kneat.com Q3 2023 Earnings Call Transcript

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November 9, 2023

There are 9 speakers on the call.

Operator

Good morning. My name is Jordan, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Neat Q3 2023 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer

Speaker 1

Thank

Operator

you. Speakers, you may now begin your conference.

Speaker 2

Thank you, operator, and welcome, everyone, to Neat's earnings conference call for the Q3 of 2023. Today's call will be hosted by Eddie Ryan, Neat's CEO and Hugh Cavanagh, CFO at Neat. Before we begin, I would like to draw your attention to the Safe Harbor statement on Slide 2 and the forward looking statements disclosure at the end of our earnings release. Comments made on today's call may contain forward looking information. This information by its nature is subject to risks and uncertainties And as such, actual results may differ materially from the views expressed today.

Speaker 2

For further information on these risks and uncertainties, please consult Our relevant filings, which can be found on SEDAR and on our website at www.neat.com/investors. Also 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 NEAT's financial results And certain investors may use this information to evaluate our performance from period to period. I will now pass the call To Eddie Ryan, CEO of Neat.

Speaker 3

Good morning, everyone, and thank you for joining the call today. I will share my thoughts on the quarter, Then Hugh will provide a detailed financial update. And after that, we'll take your questions. Our Q3 financial results were solid, With total revenue up 46%, SaaS revenue up 72%, total annual recurring revenue up 64% And SaaS annual recurring revenue up 74%. Growth in the quarter was driven primarily by expansions in the number of licenses held by Customers and to a lesser degree by incremental revenue from new customers deploying for the first time in the quarter, including several that we announced earlier this year.

Speaker 3

Essentially, what we saw in the quarter was our land and expand strategy play out as it has done uninterrupted for the past several years. What makes this year different from previous years is the Size and number of both new and expansion deals. The strategic importance of momentum at this stage of our life cycle cannot be overstated. As life sciences companies have been understandably careful in their adoption of digital solutions, the majority of their transition to digital validation lies ahead. By getting in early to serve as the initial foundation on which life sciences companies are preparing for automation, Neat secures an early lead, Greater marketing mindshare and can be more influential in building the future of digital validation and quality management.

Speaker 3

Once a company has chosen and deployed a digital platform to support validation, switching away from that platform is not easy. Companies are obliged to maintain years' worth of validation records for quality tracking, assurance and dollars. This is why companies Put so much effort into their platform selection in the 1st place. It is not an easy reversible decision. Integrations with the rest and helps our customers make even more efficient use of their resources.

Speaker 3

This is why our R and D team is also building We brought the total number of our strategic wins year to date to 7 with the announcement of 2 more in the 3rd quarter. A contract development and manufacturing organization headquartered in Asia for equipment validation and a manufacturer and distributor of medical supplies headquartered in the United States for computer systems validation. I note that neither of these is a traditional global pharma, underscoring the applicability of the Neat platform throughout the life sciences ecosystem. We enjoy the company of customers, prospects and partners Coming from all across the pharma supply chain at the NEAT Validate Conference in Miami last month, spending a few days with true leaders in validation Through formal presentations and 1 on 1 conversations informs our roadmap and customer interactions and inspires our R and D going forward. I came away from the conference more enthused than ever about our relationships with customers, our position in the industry and our business strategy.

Speaker 3

The conference also reinforced for me that digitization and automation will continue unrelenting into the foreseeable future And that our unmatched focus on e validation will continue to power our near term success. It was a fantastic event and a great showcase of the differentiated talent that powers Neat and our connection to our customers and partners. So with that, I will hand you over to Hugh for a review of the financial results.

Speaker 4

Thank you, Eddie. As Eddie mentioned, quarter 3 was another quarter of strong revenue growth and year on year gains in our gross margin. Revenue for the Q3 ended September 30, 2023 was $8,400,000 up 46% from $5,800,000 for the Q3 of 2022. SaaS license revenues Grew by 72 percent to $7,700,000 compared to $4,500,000 for the same period in 2022. This brings us to just over $24,000,000 in revenue, three quarters of the way through the year.

Speaker 4

Cost of sales for the Q3 of 2023 was $2,900,000 which is a 31% increase in cost of revenues year over year relative to the 46% increase in overall revenues over Q3 2022. Gross profit for the 3 months ended September 30, 2023 was $5,500,000 56 percent higher than The $3,500,000 in the same quarter in 2022. Gross margin percentage was 65% compared with 61% for the Q3 of 2022. The increase in gross profit margin was driven by the significant increase in SaaS revenues as compared to the increase in cost of revenues. I would also note that As partners take on more professional services and the proportion of our license revenues to professional services revenues continues to increase, We expect the gross margin percentage to keep on this upward year over year.

