kneat.com Q2 2024 Earnings Call Transcript

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August 7, 2024

There are 9 speakers on the call.

Operator

Hello and thank you for standing by. At this time, we would like to welcome you to the Neat Solutions Inc. Q2 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, I would now like to turn the conference over to Katie Keita, IR Lead.

Operator

Please go ahead.

Speaker 1

Thank you, operator, and welcome, everyone, to Neat's earnings conference call for the Q2 of 2024. Today's call will be hosted by Eddie Ryan, Neat's CEO and Hugh Cavanagh, Neat's CFO. Please note the Safe Harbor statement on Slide 2 and the forward looking statements disclosure at the end of the earnings release. Please inform you that some of the comments made on today's call contain forward looking information, which by its nature is subject to risks and uncertainties, so actual results may differ materially from the views expressed today. 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.

Speaker 1

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 our performance. Management believes that these non IFRS measures provide additional insights into our financial results and certain investors may use this information to evaluate MEATS performance from period to period. With that, I pass the call to Eddie Ryan, CEO of MEATS.

Speaker 2

Thank you, Katie. Good morning, everyone, and thank you for joining the call today. You and I have prepared a few brief remarks about the business and our financial results, and then we will open up the call for your questions. Our strong performance we started 2024 with carried into the 2nd quarter, with annual recurring revenue up 60% over last year's 2nd quarter to $45,400,000 SaaS license fee revenue in the quarter grew by nearly $4,000,000 from last year's quarter 2, a 54% increase to $10,800,000 This acceleration helped lift overall revenue to $11,700,000 a 45% increase over last year's Q2. With this solid growth in revenue and cost of sales up minimally year on year, gross profit margin in the quarter was 74%, up from 66% in last year's Q2.

Speaker 2

The steady deal flow momentum we experienced in the Q1 continued into quarter 2, split roughly evenly between the U. S. And Europe. While expansions within our existing customers drove most of our incremental revenue, we added a number of new customers in the quarter and are still tracking to outpace last year's number of new customer adds. More companies and more departments and teams within companies are acting on the need to digitize validation.

Speaker 2

Paper based and hybrid processes are increasingly out of step with everything that is propelling the pharma industry forward. Even updating other parts of an IT infrastructure can require an e validation solution. And this was a catalyst for one of our wins in the quarter. This drive to digitize validation across the life science industry is contributing to the progress we are making with our partner program. We signed several new partners so far this year, including Corver Pharma Consulting, which we announced in June.

Speaker 2

With Corber as just one of several European partners brought on, we are making progress in expanding our geographic coverage. Every regulated company, no matter where it's located, should have access to e validation from Partners leaned in heavily to help us put on our best ever validate user conference in May in Berlin. Customers and future customers alike joined us to dig in on the features that we've already added, that we plan to add and that they would like us to add. We talked about a lot of things at Validate, among them best practices, artificial intelligence and multitenancy, with the goal that we all come away from the 2 days together smarter and better equipped to capture the many benefits that still lie ahead to digitization. I'll close here with a big thank you to our partners, our customers and our lead team that made validate the huge success that it was.

Speaker 2

With that, I will pass it over to Hugh to go over 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 solid financial results in Q2 underscore the growing demand that Eddie just talked about as revenues grew 45% year over year to $11,700,000 SaaS revenues grew 54% year over year to $10,800,000 and ARR grew 60% year over year to $45,400,000 Scaling the DGX within existing customers drove most of this growth, while revenue from new customers added a contribution as well. Revenue from professional services was $800,000 This is lower than Q2 a year ago as we grew our partner community to take on more services. This transition aims to focus more of our resources on developing our platform and incentivizing our partner community to seed needs across life sciences to help consolidate a leadership position in e validation.

