kneat.com, inc.

Good day and thank you for standing by. Welcome to Q4 25 earnings conference call. At this time, all participants are in the listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Katie Kata, IR lead. Please go ahead.

Thank you, operator, and welcome, everyone, to NEET's earnings conference call for the fourth quarter of 2025 and the full year. Today's call will be hosted by Eddie Ryan, NEET CEO, and Dave O'Reilly, NEET CFO. Note that the safe harbor statement on slide two and the forward-looking statement disclosure at the end of the earnings release inform you that some comments made on today's call may contain forward-looking information. This information by its nature is subject to risks and uncertainty, 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. Also during the call, we may refer to certain supplementary financial measures as key performance indicators. We use both IFRS and supplementary financial measures as key performance indicators when planning, monitoring, and evaluating our 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 our performance from period to period. With that, I will now pass the call to Eddie Ryan, CEO of Neets.

Good morning, everyone, and thank you for joining the call today. In order to leave more time for your questions, we will keep our prepared remarks brief. As I laid out in my letter to shareholders, 2025 was a year that proved the strength of Neets' resilience. In a period of macro uncertainty, elongated buying cycles, and new considerations presented by AI, we continue to gain share with software revenue up 33% for the full year, and we welcome the record number of new customers. These new customers were added to an exceptionally stable base of existing large customers. Our net revenue retention was 115%, reflecting continued expansion with that base. Customers come to me today because we are a trusted domain expert in a field where confidence in the product is paramount. There's our highly regulated mission critical environments where validation data needs to be attributable, traceable and auditable. All things for which NEET has been purpose built. With this in mind, NEET's advantage in leveraging AI to deliver business value for companies is clear. Over the last while, we've been building AI into our platform to accelerate the advantages NEET already brings to validation. We introduced AI powered features designed specifically for environments adhering to good manufacturing practices. These include content review agents, a natural language process analysis expert, a user support expert, and an instant language translation function. Building in AI to improve the platform extends our competitive advantage, which was already considerable. With these tailwinds, we are excited about where we are heading in 2026. Our platform is second to none. Our pipeline is strong, and our land and expand model, which contains significant expansion potential and brings more with each new customer we add, is proving to scale, putting cash flow profitability within line of sight. This is a necessary milestone as we plan for the long game in pursuit of our mission, that any regulated company can be confident they are developing, manufacturing, and delivering their products to the highest safety standard. I will now turn it over to Dave, who will take you through the numbers.

Good morning. As you have the numbers and commentary in our materials that went out last night, I won't go through them in detail again. However, before we turn it over to you for your questions, I do want to first highlight a few numbers and what drove them. First, ARR growth in the quarter year over year was 24%. Solid, but not as high as we were expecting. With changes to FX rates since Q3 added $1.1 million headwind, some of the delta came from expansion being pushed to a future period. This means we expect these same deals to materialize in 2026, if not in Q1, then in the subsequent quarter. Incremental ARR is historically back-end loaded and we also expect 2026 to be no different. Second, operating expenses in the fourth quarter came down from Q3 and for the full year were up 33%. After 2024, in which we held headcount steady, we invest in key talent in 2025 to drive the platform forward. expand our presence within our growing number of customers, and amplify our voice in the life sciences space. Finally, on our financial position in Outlook, we ended the year with $48.7 million of cash on the balance sheet. This, together with a fortified team, sets us up for a pivotal year. As Eddie mentioned, we are targeting for 2026 to be cash flow break-even. Meeting this target is contingent upon meeting our own top-line growth expectations for the year. With that, I'll turn it over to you for your questions.

I do show we have a first question in queue coming from the line of Doug Taylor from Canaccord Genuity. Please go ahead.

Hi, thank you. Hopefully you can hear me.

Can do, Doug.

Okay, thanks, Eddie and Dave. I'll start with, you know, an AI question seems unavoidable these days. I appreciate all the commentary provided on AI in your letter overnight and your prepared remarks. You frame this as additive versus competitive to your platform. I guess I'd like to ask if you could provide anything you've heard, like what your customers are saying on the subject. Are they building things with AI that sit on top of your data and your infrastructure? Is there evidence of that? I'm just looking for some anecdotes to wrap around the subject.