Speaker 4

As we saw last quarter, while this transition adds to headwinds on our year over year Growth in of revenues in the short run, it leaves us much better positioned for the long run-in the form of More gross margin dollars available to our business. Turning now from progress In gross margins to progress in operating margins, R and D expense net of capitalized R and D Our Q3 2023 was $3,800,000 compared to $2,800,000 in Q3 of 2022. Net sales and marketing expense was $3,100,000 in Q3 2023 compared to $2,100,000 In Q3 of 2022, we saw the year over year growth in these line items begin to taper as we annualize The investments in hiring that we made over the course of 2022. Total annual recurring revenue ARR, which includes SaaS license fees and maintenance fees, grew by 64% to $31,400,000 from $19,100,000 at the same point last year. As we look at just the proportion of ARR coming from SaaS license fees, SaaS ARR grew 74 percent to $31,300,000 from $18,000,000 at September 30, 2022.

Speaker 4

This recurring revenue from sales of our software is central to our growth strategy and explains why ARR is a key performance indicator for Neat. Revenue from our SaaS offering adds to our annual recurring revenue base, ARR from maintenance fees was $100,000 at the end of the Q3 of 2023 compared to $1,100,000 at September 30, 2022, as nearly all customers have transitioned over to SaaS. We added to our cash balance at the end of the Q3 by putting the 2nd tranche of our debt facility to use, And we continue to have the 3rd tranche of the facility available to be drawn down. For your reference, we have filed our unaudited interim

Operator

Your first question comes from the line of Christian Cicero from 8 Capital, your line is live.

Speaker 5

Hi, good morning. Your comments said that some of the growth you saw in the quarter was Q2 expansions instead of new business and I think that's common from Neat. But as you talk about new licenses, Is there any color you could provide around one of those new licenses where across new sites, more people per site, new geographies, new functions, Where are you getting some of that pickup?

Speaker 3

Hi, Christian. Thanks for your question. Yes. So the expansion is a large part of our business. And I will say that Most of our expansions are in that vein.

Speaker 3

They're either new processes or expansion to new users or expansion across sites. So it's Very common within our expansion business, going to new sites, new processes and more user licenses.

Speaker 5

Okay. And you mentioned there's more commentary than normal this quarter already The stickiness, the moat of the Neat platform, is there an update you could provide around the sales cycle and implementation cycles Of the Neat GX platform, I know historically they've been quite long for business reasons, it's great to shorten them, but if they're still long, maybe that speaks to how How critical the decision is and how sticky the product can be?

Speaker 3

Yes. So that it's very this sales cycle varies Time to time and I would say the current climate sales cycles are extending a little bit. Nothing significant when you have a strong pipeline. But I would say that as we develop more technology, we're also seeing that countering that. So we're enabling So but in the current climate that's contributing to weakness, but I would say that, yes, we're heading in the right direction regarding shortening these cycles.

Speaker 5

Okay. And one last question from my end on seasonality. Sometimes software companies Have a stronger Q4 just in the calendar, if there's any budget flush or customers looking to spend ahead of the year end. Now is that a theme at all for Neat or would you say some of the expansion activity is less predictable and not to think of Q4 as necessarily being stronger for seasonal reasons?

Speaker 3

Well, I suppose the other thing to say, the thing that I always say, Christian, is that certain deals can Caused a bit of lumpiness from quarter to quarter, but traditionally, when we look back over our cycles, traditionally, the Q4 has been strong for us. And I think that is to do with customers that have budgets there and they have didn't get around to doing what they needed to do when something they have Thanks, Christian.

Operator

Your next question comes from the line of Gavin Fairweather. Your line is live.

Speaker 1

Hey, good morning, good afternoon. Congrats on all the progress.

Speaker 4

Thanks, Kevin.

Speaker 1

Maybe just to start and kind of building on one of Christian's Questions around expansion, maybe less so around kind of Q4, but maybe you could help us understand what you're hearing from Your customers on expansion plans over the course of 2024, what are you hearing in terms of kind of CapEx plans and new plant builds? Any kind of color on that expansion environment maybe over the course of next year would be helpful.

Speaker 3

Yes. So definitely, our customers are all indicating expansions and We see lots of opportunities and we believe that we're only touching the surface with our customers and we see a lot of opportunity there to become more intimate and to Pushing these other areas with them. But there's definitely all our customers, all our strategic customers certainly are On rollout plans of one sort or another, whether that's new sites or whether it's more users or whether it's capital projects like you say that they're You know, applying Neat to as well, Gavin.