Speaker 3

This brings the first half 2024 revenue to $22,400,000 up 40% from $16,000,000 for the first half of last year. SaaS license revenue year to date grew faster than overall revenue year to date, up 53% to $20,600,000 from $13,400,000 in the same period in 2023. The acceleration in top line growth after a strong first quarter was accompanied by a slowdown in growth of cost of sales and by carefully controlling growth in operating expenses. Cost of revenues for the Q2 of 2024 was $3,000,000 up 10% from the cost of revenues in Q2 of 2023. The 6 months year to date cost of revenue also increased by 10%.

Speaker 3

These are relative to 45% 40% increases in overall revenue for the 3 6 month periods respectively. Gross profit for the 3 months ended June 30, 2024 was $8,700,000 63 percent higher than the $5,300,000 in the Q2 of 2023. Gross margin percentage for Q2 was 74%, same as last quarter. For the year to date, we see similar expansions of gross margin year over year at 74% for the 6 months of 2024 versus 67% for the first half of twenty twenty three, an increase in gross profit dollars of 55%. Operating expense grew 22% in the 2nd quarter to $11,300,000 versus $9,300,000 in Q2 of 2023.

Speaker 3

Sales and marketing expense was the primary driver of OpEx growth, up 31% year over year to $4,400,000 in Q2 versus $3,300,000 in the Q2 of 2023. Validate 2024, which was held in May, was a key driver of the expense growth in the quarter. R and D expense, net of capitalized R and D was up 13% year over year to $4,800,000 in the 2nd quarter compared to $4,200,000 in Q2 of last year, driven in significant part by an increase in amortizations of the intangible assets. We ended the quarter with total annual recurring revenue ARR of 45 point $4,000,000 up 60 percent from $28,400,000 at the end of the last year's Q2. ARR from SaaS license fees was $45,200,000 also up 60% from $28,300,000 of SaaS ARR in June 30, 2023.

Speaker 3

As we continue on our planned trajectory, that is revenue growth outpacing growth in our costs, we are energized to pursue our strategic plans with even greater confidence. For your reference, 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

Thank you. The floor is now open for your questions. Our first question comes from Doug Taylor from Canaccord Genuity.

Speaker 4

Yes, thank you. Good morning, Eddie and Hugh. The continued evolution of your business mix with strong momentum in the channel partners is again evident this quarter. Can you speak to the visibility you have into the pipeline with your channel partners for new customers or expansions versus your direct sales efforts?

Speaker 3

You're on mute, Eddie.

Speaker 2

Hi, Doug. How are you? Yes, we have good clarity. We've actually detailed clarity on the pipeline and what our partners are working on. And we have very strong, I guess, go to market cadence with our partners.

Speaker 2

So we would be in with them early on a low touch type of approach and but enabling them to do the full life cycle from resell through to implementation and support of the partners. So yes, so we do see that model evolving for us and it is having an impact. And we see it still early in our life cycle, but it's beginning to bubble up stronger all the time. And we do see more clarity on the pipeline and the leads that are going to partners and we're supporting them, not just the leads that we bring to them, but also leads to bringing themselves. Hope that answers that, Doug.

Speaker 4

Yes. Well, maybe just to follow-up on that. We've historically seen some substantial seasonal ARR addition in the Q4 timeframe, which we're approaching here. That's really helped drive momentum and operations into the New Year. Do you believe that the setup is still for that to happen this year as your mix of channel versus or partner versus direct changes and evolves?

Speaker 2

Yes, I would say, our pipeline has ever been stronger, Doug. And I would say that right from the top of funnel through to customer delivery is a high quality funnel that we have that's getting more quality driven all the time. So yes, I'd be optimistic, but there's no guarantee on that. Sometimes deals can slow a little bit here and there depending on the size of the deals and all of that. But we have a good pipeline that we believe will be impactful through the year.

Speaker 4

Okay. Can you speak a bit about the progress you're making in building out your systems validation, the product development there to add to clear success you've had and are having with process validation?

Speaker 2

Yes. So we're making great progress. And 9.2 would be our most recent release and we would say that we brought forward some really strong capabilities that split will go to a fuller, more sort of digitized, agile type approach to CSV, computer system validation for the customer. So we have we're at, I would say, the first stage of that and it's really impactful and the customers love what we're doing and they're waiting patiently for the next phase of that. So we're very positive about where that solution is right now.