Yeah, good question, Doug. We're not seeing anybody sitting on top, right, doing anything like that. And we're dealing with the biggest pharmaceuticals in the world, as you know, and we've been dealing with them for over 10 years, 15 years. And one of the things that is really critical to them is data integrity and compliance. And NEAT is a system of record for that data integrity and compliance. And when I talk about data integrity in the compliance world, I'm not talking about data in a database being managed and protected there and secure. I'm talking about the interaction with that data and the audit trail on that data and who put that data there, when they put it there, when they changed it, no matter how small that data is. So everything is attributable, it's auditable, and it's traceable. So this is the kind of data integrity that this industry requires, right? And, you know, so we see that as a real moat from our perspective. Except yes, that there has to be, you know, additional AI to support that. And we would see AI from our perspective is, you know, doing the heavy lifting as part of the workflow processes and that type of thing for the customer and bringing value to that way. And over time where it may go to the next level. So just back to your point, Doug, on the customers today, we have very intimate relations with these customers and we would be sharing our roadmap and we'd be sharing what we have in AI already with them. And they're aligned with us, very much aligned with us in what use cases they want AI to support them in and what parts of the workflow they want it to be present in and how they don't want it to be, you know, it's a human aid at this point in time. So does that answer your question there?

Yeah, I mean, it does. And so, you know, taking the AI as, you know, being additive and not, you know, in any way competitive with your solution as, If we set that aside, the ARR growth in this last year was slower than in prior years, partly because you're lapping some larger numbers, but also you've referred to these deferred expansion plans for a few quarters now. And I think some of that was attributed to uncertainty as it relates to global trade and things like that. And that's no less confusing today than it was maybe in the last quarter. So I guess I'd like to refresh our understanding of, you know, the duration of those deferrals. When do you, you know, do you see those start picking up again and perhaps, you know, returning your NRR to some of the levels we've seen need enjoy earlier in, you know, 2026 and beyond?

Yeah, we definitely expect it to go up. And what I would say is You know, it's only when you look back on the year you can see how the year penned out fully, right? And we are back end of the year type where we do a lot of our AR addition traditionally. And what I would say is quarter two began to see the macro environment, Doug, as you know, and the uncertainty and what we would have seen that followed through to the year, the full year. Our budgets were deprioritized in certain areas where they were cut and frozen temporarily. So that's what we've seen. All of those All of those, what we call deferred expansions, they're all still in our pipeline, as Dave said in his earlier note. And they're all being worked on and the engagement is ongoing on all of those. So I expect them to come true for us as well through 2026. Do I know exactly what the year ahead of that is like from a macro perspective? You know, there's still uncertainty from last year, but I think it's beginning to get stabilized more from that perspective. Other things are coming into play like AI and stuff like that.

So the message there being you'd expect ARR to rebound from the 2025 level, sorry, NRR, I should say, based on what you said?

Absolutely.

Okay. And then I guess a similar comment or question about what was definitely clear last year was a very strong pace of new customer

additions new logo wins um is the setup in the pipeline this year for for you to extend that streak yeah yeah we added i think next new uh there was a bit of churning there as well but net new we had 20 20 odd percent new customers uh in 25 and as you know you know in recent years we focus more on strategic and enterprise so very very uh happy with that delivery from our sales team And, you know, we're seeing these deals being more and more matured. And for that reason, going through more diligence and, you know, more competitors involved and more RFPs. And we're winning, you know, the majority of these RFPs. So I'm very excited about that. And that puts in a great platform for the future, as you know. And I would say the marketing team has done a great job of building the pipeline. And we see a similar and better pipeline for the year ahead and beyond, you know.

Okay, one last question for me and perhaps this one for Dave. You've stuck to the cash breakeven bogey for this year and we're in this year now, so I do want to give that a little more attention. To start with, just to confirm once again, you're talking about free cash flow or operating cash flow breakeven as being the target you expect to eclipse this year given the capitalized R&D. And if so, I mean, in any event, it's a big lift from where you were over this past year. So I just want to maybe walk through some of the assumptions, not necessarily the revenue, but the margin assumptions and spending and budget for OPEX that would get us to that objective.

