Earnings Call: Q3 2020

Nov 25, 2020

Earnings release

Ladies and gentlemen, thank you for standing by, and welcome to the neet.com Third Quarter 09/30/2020 Update and Results Conference Call. Please be advised that today's conference call is being recorded. My name is Hugh Cavna. I am CFO at Neet. I am joined today on the call by Eddie Ryan, our CEO. At the conclusion of our comments, we will allocate some time to take questions. Eddie will begin with his comments, and then I will move on to some financial highlights. Before we begin, I would like to remind you that except for historical information, the comments contained in today's conference call contain forward looking statements, including statements regarding Neat's future financial outlook and financial performance, market growth, the release date for and benefits from the use of Neat's solution, our strategies and general business conditions. Any forward looking statements contained in this conference call are based on Neat's historical performance and its current plans, estimates and expectations and are not a representation that such plans, estimates or expectations will be achieved. These forward looking statements represent Neat's expectations as of today. Subsequent events may cause these expectations to change, and Neat disclaims any obligation to update the forward looking statements in the future. These forward looking statements are subject to known and unknown risks and uncertainties that may cause actual results to differ materially, including our quarterly results and limited operating history, which make it difficult to predict the future results our expectations for future growth of our revenues unauthorized access to our customer data dependence on revenue from new customers the rate of adoption of our SaaS model acceptance of our applications and services by customers loss of one or more key customers adverse changes in general economic or market conditions, particularly in the life sciences industry delays or reductions in information technology spending, particularly in the life sciences industry, including as a result of mergers in the life sciences industry the development of the market for enterprise cloud services, particularly in the life sciences industry competitive factors, including but not limited to price pressures industry consolidation entry of new competitors and new applications and market initiatives by our competitors our ability to manage our growth effectively and changes in sales that may not be immediately reflected in our results due to the revenue recognition criteria under International Financial Reporting Standards. Further to these risks, these forward looking statements do not include a full assessment or reflection of the unprecedented impact of the COVID-nineteen pandemic occurring since the 2020 and the ongoing and developing situation resulting in direct global and regional economic impacts. This has resulted in significant economic uncertainty. And even though the company has today experienced no significant impact to its operations, any potential impact on our future is difficult to understand or measure at this time. Further information on potential risks that could affect actual results will be included in other filings Neat makes on www.sedar.com. The press release, the MD and A and the consolidated financial statements are all posted on our website. If you wish to receive a copy of any of these documents, please do not hesitate to contact us. Eddie will now start with his comments. Eddie? Thank you, Hugh. Welcome, everybody. I am pleased to report on the progress that our team has made during the quarter ended 09/30/2020. We continue to achieve strong revenue growth throughout 2020, and in particular, our SaaS license revenue, which is up 250 over the same period last year. It is also pleasing to see that our SaaS license fees now represent 77% of the total license revenue for the nine months ended September 2020 compared with 33% for the same period in 2019. This reflects our success of promoting our SaaS platform and highlights the the demand for cloud solutions in the market. Our existing customers are expanding into new work processes and new sites, delivering a great opportunity for growth and expansion of our software. The movement towards our SaaS offering is contributing to strong growth in our overall annual recurring revenue key metric. Excellent customer references coupled with a strong sales and marketing effort is driving a healthy sales pipeline. We continue to develop our company structure and recently made the senior appointment of mister Keith Holmes as chief technology officer. Nid will benefit from Keith's broad technology expertise and his considerable experience in product strategy and technical leadership as we continue to grow our operations globally. With the support of broad customer feedback, our r and d team continues to build out our technology, and we are excited about what they are achieving. In addition, we continue to enhance our SaaS delivery model, which is leading to its increased adoption. In spite of