Speaker 4

Okay. Maybe last question for me and this one would be I think for Hugh. Leverage over both COGS and OpEx been showing through here significantly in the quarter, which is great to see. The question specifically about the COGS, cost of goods, which has basically been flat for over a year now. I mean, at what point do you need to start incrementally investing in your infrastructure to support your SaaS platform as it continues to grow?

Speaker 4

Flagged

Speaker 3

for the last while that we had intended that we'd flagged for the last while that we had intended that we put in place the structures. We particularly talked about R and D and sales and marketing, but that also did apply to obviously the cost of sales lines, the customer support and so on. And so we had those structures in place, which have allowed us to continue to grow the revenue while not significantly growing those various cost lines. Now for sure, as we go into 2025, we'll need to continue to look at that and there will be a need to add resources at some point in the future. I don't think it's going to be through the remainder of this year.

Speaker 3

But as we go into next year, that's something that we will continue to reassess as to vendors need to add more resources in those various areas.

Speaker 4

Okay. Thanks for that color and congrats on another strong quarter. I'll pass the line.

Speaker 3

Lovely. Thanks, Doug.

Operator

Our next question comes from Gavin Fairweather from Cormark.

Speaker 5

Hey, good morning and congrats on the strong results. Maybe just to kick it off for me after your Valade conference in May, any kind of takeaways as you debrief with the sales team in terms of the outlook for customer expansions or perhaps whether some of the product work that you're undertaking, whether that's unlocking kind of new use cases or workflows for customers?

Speaker 2

Yes, good question, Gavin. That the Value8 Conference, as you know, is and we keep reiterating this, is a very positive experience for the Neat employees in the different departments to enable them to be clear about where we're delivering value for our customers and also to be able to continue that in a focused way. The intimacy with the customers is very important to us. And as you know, prior to the Validate conference in general, we have the customer advisory board where a lot of our key customers come together and we share details on where the product is, where it's going, and we show them where it's going. That's very, very impactful for us.

Speaker 2

And we're very, very excited about alignment we have with our customers, especially our strategic customers. So it also informs us and where the customers want to what features will enable them to expand further in certain areas. And we are able to take that back to the R and D team and focus on that. So I think that's a really strong pillar of our customer intimate model where we learn where we can add the value and continue that valuable to customers.

Speaker 5

That's great to hear. And then maybe just on the partner side, when you added Korber, which seems like a pretty exciting partner, maybe you can discuss what you're seeing with them? Are they resourcing up to work with Need and Sell Meat? And then what are you seeing in terms of the pipeline for new partners, particularly within the more of the kind of larger SI space?

Speaker 2

Yes. So there's different variations to the partner model and there's different value through different partners. The Cobre partner is Cobre are they're a customer plus a reseller plus an implementation partner. So they are really domain focused. They're very focused on life science and pharmaceutical manufacturing.

Speaker 2

So they're really sweet spot from the partnership perspective. They understand the customer intimately. They understand our products. They understand and they also have their own IT products. So we are our products is going to enable them to deliver their product to market faster.

Speaker 2

It's also going to give them another product to resell as an add on to their own capabilities, their own suite of products and also allow them to maximize their services division through implementing these as well. So that's a special type of partner where you touch a value point in 3 different places with them, right? The other partners often just resell your product or implement your product, may not have the usages themselves directly. So customer plus partner, which we're excited about. The partner channel is robust, Gavin.

Speaker 2

It's still we've signed on probably 6 new partners this year. So as I said, there's what I call domain specialist partners. They're kind of on the business side, on the quality side, the validation side, and they live in that space. And then you have the IT partners, the systems integration partners and the cobers are kind of in the middle we would say. And the system integration partners are really interested in integration within our big customer space, helping us to expand our software across all the different sites within the big customers.

Speaker 2

So we have opportunities running in all those three categories.