Thanks, Doug. Yes, it's still very much our objective for 2026 is to cash flow break even. To your point, we can get into some of that detail, but what I would say is that the messaging that we've given before, certainly in Q3 about, say, adjusted EBITDA margins, I still expect that to hold true for the next 12 months. I expect our capitalized R&D, I would expect that to be relatively static year over year. I still expect a little bit of growth on our OpEx, and I expect improvement on our growth margin lines.

And so just to be clear then, to be cash flow break, you would have adjusted EBITDA that would surpass your capitalized R&D. I mean, that would be necessary for free cash flow break even. Just maybe sharpen my understanding there.

To an extent, yes, Doug. It should cover the vast majority. There's a couple of other levers in the balance sheet that will help us hit that number in 26, such as our R&D tax credits. So it's not just the adjusted EBITDA that will get us there. As I mentioned, there's another couple of levers on our balance sheet that will help us in the pursuit of cash flow breakeven. All right.

I appreciate the answers to my questions. I'll pass the line.

Thank you. And I show our next question in the queue comes from the line of Gavin Fairweather from ATB Cormark. Please go ahead.

Oh, hey, thanks for taking my questions. Eddie, in your letter, you called for an expansion of incremental ARR in 2026 versus 2025. I think that's the first time you've kind of provided that type of guidance. So maybe you could just flush out what you're seeing in the macro and the pipeline that kind of gives you that confidence to hang that out there in your letter.

Yeah, so, but, you know, I mean, Trying to remember that statement, but yeah, so far we, as I said, we put in a lot of strong customers over the last couple of years into the pipe into our sorry, into our customer portfolio. So as you know, Gavin, we focused on enterprise and strategic, you know, a couple of years ago, and they're beginning to show fruit now, the ability for them to expand into the future. You know, they take a year, maybe two years to get going. And we're seeing that playing in as well. We're also having these great conversations with our customers around new potential areas that we will bring value for them. So outside of validation, adjacencies areas, and we expect to be delivering to some of these areas as well in 26.

Yeah, that kind of flows into my next question. I mean, I was looking for a bit more detail on how conversations are going in the base around CSA and adjacencies and how you're thinking about potential adoption in 2026? Like how many customers would be speaking to you about moving into some of these new areas?

Yeah, we would say that we are already deploying in some of these areas with some of our customers. We have some really engaging, you know, opportunities, you know, under discussion with some customers. And we see us being able to capitalize on that further. And these are, you know, you know, couple of the biggest customers in the world, right, who are talking about looking at these new adjacencies. So we're really upbeat about that. And we will, you know, we will hope to announce them in due course, Gavin. But I would say just to give you a flavor, they're more, you know, deeper in the manufacturing space, you know, adjacent to validation where we've already earned the right to be there. You know, we've proven our ability to be great at data integrity in a validation environment. And now we can take that same capability adjacent areas and the one thing i would say is that you know i think our ability to be great at data is going to enable uh more processes in the future uh because of that you know if you've got this great data integrity uh underpinning your ai then you'd be more inclined to put processes in there that can give you that that quality and i think great ai is going to need great data integrity and when i said it's not just data and databases data is managed and policed and that's what i think would be great as well

And then maybe a couple for Dave, the gross margins seem to be increasing faster than your mix would kind of imply. So we can just discuss where you're getting some leverage on the COGS line, whether it's still coming through in SaaS or also if you're starting to make a bit of money on the services line.

Yeah. So in Q4, there's a couple of credits that we booked to our P&L in Q4 related to year-end accrual releases. There's probably half a percent on a gross margin because of that in Q4. But to your point, sales mix is still beneficial to us. We are eking out a little bit more margin RPS. You know, I think historically that's been running at around 15 percent. I expect that to increase over the next 12 months. SaaS is continuing to be in, you know, an 80 percent kind of level. And that will flow into 26 percent.

And then just lastly on debt, if I remember correctly, I think some of that debt on the balance sheet, the penalties for prepayment start to roll off over the course of 2026. So just on capital allocation, maybe you can discuss your plans. Obviously, you have more cash on the balance sheet than you have debt. So should we be thinking about some of that debt starting to move off the balance sheet there?