Speaker 1

Okay. That's great to hear. And then just on the new logo acquisition side, I think you said

Speaker 5

2 strategic

Speaker 1

logos in the quarter and 7 year to date. What do you see when you look into the pipeline in terms of those Do you have a good number that are kind of in the works?

Speaker 3

Yes, we do. We do see lots of them in the works And we're optimistic that we will continue to deliver news like that into the future. So there's a strong pipeline across Mid tier, large strategics and small family as well.

Speaker 1

Got it. And then a lot of the effort on the product side has been Redoing the data taxonomy and moving to more kind of data centric structure within the product. I'm curious for your perspective on kind of what kind of new functionality that might unlock, including leveraging AI. And then also maybe you can touch on how you might see data flowing within the stack? What kind of use cases or

Speaker 3

Yes, it's very good question. We're very Optimistic about where the product is going and how aligned we are with our customers. We had a very great validate conference recently And the customers are just pointing out how aligned we are with them. And that's really great to hear. And that seems to be getting stronger every year when we meet our customers in mass like that.

Speaker 3

So what we're bringing forward is the customers are really excited about this enabling more data centricity Within documents and outside the documents on that. So when you get this very strong data structure where we are Continuously delivering. It gives us the ability then to have really strong data analytics and deliver more value to the customers. And also the it enhances also the integration capabilities and just bringing more value generally to the customer and also giving that data integrity Customers must have in our industry. It's critical.

Speaker 3

And so there's a huge amount of work that we're doing there and it's all coming through the pipe as we speak.

Speaker 1

Okay, great. And then just lastly for me, just on the working capital. I saw that the receivable Tim, it's a little bit this quarter, maybe for Hugh. Is that just kind of timing? And have you seen any of that kind of reverse so far here in Q4?

Speaker 4

Yes, for sure, Gavin. Yes, so versus last quarter, the trade receivables are up Quite a chunk. And in fact, of that $7,000,000 or so dollars that we have of trade receivables at the end of the quarter, The vast majority of that actually has been received at this point.

Speaker 1

Okay, great to hear. I'll pass on. Thank you.

Speaker 4

Lovely. Thank you very much.

Operator

Your next question comes from the line of Andy Newan from Raymond James, your line is live.

Speaker 3

Hi, thank you for taking my question.

Speaker 6

So You have a couple of big win customer wins last quarter and this quarter as well. How is the onboarding process going for those clients with respect It was a typical process you see with other customer as well.

Speaker 3

Yes. Hi, Andy. Yes, so we're Our professional service team is very good at delivering deployments and partners where they're involved as well because we get involved with our partners to make sure they go effectively. So all those deployments of those new customers are on target and we would say assume a 6 month plus From the time we announced them to be complete from a deployment perspective, on the first phase of the deployment. Thereafter, it's about expansion into the future.

Speaker 6

Got you. Thank you. And with respect to the partner network, I think you have about 77 partners in So this provided this Q compared to like 50 of the previous year, how should we think about the growth of that partner network going into fiscal 2024?

Speaker 3

Yes. So the partners belong in different categories. And If you think about our strategic partners, that base is growing and those partners are evolving in their capabilities. They would have started out as You know, trained service partners, being able to use Neat in industry and then going to from there to be able to deploy Neat and expand Neat with their customers' process mapping and the like To expand the product across the customer sites and then from there moving into capable enough to be potential resellers. So we see that model working really well and we see a number of customers really stepping partners, excuse me, stepping up to become these Strategic partners that can also resell our platform into the industry and especially into the mid and smaller customers as well.

Speaker 3

So, yes, that's going very well for us and we expect that to continue and we have a strong focus on this.

Speaker 6

Got you. And final questions for me. I'm assuming the retention rate remained 100% this quarter for the customer base?

Speaker 3

So just repeat that again. Yes, sorry.

Speaker 4

Yes, can you repeat? Yes. So I just want to reiterate

Speaker 6

the retention yes, yes, remained 100% for the quarter?

Speaker 3

Yes. So We would say that we have 0 churn. And what I would say from that there are some exceptions from that, but by and large, Still zero churn as far as we're concerned, but you may see the odd small customer that may whatever for one reason or another go back to small bit. But by and large, I would say still 100% from that perspective.

Speaker 6

Got you. Thank you. And I'll pass it

Operator

Your final question comes from the line of Steve Lee from Raymond James. Your line is live.

