Akerna Corp.
Q1 2021 Earnings Call Transcript

Published: 11 May 2021

[Operator:]

Good morning and welcome to Akerna's First Quarter ended March 31, 2021 Financial Results Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Erica Mannion, Investor Relations for Akerna. Thank you. You may begin.

[Erica Mannion:]

Thank you, and welcome to today's first quarter ended March 31, 2021 conference call. On the call today are Jessica Billingsley, CEO and Chairman of Akerna; and John Fowle, CFO of Akerna. Before management begins with formal remarks, I'd like to remind everyone that during this conference call, certain statements will be made that are forward-looking statements within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995.

[Jessica Billingsley:]

Good morning, everyone. Thank you for joining us today. Our first quarter was a strong start to 2021 with software revenue growth of 62% year-over-year and 10% sequentially. The Our business as a whole grew 31% year-over-year with software growth, offset by softness in our consulting business. Our total SaaS ARR is currently $15.7 million, a 73% increase over the same period last year. In addition to top line growth, the restructuring activities taken in 2020 continue to deliver results. With adjusted EBITDA improving 42% year-over-year and 4% sequentially in the March quarter. We are encouraged by the pace of demand in the first quarter, and we look forward to continued growth in the quarters ahead. Our focus on the multistate international and emerging enterprises in the more than $20 billion global cannabis industry continues to serve us well. This quarter, we saw churn improve by 35% sequentially while consolidation continues with many of our larger clients significantly increasing their footprints. Our average B2B deal size has also increased by 23% year-over-year. On average, MJ Platform clients number of transactions tracked in our system has increased by 51% year-over-year. MJ Platform delivered 49 of uptime in the quarter and our average client satisfaction rating across all products continues to exceed 8 on the scale of 1 to 10.

[John Fowle:]

Thanks, Jessica. Today, I'll provide an overview of our financial results and key business metrics for the first quarter ended March 31, 2021. As a reminder, these results are discussed in further detail in our Form 10-Q which will be filed shortly with the SEC. Financial results reported today are preliminary. Final financial results and other disclosures will be reported in our quarterly report on Form 10-Q and may differ materially from the results and disclosures today due to, among other things, the completion of final review procedures, the occurrence of subsequent events or the discovery of additional information. We encourage you to review the filing in detail. This past quarter, we continued to deliver on our core objectives of expanding software revenue optimizing our operating infrastructure and improving profitability. We work hard each day to deliver strong results like those produced this quarter while simultaneously investing aggressively to build the compliance platform of the future. With software revenue up 10% sequentially, approximately $1.2 million of new ARR bookings and the average booking amount up 23% year-over-year, the growth momentum of our business continues to improve as larger, multi-location and multistate operators increasingly implement our solutions to solve their business needs. As evidenced by the continuing increase of transaction volume, which was up 67% year-over-year and retail order value, which was up 29% year-over-year, our clients' operations are scaling rapidly.

[Operator:]

. Our first question comes from the line of Brian Kinstlinger Kinstlingerwith Alliance Global Partners.

[Brian Kinstlinger:]

First, with so many regulating cannabis -- with so many states, as you highlighted since November regulating cannabis, can you talk about your positioning and even early conversations with potential licensees? I take a lot of them are existing licensees that you have? And how many states you're evaluating or have determined a closed-loop system is the way to go of those 7.

[Jessica Billingsley:]

Great questions. Let me actually take the lease portion of that question first, Brian. We're in a number of conversations that I mentioned in my prepared remarks. And we've either recently responded or are responding to RFPs from new states. It is worth noting, though, that due to the length of the RFP process, even if new ones were issued in the near term, it's unlikely that we would see revenue in calendar 2021. And I can also share, as far as the closed-loop model piece of that question goes, that our contacts in Pennsylvania and Utah are regularly contacted about this, particularly in Pennsylvania, which has a very robust and healthy program that appeals to industry and enforcers alike. And we do expect it to serve as a model in future states based on the seats we know are having those discussions. As far as B2B licensees, existing clients who are in discussions with us about expanding their footprint into new states. I think you see that reflected in our continued robust and growing pipeline, as we mentioned in our prepared remarks. And I can share anecdotally that we are continuing to have conversations with the clients and formulate plans for large rollout plans across all of their locations.

[Brian Kinstlinger:]

Great. And then you've been holding it around $1 million of annual run rate bookings per quarter for some time, plus or minus, do you expect that can accelerate? Given not only the new state regulations, which you highlighted is probably a 2022 event, and can bookings accelerate given the opportunities you have just with your existing client base in existing states.

[Jessica Billingsley:]

Well, we certainly do expect to see some acceleration. There was really no new markets last year in 2020 throughout the COVID-19 year, if you will, and the impact, and we continue to just see strong month-over-month and quarter-over-quarter performance in our bookings. as the many new opportunities that are available to come online, we do expect to see some acceleration in bookings as well.

[Brian Kinstlinger:]

Great. I think you were trying to communicate, and correct me if I'm wrong, that you believe you can grow software revenue 30% organically with your existing client base, I think you might in an existing state, but maybe I'm mistaken. When do you think you can begin achieving those types of growth rates on software revenue organically?

