Akerna Corp.
Q2 2021 Earnings Call Transcript

Published: 23 Mar 2021

[Operator:]

Good morning and welcome to the Akerna’s Quarter Ended December 31, 2020 Financial Results Conference Call. Today’s call is being recorded. At this time, I’d like to turn the call over to Erica Mannion, Investor Relations for Akerna. Thank you.

[Erica Mannion:]

Thank you and welcome to today’s quarter ended December 31, 2020 conference call. On the call today are Jessica Billingsley, CEO and Chairman of Akerna and John Fowle, CFO of Akerna. Before we begin our 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. Such words as estimate, projected, expect, anticipate, forecast, plan, intend, believes, seeks, may, will, should, future, propose and variations of these words or similar expressions or versions of such words or expressions are intended to identify forward-looking statements. These statements include, but are not limited to statements regarding the future growth and prospects for Akerna and statements regarding expected future revenue recognition. These forward-looking statements are not guarantees of future performance, conditions or results and involve several known and unknown risks, uncertainties, assumptions and other important factors, which could cause actual results or outcomes to differ materially from those discussed, including risks related to changes in the cannabis market and risks related to the impact of the COVID-19 pandemic. These risk factors are more fully described in the current’s filings with the SEC. Forward-looking statements speak only as of the date they are made. Akerna undertakes no obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required by law.

[Jessica Billingsley:]

Thank you, Erica and good morning everyone. Thank you for joining us today. We stated on our last quarterly call our intent to change our fiscal year end to December 31, which we have done and therefore, any references for the quarter period during today’s call are references to our fourth calendar quarter for 2020 ended December 31, 2020 and references to the year are references to the calendar year of 2020. 2020 was an important growth year for Akerna. And I am pleased to share in the quarter we grew our software business by 38% year-over-year. Our business as a whole grew 24% in 2020, with our strong software growth, offset by a contraction in our consulting business which was impacted by pandemic-related shutdown and delays. As businesses and governments have adapted, we are encouraged to see our quarter-over-quarter consulting revenue increased by 75%, while our software revenue also grew sequentially in the December quarter. Our total SaaS ARR is currently $13.8 million, a 42% increase over the same time last year. In addition to top line growth, the restructuring activities taken in 2020 are delivering results, with a 36% sequential improvement in adjusted EBITDA in the December quarter. We are encouraged by the pace of demand we saw going into 2021. We look forward to continued growth in the quarters ahead. As has been a theme for much of 2020, our focus on the multi-state, international and emerging enterprises in the $21 billion global cannabis industry continues to serve us well. This quarter, we saw continued churn improvement by 41% sequentially, while consolidation continues with many of our larger clients significantly increasing their footprints. On average, MJ Platform clients’ number of transactions tracked in our system has increased by 63% year-over-year. Our average MJ Platform deal size has also increased by 21% year-over-year, further illustrating the value of our technology to the important mid-market and enterprise client base. MJ Platform delivered 99.97% uptime in the quarter, and our average client satisfaction rating across all products now exceeds the 8 on a scale of 1 to 10. With leading market share driven by the breadth and capabilities of our platform, we believe we are well-positioned to capture the opportunity in front of us as the cannabis industry expands in the years ahead.

[John Fowle:]

Thanks, Jessica. Today, I will provide an overview of our financial results and key business metrics for the quarter ended December 31, 2020. As a reminder, these results are discussed in our earnings release for quarter ended December 31, 2020. Further details in the 6 months ended December 31, 2020, including our audited financial statements for that period, will be in our Form 10-KT, 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 annual report on Form 10-KT 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. Before I review the financial results, I’d like to again highlight the administrative change. As discussed last quarter, our Board of Directors adopted resolutions to change our fiscal year-end from June 30 to December 31. The transition period from June 30 to December 31 will be covered by filing a transition report on Form 10-KT for the 6 months ended December 31, 2020. This change was made to simplify and standardize our operations for enhanced comparative analysis and reporting for both internal and external benefits. 2020 was a period of rapid transformation for Akerna. We have matured as a publicly-traded company. We completed 3 acquisitions that have expanded our footprint and provided additional TAM. We completed 2 financings, giving us the capital to accelerate growth. And we have made remarkable progress on internal initiatives of building scale, developing our software ecosystem and while continuing to focus on client experience. The execution rigor is driving efficiencies across our income statement. In the fourth quarter, gross profit margin was 66%, a record for Akerna. Over the last 6 months, we have improved adjusted EBITDA, 46%. This past quarter, we had strong sales to net new clients as a result of building momentum in both lead generation and sales, recording $800,000 of new ARR bookings. Our average booking amount is up 21% year-over-year, which illustrates the success we are seeing with larger multi-location and multi-state operators. As Jessica mentioned, we continue to have a strong software and consulting pipeline.

