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Good morning, and thank you for standing by. At this time, I would like to welcome everyone to the Kneat Q4 2023 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Katie. Please go ahead.
Thank you, operator, and welcome, everyone, to Kneat's earnings conference call for the fourth quarter and full year 2023. 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 in the forward-looking statements disclosure at the end of the earnings release. These inform you that some comments made on today's call contain forward-looking information, which by its nature is subject to risks and uncertainties. Actual results may differ materially from the views expressed today. For further information on these risks and uncertainties consult the company's relevant filings, which can be found on SEDAR and on the company's website at www.kneat.com/investors.
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 the company's financial results and certain investors may use this information to evaluate the company's 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. This morning, Hugh and I will talk about the progress Kneat has made over the last quarter and 12 months, and share what we can about our plans for the next 12 months. After that, we will take your questions.
As I said in my letter to shareholders, 2023 was another year of strong execution against our plans, which were to add new customers, expand our existing customers, leverage our partner community, further develop the Kneat platform and continue to build Kneat's own structures for growth over the coming years. I am pleased to report that our team delivered on all fronts.
Total revenues for 2023 grew 44%, SaaS revenue grew 73% and annual recurring revenue grew 55%. These growth rates were mostly powered by customers we won prior to 2023, demonstrating headway on the expand part of our land-and-expand strategy. We use a net revenue retention rate to measure how well we are doing on expansions. Our net revenue retention came in at a solid 138% for 2023.
And with a record number of new strategic customer wins this past year, the high-quality customer base driving our growth grew substantially bigger, helping to secure durable revenue growth into the future. This is because it can take a customer several years to fully scale Kneat across each sites and processes as they look to digitize and harmonize validation enterprise-wide.
The result has been a steady and consistent upward trend in our revenue base. The number of customers generating over $200,000 in annual recurring revenue has more than doubled over the past 2 years. At the same time, the average annual recurring revenue generated by these customers has also expanded. We estimate that our existing customer base has the potential to contribute more than USD 65 million in annual recurring revenue when fully scaled for validation use cases alone. This is without adding a single new customer.
But of course, we do plan to add more customers. With the investments we have made in the land part of our strategy, we expect to add more new customers in 2024 than we did in 2023. Our go-to-market strategy for 2024 leverages a more seasoned sales and marketing team and an evolving partner strategy, helping our end users to capture more and more value from our software.
Kneat's software is not standing still. In 2023, our R&D team continued to make Kneat Gx more flexible, more powerful and more feature-rich, enhancing our value proposition across all areas of validation.
Our achievement this past year would have been impossible without the investments in talent we made in prior years. While we made excellent use of our expanded capacity this year, we still have room to run, with only strategic hires planned for 2024. Our customers will tell you that we have an incredible company of people at Kneat. This is great for them, but it makes all the difference in the world to the Kneat team itself, doing work every day with truly excellent people who care deeply about the outcome.
As we embark on 2024, we stand to benefit from a powerful and timely combination of advantages, a large and growing customer base, where we still have much room in which to expand; a bigger and more seasoned team; and software that we believe revolutionizes validation for life sciences. What this means is that we're better equipped than ever before to create value for our customers, employees and shareholders. We look forward to seeing what we can accomplish in the year ahead.
I will now hand you over to Hugh for a review of the financial results.
Thanks, 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.
Our fourth quarter results reflect progress we've made in leveraging the investment we've made in 2022. Revenue for the quarter ended December 31, 2023, was $9.8 million, up 35% from $7.3 million in the fourth quarter of 2022. $8.9 million of this was SaaS license revenue, which grew 58% over the $5.7 million of SaaS license revenue we did in Q4 of 2022. For the full year, revenue grew 44% to $34.2 million from $23.7 million, powered by a 73% growth in SaaS revenues from $17.3 million in 2022 to $30.1 million for all of 2023. The increase in revenue for both periods primarily reflects the continued scaling by existing customers in their use of Kneat Gx and, to a lesser degree, the purchase of license subscriptions by customers new to Kneat in 2023.
Cost of revenue for the fourth quarter of 2023 was $2.8 million, which is lower than in Q3 and slightly higher than cost of revenues in Q4 2022 of $2.7 million. Gross profit for the 3 months ended December 31, 2023, was $7 million, 53% higher than $4.6 million in the fourth quarter of 2022. Gross margin percentage was our highest yet at 72%, compared to 63% for the fourth quarter of 2022.
