kneat.com, inc.

Hello and welcome to the NEET Q1 2025 earnings call. Please note that this call is being recorded. You will have the opportunity to ask questions to our speakers later on during the Q&A session. If you would like to ask a question by the time, please press star one on your telephone keypad. Thank you. I'd like to hand over the call to Katie Keita, IR lead of NEET. Please go ahead.

Thank you, Operator, and welcome everyone to NEET's Earnings Conference Call for the first quarter of 2025. Today's call will be hosted by Eddie Ryan, NEET's CEO, and Hugh Cavanaugh, NEET'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 may 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 www.neat.com forward slash investors. Also during the call, we may refer to certain supplementary financial measures as key performance indicators. Management uses both IFRS measures and supplementary financial measures as key performance indicators on planning, monitoring, and evaluating our performance. Management believes these non-IFRS measures provide additional insight into NEAT's financial results, and certain investors may use this information to evaluate our performance from period to period. I will now pass the call to Eddie Ryan, CEO of NEAT.

Thank you, Katie. Good morning, everyone, and thank you for joining the call today. We will share what we saw in the quarter from our customers, what we're seeing in the broader space, and our plans for 2025, and how they're coming along. After that, we'll open up the call for your questions. The first three months of 2025 show steady momentum, with annual recurring revenue up 51% over last year's first quarter, total revenue up 37%. SaaS license revenue up 42%, gross profit up 38%, and operating expense up only 21%. In summary, we are sustaining strong growth as we move toward profitability. Of the dozens of wins logged in the quarter, over two-thirds were expansions within existing customers.

North America, Europe, and Asia were all represented, and several new partners signed on in the quarter also.

It is worth noting the variety of use cases represented by the strategic wins we announced so far this year. These include a maker of specialty therapeutics that is using NEAT for commissioning, qualification, and validation of its manufacturing processes, a global consumer products company using NEAT in its health sciences division for computer system validation, and a manufacturer of generic pharmaceuticals that will be using NEAT to digitize its drawing management process. The different ways that these new customers are using NeatGX is testament to the power of the platform. In its simplest terms, it is a single platform, configurable to digitize workflow processes where data integrity is critical. This solid start to the year, coupled with a promising pipeline, indicate that tariffs have not deterred the larger life sciences companies from their drive for continuous improvement through digitalization. While this could change and while smaller companies may experience the changes differently, our enterprise and strategic accounts, which contribute the vast majority of annual recurring revenue, continue to invest at this time. Enterprise and strategic accounts are looking for a single validation platform for all their validation needs done their way. Being able to satisfy this requirement is one of NEET's key differentiators. While we grow increasingly confident in our position, With every customer and partner we win, we are far from complacent about our leadership in digital validation. Every day, our dev teams continue to build out the NeatGX platform for the many underserved areas in our space that could benefit meaningfully from the right enhancements to our platform. Neat's co-founder, Kevin Fitzgerald, has guided our product to what it is today. We all know that NeatGX has carved out a new space in the IT landscape for life sciences on the validation front. What those who rely on our platform recognize is that NeatGX is a framework that deserves a much larger position within the quality management space overall. As Chief Innovation Officer, a newly created role that Kevin will assume next month, Neat can be confident that product will remain aligned with our vision as it develops into its full potential as an intelligent data-centric documentation process workflow platform. With this expansion, Donal O'Sullivan will join our leadership team as Chief Product Officer. Donal is very well suited to this role, having led product management at software companies Corville and Pico for years to deliver significant growth. With experience across pricing, bundling solutions, sales enablement, and product marketing, I have no doubt Donal's product management experience will be hugely beneficial for NEET. Before I pass the mic to Hugh, I want to take a moment to thank everyone who contributed to making last week's valid date the resounding success that it was. Our marketing team did an excellent job in organizing all aspects of the event. Contributions from our sales teams, product teams, customers, and partners brought it full circle as the place to be to learn anything and everything about digital validation for our industry. My big takeaway was that customers and partners are very much aligned with our product development strategy and vision. That's a good place to be. So with that, I'll turn it over to you for a financial summary.

