kneat.com Q1 2023 Earnings Call Transcript

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May 10, 2023

There are 9 speakers on the call.

Operator

Ladies and gentlemen, good morning. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Neat First Quarter 2023 Earnings Conference Call. Today's conference is being recorded and all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Neet First. Thank you. And I will now turn the conference over to Katie Keita. You may begin.

Speaker 1

Thank you, operator, and welcome everyone to Neat's earnings conference call for the Q1 of 2023. Today's call will be hosted by Eddie Ryan, Neat's CEO and Hugh Cavanagh, Neat's CFO. Call. 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 the earnings release. Call.

Speaker 1

Comments made on today's call may contain forward looking information. This information is by its nature subject to risks and uncertainties and as and uncertainties. Please consult the company's relevant filings, which can be found on SEDAR and on the company's website atneat.com/investors. Call. Also during the call, we may refer to certain supplementary financial measures as key performance indicators.

Speaker 1

Management uses both IFRS S 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 Neats.

Speaker 2

Thank you, Katie. Good morning, everyone, and thank you for joining today's call. I will begin with some high level remarks before passing the call to Hugh to provide a detailed financial update. At the end, we will open the call for questions. In short, 2023 has gotten off to a fantastic start for Neat.

Speaker 2

We closed the Q1 with total revenue up 53%, SaaS license revenue up 94% quarter and annual recurring revenue up 100% compared with the Q1 of last year. The acceleration of all three of these revenue metrics for Neat comes from a combination of things. First, as we continue to make strides in our core market, the benefits of using the knee platform are becoming more well known. This should not be surprising given that our approach, which is revolutionary compared to current standard practice, Enabling customers to derive significant value through greater efficiencies and a higher compliance standard. 2nd, Our customers are increasingly discovering Neat's value as a platform and are applying it beyond what they had initially implemented it for, call for more teams, more sites or more quality processes.

Speaker 2

This means we are expanding within our customers' organizations, quarter. A major contributor to revenue growth and into the companies that are part of their supply chains as well. Finally, the investments we made last year to grow our team are paying off. With a larger R and D team, we can tackle more of what we have planned for the Neat platform sooner. And with more sales resources, we can better and more broadly showcase what Neat can do as the industry builds quarter towards Pharma 4.0.

Speaker 2

We saw ample evidence of all these factors at work in the Q1 of 2023. The wins of 3 large new customers continue to build our market leadership momentum. In January of Fresenius Kabi, In February of the manufacturer with more than 80 sites worldwide and in March of the division of a top 20 pharma. Expansion within our existing footprint drove the majority of our SaaS revenue growth in the quarter. The ongoing expansion of Neat licenses The long standing customers supports the sustainability of revenue growth, particularly as Neat continues to win new logos.

Speaker 2

Finally, our sales team is now well over twice the size it was last year and are bringing in smaller new deals that don't get announced. We are excited to see what they achieve as they continue to ramp up. There was a lot of interest in the platform at our user conference, Validate, which we hosted in Dublin last month for our European customers. I'd like to commend the Neat team that carried it out as it got stellar reviews by users and sponsors alike. Over 150 attendees got to see some of the creative ways our customers are putting the platform to work.

Speaker 2

Most of the top 15 global pharmaceutical companies were there with several sharing their digital validation journeys using Neat From selection through to successful global rollouts. After experiencing how transformative Neat has been call. For their own productivity across teams and processes, these customers were eager to contribute knowing that further adoption of digital validation will add velocity to their industry's mission. After all, to fully realize the benefits of digitization, influencers need The other players connected to the ecosystem to get on board. Customers at Validate also got a preview of Neat 9.0, which is now launched.

Speaker 2

9.0 is a fundamental step forward for Neat GX as we continue to innovate. Several years ago, we transitioned from on prem to SaaS. Today, 9.0 further modernizes Neat with next gen software approaches like containerization and multi tenancy, as well as other architectural advances. This foundational work enables Knee to go further in terms of efficiency, functionality and speed of delivery, valuable to ourselves and to our customers. We are incredibly proud of our development teams, Every single one of which contributed materially to this release.

