kneat.com, inc.

Good day and welcome to the NEAT first quarter 2024 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. If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, please press star 1 again. For operator assistance throughout the call, please press star 0. And finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Katie Cater to begin the conference. Katie, over to you.

Thank you, operator, and welcome everyone to NEAT's earnings conference call for the first quarter of 2024. Today's call will be hosted by Eddie Ryan, NEAT's CEO, and Hugh Cavanaugh, 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, informing you that some comments made on today's call contain forward-looking information. This information 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 CDAR and on our website at .NEAT.com forward slash investors. Also, during today's call, we may refer to certain supplementary financial measures as key performance indicators. We use both IFRS measures and supplementary financial measures as key performance indicators when planning, monitoring, and evaluating our performance. We believe that these non-IFRS measures provide additional insight into NEAT's financial results, and certain investors may use this information to evaluate NEAT's performance from period to period. Thank you, Katey. I will now pass the call to Eddie Ryan, CEO of NEAT.

Thank you, Katey. Good morning, everyone, and thank you for joining the call. Hugh and I will talk this morning about what we are seeing across the business. We'll discuss what we're seeing in our end markets, and we will talk about how we are building for the future. After that, we will take your questions. As you saw in the numbers we reported yesterday, 2024 is off to a solid start in our first three months with annual recurring revenue up 57% over last year's first quarter, gross profit margin up to 74% from 67% in the first quarter of last year, and operating expense growing at a fraction of last year's pace up 17% year over year versus 77% in quarter one 2023. This strong top-line growth on much lower expense growth highlights the expansion potential baked into our customer base and the returns accruing from earlier expenditure on resources. In the first quarter alone, our existing customers across North America, Europe, and Asia added substantially to their NEAT GX license base, and we expect them to continue expanding. Many have sites and processes where they have not yet deployed NEAT, and their goal is to harmonize these processes across all their sites and divisions. Standardizing on a single platform improves quality, efficiency, and time to market. And standardizing on the NEAT platform appears to be emerging as best practice. As our existing customers scale NEAT with confidence and place increasing trust in our platform, this compels other companies to embark on their digital validation journey with NEAT. We announced two large strategic customer additions in January and February, and added several other smaller customers in the quarter, putting us on pace to surpass last year's number of new customer additions. Our healthy pipeline gives us confidence that we will continue on that track. Based on our strong land and expand capability, and if history is our guide, these incoming customers are the expanders of tomorrow. So I'm pleased to report that we are executing the plan. We have the teams and processes in place to support the increasing customers and the activity we are expecting this year. And most importantly, the teams themselves are in better shape than ever. When I look at our win reports, the one thing I see again and again is the salesperson attributing the win to teamwork. The collaboration between sales, engineering, customer success, our contracts team and others is core to our culture and a competitive advantage. I believe it contributes significantly to our success, and I'm glad to see it thriving. With that, I will pass it over to you to go over the financials.

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. As Eddie said, our results for the first quarter put us on a solid footing for the rest of 2024. Revenue for the quarter ended March 31, 2024, was $10.8 million, up 35% from $8 million for the first quarter of 2023. $9.7 million of this was SAS license revenue, which grew 52% over the $6.4 million of SAS license revenue we did in Q1 of 2023. As has been the case for some time, the increase in revenue was primarily driven by expansion by our existing customers' use of GX. New customers since Q1 of 2023 also contributed to the growth, albeit to a lesser degree. Revenue from professional services was approximately $1 million, about the same as Q1 of 2023, reflecting the increased contribution from our strategic partners in this area. Cost of revenues for the first quarter of 2024 was $2.8 million, on par with Q4 of 2023, and slightly higher than cost of revenues for Q1 of 2023 of $2.6 million. Growth profit for the three months ended March 31, 2024, was $7.9 million, 48% higher than $5.4 million in the first quarter of 2023. Growth margin reached another record at 74%. This is a material increase from the 67% growth margin we recorded in last year's first quarter. The expansion of our growth margin reflects the services transition I mentioned above. So, growth margin is starting to look more like that of a company that is pure SAS. Operating expenses grew by 17% in the first quarter to $10.2 million versus $8.7 million in the first quarter of 2023. The largest contributors to this growth include R&D expense, net of capitalized R&D for Q1 of 2024 was $4 million, up 5% compared to $3.9 million in Q1 2023. And sales and marketing expense at $4 million in Q1 of 2024, up 36% versus $3 million in Q1 of 2023. We are pleased to see the leverage on the investments we made in 2022 and early 2023. We ended the quarter with a total annual recurring revenue ARR of $42.1 million, up 57% from $26.9 million at the end of last year's first quarter. ARR from SAS license fees was $41.8 million, up 59% from $26.3 million for SAS ARR at March 31, 2023. We shored up our balance sheet in February with an equity offering that added approximately $18.5 million to our cash balance. Together with the debt financing completers in 2023 and our wrapping of revenue alongside material gains in gross margin and a slower ramp in operating expenses, we feel confident in our cash position for this year and our momentum towards profitability. For your reference, we have filed our unaudited consolidated financial statements and MD&A on CDARF, and they are also available on our website. I will now turn the call over