Thank you, 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. We are pleased with our results for the quarter. Revenue for the quarter ended 31 March 2025 was $14.7 million, up 37% from $10.8 million for the first quarter of 2024. $13.8 million of the Q1 2025 revenue was SAS licenses, which grew by 42% over the $9.7 million of SAS license revenue we did in Q1 of 2024. As Eddie mentioned, most of this license growth came from existing customers scaling their use of NeatGX. On the service side, more partners are taking on NeatServices. As a result, our services revenue now accounts for a smaller percentage of overall revenue than it did a year ago. Cost of revenues for the first quarter of 2025 was $3.8 million, up 35% from Q1 of 2024's $2.8 million. Gross profit for the three months ended March 31, 2025 was $10.9 million, 38% higher than the $7.9 million in the first quarter of 2024. The increase in gross profit reflects the growth of SAS revenues and the lower level of growth in cost of revenue. Operating expenses grew by 21% in the first quarter of 2025 to $12.3 million versus $10.2 million in Q1 of 2024. The largest contributors to this growth include sales and marketing expense at $5.1 million in Q1 of 2025 versus $4 million in Q1 of 2024. R&D expense, net of capitalized R&D for Q1 2025 was $4.7 million compared to $4 million for Q1 of 2024. We ended the quarter with total annual recurring revenue, ARR, of $63.5 million, up 51% from $42.1 million at the end of last year's first quarter. Our cash position as of March 31, 2025, was $74.1 million. The increase in cash from $58.9 million at the end of December 2024 mainly reflects the timing of cash collections on annual subscriptions, the bigger portion of which occurs in the first half of the year. For your reference, we have filed our unaudited condensed interim consolidated financial statements and MD&A on CDAR, and they are also available on our website.

I will now turn you over to our operator for your questions.

Thank you. We will now begin the question and answer session. At this time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. And your first question comes from the line of Gavin Fairweather with Carmark. Please go ahead.

Oh, hey, congrats on the strong results. Thanks, Gavin. Thanks, Gavin.

Maybe just to Maybe just to start, the MD&A referenced some incentives to get customers to make long-term commitments, and we did notice the divergence in SaaS and ARR growth this quarter. So maybe, Eddie, can you provide some context around these incentives and the strategic rationale on NEET's part?

Absolutely, Gavin. Thanks for the question. So, yeah, that's a really good positive thing for NEET. And recently, in the last six to nine months, I guess we've seen some of our larger customers looking to scale into enterprise license territory. And these enterprise licenses are opportunities for them to expand over a three-year period, and there would be contracts for three-year periods where they would be locked in. So the annual recurring revenue will be based on the final amount in the third year. But there are incentives given to enable the customer to move faster and scale their license quicker. So, for example, if you take year one, they have the ability to move into their license count in year one. And if we model them out at a list pricing type structure, there'd be no difference in the pricing other than we would get it over a period of time and the customer would have the ability to scale the licenses. And that's good for us. And it's good for the longer term scaling when you come to a further expansion, which would be on the second probably ELA that they would come up against afterwards. One thing to remember here is that the customer is not out of pocket and they're committing to long-term agreements here. So we would have seen some of those coming in the back end of last year. So this is something that as we scale the company is beginning to play in a little bit, I would say, Gavin.

Yeah, that's helpful, and I'm not sure who wants to take this, either you or Hugh, but from a modeling perspective, can you help us understand maybe the amount of ARR that's kind of staging into revenue over time?

Yeah, so again, as Eddie mentioned, the objective here, and I'll get on to the specificity of your question in a second, but the key objective here is that essentially customers are getting their hands on licenses earlier than the they would otherwise have done, you know, they might have planned out over time that they'd get them over, you know, a number of quarters, whatever, and essentially just allows them to get the licenses into their hand earlier without being out of pocket. So that's really the core thing that's going on here. And, you know, at this point I'm not going to give numbers on, you know, exactly how much is involved here, but I think if you, you know, from a doing the maths perspective and a modelling perspective, I think the easiest way to look at it is if you look at ARR, which is the recurring revenue, sort of the long-term recurring revenue, that's what we expect revenue out over future years to be. But in any one quarter, if you look at what the quarter's revenue is versus that ARR or a quarter of that ARR, it'll give a sense of the difference between those two numbers.