This brings us for the full year to gross profit of $23.2 million, 58% higher than the $14.7 million for 2022. Gross margin percentage for the full 12 months of 2023 was 68% versus 62% for all of 2022.
As partners take on more professional services and the proportion of our SaaS revenue to professional services revenue expands, we expect the gross margin percentage to continue inching upwards year-over-year in 2024.
Operating expenses grew 28% in the fourth quarter to $10.1 million versus $7.9 million in the fourth quarter of 2022. The largest contributor to this growth includes sales and marketing expense of $4.4 million in Q4 2023 versus $3.4 million in Q4 of 2022. Note that our VALIDATE conference in Q4 for both periods drove much of the increase from Q3.
R&D expense, net of capitalized R&D for Q4 2023 was $3.8 million compared to $3 million in Q4 of 2022, and relatively flat compared to Q3 2023. Total operating expense for the full year was $36.7 million, 50% higher than in '22, driven primarily by a 62% growth in sales and marketing expense to $13.8 million versus $8.5 million for 2022. A 43% growth in R&D expense, net of capitalized R&D, to $15.8 million for the full year compared to $11 million for all of 2022. We saw growth in OpEx come down every quarter in 2023 and plan to maintain a more measured pace of OpEx growth throughout 2024.
We ended the quarter and the year with total annual recurring revenue, ARR, of $37.4 million, up 55% from the end of 2022, when it was $24.2 million. Virtually all of this ARR is now coming from SaaS licensees, which grew 57% to $37.3 million from $23.7 million at December 31, 2022. The difference between total ARR and SaaS ARR comes from maintenance fees, which were $0.1 million at the end of 2023 compared to $0.5 million at the close of 2022, with all but one significant customers having transferred to SaaS.
Moving on to the balance sheet and use of cash. We've had some developments here since our last report in November. The first of which was a drawdown of our debt facility in December of EUR 5 million, which is a little over CAD 7 million. We supplemented this earlier this month with an equity offering through a bought deal from a consortium of investment bankers in Canada. The offering added approximately $18.5 million to our cash balance.
As a result, we are well capitalized to transition towards breakeven and profitability over the next several quarters as we execute on our go-to-market motion, continue to build the Kneat platform and fortify our internal processes and operations to accommodate the company as we scale.
For reference, we have filed our audited consolidated financial statements and MD&A on SEDAR, and they are also available on our website.
I will now turn the call over to our operator for your questions.
Thank you. The floor is now open for your questions. [Operator Instructions] Your first question comes from the line of Christian Sgro from Eight Capital. Please...
Congrats on a strong close to the year. In the disclosures, you noted that expansion activity drove most of the software or SaaS growth through the year and in Q4. So just wondering if you could give any color around what type of expansion activity it was? And maybe to focus the question a little bit, how much of that expansion activity would you say is, you know, geographic or new site expansion as you move across your big customers?
Yes. So expansions with our existing customers, as part of our TAM white space that we have there, is very strong. And I guess there is a tendency for it to happen in the latter part of the year stronger than the front of the year. That's one of the things we will have there.
And then we have -- it's coming primarily from what we would term as enterprise and strategic customers. And there's also customers in there that would have gone live early in the year that would also be seeing some expansion. But there'll be a smaller proportion of those. So by and large, the expansions are coming from the customers that would be more than a year with us type thing, or most of the year before they start in the expanding proper.
That's helpful on the timeline. I have one follow-on there for your newer customers. Do you expect as Kneat scales that you could scale them faster? And do you maybe expect them to? Or is that 3- to 6-year full-scale timeline pretty consistent, even with the newer logos?
I would say, yes, there is a very good opportunity for that, especially given that we have a stronger focus on account management and customer success management and tech support going in -- into the future that we built up that function later last year.
And also the maturity of Kneat in the marketplace, its reputation of being tried and tested technology that works and delivers the compliance aspect all the needs that other systems may struggle with. So we're known for being successful. We're known for being an easy-to-use software. And that's constantly getting stronger. And I think that's feeding into a more aggressive expansions by our customers.
Just one more question from mine, and then I'll pass the line. But on the strategic hires going forward, Eddie, maybe 2 parts, does that suggest a broader, slower pace of hiring across all functions? And then by strategic, does that mean would you call it, senior leadership or more organizational additions? Just what do you mean by that commentary?
