to clarify the comments on the gross margin.

So I think you said there was about 50 bps of year-end accruals. So maybe the normalized gross margins were in the 77% range.

So could 2026 gross margins be at this level or maybe even better than that?

I would assume that they should be at a similar level, David, yes. It does depend on the mix when we get there.

Obviously, our PS revenue is running at -- historically has been around 15%. I expect that to be 20% and above.

And that depends on where we finish up from a PS revenue in '26. But I do expect the gross margin to be up around the 77% range.

Sounds great. That's helpful.

And just digging into the NRR, the decline there. Obviously, you talked about some expansion projects getting pushed out there and some churn.

Could you -- you mentioned, I guess, that there weren't any customer or customers that were switching to competitors. But I was just wondering if you had any color on what the churn was related to like did those customers go bankrupt?

Or was there something else?

Yes, David, thanks for that. So I would say that there are 3 aspects of the churn, there's the deferred expansions, there's the FX going against us and then there is the churn element.

And I would say, yes, most -- all of those customers actually, in fact, have had some degree of financial difficulty to some extent. And yes, there's 1 or 2 of those customers actually closed down.

But for those customers that discontinued using Kneat, we're not aware of any of them going to a competitor at all, and that's very clear to us. So some of the -- when we look back and again, talking about the -- how we focus on enterprise and strategic customers over the last couple of years.

Prior to that, we would have sold to a lot of different types of customers. And maybe the product market fit may not have been or the product company fit may not have been 100%.

So we're seeing some of those bubbing up a little bit as well over the last year.

Well, thanks for that color Eddie. And can you say like how much of ARR it represented?

I'm guessing it's relatively small, but if you could quantify it.

Yes. It's smallish, I would say that if you were looking at where we wanted to be on our overall growth versus where we were, it's probably divided into 3 things, maybe 40%, 50%, Dave, you might be able to correct me here is related to the deals that were pushed out and the other 50% is between China and FX.

Great. And just one last question.

I expect it's maybe a bit early here, but just obviously, with the Supreme Court's tariff ruling, is that -- do you expect that to probably lead to continued hesitation from your customers just as it relates to the uncertainties on their expansion plans?

Yes. I haven't consumed that fully, David, I would say, right?

What I am seeing is more stability in the customers, more clear on what they were doing. Maybe this adds another bit of volatility to the situation.

But I had a feeling that things were improving, and it's a bit early for me to comment on that.

That's great. Thanks guys.

Thank you. And I show our last question in the queue comes from the line of Erin Kyle from CIBC.

Please go ahead.

Hi, good morning. Thanks for taking my questions.

I apologize if any of this has been asked already. I just kicked off the call a little bit earlier here, but I want to go back to some of the comments in the shareholder letter around retention.

And you called out that you're not aware of any churn to competitors, which is good to hear. But I wanted to expand there and maybe ask if you're seeing any pricing pressure from increased competition in the space or anything to call out there?

Yes. So I said earlier on, Erin, that of all the new deals last year, we are winning the majority of them by far.

And I would say that there's definitely more competition in valuations and that competition was entering to 2025 and having the ability to maybe slow down the sales process a little bit. But also, there's also the macros that we were slowing down the sales process.

So I would say that definitely, there's not a huge amount of pricing pressure. We're not pushing our prices down in any way.

We're winning the deals. We're holding our prices.

I would say a little bit here and there, maybe we can be a bit innovative around the contracts and stuff like that and the multiyears and that type of thing. But no significant impact on our pricing.

And that's -- but we put a lot of effort into making sure our customers understand how great our product is before we get to the pricing stage, and I think that helps a lot.

Okay. That's helpful.

Thank you. And then maybe can you just remind us the percentage of your customer base that's on the enterprise-wide licenses?

And maybe just discuss whether you've been making a more dedicated push towards enterprise-wide. I believe you have.

And then can you let us know if customers have been receptive to this model? Or what's the reaction to maybe moving to more enterprise-wide licenses?

Yes, that's an ongoing thing. As customers step up in volume, they go to more enterprise, and we have done quite a bit of that over the last, I'd say, 14 months or so, 16 months, and we continue to do it.

And it's a very win-win situation, and we do very well from that. Percentage-wise I find it hard to tell you exactly right now.

Dave might have a number on it, but we don't track that number. But I would say that if we were to take our strategic maybe top 30 customers, I would say we have 30% on some form of strategic longer-term deal.

That's kind of an order of magnitude now, Erin. So I can't -- I have to come back to you with that number if you want to follow up on this.

Sure. Maybe I'll follow up offline.

Thank you.

Thank you. That concludes our Q&A session for today.

I would now like to turn the conference back to Eddie Ryan, CEO, for closing remarks. Please go ahead.

Thank you. We are excited about what we are setting out to accomplish in 2026.

We are in a great spot to keep our momentum going as the go-to validation platform for the world's biggest life sciences companies. We continue to deploy AI to help our customers work faster and smarter while keeping their data 100% compliant in a way that they can see, understand and trust.

And with an experienced and energized team, we are confident in our ability to sign up even more new business this year than last. Thank you for your support and for believing in what we are doing.

Thank you. This concludes today's conference call.

Thank you for participating. You may now disconnect.