That makes sense. Yeah, definitely. And then I know you just got back from your Validate user conference and Eddie, you provided some high-level comments in terms of your takeaways. But I'm curious if you could provide any further color in terms of the takeaways that you got after you huddled with the team afterwards. What kind of feedback were you hearing from customers on the R&D roadmap which was presented and You know, what kind of, you know, pipeline generation did you see, you know, when you talked to the sales team afterwards?

Yeah, I would say that, you know, it's a very positive event. It's a great event for us, actually. And recently, the 2025 event was the biggest ever. And, you know, it was, you know, probably the most... beneficial that we've had. I mean, we're the leading conference now for validation in our industry. And there's a huge amount of information sharing and intimate sharing of data and stuff like that. And the biggest takeaway for me is that the customers are so well aligned with our vision where we want to take the product and the strategy and the roadmap. The customers are very aligned with that. That's what they want to. And that's something that got reinforced in me in multiple dimensions. Regarding pipeline, I would say I have site meetings with potential prospects at that event. And the prospects are very excited to have been there, to be able to talk to all our existing customers. One prospect, you know, sent me an email afterwards saying that more or less his decision was made, you know, that he's going to be now encouraging the company to go with Nice. So I think, you know, a pipeline doesn't happen just based on one event, Gavin. You know, it's running through the year, but, you know, we have a very strong pipeline. It reinforces our pipeline, and it enables our prospects to get, you know, intimate detail back from existing customers. And, you know, as you know, our customers are telling their case studies of how they're using Nice. and how they're innovating with NEET and where they want to go with NEET. So I think it's just a great event for NEET and we get a lot out of it.

That's great. And then lastly, for me, before I pass the line, if I think about the core NEET use cases in terms of equipment and computer system validation, I'm curious if you're starting to see a bit more diversity of use cases being configured on the platform or are you starting to see more diversity in terms of your existing customers, thinking about new types of workflows. How is that breadth starting to trend in the existing customer base in the pipeline?

Yeah, I think it's great. And we are seeing the customers wanting our product to be in other places. And as I say, you know, we are selling a platform, one platform for all your validation needs today, zero code and easy to set up and use. And that's customers, you know, are telling us that. And so, you know, tomorrow it's one platform for all your regulated data intensive documentation processes, which for us means adjacencies. So what I always tell and I've been telling everybody I talk to is we're building the future for today as we build out our leadership and validation. So we're also building for adjacencies. And customers are spreading us beyond those two core areas that you spoke about being computer system validation and equipment validation. Customers are taking us to other validation areas, completing that picture of your one platform for all your validation needs. And I'm very excited about that. And we continue to work closely with our customers. And, you know, bearing in mind our focuses on consolidating our leadership position and validation today.

Thanks so much. I'll pass the line. Thanks, Kevin.

And your next question comes from the line of Scott Fletcher with CIBC. Please go ahead.

Hi, good morning. SAS ARR growth, strong in the quarter, but if I look at the net amount of new ARR in Q125 versus Q124, it was slightly down year on year. Just wondering if there's anything to call out either in the prior year or in the environment in the current year in terms of new ARR additions.

So, Eddie, I mean, I can talk to that if you like. So the first thing I'd say, Scott, is that I think you've probably heard us say before that it's important to look at NEAT on a slightly longer than a quarter by quarter basis. Any particular quarter can have higher or less high level of growth. I certainly wouldn't be reading anything into one quarter versus the direct same quarter last year. there can be things that drive one up or keep the other back a little bit and it's really over the course of the longer period or 12 months or whatever that is really probably the more important. There's nothing major that I would point to between those two. We have a strong pipeline and conversions are happening and we're seeing continued strong growth

Okay, that's fair enough.

On the just on you. It's great to hear that the pair of stones seems like they're having an impact on the pipeline and the generation but curious on the on the implementation timelines. Are there any sort of delays their customers waiting to go live just so they have a little bit more clarity. Anything on the implementation would be would be nice.

Thanks. Okay. No, Scott, we don't see anything there on implementation time specifically. I mean, the customers, once they buy and they set their minds to go to implement, they do that. You do hear of companies expanding back in the U.S. from a farmer perspective, and this is all a new opportunity for NEET. Most of these customers that are making these announcements are actually NEET customers. So we see opportunity there. In the smaller customer size, there might be a little bit more apprehension, and there might be slowing down deals a wee bit, but by and large, we don't see this.