COVID nineteen, we are executing on our plans, and we are very proud of all our team as they do so in a challenging remote environment. It is very satisfying to be helping many of the largest global health care companies to digitize and become papers with some of their critical business processes. As we progress, we are becoming trusted by more and more of the largest global health care companies. Our plan for the rest of 2020 is to continue to add and deploy new SaaS customers, expand to new work processes and new sites with our existing customers, and continue to develop the MeetGX platform to deliver increasing value for all customers. This concludes my review and comments. I will now hand back to Hugh, and I will be back for the question and answer session and with my closing statements. Hugh? Thanks, Eddie. For the financial review, please keep in mind that all the numbers I will be discussing are in Canadian dollars. Revenue for the three months ended 09/30/2020 was $1,960,000 This was an increase of 24% from $1,500,000 in the same period in 2019. SaaS license fees, which are one of our recurring revenue streams, were $700,000 for the three months ended 09/30/2020. This was an increase of 210% compared with the 2019. Gross margins for the three months ended 09/30/2020, was $720,000 This is a decrease in gross margin from 990,000 for the same quarter in 2019. The decrease in gross margin reflects a change in revenue mix, whereby revenue for 2020 included a smaller amount of the higher margin on premise license and a higher proportion of professional services revenue. Cost of revenues and professional services costs incurred during the third quarter were expensed during the period, including costs associated with additional professional services of $340,000 billed during the quarter, which will be recognized in future periods. The increase in cost of revenues and professional services costs from $600,000 in the 2019 to $1,240,000 in the 2020 reflects an increase in salaries and benefits related to additional headcount in the professional services team as well as increased hosting costs. Net loss for the 2020 was $1,340,000 and is consistent when compared to the net loss of $1,360,000 for the same period in 2019. The impact of increased revenues and favorable foreign currency movements was offset by additional salaries and benefit costs related to higher headcount on the professional services and R and D teams as well as increased amortization costs related to the intangible assets. Finally, some comments on the non GAAP measure of annual recurring revenue ARR, which includes SaaS licensees and maintenance fees. The promotion of our SaaS offering, which adds to our annual recurring revenue base, is a key strategy for Neat. Progress on this front is reflected in the growth in ARR at 09/30/2020, to $3,790,000 a 163% increase compared to September 3039. More specifically, ARR from SaaS license fees increased by 244% and ARR from maintenance fees increased by 37% from September 3039. Focusing specifically on SaaS. Since the beginning of the 2020 financial year, ARR from SaaS has more than doubled from $1,200,000 at the thirty one December twenty nineteen to $3,020,000 at thirty September twenty twenty. As a reminder, we have filed our unaudited condensed interim consolidated financial statements and MD and A on SEDAR, and they are also available on our website. We are now ready to take questions. To ask a question, please use the hands up feature available in your GoToWebinar control panel. There should be a slide showing the image of the hands up feature in your GoToWebinar control panel now. Once you have selected the hands up icon, I will introduce you, and you can ask your question using the microphone on your computer system. Please note that only attendees with a microphone will be able to ask questions during today's session. We're ready now to take questions. As you take questions, I will unmute your microphone and introduce you. And if I could ask the questioners to just identify the organization that they represent just before they ask the questions. So we'll start today with Gavin Fairweather. Gavin, I think you're mute now. So, just identify who you represent and go ahead with your question. Hey. Yeah. It's Gavin from Cormark. Thanks for taking my questions. Maybe one for Eddie. I mean, you referenced your healthy sales pipeline in your opening remarks. I was hoping to just get a bit more color. I I think when I look back, you guys announced a new kind of Tier one in August. Can you just discuss your pipeline in more detail? Is it growing? Are there is there good activity with additional Tier 1s in the pipeline? Maybe just some more color there would be helpful. Hi, Gavin. Thanks for that question. Yes. So the pipeline, we continue to work hard on the pipeline, and it is growing well for us. And we are working on many opportunities, both in the customer base we have, where we're scaling existing customers and also bringing on new customers. So we'd be optimistic with our pipelines all the time. Okay. That's helpful. And you mentioned client