kneat.com Q4 2023 Earnings Call Transcript

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February 22, 2024

There are 8 speakers on the call.

Operator

Standing by. At this time, I would like to welcome everyone to the Neat Q4 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I would now like to turn the conference over to Katie.

Operator

Please go ahead.

Speaker 1

Thank you, operator, and welcome everyone to MEET's earnings conference call for the Q3 and full year 2023. Today's call will be hosted by Eddie Ryan, Neat's CEO and Hugh Kavanaugh, NEET's CFO. Please note the Safe Harbor statement on Slide 2 in the forward looking statements disclosure at the end of the earnings release. These inform you that some comments made on today's call contain forward looking information, which by its nature is subject to risks and uncertainties. Actual results may differ materially from the views expressed today.

Speaker 1

For further information on these risks and uncertainties, consult the company's relevant filings, which can be found on SEDAR and on the company's website at www.neat.com /investors. 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 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 MEET.

Speaker 2

Thank you, Katie. Good morning, everyone, and thank you for joining the call. This morning, Hugh and I will talk about the progress Neat has made over the last quarter 12 months and share what we can about our plans for the next 12 months. After that, we will take your questions. As I said in my letter to shareholders, 2023 was another year of strong execution against our plans, which were to add new customers, expand our existing customers, leverage our partner community, further develop the LEAP platform and continue to build LEAP's own structures for growth over the coming years.

Speaker 2

I am pleased to report that our team delivered on all fronts. Total revenues for 2023 grew 44%, SaaS revenue grew 73% and annual recurring revenue grew 55%. These growth rates were mostly powered by customers we won prior to 2023, demonstrating headway on the expand part of our land and expand strategy. We use a net revenue retention rate to measure how well we are doing on expansions. Our net revenue retention came in at a solid 138% for 2023.

Speaker 2

And with a record number of new strategic customer wins this past year, the high quality customer base driving our growth grew substantially bigger, helping to secure durable revenue growth into the future. This is because it can take a customer several years to fully scale Neat across its sites and processes as they look to digitize and harmonize validation enterprise wide. The result has been a steady and consistent upward trend in our revenue base. The number of customers generating over $200,000 in annual recurring revenue has more than doubled over the past 2 years. At the same time, the average annual recurring revenue generated by these customers has also expanded.

Speaker 2

We estimate that our existing customer base has the potential to contribute more than US65 $1,000,000 in annual recurring revenue when fully scaled for validation use cases alone. This is without adding a single new customer. But of course, we do plan to add more customers. With the investments we have made in the land part of our strategy, we expect to add more new customers in 2024 than we did in 2023. Our go to market strategy for 2024 leverages a more seasoned sales and marketing team and an evolving partner strategy helping our end users capture more and more value from our software.

Speaker 2

Neat software is not standing still. In 2023, our R and D team continued to make Neek GX more flexible, more powerful and more feature rich, enhancing our value proposition across all areas of validation. Our achievement this past year would have been impossible without the investments in talent we made in prior years. While we made excellent use of our expanded capacity this year, we still have room to run with only strategic hires planned for 2024. Our customers will tell you that we have an incredible company of people at need.

Speaker 2

This is great for them, but it makes all the difference in the world to the Neat team itself, doing work every day with truly excellent people who care deeply about the outcome. As we embark on 2024, we stand to benefit from a powerful and timely combination of advantages, a large and growing customer base, but we still have much room in which to expand, a bigger and more seasoned team and software that we believe revolutionizes validation for Life Sciences. What this means is that we're better equipped than ever before to create value for our customers, employees and shareholders. We look forward to seeing what we can accomplish in the year ahead. I will now hand you over to Hugh for a review of the financial results.

Speaker 3

Thanks, Eddie. As I take you through the numbers, please keep in mind that all the numbers I will be discussing are in Canadian dollars unless otherwise noted. Our 4th quarter results reflect progress we've made leveraging the investment we've made in 2022. Revenue for the quarter ended December 31, 2023 was $9,800,000 up 35% from $7,300,000 in the Q4 of 2022. Dollars 8,900,000 of this was SaaS license revenue, which grew 58% over the $5,700,000 of SaaS license revenue we did in Q4 of 2022.