[Operator:]

Thank you. Our first question comes from the line of Brian Kinstlinger with Alliance Global Partners. Please proceed with your questions.

[Brian Kinstlinger:]

Hi. Good morning guys. Thanks for taking my questions.

[Jessica Billingsley:]

Good morning, Brian.

[Brian Kinstlinger:]

You’ve obviously – how are you, Jessica? So you’ve talked about consulting. Obviously, a lot of states have regulated and most recently, Virginia. Can you talk about maybe a little bit more, have you won consulting projects that you expect to see ramp over calendar 2021? Yes, you said it was lumpy, but should we continue to expect significant increases? And the impact on margin would be helpful.

[Jessica Billingsley:]

Sure. Well, I’ll take that first part and then let John speak to margin. On the first part of your question, we’re seeing a combination of both projects that were placed on hold at the beginning of the pandemic start to come back in terms of where we’re able to execute on them and recognize that revenue from the booking, as well as new projects from recently-passed state initiatives. So one example is the state of Georgia resumed accepting applications. We were able to help a number of clients with those applications, and we’re already signing clients in some of the new states. Now I do want to note that we do expect to see continued lumpiness in our consulting revenue. Sometimes quarter to quarter, those bookings may not translate directly into revenue recognition, although we do expect a return to historical levels roughly this year. John, do you want to speak to how that impacts margin?

[John Fowle:]

Sure. So, good morning, Brian. How are you? As we have shared before, our cost structure really and our cost of sales is largely fixed, so as it relates to consulting, that’s a highly specialized group of people, and we try not to flex them up or down. So we maintain sort of the continuity of those groups. So as we bring on new revenue and new business, that, as you can imagine, comes with a very high-margin profile and just drops right through the bottom line.

[Brian Kinstlinger:]

Yes, good. Great. So in terms of the states in November that regulated in different ways and Virginia as well, are any discussing a single source software provider like Utah, for example? And then can you talk about when we should and how we should think about new state regulation driving software revenue? Is that a year after? Is it months after?

[Jessica Billingsley:]

That’s a great question. And it’s mixed, as you might expect. So for instance, we’re starting to see activity in New Jersey and Mississippi, while South Dakota, which legalized both medical and recreational with no prior framework, is moving more slowly. So we do expect to see that be mixed to some extent. I could share that we are in conversations with a number of states, both new and existing, about our Leaf Data Systems product. There have been no new RFPs issued since our last call, but we are in conversations with several states. The pipeline will result in consulting revenue first and then software revenue following. And we expect something of a rolling thunder if some of those markets will be faster than others.

[Brian Kinstlinger:]

But are any states talking about on the speed to sale tracking software, requiring their licensees to use one single source. Is that in discussion at all or do you don’t see that from any of the new states?

[Jessica Billingsley:]

We are in discussion with a couple of states who are very interested in the Pennsylvania, Utah model.

[Brian Kinstlinger:]

Got it. Great. And then can you quantify the dollar value, you mentioned the growth, but the dollar value of cannabis that’s been processed through your platform? And if you were able to provide payment solutions, what would that mean from a revenue prospective for the cannabis? And then similarly, once the Priority Solutions technology is available for you to use, what would that – what market does that give you for CBD and hemp if everyone who sold CBD and hemp use that solution?

[Jessica Billingsley:]

You want to take that one, John?

