Echelon Capital Markets analyst Rob Goff is being a little more cautious on validation software company kneat.com (kneat.com Stock Quote, Chart, News TSXV:KSI), giving the company a “Speculative Buy” rating and dropping his target price from $4.90/share to $4.40/share in an update to clients on Friday. Kneat.com is an Irish developer and supplier of software for data and document management within regulated environments in Ireland, Canada, the United States and internationally through its KneatGx platform, which focuses on validation lifecycle management and testing for the biotechnology, pharmaceutical and medical device manufacturing industries. Goff’s updated analysis comes after the company released its first quarter financial results for the 2022 fiscal year, with Goff noting that his target adjustment is more of a recalibration of valuation parameters given that forecast modifications are relatively small. Kneat’s financial quarter was headlined by $5.2 million in revenue for a 121 per cent year-over-year increase, while beating out the Echelon estimate of $4.6 million and the consensus projection of $4.7 million. In breaking down the revenue streams, SaaS license fees were the company’s biggest driver at $3.3 million to account for 65 per cent of the revenue mix while being up 8.7 per cent sequentially and 156 per cent year-over-year, though it still came in slightly below the Echelon expectation of $3.4 million. The SaaS success also helped the company increase its ARR to $13.4 million, marking a 134 per cent year-over-year increase. Professional services accounted for a slight beat at $1 million (19 per cent of the revenue mix) compared to the $0.8 million estimate from Echelon and producing a 41 per cent year-over-year increase. Meanwhile, on-premise license fees also produced a beat at $0.7 million (13 per cent of the revenue mix), ahead of the $0.2 million Echelon projection, and maintenance fees were in line at $0.2 million. On the margins, Kneat produced a beat in its gross margin, with its 63 per cent report ($3.3 million gross profit) significantly outpacing the Echelon forecast of a 54.8 per cent margin ($2.5 million gross profit). The company’s EBITDA was a loss of $0.4 million, though that still beat the Echelon estimate of a $0.7 million loss. “The first quarter marked a solid start to the year for Kneat. Our investment in sales and marketing continued to drive robust new customer activity,” said Eddie Ryan, Chief Exective Officer of Kneat.com in a May 12 press release. “Within our customer base we count 8 of the top 10 and the majority of the top 20 biggest pharmaceutical companies, several top tier consumer packaged goods companies and both large and small suppliers to these organizations. These companies are selecting a system to manage their global validation which is a critical regulated business function.” “We are proud to be trusted by these global leaders to help them deliver their highly regulated products to their customers, efficiently and to the highest quality standard,” Ryan added. Kneat was also busy in terms of onboarding, having added nine net new logos to expand its portfolio to 57, with most coming in the midmarket life sciences industry but including supply chain clients and adjacent market clients. “Management indicated investments in direct sales with a focus in the US/European regions will continue throughout the year with an eventual shift towards winning new business through partnerships,” Goff said. “Across its three to four major on-premise license customers, KSI looks to see its last one migrate to SaaS in 2023.” Goff has made minimal movement in his financial projections, slightly raising his 2022 revenue target from $24.2 million to $24.3 million for a 57 per cent year-over-year increase, and also raising his gross profit forecast from $13.2 million to $13.7 million for a margin of 56 per cent, though he did increase his adjusted EBITDA loss projection from $2.4 million to $3 million. In terms of valuation, Goff forecasts a drop in the EV/Revenue multiple from 13.5x in 2021 to 9.2x in 2022, while he forecasts the EV/Gross Profit multiple to dip from 22.4x in 2021 to 16.2x in 2022. Looking forward, Goff believes Kneat presents a formidable investment option. “We believe the Company’s transition into a SaaS model together with strong organic growth strategy execution present an attractive investment as KSI shares are currently valued at 9.2x/6.8x 2022/23 revenues and 16.2x/11.6x profits in the context of larger, slower growth peers Veeva Systems and Aspen Technology, Inc.,” Goff said. “We see KSI shares continuing to command a premium to their Canadian peers given the strength of its land and expand profile and attractiveness as a mid-longer-term takeout.” Kneat.com’s stock price has dropped by 32 per cent through the course of 2022 after starting the year trading at $3.85/share. However, it has experienced a slight rebound since closing at a 2022 low of $2.38/share on March 7. At press time, Goff's new $4.40 target represented a projected one-year return of 61 per cent.