Speaker 3

For the full year, revenue grew 44 percent to $34,200,000 from $23,700,000 powered by 73% growth in SaaS revenues from $17,300,000 in 20 22 to $30,100,000 for all of 2023. The increase in revenue for both periods primarily reflects the continued scaling by existing customers in their use of Neat GX and to a lesser degree, the purchase of license subscriptions by customers new to Neat in 2023. Cost of revenue for the Q4 of 2023 was $2,800,000 which is lower than in Q3 and slightly higher than cost of revenues in Q4 2022 of $2,700,000 Gross profit for the 3 months ended December 31, 2023 was $7,000,000 53% higher than $4,600,000 in the Q4 of 2022. Gross margin percentage was our highest yet at 72% compared to 63% for the Q4 of 2022. This brings us for the full year to gross profit of $23,200,000 58 percent higher than the $14,700,000 for 2022.

Speaker 3

Gross margin percentage for the full 12 months of 2023 was 68% versus 62% for all of 2022. As partners take on more professional services and the proportion of our SaaS revenue to professional services revenue expands, we expect the gross margin percentage to continue inching upwards year over year in 2024. Operating expenses grew 28% in the 4th quarter to $10,100,000 versus $7,900,000 in the Q4 of 2022. The largest contributor to this growth includes sales and marketing expense of $4,400,000 in Q4 2023 versus $3,400,000 in Q4 of 2022. Note that our Validate conference in Q4 for both periods drove much of the increase from Q3.

Speaker 3

R and D expense, net of capitalized R and D for Q4 2023 was $3,800,000 compared to $3,000,000 in Q4 of 2022 and relatively flat compared to Q3 2023. Total operating expense for the full year was $36,700,000 50 percent higher than in 2022, driven primarily by a 62% growth in sales and marketing expense to $13,800,000 versus $8,500,000 for 2022, a 43% growth in R and D expense, net of capitalized R and D to $15,800,000 for the full year compared to $11,000,000 for all of 2022. We saw growth in OpEx come down every quarter in 2023 and plan to maintain a more measured pace of OpEx growth throughout 2024. We ended the quarter and the year with total annual recurring revenue ARR of $37,400,000 up 55% from the end of 2022 when it was $24,200,000 Virtually all of this ARR is now coming from SaaS license fees, which grew 57% to $37,300,000 from $23,700,000 at December 31, 2022. The difference between total ARR and SaaS ARR comes from maintenance fees, which were $100,000 at the end of 2023 compared to $500,000 at the close of 2022, with all but one significant customer having transferred to SaaS.

Speaker 3

Moving on to the balance sheet and use of cash. We've had some developments here since our last report in November. The first of which was a drawdown of our debt facility in December of €5,000,000 which is a little over 7,000,000 dollars We supplemented this area or this month with an equity offering through a bought deal from a consortium of investment bankers in Canada. The offering added approximately $18,500,000 to our cash balance. As a result, we are well capitalized to transition towards breakeven and profitability over the next several quarters as we execute on our go to market motion, continue to build the Neat platform and fortify our internal processes and operations to accommodate the company as we scale.

Speaker 3

For reference, we have filed our audited 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

Thank you. The floor is now open for your questions. Your first question comes from the line of Christian Growe from Need Capital. Please go ahead.

Speaker 4

Hi, good morning, Eddy and Hugh. Congrats on a strong close to the year. In the disclosures, you noted that expansion activity drove most of the software or SaaS growth through the year and in Q4. So just wondering if you could give any color around what type of expansion activity it was? And maybe to focus the question a little bit, how much of that expansion activity would you say is geographic or new site expansion as you move across your big customers?

Speaker 2

Hi, Christian. Thanks for the question. Yes, so expansions with our existing customers as part of our TAM white space that we have there is very strong. And I guess there's a tendency for it to happen in the latter part of the year stronger than the front of the year. That's one of the things we will have there.