[John Fowle:]

Yes, I’ll take that. Brian, yes, so if – so, let’s frame it correctly just to make sure. So, if we assumed every one of our customers today on MJ Platform at a retail location was processing through our transaction platform, that would probably – plus or minus $20 million, I think, is the right way to think about it in terms of total size, in terms of our revenue share with our service provider.

[Brian Kinstlinger:]

Yes. And then on this hemp, CBD side, the same question, right, because that is legal. So once that solution is ready and can be integrated, if everyone who sold CBD and hemp use that solution, I take it it’s a smaller addition, but what would that look like?

[John Fowle:]

It’s an order – it’s significantly smaller as an order of magnitude. I mean, obviously, a large part of our clients today are on the cannabis front. Just to be frank, I haven’t – we haven’t looked at that specifically, our hemp and CBD, but it would be several hundred thousand dollars a year is what I would guess. I mean, the real upside for us here is federal legalization and transacting with our cannabis clients.

[Brian Kinstlinger:]

Great. And then you mentioned why Viridian. You clearly made a couple of moves to align yourself with SAP. Can you take a minute to discuss because maybe I missed it, this software function? What are they providing to their customers? And I’m not sure I heard Jessica right or maybe I did, but how much revenue did they generate in 2020?

[Jessica Billingsley:]

So, John, for you, for what is public about revenue, I think what we disclosed, Brian – actually, I know the answer. We disclosed $6 million purchase price, which represents 1.7x 2020 ARR. So not total revenue, but their ARR.

[Brian Kinstlinger:]

Got it. Okay, yes.

[Jessica Billingsley:]

And maybe just speaking to a little bit of your bigger question there in terms of what they do. For a long period of time, we believed the greatest potential competitors would be the large ERP system providers such as SAP and NetSuite. And as a result, we’ve made significant investments over the past several years in integrations and developing strategic partnerships with these providers, including our recent acquisition of Viridian. Viridian is SAP Business One product that has a number of cannabis specific compliance pieces that have been built into it today. Of course, there is future synergy and connecting Viridian’s Business One product to our compliance gateway and not having to rebuild that compliance or redo it, reimplement it every time in every new market for each new client. So that’s where there is some real tax synergies and continues to prove, I think, the overall strategic value of our product and our product lines. So at this point, we feel really good about the position we’ve created for ourselves with the large players now looking to partner with us versus trying to build it themselves to compete.

[Brian Kinstlinger:]

Great. Thank you.

[Jessica Billingsley:]

Thank you.

[Operator:]

Thank you. Our next question is a follow-up from Brian Kinstlinger with Alliance Global Partners. Please proceed with your question.

[Brian Kinstlinger:]

Well, I wanted to give others a chance before I ask one more question. You have clearly been acquisitive over the last 18 months or so, as you highlighted. So – but I know M&A is a big piece to augmenting organic growth. So maybe talk about what valuations look like these days and what the pipeline looks like? Are there a number of these small tuck-in acquisitions or couple of million dollars in revenue? And what specifically, as you look at your total solution, might you – is on your wish list, for example, to add to the platform?

[Jessica Billingsley:]

Great question. So we continue to have a strong pipeline of potential technology in each of our three target categories we’ve shared previously, namely, TAM expanding technology, product tuck-in and market share. And I can share that, that pipeline has increased dramatically following the Georgia Democratic election to the Senate, which probably makes some progress towards federal legalization more likely in the near-term. So as a result, we can afford to be very opportunistic with anything we pursue and focus on opportunities where there is positive cash flow industry. The second part of your question there, as we look at the industry landscape, there are more Trellis and Viridian-sized opportunities out there and available than there are larger opportunities. And John, I don’t know if you want to speak briefly to the valuation for both Trellis and Viridian, the two deals we’ve announced over the past 8, 9 months and sort of how we’re seeing some of those valuations.

[John Fowle:]

Sure. I think the valuations are a bit over the board, and maybe there is a way to answer that. I think deals are getting done at lower values, maybe more realistic values, I think. As you look at Trellis’ 2x revenue and Viridian sort of in that neighborhood, there is certainly no shortage, as Jessica shared, of opportunity out there. I think there is those who sort of hold themselves out for really high valuations. And obviously, when that happens, it’s harder to get deals done. So I think we see it pretty dispersed, but I do believe that where we’ve been able to complete some transactions is sort of indicative of where deals actually are completed.