Yes. I suppose there's a bit of both. But I would say that over the last year, 1.5 years, we strengthened a lot of our functions, right? And in the back end of last year, we were probably more focused on customer success efforts of the business. And so I would still see strategic being more customer success functions, a bit more on the sales. But generally speaking, and a little bit of leadership as well.
Generally speaking, we're going to be flat on our expenses through the year is what we've more or less said late last year as well, and that is holding true. We still believe we're growing into a strong team that's really performing and delivering for us on the marketplace.
Our next line question comes from the line of Rob Goff from Echelon Capital Markets.
And congrats on a very strong quarter, guys. I just wanted to maybe focus on the revenue line, where Eddie, you did -- I believe you commented that you look forward to adding more customers in '24 versus '23. Would that apply to the enterprise level of customers?
Yes. So we -- I guess our business is very much focused on enterprise and strategic. So enterprise is kind of layer down below strategic from our perspective. And I would say that we're seeing a quality strong pipeline developing all the time, and we expect that to continue through '24.
So there is -- obviously, we would say that last year, to some extent, there was a slowdown in deals here and there, and a little bit of -- because of the macro environment. We still don't know how that will pan out to the year. But generally speaking, it's not significantly impacting us.
But if you go down to smaller customers yesterday, we're looking to do more of our smaller customers to our partner channels as well as we go through '24.
And then perhaps on the spending side of things, could you talk to your R&D spending and how that relates to your moves to add new services and expand your TAM?
Yes, absolutely, Rob. This is really -- the guys -- I mean, the R&D team is doing a great job. And as is the rest of all the other functions. But I would say that we're very excited about what the guys are [indiscernible]. And we saw the newest release of our products, which will go on the market very soon, and it's very powerful. And we believe that it's really consolidating our ability to expand with our customers and grow into that addressable market that we have in front of us.
So we think that we're -- what's coming out is going to be really exciting for the market, and we're looking forward to that. So the R&D team is doing a great job. They're building, as I say Rob, of they're building, and I said it before, they're building for great closeness to our customers, real intimate customer relationships, building here now, but also building the future for Kneat, as well in parallel.
And if I may have a follow-up for passing along. Could you perhaps talk to the role of that product upgrade and just how significant that might be for customers?
Yes. So it's -- I would say in the release of -- our next release is due probably later in the quarter and -- but it will probably take a bit of time before it gets into customers' hands and all of that, right? So as you go through the year, we'll begin to see that in customer success, right? So -- but it's still part of the -- what we would call the validation space. We're still focused on validation space and ensuring we're giving as much value as we can to our customers as broadly and as deeply as we can in that space.
Our next question comes from the line of Doug Taylor with Canaccord.
This is [ Neil ] speaking on Doug's behalf. First off, congratulations on the strong quarter, Eddie and Ryan. The first question that we have is just with respect to the pipeline. We had some strong momentum in 2023. And you spoke to some good momentum into the new year. Just wondering if you could speak a little bit more to the mix of customer conversations you're having between traditional pharma and kind of the CPG and other markets kind of adjacent to this the highly regulated life sciences space.
Yes. So there's a bit of everything there, but I would say that our pure play -- in our pure market, which is biopharmaceuticals manufacturing and the supply chain around that, is really key where most of our conversations are, right? And then adjacent to that, we have the consumer product goods companies as well, [ Neil ].
And there -- we have -- in our customer base, we have some very large consumer product goods companies. And they are also expanding with us, and we're also having conversations more. So we expect to continue to see the supply chain and the consumer product goods companies being -- coming through with customers in due course.
So we have a very diverse, I would say, pipeline from that perspective from that space. We have a lot of -- we turn large customers supplying into our core, which is biopharma manufacturing. We're a lot of big companies supplying in there, engineering companies, IT service providers. And we have a value proposition for all of these also, and that's evolving as we go forward.
So we would expect to see good return from the supply chain as well. And that also includes contract manufacturing organizations and the like, and research organizations. So we have a value proposition for all of them. And that's what we term as our life sciences $2 billion TAM.
And then just a follow-up, kind of working within one of the follow-up to questions earlier, just with potentially hiring being a little bit slower. Just wondering, as you approach the TAM that you said touches so many different industries, are there any kind of reshuffling or allocation or reallocation of resources around certain opportunities where you're seeing some particular momentum? I'm just wondering how you, I guess, configure your go-to-market, depending on where you're seeing the strongest opportunities over the coming year.