Speaker 2

And then we have it's coming primarily from what we would term as enterprise and strategic customers. And there's also customers in there that would have gone live early in the year that would also be seeing some expansion, but there'll be a smaller proportion of those. So by and large, the expansions are coming from the customers that would be more than a year with us type thing or most of the year before they start in expanding proper.

Speaker 4

Okay. That's helpful on the timeline. I have one follow on there for your newer customers. Do you expect as NeatScale that you could scale them faster? And do you maybe expect them to?

Speaker 4

Or is that 3 to 6 year full scale timeline pretty consistent even with the newer logos?

Speaker 2

I would say, yes, there's very good opportunity for that, especially given that we have a stronger focus on account management and customer success management and tech support going into the future that we built up that function later last year. And also the maturity of Neze in the marketplace, it's reputation of being tried and tested technology that works and delivers the compliance aspect of the needs that other systems may struggle with. So we're known for being successful. We're known for being an easy to use software. And that's constantly getting stronger.

Speaker 2

And I think that's feeding into more aggressive expansions by our customers.

Speaker 4

Okay. Just one more question from my end and then I'll pass the line. But on the strategic hires going forward, Eddie, maybe 2 parts. Does that suggest a broader slower pace of hiring across all functions? And then by strategic, does that mean, would you call it senior leadership or more organizational additions?

Speaker 4

Just what do you mean by that commentary?

Speaker 2

Yes, I suppose there's a bit of both. But I would say that over the last year, 1.5 years, we strengthened a lot of our functions, right? And in the back end of last year, we were probably more focused on customer success aspect of the business. And so I would still see strategic being more customer success functions, a bit more into sales. But generally speaking and a little bit of leadership as well.

Speaker 2

Generally speaking, we're going to be flat on our expenses to the year is what we've more or less said late last year as well. And that is holding true. We still believe we're growing into a strong team that's really performing and delivering for us on the marketplace.

Speaker 4

That's all great. Thanks so much for taking my questions and I'll pass the line.

Operator

Our next line question comes from the line of Rob Jaff from Echelon Capital Markets. Please go ahead.

Speaker 2

Thank you for taking my question and congrats on a very strong quarter guys. Thanks, Rob. Thank you, Rob. I just wanted to maybe focus on the revenue line where Eddie you did I believe you commented that you look forward to adding more customers in 2024 versus 2023. Would that apply to the enterprise level of customers?

Speaker 2

Yes. So we I guess our business is very much focused on enterprise and strategic. So enterprise is the kind of the layer down below strategic from our perspective. I'm sorry, I should have said that for a minute. Yes.

Speaker 2

Okay. No problem, Rob. And I would say that we're seeing a quality strong pipeline developing all the time. And we expect that to continue through 2024. So there is obviously, we would say that last year to some extent there was slowdown in deals here and there and a little bit of because of the macro environment.

Speaker 2

We still don't know how that will pan out to the year, but generally speaking, it's not significantly impacting us. But if you go down to smaller customers, yes, it is. And we're looking to do more of our smaller customers to our partner channels as well as we go from 24. Okay, great. And then perhaps on the spending side of things, could you talk to your R and D spending and how that relates to your moves to add new services and expand your TAM?

Speaker 2

Yes, absolutely, Rob. This is a really the guys I mean the R and D team is doing a great job and as is the rest of all the other functions. I would say that we're very excited about what the guys are developing. And we saw the newest release of product, which will go on the market very soon and it's very powerful. And we believe that it's really consolidating our ability to expand with our customers and growing to that address the market that we have in front of us.

Speaker 2

So we think that what's coming out is going to be really exciting for the market and looking forward to that. So the R and D team is doing a great job. The building, as I say, Rob, the building and I've said it before, the building for good, great closeness to our customers, real intimate customer relationships, building the here and now, but also building the future for Neve as well in parallel. Great. And if I may have a follow-up for passing 1.