expansion there. I was wondering when you're talking to your SaaS clients about kind of expansion, are there any kind of general trends that you can kind of parse out with respect to scaling? Are some of those clients, given that maybe they signed up with you around a year ago or kind of nine months ago, are some of those clients looking to kind of accelerate the rollout of meat to additional plants and additional processes? Yes. I suppose that's continuously the same, Gavin. I would say in the sense that all our customers are expanding to one extent or another. Some are going faster than others, and we're also working with existing customers to transition them over to our SaaS environment, which is also progressing well for us. So we have scaling on the existing customers, and we have new customers coming in into the SaaS environment. And so we are happy with the way that is working for us right now. Okay. So you're actually actively now looking to migrate some of your on prem clients over to SaaS. Did I catch that correctly? Absolutely, yes. So we're working through with our customers that are on prem, and we're looking to move them over to SaaS in the not too distant future. Okay. So maybe that I mean, I was going to ask on kind of the on prem licenses a bit quieter, but maybe that's kind of playing into it if they're corona or on this road map to maybe move over to SaaS kind of at some point. That's correct, Gavin. Yes, absolutely. We will see less and less of on prem revenues going forward. Okay. I have some more questions, but I'll pass the line in case there's other people in the queue here. Great. Thanks, Gavin, and we'll come back to you in a few minutes, okay? Sounds good. So next question is from the line of Rob Goff. Rob, again, you might just identify your organization. And at the moment, you're self muted, so you need to unmute yourself. Thank you, Hugh, and good morning, Eddie. My question would be, once again, on the pipeline. In terms of pursuing new clients, are you being held back with respect to lack of travel? Or is our virtual presentations adequate in terms of signing new licenses? Rob, that's a good question. I'm getting some playback there, but that's a good question. Yes. So I truly believe that need is a it's a very it's a it's an involved purchase. And face to face does is normally more productive and also the ability to get to meet prospects is better. But I will say it's not impacting us very significantly. And we are achieving everything remotely, But we would be in favor of being back, you know, having especially on the front facing side, more face to face with our customers. But it is working for us, and it is going well from that perspective. But we would prefer it if it was face to face. That's just the the summary, I guess. Thank you. And if I may, in terms of pipeline development, could you talk to your efforts and strategies with respect to targeting second tier clients in terms of going indirectly at that marketplace? Yes. So we would see a lot of momentum in the marketplace around partners and refer to partners and that type of thing. So on a number of fronts, we would be approaching these customers through inbound marketing, through our referral partners, and also indirectly to partners themselves who are working with these customers. So we do see that as being part of our pipeline that we are maturing as well. If I could, with respect to the pipeline, would there be situations where you are currently involved with RFPs and competitive situations? Or if there's any additional perspective or color or nuances within that pipeline, it would be appreciated. Yes, Rob. There's a we're always involved in our RFPs at some stage or another. Some RFPs are longer RFPs and some are shorter, but we are certainly working on some of those right now. And we're in, we would say, the sales sales process or the purchasing process with a number of clients. Thank you. I'll jump back in queue. Thank you. Okay. Thanks, Rob. Thanks, Rob. Our next question comes from the line of Martin Toner. Martin, you're on mute, so go ahead. Hey, guys. Thanks for taking my question. I hope is good over there in Ireland. Sure is. Sunny day. It's good. Is there seasonality to the selling season for this type of solution? I mean, are there key conferences, opportunities, specific sort of windows within the year where you'd book more versus less? Yeah. So I wouldn't say that's clear cut. Regarding activity on the sales side, there tends to be more of it in the the autumn time after the summer. It picks up at that point in time. Then you have the companies preparing budgets for the end of the year, so that can be a factor as well. But by and large, it's not a major concern, Martin. Okay. And can you give us a little feel for the extent to which revenue and ARR growth was new customers versus growth with existing customers? Yes. So I would say that growth in ARR is there's two dimensions to it. There's your maintenance and your SaaS. So it's growing steadily year on year, mean, growing well year on year and growing steadily throughout the year as well. So I