[Brian Kinstlinger:]

Great. And then when I think about the margin profile of Viridian, is it the majority of their revenue software license or SaaS? Is it software license and maintenance? Just take us through so we can at least – how we should think about the gross margins compared to yours.

[John Fowle:]

Yes. So again, I mean, traditional SaaS business with recurring software revenue, professional services, etcetera. I think they are going to have – you will expect to see a nice margin profile, I think, probably similar, if not maybe slightly uptick to ours. So that will certainly, I think, add to our overall margin profile and help improve it. But as we think about Viridian, I think the best way to think about them is just as a standard SaaS business with software licensing recurring revenue and then the traditional professional services to supplement.

[Brian Kinstlinger:]

Great. Last question I have, maybe – we haven’t touched in a while on Canada and Ample. So maybe just talk about how that market is materializing in terms of the outlook and more licensees and things like that.

[Jessica Billingsley:]

Can you ask that one more time, Brian? Sorry.

[Brian Kinstlinger:]

So I’m just wondering, Canada stalled out for a while. And so I am just wondering how that market is materializing in terms of the opportunity for Akerna.

[Jessica Billingsley:]

Yes. So as we know, it’s been – as you can imagine, it’s always difficult to predict. But from that pace of activity we’re seeing thus far, we would expect an uptick in licensing activity in mid-2021, maybe followed by some software decisions towards the end of 2021, sort of typical with software spending cycles. Canada, of course, had more strict and stringent COVID lockdown across most of its provinces and territories than we did here in the U.S. And Health Canada, it also paused on new license issuances for a period of time. That is beginning to reopen, and we’re optimistic for 2021.

[Brian Kinstlinger:]

Great. Thanks guys.

[Jessica Billingsley:]

Okay. Thanks so much.

[Operator:]

Thank you. Our next question comes from the line of Martin Toner with ATB Capital Markets. Please proceed with your question.

[Martin Toner:]

Good morning. Thanks for taking my questions and congrats on a good quarter.

[Jessica Billingsley:]

Good morning. Thanks, Martin.

[John Fowle:]

Thanks, Martin.

[Martin Toner:]

Thanks. Can you guys – can you give me what the organic growth number was for software revenue? And then can you guys comment a little bit about sales efficiency, what you’re doing on the sales and marketing front, if you’re doing anything different? And what you see prospects looking like going into this year? And then lastly, I’ll throw a question about churn in there, too. Can you just talk about – just talk generally about what churn looks like? Thanks.

[Jessica Billingsley:]

Sure. Well, I’ll take the sales and marketing and what we’re seeing in the landscape, and I’ll touch on churn and then turn it over to John to get into the numbers there. So from the sales and marketing standpoint, we’re seeing some really great traction and efficiencies from our combined selling approach at the Akerna level for all of our products. And as is evidenced by our reporting of over 20% growth in our average deal size for MJ platform, we’re continuing to see consolidation within the industry, existing clients really expanding their footprint as well as new consolidators beginning to expand and consolidate. We’re seeing more and more of those mid to enterprise sized deals that are really where we’ve targeted our product and services to the industry. The – we did report improvement on the churn front. I think the number we reported was 42% churn improvement sequentially quarter-over-quarter. John, do you want to comment to our growth?

[John Fowle:]

Yes. I would say more of the growth actually came organically from our core business. As we know, the last 12 months has been pretty dramatic at a macro level, and I think we’ve seen a little more slowdown in the Canadian markets with Ample Organics than we have here in the U.S. And so I would attribute our growth here in the quarter sequentially like to Jessica’s point of what we’re seeing with some of our larger operators, some of that growth is more tied to our core businesses, although we’re certainly opportunistic of where we think long-term Canada will be. But short term, I think it was more of our legacy system.

[Martin Toner:]

Great. Thanks guys.

[Jessica Billingsley:]

Thanks, Martin.

[Operator:]

Thank you. This concludes our time allowed for questions. I’ll turn the floor back to Ms. Billingsly for any final comments.

[Jessica Billingsley:]

Thank you, operator. We are 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:]

Thank you. This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.