Speaker 2

Could you perhaps talk to the rollout of that product upgrade and just how significant that might be for customers? Yes. So it's I would say the release of our next release is due probably later in the quarter and but it'll probably take a bit of time before it gets into customers' hands and all of that, right. So as you go through the year, we'll begin to see that in customer success, right? So but it's still part of the what we would call the validation space.

Speaker 2

We're still focused on validation space and ensuring we're giving as much value as we can to our customers as broadly and as deeply as we can within that space.

Operator

Our next question comes from the line of Doug Taylor with Canaccord. Please go ahead.

Speaker 5

Hi, thank you. This is Neil speaking on Doug's behalf. First off, congratulations on the strong quarter Eddie and Ryan. The first question that we have is with respect to the pipeline. We had some strong momentum in 2023 and you spoke to some good momentum into the New Year.

Speaker 3

Just wondering if you could speak

Speaker 5

a little bit kind of adjacent to this, the highly regulated life sciences space? Yes, kind of adjacent to this highly regulated life sciences space?

Speaker 2

Yes. So there's a bit of everything there, but I would say that our pure play our pure market, which is biopharmaceuticals and manufacturing and the supply chain around that is really key where most of our conversations are. And then adjacent to that, we have this the consumer product goods companies as well, Neil. And there we have in our customer base, we have some very large consumer product goods companies. And they're also expanding with us and we're also having conversations with more.

Speaker 2

So we expect to continue to see the supply chain and the consumer product goods companies being coming through as customers in due course. So we have a very diverse, I would say, pipeline from that perspective, from that space. We've a lot of like we turn large customers supplying into our core, which is biopharma manufacturing.

Speaker 3

We have

Speaker 2

a lot of big companies supplying in there, engineering companies, IT service providers. And we have a value proposition for all of these also. And that's evolving as we go forward. So we would expect to see good return from the supply chain as well. And that also includes contract manufacturing organizations and the like and research organizations.

Speaker 2

So we have a value proposition for all of them. And that's what we term as our life sciences $2,000,000,000 TAM.

Speaker 5

Okay. And then just a follow-up, kind of working within one of the follow-up to questions earlier. Just with potentially hiring being a little bit slower, just wondering as you approach this TAM that, as you said, touches so many different industries, are there any kind of reshuffling or allocation or reallocation of resources around certain opportunities where you're seeing some particular momentum? Just wondering how you, I guess, configure your go to market depending on where you're seeing the strongest opportunities over the coming year.

Speaker 2

Yes. I would say that the key thing from our talking to different segments in that space doesn't dilute any of our capabilities. In other words, the people who are selling to pharma manufacturers can also sell to the consumer product goods companies. The conversations are very much the same. What I would say is that what we would be focusing more on is on the smaller customers that we would try and have our strategic partners play more a part in that space.

Speaker 2

And they would be from an implemented lifecycle management of the customer, for example, through the partner. So we're beginning to see that and we've launched that this year and we're pushing that further. So that Neetten would be more focused on enterprises strategic and that the channels would take more ownership of the small and medium customers. But it's not perfect, crosses over a wee bit so and all that. But they'd be the only sort of changes we would be from an organization perspective focused on at this point in time, Neil, but there's we're constantly evaluating everything and strategy tweaks a bit as we go all the time.

Speaker 5

Great. And then just one more question. You had mentioned the expectation to be able to approach breakeven over the coming year. It seemed, I think, I'm not mistaken on the EBITDA metrics. Just wondering if you could speak to if it's below the line what you're seeing in terms of expected working capital dynamics over the coming year.

Speaker 5

Just wondering if you could speak to what you're seeing there? And thank you. I'll pass the line after that.

Speaker 3

Okay, Neil. I'll pick up an asset queue here. So yes, the fundraising has given us a very strong balance sheet and puts us in a very strong position and I believe that it puts us in control of our own destiny. But in terms of the actual expenses, etcetera, yes, so as Eddie talked about previously, we're not planning to add a lot of headcount. I mean, there will be, as you mentioned, some strategic adds, etcetera.