to the operator for your questions. If you wish to ask a question, please press star followed by 1 on your telephone and wait for your name to be announced. Your first question comes from the line of Christian Sebreu from 8 Capital.

Your line is open.

Good morning. Thanks. Not thanks. Well, thank you both for your questions. I would also like to congratulate you on another good ARR edition quarter. As we look out through the year and at the current pipeline, would you say it's largely comprised of life sciences customers? A lot of the filings and the reports spoke to your focus there. Or is your pipeline starting to get more mixed across other verticals as well?

Hi, Christian. Thanks.

Eddie here. Yes. So I would say, Christian, the mix is like a life sciences. I mean, that's our pipeline and everybody in there is part of our, you know, our team that we believe is over two billion. So it's life sciences, which includes everything from pharma, biotech device manufacturers, the supply chain into those into those regulated manufacturers and also on the distribution side. We're all regulated to a similar or higher or similar degree. So across the board there, Christian, life sciences. Yes, there are obviously some consumer product goods companies as well. And I treat them as life sciences because we're applying to their regulated side of their business, which is the validation space.

Got it. I'll sneak in two more questions. The first of these two on the partner channel. There was some explicit commentary on how the partner channels matured or evolved even at the start of this year. So Eddie, what could you share on? I think there's a tiered system as well as more focus on the systems integrators. Does that help you get to market in a lower touch format? Does that help you get to new geographies? How is the structure of the team changed? What color could you provide around this evolving channel?

Yeah, that's a good question, Christian. So the partner channel is continuing to evolve and we have partners in the different segments and some might be more focused on integration. Others are also they've come up to a level where they can be resellers. So we have different, I guess, partner agreements now. Some are interested in being that more pure play integration channel and others are interested in being resellers and integrators and follow on support. In other words, managing the life cycle of the customer. So yeah, so there are different tiers. And the goal is that the partners will be successful in the non-strategic customer's moral perspective.

Great. And then my last question here might be more for Hugh. The gross margin is 74%. This is a little bit higher than what I was looking out for. Was there any benefit on the services side from utilization or otherwise? Or is this 74% steady state trend going forward, driven by the software? What could you say about any puts and takes in the quarter there?

Yeah, no, sure. Sure. Thanks, Christian. Yes. So, yeah, I'd say we're very pleased with the 74% is tacking along the right way, thankfully. But yeah, I think there are a few nuances in there that it's probably worth being aware of. And it's probably most in terms of professional services, most to do with timing of when projects get completed and when they get recognized in revenue. We tend we expense our professional services as we incur the costs. And then obviously, you know, projects can finish one quarter or they may slip into the next. And that that then impacts the amount of revenue recognized in a particular quarter. And that that certainly can impact the gross margins, you know, to a small degree. But also, there is also certainly efficiencies on the whole professional services side. And, you know, there's a lot of focus on, you know, as you mentioned, utilization and, you know, having that group focused on on providing professional services as opposed to, you know, doing doing other stuff which, you know, which belonged in other areas. So, yeah, absolutely. There's better utilization, but also to do with timing of projects.

Got it. Thanks, Hugh. Thanks for taking my question this morning and I'll pass the line.