Speaker 7

Hey, thanks. Hi, Eddie. Hi, Hugh. I joined a little late, so I may have missed it. But What was the FX impact on the revenues, positive or negative?

Speaker 4

Yes. So the impact on revenues Quarter over quarter in this quarter was actually versus the same quarter last year was essentially there's no impact on revenue Versus the same quarter last year.

Speaker 7

How about year over year, Hugh?

Speaker 4

Year over year, yes, over the course of the year, There is a tailwind in the several $100,000 type range.

Speaker 7

Okay, perfect. Okay. And On the potential ARR from current customer, on your website you still show 50,000,000 ARR, which You've been using for quite some time. Do you have an updated number?

Speaker 3

Yes, we do. But Question is, is that date number publicized?

Speaker 4

No, we haven't put it out in press releases, no. So, yes, so we certainly have updated a number and we'll probably refer to it in our next our year end press release, yes.

Speaker 3

Yes, but just safe to say there, the number definitely is revised upwards and we will release that I guess in due course.

Speaker 7

Okay, got it. Thanks. That's all for me. Thank you.

Speaker 3

Thanks, Stephen.

Speaker 4

Okay. Thanks, Stephen.

Operator

We have another question from Gavin Fairweather. Your line is live.

Speaker 1

Hey, just a follow-up maybe for Hugh. We saw the gross margins tick down very modestly from Q2 levels despite Kind of the SaaS mix moving higher. Is that just kind of lower services utilization? And maybe Yes, just unpack that a little bit. That would be helpful.

Speaker 4

Yes, no, you're spot on there in your comments, Gavin. Yes. So essentially, the lower professional services revenue this quarter is really the driver of that slight tick down Quarter on quarter. But yes, so the situation continues to be that we have very strong SaaS margins, we continue to have PS our focus is not on margin there, so those are low margins, but Quarter on quarter where PS revenues go up or down, then that can have an impact on the overall gross margin From the perspective of we essentially recognize cost in the quarter in the quarters that the cost is incurred, but then revenues Sometimes it's very because of the timing of finishing out on projects, etcetera.

Speaker 1

And do you see like when you think about the building partner network, should we think about services revenue being I mean, I guess, if I look back the last few years, it's probably averaged about $1,000,000 maybe a tick over $1,000,000 a quarter. Is that a decent run rate? Or is Some of that going to be increasingly given way to partners as well?

Speaker 4

So, yes, I mean, Probably a little lower than the historic run rate for CURE. And the partners are certainly That program is kicking in well. But yes, no, I mean, it's not a case that the PS revenue is going to go away. We will be maintaining it. We don't expect to grow hugely, but as or maybe at all, but certainly we expect

Speaker 1

Okay. Thanks so much.

Operator

Your next question comes from the line of Tanvi Gabriel from Echelon Wealth Partners. Your line is live now.

Speaker 8

Hi. I'll be speaking on behalf of Rob Goff. I just wanted to ask regarding the year to date wins. What are some of the key factors that led to the year to date wins as well as the traction within medium and small clients, both directly as well as through distribution partners.

Speaker 3

Yes. Hi there. So yes, the wins are based on the And the referenceability of that and the known brand of the Neat technology delivering success. And that's been the Key reason, ultimately Neat delivers high quality product that enables your compliance and your data integrity right first time In an industry that really values that and also cuts the cost of the man hours associated with these processes by 50% and brings And enables them to get their products to market faster. So these are huge value it's a huge value proposition and it's proven to deliver on all of those, Which is one of the key things of Neat at this point in time is maturity of product and maturity of company within the marketplace.

Speaker 3

And that's filtering down to all customer sizes.

Speaker 8

Right. Okay. And in terms of your current pipeline, do you see or what's the division between the medium and small clients?

Speaker 3

The division between the medium and small clients, okay, so there's 3 layers and that's Strategic, there's enterprise and then there's medium and small. So small would be companies that have probably Up to 500 employees. And then up to 2,000 becomes your next layer, which Medium and then above that is enterprise and above 5,000 become strategic. Yes, I think they have those numbers right.

Operator

There are no further questions at this time. Mr. Eddie Ryan, CEO of Neat, I turn the call back over to you for final remarks.

Speaker 3

We've come a long way since we got our first customer nearly 10 years ago. There's still so much to accomplish. We are lucky to have a great team in place getting us there and building capabilities our customers are excited about because it accelerates their progress. I close with a sincere thanks to everyone on the call today for your interest in and support of Neat.

Operator

That concludes today's conference call. You may now disconnect.

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