You're exactly right. 26, there's a couple of tranches that will roll out of penalty zones if we were to clear those tranches. But it's certainly not in our short-term projections. We're talking about cash flow neutrality in the year. If we do make that call, we'll certainly announce it. But right now, we're just probably going to let them continue to pay. If we see the opportunity to clear them down sooner, we absolutely will. Thanks so much. I'll pass the line.

Thank you. And I'm sure our next question comes from the line of Justin Keywood from CIFL. Please go ahead. Hi.

Thanks for taking my call. Just circling back on the outlook and the expectation for incremental ARR in 2026 over 2025, doing the math, does that imply there's an expectation for 15 million in additional ARR this year?

So, yeah, so we don't put a number on it, Justin, but, you know, when we look at, you know, the add-ons and for this year, they will include the delayed expansions from 25. And they, you know, we see also outside of that cohort, we see expansions from, you know, the other cohorts of customers we have. And today we service over 130 customers. And we also see that, you know, the new customers kicking in as they would be the ones outside that cohort of the deferred expansion. So yes, we see those, definitely the number increased on 25.

Okay, good to hear, that's helpful. And then just circling back to the AI discussion, I'm wondering if there's an opportunity to deploy some of the AI tools that are out there, particularly around coding within Neat's own business, the R&D expense continues to appear to be increasing at a decent rate. And is there an opportunity to perhaps replace some of those functions with AI?

Absolutely. And our team has been doing automated enhancements for quite a while. I would say, Justin, at the beginning, like in the last six months, I really began to see tools that can really add value. And I think we are hearing about that in the news, and it's true. And we're acknowledging this, our team is acknowledging it quite well. So we have dedicated AI teams in place now looking to enhance everything. And we're seeing some really good improvements in productivity in certain areas, right? We're still building features into a big platform and coding is one part of this. Understanding what you're doing from your domain experience is a huge part of this. Articulating those requirements to any tool, whether it's an agent or whether it's a human that actually codes this is a good part of the work. And we're getting, I would say there's tools happening across the board, not just in the coding itself. There's value there. There's good stuff happening there. You know, there's ability to reverse engineer pieces of code and re-engineer them again. A lot of good things happening. So I expect we will be focused. We are focused on that, Justin. And I expect we will, over time, start bringing that down. The goal now is to get more out of the team we have. And, you know, any of those bits of hires that are going in this year are primarily related to AI for the product for our NEET-GX platform, but also AI to improve our productivity in the organization.

Very interesting. So would it be fair to assume the R&D or additions to intangible assets to be leveling off at this level? And perhaps that's where today's outlook on break-even free cash flow, is that where

the operating leverage is going to show up with that r d level normalizing yeah just there will still be some um growth in the r d function to eddie's point it's probably going to be around the ai team and helping you know accelerate the development and but We're also going to see that shift. I mentioned this one in the prior quarter that we're going to probably see a little bit more R&D expense to the income statement as we capitalize less. And I would imagine that what we will see being capitalized year over year being very static.

Very helpful. Thanks for taking my questions. No problem.

Thank you.

And I assure our next question comes from the line of David Kwan from TD Cowan. Please go ahead. everyone.

Dave, maybe I just want to clarify the comments on the gross margin. So I think you said there was about 50 beats of year end accruals. So maybe the normalized gross margins were in the 77% range. So could 2026 gross margins be at this level or maybe better than that?

I would assume that they should be at a similar level, David. Yes. It does depend on the mix when we get there. And Obviously, our PS revenue is running at, you know, historically has been around 15%. I expect that to be 20% and above. And that depends on where we finish up from a PS revenue in 26. But I do expect the gross margin to be up around the 77% range.

Sounds great. That's helpful. In digging into the NRR, the decline there, obviously, you talked about the some expansion projects getting pushed out there and some churn. You mentioned, I guess, that there weren't any customers that were switching to competitors, but I was just wondering if you had any color on what the churn was related to. Did those customers go bankrupt, or was there something else?