Speaker 2

Definitely not easy, but of course, the work that is worth doing really is. In addition to customers promoting our product as they did at Valadis and the efforts of our expanded sales force, Our growing partner community is also leaning in. All three together make a powerful formula for growth. These partners and service providers are taking on more services to support our customers and are bringing new customers onto the Neat platform as well. In fact, the large strategic customer that we announced in early April came to us through one of our partners, a large global consulting firm.

Speaker 2

Like our customers, they too are eager to help the industry shed the owner's legacy approach to compliance and instead turn it into a power tool with Neat, One that removes friction and edge value. So whether you are a part of Neat as a customer, A team member, a partner or a shareholder, right now is an excellent time to be on board with us. We look forward to reporting our continued progress call as 2023 unfolds. I will now hand you over to Hugh for a review of the financial results.

Speaker 3

Thanks Eddie. As Eddie mentioned, we saw excellent top line growth in Q1 led by an acceleration of our SaaS license revenues. Revenues for the quarter ended March 31, 2023 was 8,000,000 dollars up 53 percent from $5,200,000 for the Q1 of 2022. SaaS license revenues, which is a key metric for NEAT was $6,400,000 compared with $3,300,000 for the same period in 2022. This is an increase of 94%.

Speaker 3

Our accelerated revenue growth in the quarter was driven by existing customers scaling their use of Neat GX, while the purchase of license subscriptions by new customers also contributed. Cost of revenues for the Q1 of 2023 was $2,600,000 Which is actually down from last quarter and up $700,000 from $1,900,000 in Q1 2022. Quarter. This increase was mainly due to an increase in payroll and cloud hosting costs. Gross profit for the 3 months ended March quarter.

Speaker 3

31, 2023 was $5,400,000 64 percent higher than $3,300,000 quarter in 2022. Gross margin percentage was 67% compared with 63% quarter of 2022 63% for the Q4 of 2022. The increase in gross profit was driven by a significant increase in SaaS revenue, which carries a higher gross margin. As we continue to scale our license revenues And as the proportion of license revenues to professional services revenues continues to increase, we expect the gross margin percentage call to continue to trend upwards towards SaaS industry norms. Moving on to operational expenses.

Speaker 3

Sales and marketing expense was $3,000,000 for Q1 2023 compared to $1,300,000 in Q1 2022, While R and D expense was for Q1 2023 was $3,900,000 compared to $2,500,000 in Q1 2022. We grew both teams substantially since Q1 of last year. So the incremental salaries and benefits associated with this NEAT. These investments is primarily behind the expense growth here. Annual recurring revenue, ARR, is a key performance metric for NEAT.

Speaker 3

Quarter. ARR includes SaaS license fees and maintenance fees. The promotion of our SaaS offering, Which adds to our annual recurring revenue base is essential to our growth strategy. Quarter. ARR doubled over last year from $13,400,000 at March 31, 2022 to $26,900,000 at March 31, 2023.

Speaker 3

ARR for SaaS alone group by 113 percent from $12,400,000 at March 31, 2022 to $26,300,000 call. On March 31, 2023, ARR from maintenance fees decreased by 44 percent to $200,000 from $1,000,000 over the same period in 2022, reflecting the shift of legacy customers transitioning from on prem quarter to SaaS since the end of Q1 2022. As we look ahead, we are optimistic for the remainder of the year. We have a high retention of a base of high quality customers and that base gets bigger every quarter. The revenue they generate is increasingly SaaS revenue.

Speaker 3

SaaS revenue carries much higher gross margins than service revenues, Which we do not expect to grow as much into the foreseeable future as these services are increasingly directed towards our partners. And with the hiring we did through 2022, our teams can spend more of their time in 2023 developing great products and getting it out to the world. As a reminder, we have filed our unaudited condensed interim consolidated financial statements and MD and A on SEDAR, And they are also available on our website. I will now turn the call over to our operator for your questions.

Operator

And we will pause for just a moment to compile the Q and A roster. Question. We will take our first question with Christian Scroggs with 8 Capital. Your line is open.

Speaker 4

Hi, good morning and congrats on the quarter and as well as momentum with the partner channel, which is growing quickly. My first question is there on the partner channel, Hi, Dean Hugh. Are you finding that you're building more of a template, like a structured way of adding partners? Call. Or is there more investment to do there where you think you get them online and up and running quicker?