[Jessica Billingsley:]

John, do you want to take that one?

[John Fowle:]

Yes, I can take. Yes, I think -- I mean I think if you think about -- look at our first quarter, I mean, 10% organic growth in just a quarter, I mean, you could certainly extrapolate how that would play out over an entire 12-month period. We're going to be continued -- have that continued focus on driving that organic growth and looking for opportunities to sort of land and expand. And I think we saw a little bit of that in the first quarter as we were able to successfully expand with a number of our clients as we certainly talked before about some of our data products in some of our AI and MG analytics tools and being able to sort of upsell that as some of our clients grow. So I think overall, from a -- just if you look sort of sequential growth from Q4 of last year to Q1 this year at 10% organic growth, we're certainly -- we're happy with that, and we're going to certainly continue to sort of look to achieve sort of those numbers in the quarters ahead.

[Brian Kinstlinger:]

And maybe to that end, can you talk about how your analytics products being accepted in the marketplace? And when do you think that will become a meaningful catalyst to software revenue.

[Jessica Billingsley:]

Well, Brian, I'll take that, at least the first part of that. As we shared in our prepared remarks, we have seen contribution from MJ Analytics double. in this past quarter over the quarter before. So we're -- and I can also share that we are seeing large close and attach rates on new deals for that product, and we expect to see ongoing contribution from it.

[Brian Kinstlinger:]

Great. Last question I have on the consulting side. It sounds like new states are moving quickly right now with the modest quarterly revenue can I assume that you're only working with maybe one state right now? And then what is the competitive landscape look like on these consulting project? There are a number of other companies that are bidding on these projects? Is there a lack of competition?

[Jessica Billingsley:]

On the competition side, we performed extremely well versus our competitors, we're not the least expensive solution out there. There's probably a handful of competitors in any market. However, we do have the, I believe, the best win rate for applications in that space and in the industry and our reputation very well known. We are currently -- it's -- we're actually seeing a combination of projects that were placed on hold at the beginning of the pandemic start to come back as well as new projects from recently passed state initiatives. We are working in a handful of states currently and progress on those new state initiatives continues to be mixed. Some states such as Arizona are moving quickly given their existing medical framework while other states such as New York and New Jersey, they're moving more slowly through the process. So as a result, we do expect our consulting revenue to remain soft in the first half of 2021. However, with our strong backlog and growing pipeline of opportunities, and we believe the second half will be meaningfully stronger.

[Operator:]

. Our next question comes from the line of Martin Toner with ATV Capital.

[Martin Toner:]

Good morning, everyone, and congrats on a good quarter. I'd like to ask about Viridian and ask us to talk about what the synergies between the businesses will be? Are there current customers that you think it would be beneficial for both of you guys for them to graduate to the Viridian solution? Will there be any integration between the Viridian solution and some of your other ones? Are there things that you can take from different solutions to improve any of the other ones, stuff like that.

[Jessica Billingsley:]

Great question. So first, I guess, let me just share the core synergy that we see between our products. After working to develop our own compliance capabilities, the Verdient management team kind of direct appreciation for the challenges of replicating the depth and breadth of our compliance gateway coupled with the integrations of our ecosystem and added functionalities such as our retail and payment solutions, we realized that integrating our platform opportunity to unlock significant synergies on both sides. The primary synergy we'll start with is integrating the Viridian product to our compliance gateway and ecosystem. And it should take about a quarter to complete the initial integration steps with the realization of synergies through our first year. As regarding which products would be with yield synergies, both Akerna and Viridian have a pipeline of clients to have already indicated interest in the enhanced product offerings. In addition, of course, to the network effects of upselling to our combined existing client base. So not only do we expect to -- and are we already in conversations for the Viridian product with our existing client base, but we also have been in discussion with Viridian clients about additional products and services that we can honor as well.

[Martin Toner:]

That's great. Super. So where do you require a lot of R&D spending?

[Jessica Billingsley:]

As we mentioned previously, Viridian does contribute positive cash flow synergies, and we have enough R&D sending in there to complete the integration work to our compliance gateway, which will realize some synergies by doing compliance in one place for all of our product lines. And then we certainly have enough and appropriate budget for ongoing product development across our product lines. John, would you want to add anything to that?

[John Fowle:]

No, I think that's a really good way to think about Viridian to Martin's question about integrating sort of with the broader current ecosystem to drive that cohesive technology platform with our compliance gateway. So I think that will be really a good way to say it.

[Operator:]

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Ms. Jessica Billingsley for closing remarks.

[Jessica Billingsley:]

Thank you, operator. We're the technology ecosystem for cannabis, serving operators, governments and brands. Our ecosystem strategy and strategic investments are focused on locking up the tech spend of the enterprise cannabis businesses and solving with technology, the growing demand for increased supply chain transparency among consumers and governments. We thank you for your interest in Akerna and we look forward to sharing our progress with you as we move forward.

[Operator:]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.