would say there's obviously, there's a proportion of new coming in there and there's also a proportion of existing that are scaling. So there's both dimensions to that. And when customers are adding when you're growing within an existing customer, does it tend to be a function of them adding new trials, new product lines or using more functionality within your solution? Yeah. It's moving it's both so they but, generally, the processes are are across products. You know? So we apply to multiple processes, validation subprocesses, we call them, And they apply across products and across lines and across sites. And, you know, there's different users for each different process. So the scalability for me is based on going to new processes and also to new sites, expanding these processes that they have modeled in the system out to new sites as they go forward. So it's two dimensional. One is new processes, and then the second is automating those processes across sites and standardizing across sites. Great. Thanks. What is in your COGS that makes your gross margins lower than some other SaaS solutions? So I suppose we are our company is growing into a pure play SaaS company coming from legacy on prem. So our professional services is growing ahead in some cases. So we will see that growing up to what you'd expect over time from a pure play SaaS company. Got you. Okay. Super. Okay. That's all for me. Thanks. Thanks, Martin. Thanks, Martin. The next question comes from the line of Christopher Joseph Beatty. Christopher, you might just identify what organization you're coming from for everyone. Hello, Christopher? I think you may be on mute. Yeah. Sorry, Chris. Sorry. We're not able to to hear you here. I think you you need to enter a PIN before you you're allowed to ask questions. I think you're coming via phone. So if you want to enter the PIN, then I'll come back to you. In the mean in the meantime, Gavin, I'll come back to you and let let you continue. I think you said you had some additional questions. Yes. Maybe for you, Hugh, I wanted to put a finer point on that gross margin question that Martin asked. I think you referenced in the press release that there was about 340,000 of, you know, services cost that, you know, had not be recognized in revenue. So your gross margins in the q three were 37%. If I just add that 340,000 to services revenue, I think I come up to 47%. Am I doing that math? That kind of the right way to think about it? No. I think that's it's not quite as simple as that, Gavin, unfortunately. I mean, if you look back to our press releases in previous quarters, we would also have referred to amounts that were invoiced in those quarters, which weren't recognized and would be recognized in subsequent quarters. So essentially, in any particular quarter, you have an element of recognizing revenue that was invoiced and for which the costs were incurred in previous quarters being recognized in this quarter, while at the same time, some of the revenue that is invoiced and for which the work was done in this quarter is essentially going being deferred and will be recognized in both. So there's unfortunately, there's an element of both coming in there. So unfortunately, the math are not as simple as that. Okay. But I mean, to say that if you were recognizing the revenue and the cost kind of close together, your margin would be probably into the 40s. So I suppose maybe just to talk a little bit more on the professional services. I mean, we're continuing to the professional service team, we added to it over the last year. They the team is now up to strength and is trained in, etcetera. So we're now starting to see invoicing happening at a more normal rate, although there will always be variability depending on when projects get completed, etcetera. So there will always be an element of lumpiness to DPS, although hopefully, as time progresses, that will even out because as more stuff goes on, there'll be one thing coming in where another thing drops out. So but in terms of overall margins, I think the overall margin is probably a reflection of the mix between PS revenue and other revenue. And you can see that in this particular quarter, PS is a bigger percentage and consequently bringing down the overall. But as we progress and SaaS becomes continues to grow and becomes an increasing part of our total revenue, we should anticipate that our margins will start to move up in the direction of what you would expect to see as normal SaaS margins. Yes. And just on the services headcount, I mean, how are you feeling about your internal capacity now? And it sounds like you've been scaling and training up new members of that team. Do you feel like you're good for a period of time in terms of your services headcount? Or is there other material additions that are going to be needed over the next kind of couple quarters? Yes. So the answer to that, Gavin, is yes, we're in a good place regarding our service capability. We are we would say we look ahead all the time to make sure our services are going to cater for the future needs of the pipeline and that and the existing