Speaker 3

And obviously, some inflation type growth in expenses, annual reviews, etcetera. But yes, no, I mean, we're absolutely moving into the direction of breakeven and on an EBITDA basis, adjusted EBITDA basis, I think we can anticipate going that direction. Over the coming quarters, maybe not before the end of this year, but certainly as we go into 25%, I think that's not an unreasonable expectation.

Operator

Great. Thank you. Our next question comes from the line of Justin Keywood from Stifel. Please go ahead.

Speaker 6

Hi, thank you for taking my call. Just on the opening comments, I think I heard the opportunity with existing customers, the ARR is $65,000,000 I believe that's up from $50,000,000 year over year, if that's accurate. And is that, I assume, reflective of the amount of new customer wins? And also if there's any indication of timing when that opportunity with existing customers could be achieved?

Speaker 2

Hi, Justin. Yes, that's a good question. So we would have reviewed that number from a ground up perspective based on the traction we have with existing customers and I would say extrapolating that into the space at large. And yes, so it's based on newer customers that have come into our customer base and also reviewing existing customers and see it is on track. And generally speaking, nothing has really changed.

Speaker 2

The timing of them, I would stand over to the other question as well, right, is that I would see these larger strategic customers being a 3 to 6 year expansion for validation across all their sites to all their different use cases, of which there are many. There can be 12 different use cases, 12 different validation processes. And expanding them to all users across all sites when we think of our lead customer having 9,000 users across the globe. So we would say they've been 3 to 6 years depending on how quickly they move internally. But as I say, that timeline is coming down and it's coming down because of the proven the validated status of Neet in the marketplace and the company behind Neet and the success that we get to our customers.

Speaker 2

I mean, there isn't a customer out there that does not work with Nida and his products, right? And that is becoming broader and broader. And the referenceability now when you're signing a customer is pretty, pretty hardly even asked when you're dealing with need now.

Speaker 6

Great, understood. Any indication on the type of EBITDA margins that could be achieved at that level of scale, the US65 million dollars

Speaker 3

Well, I mean, ultimately, Justin, our gross margins are moving up and our EBITDA margins are coming up. I'm not going to put an exact number on where we could expect EBITDA to be at that sort of €65,000,000 level. But I am happy to sort of say that we expect to move towards the sort of normal EBITDA type of margins as over time over the next number of years, we would expect to get to those normal levels.

Speaker 6

Thanks. And maybe a follow-up, Hugh, on your opening remarks in regards to gross margin, I think I heard there's going to be some slight expansion this year. Any indication of what that could be?

Speaker 3

Yes, I mean, again, that to a significant degree has been driven by the mix of professional services to SaaS revenue. And as we continue to grow our SaaS revenues, then that mix is going to continue to move towards SaaS and be more reflective of the SaaS margins that we are achieving. So I mean, as I think you may have heard me saying before, we achieved we've been achieving very low margins and have been able to achieve very low margins on our professional services. They're very much professional service is to drive the growth in licenses and license revenue. So yes, so I mean, I think realistically, we probably there may be the first we won't necessarily see that tick up happening in the Q1.

Speaker 3

But in subsequent quarters, as the ARR and revenue grows, yes, we're going to see small tick ups. We're at 72, which is a very nice increase from where we were last quarter and last year. So I think we've made a very significant jump in this quarter. We're not going to see that level of increase repeated over the quarters of 2024, which had to be slight hiccups.

Speaker 6

Great. Maybe just a quick follow on. So 72% in Q4, would that be a good level to build on, maybe assuming flattish results for Q1 and then upticks thereafter?

Speaker 3

Yes. I mean Q1, I mean, might be flat, maybe 1% or 2% down versus that, but then back Q2 will be back again and ticking on from the area.

Speaker 6

Thank you for taking my questions.

Operator

Our next question comes from the line of Gavin Fairweather with Cormark. Please go ahead.