Yes, I would say that the key thing from our -- talking to different segments in that space doesn't dilute any of our capabilities. In other words, the people who are selling the pharma manufacturers can also sell to consumer product goods companies. The conversations are very much the same.
What I would say is that what we would be focusing more on is on the smaller customers -- that we would try and have our strategic partners play more part in that space. And they would be from an -- a life cycle management of the customer, for example, through the partner. So we're beginning to see that. And we've launched that this year, and we're pushing that further so that Kneat, then, would be more focused on enterprise and strategic and that the channels would take more ownership of the small and medium customers.
But it's not perfect, crosses over a wee bit so -- and all that. But there would be the only sort of changes we would be from an organizational perspective focused on at this point in time, [ Neil ], but there's -- we're constantly evaluating everything and strategy tweaks a bit as we go all the time.
And just one more question. You had mentioned the expectation to be able to approach breakeven over the coming year. It seems -- I think if I'm not mistaken on EBITDA metrics. Just wondering if you could speak to this below the line, what you're seeing in terms of expected working capital dynamics over the coming year? Just wondering if you could speak to what you're seeing there.
Okay. [ Neil ], I'll pick up that. It's Hugh here. So yes, the fundraising has given us a very strong balance sheet and puts in a very strong position. And I believe that it puts us in control of our own destiny. But in terms of the actual expenses, et cetera, yes. So as Eddie talked about, previously, we're not planning to add a lot of head count. I mean, there will be, as you mentioned, some strategic adds, et cetera. And obviously, some inflation type growth in expenses, annual reviews, et cetera.
But yes, no, I mean, we're absolutely moving into the direction of breakeven. And on an EBITDA basis, an adjusted EBITDA basis, I think we can anticipate going that direction over the coming quarters, maybe not before the end of this year, but certainly as we go into '25. I think that's not an unreasonable expectation.
Our next question comes from the line of Justin Keywood from Stifel.
Just on the opening comments, I think I heard the opportunity with existing customers, the ARR, is $65 million. I believe that's up from $50 million year-over-year, if that's accurate. And is that, I assume, reflective of the amount of new customer wins? And also if there's any indication of timing when that opportunity with existing customers could be achieved?
Justin, yes, that's a good question. So we would have reviewed that number from a ground-up perspective based on the traction we have with existing customers, and I would say, extrapolating that into the space at large.
And yes. So it's based on newer customers that have come into our customer base and also reviewing existing customers and seeing if they're still on track. And generally speaking, nothing has really changed.
And the timing of them, I would stand over the other question, as well, right, is that I would say these larger strategic cost as being a 3- to 6-year expansion for validation across all their sites to all their different use cases, of which there are many. There can be 12 different use cases, 12 different validation processes, and expanding them to all users across all sites -- when we think of our lead customer having 9,000 users across the globe. So we would say being 3 to 6 years, depending on how quickly they move internally.
But as I say, that time line is coming down, and it's coming down because of the proven -- the validated status of Kneat in the marketplace and the company behind Kneat, and the success that we get through our customers. I mean there isn't a customer out there that doesn't love working with Kneat and its products, right? And that is becoming broader and broader. And the reference ability now when you're signing a customer is pretty, it's hardly even asked when you're dealing with Kneat now.
Any indication on the type of EBITDA margins that could be achieved at that level of scale, the USD 65 million.
Well, I mean, ultimately, Justin, our gross margins are moving up and our EBITDA margins are coming up. I'm not going to put an exact number on where we could expect EBITDA to be at that sort of EUR 65 million level. But I am happy to sort of say that we expect to move towards the sort of normal EBITDA type margins as -- over time over the next number of years, we would expect to get to those normal levels.
And maybe a follow-up, Hugh. On your opening remarks in regards to gross margin, I think I heard there's going to be some slight expansion this year. Any indication of what that could be?
Yes. I mean, again, that, to a significant degree, has been driven by the mix of professional services to SaaS revenue. And as we continue to grow our SaaS revenues, then that mix is going to continue to move towards SaaS and be more reflective of the SaaS margins that we are achieving.
So I mean, as I think you may have heard me saying before, I mean, we achieved -- we've been achieving very low margins and have been able to achieve very low margins on our professional services. They're very much -- professional services is to drive the growth in licenses and license revenue. So yes, so I mean, I think realistically, we're probably -- there may be -- the first-- we won't necessarily see that tick up happening in the first quarter, but in subsequent quarters, as the ARR and revenue grows, yes, we're going to see small tick-ups.