customers. So we feel in a good place right now. There may be a few tweaks here and there. And we may be we may we will revisit as we go. But right now, I don't see any problem there. Okay. Great. And then, Hugh, I know you've been kind of working to put in place a new ERP. I think some of that cost has been kind of capitalized. Can you just provide us with an update on kind of where you are on that project? How much is been spent and maybe how much spend is left to go? Yes, sure. So first of all, I'm happy to tell you that we have gone live on the financial modules on the new ERP system. And this quarter's numbers have been reported using that new ERP system. So obviously, we're still working through and trying to fine tune it to do all the things we wanted to do and adding additional modules for other parts of the business. But yes, happy to report that we are live on it. In terms of costs, it's essentially, the cost of that will be spread out over lease over not a lease, but essentially over future periods. So it's not going to be a dramatic impact in any one particular period. You'll just see a marginal increase in cost over future periods associated with that. Got it. And then maybe just a last one for me for Eddie. Obviously, Keith joining as CTO. Maybe you can just speak about how you selected Keith, what he brings to the organization and kind of how the duties will be split between Keith, Kevin and Brian on the tech and product side. Yes. So Keith is coming in. The criteria for Keith was an experienced person across all dimensions of software development and growing scalable companies. And so the key thing there to bring in his knowledge of SaaS and deploying cloud solutions into these as well. I mean, it's not that that's not missing from the company, but we wanted a second opinion and a person that can be a guiding staff for that area. So regarding the splits in the roles right now. So Kevin is our Chief Product Officer. So Kevin's goal is to ensure that we develop our technology to meet the requirements of the marketplace and that, that Filter Street division of the technology and the strategy of the technology is communicated right down to every corner of the company. And Keith's goal is to Keith's responsibility is to develop that and to, you know, to bring the how to that, to develop that according to the requirements of the market. And Brian then is our so Brian is our chief information officer. So Brian is just responsible for everything to do with data security, information support systems, quality assurance, which is a huge area of our business because it is it's very, you know, very critical to the customers we deal with. So we have been getting a lot of a lot of pressure in those areas from customers to make sure that our systems are to the best they can be from a secure point of view, especially all our SaaS environment. And so Brian is really ultimately responsible for all of that. So is that the question, Gavin? Absolutely. Thanks so much. That's it for me. Okay. Thanks, Gavin. Great. Thanks, Gavin. Rob, you still have your hand up. I don't know if you have some further questions or just haven't taken your hand down. See your hand going down, okay? Thanks. Or not sure is your hand up? Sorry. Rob, do you have further questions? Yes. Thank you. If I may, could you talk about your plans to expand into adjacent markets? And would those plans be reflected in the ongoing R and D that we're seeing? Yes. So I suppose it's important to understand that LEED is a, first of all, is a data driven documentation system. And so it's capable for many, many processes. Our focus right now is in a huge market opportunity we have in life sciences. So there's no short term goal to spread ourselves any thinner into other markets, other than complementary markets such as the consumer goods market, which has the same needs and it's similar to dealing with the life sciences. So our domain specialties in life sciences right now, and we're, you know, everything but everything we do is based on building a platform that's capable of of potentially going into other industries if needed. Great. Thank you very much. Yeah. Thanks. Great. Thanks, Rob. Martin, I see you still have your hand up as well. I don't know if you have a further question. One more, please. Just looking at your SaaS revenue growth versus the on prem, And just wondering what the ratio of new seats is SaaS versus on prem? Are you getting new on prem customers? Or is that mostly growth within customers? And then last part of this question, like what sort of is it regulatory in nature that keeps people on prem or has them buy licenses on prem, or is there something else? Well, the the quick answer to that is that, you know, the the last seven to eight eight customers, I think, we've signed have been SaaS customers. You know, what we're seeing now is the customers are all looking to be SaaS. There's very few out there now that don't want to be a SaaS customer. So but there is some some customers still are, you know, happy to stay on prem even though they know the future is not good for them on