Speaker 7

Hey, guys. Congrats on all the progress. A few for me. When you think about your earlier cohorts of customers like pre-twenty 20, are you still finding ways to grow those customers through your increased But I'm curious with those earlier cohorts if you're still finding ways to expand them even though they might be a bit further along in the initial use case?

Speaker 2

Gavin, yes. So exactly, I mean, so the e validation space, as I said, is potentially 12 use cases across multiple different functions and different segments. And there's different variations to this in different places. We're constantly building out technology to go deeper and broader within those spaces. So yes, we are certainly still expanding customers that would have been there, as you referenced pre 2021, 2020, whatever.

Speaker 2

So they're constantly spending. But just a big picture thing is that our view is to expand them all, like continuously expand them. And we see we're always looking for opportunity to do that. And as I say, I often say in the call is that we're building the future of our platform parallel with the current. So we expect to see these customers expanding for a long time.

Speaker 7

That's great. And then just on the new addition in the senior leadership team with Calm, it sounds like part of his duties are doing a bit of a revamp on how the channel program is working. Maybe you can just discuss a little bit how you're kind of tweaking that program and ultimately what impact are you trying to drive

Speaker 6

with those changes?

Speaker 2

Yes. So, Calum is very focused on our the operational side of things and our customer success side of things and professional service. So it's about bringing continuing that customer intimate engagement and supporting our customers' success of our product across all areas, right? And ensuring that we really have these intimate understandings with our customers as well around where we should be going for them and does a lot of gathering information gathering through this. But there's also customer success helping them to, first of all, utilize our software to the fullest and then expand it further.

Speaker 2

So there's a lot of work going on there and I guess that's where the strongest focus for column is supporting the sales function with customer success and tech support right where it comes to engaging with the customer. That will be the key focus amongst other things. So we've done a lot of work there at the back end of last year, put strategic people in locations there. And we are seeing green shoots coming through that as well, Gavin.

Speaker 7

Okay. Anything specific in terms of the channel or partner program that you would highlight in terms of changes to how it's running or operating?

Speaker 2

Well, the partner program, we have taken it from what it was, we will say implementation partners. Partners would come up and become very strong at implementation and have real deep domain knowledge and close to the customer. These partners are now becoming more strategic partners and reseller partners. So they now we would have reseller agreements with these partners now. And so that's the change there.

Speaker 2

And again, that's under Colm's area as well. So yes, so more focus on strategic partners to deliver the full life cycle of the customer from selling all the way through to deployment and post sales support with Neet being the direct SaaS supporter obviously of that.

Speaker 7

Great. And then just from reading through the MD and A, it sounds like you saw a little bit of churn in 2023. Would it be fair to say that that was kind of smaller customers, smaller dollars? Maybe you can just kind of expand on that a little bit on what you saw?

Speaker 2

Yes. Yes. There was a few customers there and I think the climate probably affected a few of them. A few of the small customers went out of business. There was a couple of those, very small ARR impact on the company as you can see from the NRR.

Speaker 2

And then there was a couple of smaller customers that would have had we're looking to start the validation division. One particular customer is looking to start the validation division, but they never went through with that and they didn't really need the software in year 2. So but very limited, nothing that would suggest anything like that they don't like Neet or it's just genuine reasons for not going forward using Neet. Thanks so much. Thanks, Scott.

Speaker 2

That's all my questions.

Speaker 7

Congrats on your progress.

Speaker 2

Thanks.

Speaker 3

Thanks.

Operator

Since there are no further questions at this time, Eddie, I'll turn the call back over to you.

Speaker 2

Thanks. Before we sign off, I will leave you with 3 key takeaways. First, our results show that Need is gaining ground in life sciences validation. Life sciences goes beyond pharmaceutical and medical device companies. It includes contract development manufacturers, consumer health and engineering and equipment companies that are helping these companies, our customers.

Speaker 2

2nd, we continue to build because there is much more our platform can do for our customers. And finally, we're getting closer to profitability, an essential element for all long lived companies and Neat plans to be around for a long time. Thank you for listening, and as always, a big thank you to the Neat team that makes our results possible. Thank you.

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