Speaker 4

Calabrio's conversation has been going maybe with the consulting firms first. It seems like you're seeing some traction.

Speaker 2

Hi, Christian. Eddie here. Hopefully, you can hear me clearly. Yes. So definitely, as we go forward, we're able to repeat a standard process that we build with our partner managers.

Speaker 2

We have a very strong partner management team for bringing partners up to speed and getting them enabled and getting them into projects with us Or if they can go directly to the customers. So there's but I would say it's continuously improving. There's we're finding better ways to Improve that. Like all our business, I guess, better ways to deliver our solution to the marketplace to go to market. And that's happening with through the partner channels And to software delivery as well.

Speaker 5

Okay, perfect.

Speaker 3

So I'll

Speaker 4

ask one more question before passing the line. More on the market opportunity on your pipeline. If there's any verticals or geographies that are exciting you just now, if anything's changed since the last conference call, where you see where you've seen any momentum, sort of in your end markets as you talk to customers?

Speaker 2

Yes. So regarding the geographies, there's no major change there. Europe and the U. S. Call.

Speaker 2

Primarily our key areas, we do have some customers also in Asia, but they'd be customers that are there to Our existing large global customers. We're not actually pushing out in that direction at this point in time. So Yes. So we continue to do that. And our customers that we have, we're very excited about how our customers are using our technology.

Speaker 2

We're going deeper and broader with our existing customers. And we're adding new customers and our customers are considering us for adjacencies within their organization. And regarding quarter. Other segments, I would say there's a lot of activity in the supply chain and on the distribution side of the manufacturing. So we are seeing A lot of activity from there as well.

Speaker 2

And of course, consumer product goods companies continue to be something that's a very strong opportunity for us.

Speaker 4

Got it. Appreciate all that color, Eddie. Congrats again on the quarter and I'll pass the line here.

Speaker 2

Thanks, Christi.

Operator

And we'll take our next question from Doug Taylor with Canaccord. Your line is open.

Speaker 6

Yes. Thank you. Good morning, Eddie and Hugh. And the rest of the NEAT team, congrats as well on a good top line growth performance. You've obviously had a period here of an exciting period of new MSA announcements over the last couple of months.

Speaker 6

So a couple of questions on that. Firstly, can you refresh us on the go live timetable and the ramp up schedules From these agreements, are you on track to work through the implementation along the original timetable, which I think was Q2, Q3?

Speaker 2

Hi, Doug. Absolutely. One thing I'm really proud of across the Neat organization is our delivery of our capital projects and the first deployment phase. And they're before 5 months approximately first for those delivery times, so the first go live with our customers. So everything is on target there for those.

Speaker 2

There might be some process that might be quicker than that, But generally, none longer than that. So I'm very proud of our delivery rate there. And so everything is on target from that perspective.

Speaker 6

Call. Okay. And I understand that these MSAs sort of start small and expand over time. I think you've demonstrated that in spades. But I'm hoping I can get you to either qualitatively or quantitatively, if you can help us understand the relative significance Of these recent signings in terms of potential ARR or any other way you want to frame it?

Speaker 6

Can you help us out there?

Speaker 2

Yes. I'll have to default to my standard approach there because the standard approach continues to be the standard approach. So it really is starting out small. All our customers are they start usually small. And but as we mature in the marketplace, Those earlier deals may become a bit larger.

Speaker 2

And the ability to reach fully scaled out with our customers in a certain area is getting a bit better as well. There's still some resistance within the companies in that different sites have different variations and stuff like that. But By and large, they're all being overcome. So I think the line really, Doug, is that it Could start out a couple of 100,000 and they all become these customers multimillion dollar opportunities as they move forward. So, and typically, if I was to say how long does it take to scale a customer for validation, within these organizations, I think anywhere between 3 5 years, depending on how quickly they go.

Speaker 2

And there's multiple processes within validation, up to 8 processes in general.

Speaker 6

Okay. Maybe one last question for me, and this one's call. Probably for Hugh. Even if we exclude the perpetual license revenue, the one time kind of upfront revenue in the quarter, gross margins would have been, I think, north of 65%, which is certainly a new high and pretty impressive. Is that a reasonable place to build from here 65% as you bring on these new customers in the coming quarters and considering your scaling and and the rest of the factories that go into that.