prem because it's more difficult and they're less agile and it's more difficult to get upgraded and to have patching down to their systems and stuff like that. So but there's they're becoming fewer and fewer all the time. And so the customer, the market's requirement is aligned 100% with needs strategy, which is a SaaS first company and a SaaS only company. And that's that's that is materializing as we go forward. And even the customers we have, like I said earlier on, are are already looking to become part of our SaaS environment. But there is some legacies that are a little bit yeah. We'll we'll hang on hang on a bit longer because they have these big internal IT departments that, you know, that they believe they can manage. But as I say, more and more are seeing that it's difficult for them to do that. So I would be regarding new licenses and that going forward. So as I said, we're SaaS. You know, all new customers we have now will be SaaS. And, you know, some legacy customers will will still expand in the short term, some license numbers. But the as I said, the conversation is also ongoing with them to switch over. Great. Thank you so much. That's all for me. Thanks, Martin. Sorry, I see Christopher Bailey, you still have your hand up. There seems to be a problem, which is actually unmuting because I think you may have a PIN that you need to enter. So my apologies that I can't take your question. And then Thomas Calandra has sent in a question. I'm going to unmute you, Thomas, if you want to actually ask your question, or I can read it out if otherwise, you are muted yourself muted at the moment, Thomas Tom. Okay. Okay. I can go ahead and read it. Eddie, congratulations on QAQC system and your extension to customers and other industries related to LifeSci. Does Neat have any particular adjacent markets identified? No. Thanks very much for the question, Tom. And it's similar to the question you just went before there. Right now, we're focused on complementary adjacent markets only, such as the consumer goods division that, you know, reached into these. So our primary focus is validation solutions for life sciences and complementary in the likes of consumer goods that is also needing the same solutions. And it's no it's no, should we say dilution of our focus. I hope that answers your question, Tom. So much. Tom, if you want to speak, just need to unmute yourself. Otherwise, I take it that you're good with that. Okay, Tom. Martin, I note that you still have your hand up. I don't know if that's just you haven't taken it down or do you have a further question? One last one. Sorry about the sorry about this, the timing. Do you guys know how many validation professionals there are working within the biopharma industry globally? Well, that's a good question, Martin. But we do have that information someplace in our literature internally. And I would have to go back over that, but it's a big number. And I guess we're our market is not just validation engineers. It's it's project engineers. It's it's the all the the supporting stakeholders around all of that, all the way up, quality engineers, scientists. You know, so there's many, many people involved in different aspects of validation and different aspects of the you know, validation is ultimately a quality, a subset of quality within the organization. So the audience is just goes way beyond validation engineers. There's project engineers, project managers, etcetera, even involved in the construction of facilities. So but the number of, you know, potential users, I guess, Martin, is what you're trying to arrive at. So there's a, you know, there's a if I ever look in LinkedIn to see, you know, how many people are out there that would use our technology, I'd be querying under quite a number of categories, you know. Gotcha. Okay. Super. That helps. And yes, that would those numbers would be interesting to learn because I know it's a vast universe. Exactly. Exactly. Super. Thanks, guys. Okay. Before I hand back to Eddie for final remarks, just if there's any further question, I'll take we'll take another question. Otherwise, we'll move on. Okay. Thank you. And that concludes today's answer and the question and answer session. I would like to turn back to Eddie for his closing remarks. Thanks Hugh. In summary, we are very pleased with the progress we have made in the 2020, and we are very proud of the Neat team as they continue to develop quality compliant software, continue to win and scale top tier customers and continue to provide excellent end to end customer service. It gives us great pleasure to be trusted by some of the largest global health care companies to support them in their mission to bring their life enhancing and life saving therapies to their customers. We are very proud of the relationships we are building with these global companies. Before I finish, thanks to our stakeholders, our shareholders, our partners and our team for their ongoing support and belief in what we do. We look forward to the journey ahead, and thank you for your intention. Hugh? Thank you, everyone, and that ends today's call.