We're at 72%, which is a very nice increase from where we were last quarter and last year. So I think we've made a very significant jump in this quarter. We're not going to see that level of increase repeated over the quarters of 2024, but yes, there'll be slight pickups.
Maybe just a quick follow-on. So 72% in Q4, would that be a good level to build on, maybe assuming flattish results for Q1 and then upticks thereafter?
Yes. I mean, Q1, I mean, it maybe 1% or 2% down. But then back Q2, we'll be back in and taking off from there, yes.
Our next question comes from the line of Gavin Fairweather with Cormark.
Congrats on all the progress. A few for me. When you think about your earlier cohorts of customers, like pre-2020, are you still finding ways to grow those customers through your increased customer success efforts and some of the new modules you're releasing? I mean you talk about that 3- to 6-year time line towards full deployment, I'm curious for those earlier cohorts if you're still finding ways to expand them even though they might be a bit further along in the initial use case?
Yes. So exactly. I mean -- so the eValidation space, as I said, is potentially 12 use cases across multiple different functions and different segments. And there's different variations to this in different places. We're constantly building out the technology to go deeper and broader within those spaces. So yes, we are certainly still expanding customers that would have been there, as you referenced, pre-2021, 2020 or whatever. So they're constantly spending.
But just big picture thing is that our view is to expand them all -- continuously expand them. And we see -- we're always looking for opportunity to do that. And as I say, I often say in the call is that we're building the future of our platform in parallel with the current. So we expect to see these customers expanding for a long time.
And then just the new addition in the senior leadership team with Colum, it sounds like part of his duties are doing a bit of a revamp on how the channel program is working. Maybe you can just discuss a little bit how you're kind of tweaking that program? And ultimately, what impact are you trying to drive with those changes?
Yes. Colum is very focused on our -- the operational side of things and the customer success side of things and professional services. So it's about bringing -- continuing that customer intimate engagement and supporting our customers' success of our product across all areas, right? And ensuring that we really have these intimate understandings of our customers, as well, around where we should be going for them. And there's a lot of gathering information gathering through that.
But there's also a customer success happening to, first of all, utilize our software to the fullest and then expand it further. So there's a lot of work going on there. And I guess that's where the strongest focus for Colum is, is supporting the sales function with customer success and tech support right where it comes to engaging with the customer. That will be the key focus, amongst other things.
So we've done a lot of work there at the back end of last year, put strategic people in locations there. And we are seeing green shoots coming through that as well, Gavin.
Okay. Anything specific in terms of the channel or partner program that you would highlight in terms of changes to how it's running or operating?
The partner program, we have taken it from what it was, we would say, implementation partners. Partners will come up and become very strong at implementation and have real deep domain knowledge and close to the customer. These partners are now becoming more strategic partners and reseller partners. So they now -- we would have reseller agreements with these partners now. And so that's the change there. And again, that's under Colum's area as well.
So yes, so more focus on strategic partners to deliver the full life cycle of the customer from selling all the way through to deployment and post-sale support with Kneat being the direct SaaS supporter, obviously, of that.
And then just from reading through the MD&A, it sounds like you saw a little bit of churn in 2023. Would it be fair to say that, that was kind of smaller customers, smaller dollars? Maybe you can just kind of expand on that a little bit and what you saw.
Yes. Yes, there was a few customers there. And I think the climate probably affected a few of them. A few of the smaller customers went out of business. There was a couple of those very small ARR impact on the company, as you can see from the NRR.
And then there was a couple of smaller customers that would have had -- we're looking to start the validation division, one particular customer is looking at starting the validation division, but they never went through with that and they didn't need a software in year 2.
So -- but very limited, nothing that would suggest anything like that they don't need or it's just general reasons for us going forward using Kneat. [indiscernible], yes.
Since there are no further questions at this time. Eddie, I'll turn the call back over to you.
Thanks. Before we sign off, I will leave you with 3 key takeaways. First, our results show that Kneat is gaining ground in life sciences validation. Life sciences goes beyond pharmaceutical and medical device companies. It includes contract development manufacturers, consumer health, and engineering and equipment companies that are helping these companies -- our customers.
Second, we continue to build because there is much more our platform can do for our customers. And finally, we are getting closer to profitability, an essential element for all long-lived companies, and Kneat plans to be around for a long time.
Thank you for listening. And as always, a big thank you to the Kneat team that makes our results possible. Thank you.
This concludes today's conference call. You may now disconnect.