Thanks, Christian. Your next question comes line of Gavin Fairweather from Cormac. Your line is open.

Oh, hey, congrats on the results.

Hi, Gavin. Thanks very much.

Thanks, Gavin. Maybe just to start out, can we just check in on kind of the health of the pipeline entering Q2? And I think the MD&A reference letter referenced that it was it was pretty strong, but I am kind of cognizant that you're coming off, you know, a very strong Q4 for ARRAD and then, you know, a very strong addition in Q1 and what's normally kind of a slower seasonal period. So I'm wondering if maybe a pulled a little bit forward from Q2, Q3. So can you just touch on kind of that pipeline health as we're entering the next couple quarters here?

Yeah, that's a good question, Gavin. And I'm very buoyant about our pipeline. It's a strong stronger than it's ever been. And, you know, it's got customers like across all the life-size space there across our target market. It's got big and small and small strategic enterprise, etc. So, you know, you're right in saying that, you know, there could be a seasonal impact. We don't know that. We're off to a very good start. We do think there's more buoyancy in the market than there was last year. It's early days, you know, one quarter was a naked year, but we think it's a better started out a better year this year. So, you know, we keep executing harder and faster and, you know, our teams are, you know, evolving and coming up to higher standard. And, you know, as we move forward and we put a lot of structure in place last year and we hired a lot of people in the last year and a half and all this is coming to bear and we see that in the pipeline. So I would be optimistic that we will, you know, continue to execute strongly.

Great to hear. And then, you know, obviously a lot of your big customers are continuing to expand that. That's clear from the numbers. I guess there's been two main verticals for expansion. You know, one is kind of site driven with existing processes and one is with with new processes. Can you just speak more fully to the new process part? How strong has that been recently? I guess that's more of a sales customer success function, probably, you know, harder to get over the line, but also really extends the runway with those customers as they add new use cases. So how strong has that been recently with your major customers?

Yeah, that's very good, Gavin. And, you know, I think it's improving as we focus on more and more, you know, especially with the strong customer success function that we put in place in the last six to nine months. So I would say that, you know, our customers are purchasing the platform for all the validation processes for harmonizing validation across all their sites. And, you know, that's for multiple use cases and we're seeing them moving along those use cases to additional use cases from where they started. So there's a huge amount of upside in our customer base from that perspective, and they are moving along and we believe it's getting stronger as we go along and it's a result of technology, you know, being able to reach in there better and also our our customer success culture that we've built over the last while. So it's always been there. We've just made it stronger.

Great to hear. And then just lastly, for me on the product, I can't remember if we're on 9.2 or 9.3. I think you had a release planned in Q2. Not sure if it's out yet. Can you just touch on the major functional changes in this release and kind of the initial reception from the ecosystem?

Yeah, so we're 9.2 is the number you're referring to there. And, you know, we've, I suppose we're out with that now and customers are beginning to see that and beginning to move into it over the next few months. And we would say that the customers are very excited about what we're developing and the value we're delivering and, you know, both in the short and longer term. So there's been a real positive response to us. We've put a lot of great technology in there. And that is, it's, you know, it's part of the very strong vision that we're building out in parallel with the customer intimacy from a day to day perspective. So giving them what they need, but also building where we want our platform to be in the future. So, yeah, it's going very well from that perspective, Gavin.

Do you think that that's a catalyst for expansion? Because I think that I remember that a lot of your big customers hadn't yet moved on to 9.0 or 9.1 where you brought in kind of the entity management and some of the new kind of cloud native functionality. So do you think that some of your bigger customers now moving onto this newer data structure could be a catalyst for expansion?

Absolutely. And, you know, so, you know, obviously we're moving into the multi-tenant space now and, you know, there'll be getting into a regular cadence of upgrading customers. And that's happening and going very well and really excited about the R&D team have delivered here. So I expect, you know, just to be clear, the future is about expanding our existing customers, the huge opportunities we have there. And everything we do is about that. So it definitely will be a catalyst. But it won't happen overnight. It'll happen as we go through the months and, you know, the half years and that.

Thanks so much for the past one. Yeah, thanks, Gavin. Your next question comes from Tanevi Gabriel from Echelon. Your line is open.