Speaker 3

Hi, Doug. Yes. Yes, I suppose the The way you look at it there is the way I think is probably the best way to look at it in terms of rolling forward backing out the on prem to get What's the underlying gross margin? And as you indicated, it's in excess of 65%, it's 65.5%, 66%, just over 65.5%, Excluding the on prem. And yes, no, I think that's not a bad basis quarter to sort of as a basis to look forward and try and estimate what our future gross margins will be.

Speaker 3

Call. Again, as I said lots of times before, that gross margin is a composite of the Very low margins that we get on professional services, but they're very good margins that we get on SaaS revenues. And Essentially, if you look back, you can sort of back into those relative margins and roll those forward to estimate where you think we will be in the future.

Speaker 6

All right. Thank you. I'll pass the line.

Speaker 3

Very good. Thank you, Doug.

Operator

And we will take our next question from Rob Goff with Echelon. Your line is open.

Speaker 5

Thank you very much. And let me call. So congratulate you on a very solid quarter and a great start to the year.

Speaker 3

Thanks, Rob. Thanks, Rob.

Speaker 5

Call. Most welcome. Could you talk to the wins that you have recorded for the year to date and some of the competitive dynamics that may have been around those wins. What points you saw as your winning hand on those?

Speaker 2

Absolutely, Doug. Sorry, Doug, Rob. Yes, so They're all strong competitive competitions to win. This is a you can imagine this is a corporate decision that's been made. They're deciding on a highly compliant right to manage their mission critical regulated processes within their organization.

Speaker 2

So they don't make decisions lightly around these. And what I would say is that some of them would have gone on for quite a while, some of the evaluations looking at alternatives within the marketplace. So very competitive, I would say, is the summary, Rob. And in some cases, they went on for quite a while. Call.

Speaker 2

And in some places, we are going in where maybe a competitor already is because of They're not fully happy with the competitor in the marketplace.

Speaker 5

Okay. Thank you. And perhaps more of a macro question. Call. Could you give your perspective on potentially expanding on your definition of the total addressable market and such, your thoughts

Speaker 2

Absolutely. As we go along and look outside of validation, today We assessed the validation space alone within manufacturing for medical devices and pharmaceutical companies as around The $600,000,000 mark. So when we look outside of that into supply chain and the distribution side, We see this being a multi billion several 1000000000 marketplace TAM for us. And that's before we look at adjacencies that also can come into play within our existing customers.

Speaker 5

Very good. And once again, back to the cadence of your wins, like call. Are these wins perhaps encouraging you to up your investment in R and D product development to capture what's Coming to you faster and faster.

Speaker 2

Yes. So one other thing to say about that I should have said earlier, right, is that Why are we winning these deals? Our maturity, our product maturity and company maturity in the marketplace, the service that the customers are getting from our technology And the reputation we have with the largest companies in the world. And these are all strong very strong referenceability situations and our customers are sharing that information amongst each other. So I think that's The key thing, our technology is very solid.

Speaker 2

We're bringing on new technology and we're also able to show new customers and existing customers This new technology at this point in time, our recent release is significant. It's a major release for Neat and there's some great features coming through there. And our customers are showing telling us back that these are great features that we're bringing through for them. And they're very happy. And it's all these features are all being built around their needs and close discussion with our customers, a real intimate relationship.

Speaker 5

Very good. Congrats again. Thank you.

Speaker 4

Thanks. Thanks, Rob.

Operator

And we will take our next question from Andy Nguyen with Raymond James. Your line is open.

Speaker 7

Call. Hi, congrats on the quarter guys. Just a quick question for me. What is I'm looking at the IR quarter. And can you break it down like the growth from the existing customer and also the contribution from the new customer Of that increase in AI and the SaaS AI.

Speaker 7

Thank you.

Speaker 3

Hi, Andy. Yes, so the growth in this quarter is primarily expansion of existing customers. So Yes. I mean, some of the customers that we would have added last year and previous years, yes, incremental on those. I typically I suppose what I'd add is that we're starting to see or we have seen a little bit of a cadence around New customers in the early part of the year are getting up and going.