All right, that's great to hear. I'll just finish with a quick one for Hugh, probably. Can you quantify the foreign exchange impact on the revenue or the ARR growth in the quarter?

Yeah, I mean, the exchange rates have moved a lot over the course of the quarter. If you look at ARR, probably being the bigger one, and given that it's a 12-month number as opposed to just a quarter. So yeah, I mean, foreign exchange on ARR is a few hundred thousand dollars, the $300-ish type area. Okay, great.

That's tailwind, by the way. Okay.

And your next question comes from the line of Stephen Lee with Raymond James. Please go ahead.

Thanks. Hugh, just to clarify on that comment on ARR, so you said when you said the FX impact a few hundred thousand, is that when you're looking year over year or sequentially?

Oh, no, that's quarter over quarter. The exchange rate year over year is a much bigger impact, yeah. No, that's looking versus Q4, yeah.

Because when I look, the USD was pretty strong in the March quarter, like 1.4 something, and then December was below 1.4. But still, the impact was only a few hundred quarter over quarter.

Yes, for the quarter, it's in the 300 type range for the year. I actually haven't got the number here in front of me, but it'll be much bigger over the course of the year because it has been a lot bigger, yeah.

Got it. Okay. And then just a quick one on your G&A, it had a good size jump from Q4 to Q1. Was there any one time in there or that's a good baseline going forward?

Yeah, no, I think it's a reasonable baseline. I mean, in terms of across the board looking at expenses, you know, obviously Q1, you know, reflects a couple of things, including, you know, it's the point in the year where we do you know, annual reviews and pay increases and so on and so forth. And, you know, so, I mean, I think if you look back over the quarters, over the course of 24, actually Q4 was probably a little bit low and, you know, and there's probably, you know, a little bit of timing of, you know, expense Q4 and Q1. But yeah, no, I think, you know, go forward, you know, I think, you know, Q1 is, Reasonable enough, yeah, on a go-forward basis, yeah.

Okay, thank you.

Okay. And your next question comes from the line of Justin Keywood with Stifel. Please go ahead.

Good morning. Thanks for taking my call. Nice to see the results. On the partnership with – thank you. On the partnership with Capgemini, I believe that's relatively new, and that followed up with another partnership announcement last quarter. Are you able just to describe the partnership path and how we should be looking at that as far as impacting future financials?

Yeah, thanks. So the partnership with Capgemini is relatively new, and it's early stages. and it's beginning to show green shoots where we're working with customers. So we will have a go-to-market approach with Capgemini on certain customers. And their goal is to expand NEET across the organization, so to accelerate expansion of NEET within these larger companies. So we see that delivering value over time, I think, is the right way to look at that, but not immediately.

Understood. And then just on the expansion of the leadership team, I know there was a new promotion or higher or two. Are you able just to describe the dynamics around that? And do you feel that you have the right team in place right now for the scale in the near medium term?

Yeah, we're a very strong team, and I would say we're bringing in a new CPO with a broad, varied product management experience from end to end, and that's to strengthen up our management team and to really allow us to be innovative on the product side. So Kevin is going to become Chief Innovation Officer and is going to be responsible for building out the strategy and the vision of the product, and making sure that everything we do is aligned with all that. So there's, you know, as a product-led company, we're investing strongly in making sure we build for the future here.

Great. Thank you very much. Thanks, David.

And there are no further questions at this time. This concludes our Q&A session. I will now turn the call back over to Eddie Bryan for closing remarks.

Those of you who have followed us for a while know that we are very serious about executing on our plans to consolidate our leadership position and validation. I reiterate here our commitment to continuing that journey. We can't control the economy, we can't control competition, but we can direct and develop our platform for continuous customer value. Digitalizing validation is becoming table stakes As the go-to platform where companies are keeping this critical data and where they plan to keep it well into the future, we are optimistic about our future. We get even more excited when we see what our customers are achieving with NeatGX.

So we're glad you're with us, and we look forward to connecting when we report again in July. Thank you.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.