Speaker 5

Yes. That's great to hear. And then maybe just lastly, excuse me, on the buying environment. I know last year you saw sales cycles move out a little bit, a bit more scrutiny around deals. I'm curious whether you've seen any kind of shifts in the buying environment more recently.

Speaker 5

I mean some other enterprise software players have kind of noted their renewed scrutiny around deals and longer sales cycles. Just curious if you've noticed any change this summer in Q3 here?

Speaker 2

Yes. I would say year to date, we are going a bit quicker than we were last year on new especially new logo acquisition. Some there are, I would say, it's still a bit early. Hopefully, back of the year is faster, but we're still very optimistic about the back of our year. But I would say that relative to last year, there's not a huge change.

Speaker 2

Probably the same type of sentiment, a little bit improved, I say, where budgets are being freed up a little bit better. But we didn't we don't suffer from the budgets on our larger customers. The strategic customers and the enterprise customers are not suffering from that perspective as much as the mid market and the smaller customers.

Speaker 5

Okay. That's it for me. Thanks so much. I'll pass the line.

Operator

Our next question comes from Christian Scroggs from 8 Capital.

Speaker 6

Hi, good morning. I wanted to dig into the composition of the pipeline as you look out from here. If we don't talk about the size of the customers in the pipe, if we focus on vertical, would you say most are in the life sciences domain or are you seeing more and more opportunities in adjacencies like CPG and such?

Speaker 2

Yes. So hi, Christian. As I said, we have very good clarity of our pipeline and it's very strong. It's stronger than it's ever been. It's a higher quality than it would have been a couple of years ago, where we put a lot more rigor into managing this.

Speaker 2

I would say that just on the sizes of the customers, we have customers in all the spaces, but primarily life sciences. But I treat like I treat consumer products, those companies as life sciences companies. I see them as that because they're using need for validation, which is, enables them to it's part of their business and enables them to be compliant with the regulations. So they're the very same as a big pharma company to us really. So we have those type of companies in the pipeline.

Speaker 2

We have supply chain customers in the pipeline, equipment manufacturers, systems integrators and also on the discharge side, logistics type company. So we still see what we categorize as life sciences is that vertical, supply chain and manufacturers, especially in the biopharma core business for us. We see them still dispersed across those areas and probably seen maybe a little bit more medical device companies coming through as well.

Speaker 6

Okay, great. And then I'll ask a second question on the professional services team and the growth there. It's incredible to see professional services revenue sort of flat or steady quarter over quarter as the software grows. So my question would be, do you find that you have capacity maybe on the pro services team? Are you structurally repurposing some of

Speaker 7

the professional services side kind of?

Speaker 6

Are they getting more engaged with your partners? Like how are you managing the growth in the professional services team?

Speaker 2

Yes, very good question. So we would be forensic on the professional services to make sure our people are we have the right we are never because you can't bring people in and have them trained in this business overnight, right? So you have to keep a bench there. You have to make sure that bench is available. You have to leverage that bench and cross multiple areas.

Speaker 2

So we've done a lot of work in the last, I guess, in the last 9 months in optimizing our professional services functions. And we split it up in the different capabilities in that. And we're watching that very closely. And I would say that we're also the partners are taking more of the services in the marketplace, which is great. But we would be from the new customers, especially in the enterprise and strategic size customers, we would be have a real direct impact.

Speaker 2

So we would have that professional services team ready to deploy new customers very quickly. And they're all delivering very well and it's working very well. So it's something that we would be continuously monitoring it. And I believe at this point in time, it's suitable for purpose. And I believe that it's actually getting more productive as we go forward.

Speaker 2

And we're getting with better models of and better revenue streams through better products that we can sell our customers through professional services now as well. So I think that whole area is

Operator

Our next question comes from Rob Goff from Bantan.

Speaker 7

Thank you very much for taking my question and congrats on the quarter. Yet another question on the partnership development. Give us a sense of how you see this scaling up. Is it something like partners could be responsible for 15% of 2025 revenues? Or how do you see them penetrating that way?