Speaker 3

And then as we go on through the year, the activity tends to increase a little bit, but yes, so it's expansion primarily.

Speaker 2

Just a point to point out there as well is that the new customers are the expanders of tomorrow. They start out small. So the contribution that they have in the quarter is usually low. And as you said, as the year progresses and the 2nd year progresses, they become the expanders. So that's a key point here.

Speaker 2

And it's the landings spend model is truly aligned with the Neat business model. Call.

Speaker 7

Got you. Thank you. And I noticed that it's like a small contribution from the off from the on premise license revenue. How should we think about it for the remaining of the year?

Speaker 2

So on the on premise, we've only got one customer left on premise now. Call. And in fact, that customer has completed all our customers audit our systems and our control systems and our security and everything to do with our SaaS and cloud environment. And that customer has already completed a SaaS audit of us recently. So that customer, we expect, will be on premise within a year, worst case scenario.

Speaker 2

And that's the last customer that we have. So it's you won't it's unlikely to see You're unlikely to see, I would say, any more on prem licenses. Pretty sure that's the case actually.

Speaker 7

Got you. Thank you and congrats on the quarter again.

Speaker 3

Thanks. Thanks, Andy.

Operator

And we will take our final question from Justin Keywood with Stifel GMP. Your line is open.

Speaker 8

Hi, thanks for taking my call. On R and D, it ticked up in the current quarter. Wondering if there's anything one time in nature there? And what's a good run rate for the R and D line?

Speaker 2

Yes. Hi, Justin. Sorry, I'll just take the first few and I'll pass it on to you there. Just to say, Justin, that we have been growing in R and D last year And but we expect it to ease off this year, but I would say the uptick is the final hires coming in early in the year And now being deployed and optimized. So if you want to add some color to that, Hugh?

Speaker 2

Call.

Speaker 3

Yes, yes, yes, sure. I mean, it's pretty much as you said, Eddie. The uptake is driven by a couple of things, but obviously, We pay merit increases, which taken in the Q1. So there's a small element of that there. Also the effect of people who started during the last quarter, who were here for a full quarter this quarter, but weren't we're only there for a partial quarter in the previous quarter.

Speaker 3

And also people some people who had been hired In the hiring has happened in Q4, but they only actually started in the Q1. They were the primary things. There were few other little odds and solves beyond that, but they were the main drivers. So I think looking at this quarter And the spend there is probably not a bad basis.

Speaker 8

Got it. And I assume with the additional hiring That's to preempt the new clients on boarding, where we haven't seen that sales yet per se.

Speaker 2

Absolutely.

Speaker 3

Yes. Okay. Go ahead.

Speaker 2

Yes. Absolutely. I think the key thing to say is that we did quite a bit of hiring last year and expanding our teams. And we're growing into those teams, for the want of a better word, this year. And we don't see ourselves expanding those functions Except for critical key hires that we may need through this year.

Speaker 2

So you can take it that There's a lot of runway in that team at this point in time. And we're seeing a outcome of that already in the pipeline, yes.

Speaker 3

Call. Thank you very much. Thank you, Justin.

Operator

I will now turn the call back to Eddie Ryan for closing remarks.

Speaker 2

I will close off today's call with 3 thoughts. 1st, just a reminder of Neat's truly unique positioning right now, not just with our software, but within the life science industry itself. With innovation on an exponential growth curve, moving forward without a digital solution and I meant truly digital, not just paper and glass seems increasingly impossible. 2nd, with annual recurring revenue approaching $30,000,000

Speaker 3

NEAT first. Nearly all of it coming

Speaker 2

from SaaS and the investments in our team we made last year, NEAT's economics are better than they've ever been. With our Tier 1 customer base solidly in place and growing, our future has never looked brighter. Finally, I want to reiterate how pleased I am with our Q1 results and the team that made that possible. While we have come a long way since those first few lines of code, the vast majority of our journey lies ahead. And I couldn't feel better about the team we have in place for that journey.

Speaker 2

As always, thank you. And thanks again for everyone on the call for your interest in Neat.

Operator

And ladies and gentlemen, this concludes today's conference, and we thank you for your participation. You may now disconnect.

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