Yeah, David, thanks for that. So I would say that there's three aspects to the churn. There's the deferred expansions, there's the FX going against us, and then there's the churn element. And I would say, yes, all of those customers actually, in fact, have had some degree of financial difficulties to some extent. And yes, there's one or two of those customers actually closed down. But for those customers that discontinued using NIST, You know, we're not aware of any of them going to competitor at all. And that's very clear to us. So some of the, you know, when we look back at, again, talking about the, how we focus on enterprise and strategic customers over the last couple of years. Prior to that, you know, we would have sold to a lot of different types of customers. And maybe the product market fit may not have been, or the product company fit may not have been 100%. So we're seeing some of those bubbling up a little bit as well over the, you know, over the last year.

No, thanks for the call already. And can you say like how much of ARR it represented? I'm guessing it's relatively small, but I didn't know if you could quantify it.

Yeah, it's smallish. I would say that if you were looking at where we wanted to be on our, you know, overall growth versus where we were, it's probably divided into three, you know, three things, maybe 40, 50%. Dave, you might be able to correct me here as related to the deals that were pushed out.

And the other 50% is between Charn and FX.

Great. And just one last question. I expect it's maybe a bit early here, but just obviously with the Supreme Court's tariff ruling, do you expect that to probably lead to continued hesitation from your customers just as it relates to uncertainties on their expansion plans?

Yeah, you know, I haven't consumed that fully, David, I would say, right? You know, what I am seeing is more stability in the customers, more clear on what they were doing. Maybe this adds another bit of volatility to the situation. But, you know, I had a feeling that things were improving, and it's a bit early for me to comment on that.

That's great. Thanks, guys.

Thank you.

And I share our last question in the queue. It comes from the line of Erin Kyle from CIBC. Please go ahead.

Hi, good morning. Thanks for taking my questions. I apologize if any of this has been asked already. I get kicked off the call a little bit earlier here, but I want to go back to some of the comments in the shareholder letter around retention. And you called out that you're not aware of any churn to competitors, which is good to hear, but I wanted to expand there and maybe ask if you're seeing any pricing pressure from increased competition in the space or anything to call out there?

Yeah, so I said earlier on, Erin, that, you know, of all the new deals last year, we're winning the majority of them by far. And I would say that there's, you know, there's definitely more competition in the evaluations. And that competition, you know, was entering through 2025. and having the ability to maybe slow down the sales process a little bit. But also, there's also the macro that we're slowing down the sales process. So I would say that definitely there's not a huge amount of pricing pressure. We're not pushing our prices down in any way. We're winning the deals. We're holding our prices. I would say a little bit here and there, maybe we could be a bit innovative around the contracts and stuff like that and the multi-years and that type of thing. But no significant impact on our pricing. And, you know, that's, you know, but we put a lot of effort into making sure our customers understand how great our product is before we get to the pricing stage.

And I think that helps a lot.

Okay, that's helpful. Thank you. And then maybe can you just remind us the percentage of your customer base that's on the enterprise-wide licenses and maybe just discuss whether you've been making a more dedicated push towards enterprise-wide. I believe you have. And then Can you let us know if customers have been receptive to this model or, yeah, what's the reaction to maybe moving to more enterprise-wide licenses?

Yeah, that's an ongoing thing. As customers step up in volume, they go to more enterprise. And we have done quite a bit of that over the last, I'd say, 14 months or so, 16 months. And we continue to do it. And it's a very win-win situation. And we do very well from that. Percentage-wise, I find it hard to tell you exactly right now. Dave might have a number on it, but we don't track that number. But I would say that if we were to take our strategic, maybe top 30 customers, I would say we have 30% on some form of strategic longer-term deal.

That's kind of an order of magnitude now, Aaron, so I can't, I have to come back to you with that number if you wanted to follow up on this.

Sure, maybe I'll follow up offline. Thank you.

Thank you. That concludes our Q&A session for today. I would now like to turn the conference back to Eddie Ryan, CEO, for closing remarks. Please go ahead.

Thank you.

We're excited about what we are setting out to accomplish in 2026. We're in a great spot to keep our momentum going as a go-to validation platform for the world's biggest life sciences companies. We continue to deploy AI to help our customers work faster and smarter, but keeping their data 100% compliant in a way that they can see, understand, and trust. I'm an experienced and energized team. We're confident in our ability to sign up even more new business this year than last.

Thank you for your support and for believing in what we are doing.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.