Speaker 2

That's a good question. Hi, Rob. So yes, so partners for us are, I would say, it's something that will take some time to mature to that type of a number, Rob. That would not be the case. A lot of our think of it, our strategic customers are the customers and the enterprise customers is where and customers that are already deployed are the customers that give you the growth every year.

Speaker 2

So the new customers today become the expanders of tomorrow and beyond. And a lot of that stuff is direct, especially enterprise customers. So we do see it tacking up, but not at that extent in that short period of time, Robert.

Speaker 7

Okay. Thank you. And it certainly didn't appear in the revenues, but did you note any customers holding back a little bit just to see how 9.2 comes out, see how some of the new services come out?

Speaker 2

Yes. So that's also a good question and there's always a bit of that. Customers are always waiting to go to the next release if they can and that's something that's just part of the business. But I think we're getting into a better approach to this where we're enabling customers all to go up to the next release a lot faster. And it's becoming part of our kind of contractual partnership with the customers as opposed to giving the customer more time to delay releases.

Speaker 2

So we're getting more focused on that and we're putting a lot of effort into making sure that customers now move forward with the releases. So that's because in the SaaS environment, you need to have them upgraded with the latest technology because there's often security patches and stuff coming into each release and all that. So it's better business for us and for the customer. So we're seeing that. But there's always some customers it's a transition for us and it's going to transition over the next year or so where all the customers will be going up together at each release.

Speaker 2

But it has started and a lot of our customers are on that cadence now.

Speaker 7

Thank you very much.

Operator

Our next question comes from Steven Li from Raymond James.

Speaker 8

Hey, thank you. Very good quarter guys. A couple of questions for me. First one, FX tailwind or a headwind this quarter?

Speaker 3

Very, very disciplined really. I mean, there's if you look at the ARR number, there is certainly a little bit of a tailwind there in the 100 of 1000. I mean, it's easy enough to calculate about 80% of our revenue is U. S. Dollar.

Speaker 3

And if you just look at the U. S. Dollar rates last the end of last quarter versus this quarter, you'll find it's €500,000 In terms of revenue and expenses, really very little impact.

Speaker 8

Okay, that's great. And Hugh, you're still burning a little cash with the capitalized R and D. At what level of quarterly revenues would you expect to be closer to cash breakeven?

Speaker 3

So again, as you have heard the same before, Stephen, we don't forecast these. But at a more general level, I suppose what I have said in the past is that you need to take account of in terms of overall cash situation, you need to take account of some of the working capital impacts as well because we invoice a big proportion of our annual revenue, a good proportion gets invoiced in the first half of the year. So as a result of that, our cash is typically stronger in the first half and you will have seen that in the Q1, we were cash positive. This quarter, we're slightly cash negative. And over the rest of this year, we will continue to be expect to continue to be cash negative overall.

Speaker 3

But then when we go into the Q1, 1st and second quarter of next year, I think I expect the first and second half again, first and second quarter, first half of next year to be strong. And part of this has slipped back again a little bit in the second half, I would hope that overall for the year, we should be neutral or maybe even a little positive.

Speaker 8

Okay. Very helpful color here. Thank you.

Speaker 3

Okay. Thanks, Steven. Yes.

Operator

There are no further questions at this time. So I'll turn the call back over to Eddie Ryan, CEO.

Speaker 2

I'll close the call today with a few final thoughts. First, we believe the momentum we've seen this year has staying power. Demand is there and with many companies still early in their rollouts, we expect demand to be durable. 2nd, our team is there. The sales and marketing teams we have invested in are coming into their own and our results are showing us.

Speaker 2

Our partner team is off and running and consequently, we expect to benefit from growing our network of Neat subject matter experts. Finally, our long term potential is there. Users are looking to leverage needs flexibility, ease of use and scalability in more ways, and we're all in on developing our platform to its fullest potential. Thank you all.

Operator

The meeting has now concluded. You may now disconnect.

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