Hey, good morning. Congratulations on the quarter.

Thank you very much.

Thanks. So I'll

be speaking on behalf of Rob Goff. And, you know, we were just wondering if you could perhaps elaborate on your capacity to increase your revenue just given the current existing resources that you have available.

Yeah, thanks, Tanevi. And so I think the key thing that we are seeing, and especially as we go forward, you can see that our revenues are increasing relative to our costs, our costs are staying steady. And I think that's a result of the team that we built over the last year and a half. And it's, you know, coming to, you know, really beginning to deliver over time and continues to do. So I think, you know, we strongly believe that, you know, we've said from the start of the year that, you know, our expenses aren't going to go up significantly in this year in 24. And we continue to maintain that thought. So, you know, we will put in some strategic hires as we go along to build the future of the company. But we're very strong on the capability that we still have a lot of bandwidth in our team.

Right.

Okay. And in terms of your expansions within, you know, life sciences and markets, could you share perhaps any recent developments that you've noticed in the competitive dynamics within your RFPs?

Yeah, so not a lot has changed there. You know, today still, you know, down selection still consists of probably two companies. There are entrants coming into the marketplace and, you know, they all have different value propositions and, you know, different levels of maturity associated with their product. I guess one of the things that we're really strong on is our maturity and how long we've been at this business and how today we're a leader in the validation space. And that doesn't happen overnight, you know, that these big large companies take you and roll you out across all their sites. You have to be a very scalable, secure, easy to use platform that delivers value. And I guess, you know, we continue to articulate that value proposition to our customers and it's very well received and very proven in the marketplace. So, yeah, just to be sure, you know, Tanvi, there's definitely competitors and they come in different guises. But, you know, we still believe in our vision and what we have and constantly are focused on, you know, deep value for our customers.

OK, perfect. Thank you.

Thanks, Tanvi. Your next question comes to the line of Justin Keywood from CIFL. Your line is open.

Thanks. And this is from the industry drivers. We've seen a record level of FDA approvals in 2023 and there's a record level of FDA submissions this year. Is that contributing to some of the strong growth we're seeing at NEET or is it just overall improvements in efficiency and digitizing operations? And then also, obviously, with the GLP-1 momentum continuing, is that a material contributor to NEET as well?

Hi, Justin. These are all very strong factors, you know, drivers within our space and all these new product approvals and all of that mean that down the line, these companies are going to be doing more validation of new facilities and ongoing operations of these new process lines and all of that. So, anything that's bringing more products to the marketplace is good for validation. And there's huge amount of that happening in not just, you know, big product category, but also in small product category in the likes of personalized medicines and that. So, I'd be very, very buoyant about the industry and, you know, the future of the industry and the growth of the industry. You know, and I think, you know, the bigger pharmaceutical companies are not as restricted by the potential macro environment out there. But I would also say that I think the macro is easing a little bit this year, but it's still a bit early to call. But yeah, for sure. These are big drivers for validation. Our goal is to help these companies. Our purpose is to help these companies to deliver their medicines and therapies to their patients to the highest quality and safety standard. That's a huge purpose. And, you know, these are delivering new medicines and that's where we fit in. And that's where we want to continue to enhance our value.

OK, and then just on the net retention rate, if there's a number in the quarter, I know it was quite high last year at 158 percent if there's a quarter number.

We don't, sorry, Hugh, go ahead. Yeah, no, I was going to say, yeah, no, we don't release quarter numbers. So, yeah, I think the number at the end of last year may have been 138 percent, 158 the previous year. But, you know, while it's not disclosed publicly on a quarter, I mean, we still remain very, very confident in maintaining those numbers at that sort of level.

Thank you for taking my questions.

There are no further questions at this time. I'd like to hand back to Eddie Ryan. We at NEET are ready

with our leadership position and validation for life sciences, our unique data centric software platform getting better all the time, our increasingly skilled sales force and the traction we are seeing with our partner program. We feel good about the rest of this year. When we look back on all the progress we have made and how we have gotten better as we have grown, we are energized. We are passionate about making validation better for more companies in more places

because

the

end result is better for us all. Thank you. That's the end of our conference for today. Thank you for participating in our Audus Connect.