Earnings Call: Q2 2020

Aug 27, 2020

Earnings release

Ladies and gentlemen, thank you for standing by, and welcome to the neet.com Second Quarter 06/30/2020 Update and Results Conference Call. Please be advised that today's conference call is being recorded. Name is Hugh Cavna. I am CFO at Neat. I am joined today on the call by Eddie Ryan, questions from sell side financial analysts. 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 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 Nick 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. And finally, take note that we will take questions only from sell side financial analysts. Eddie will now start with his comments. Eddie? Thank you, Hugh. Welcome, everybody. I'm very pleased to report on the progress that our team has made during the quarter ended 06/30/2020. We have achieved strong revenue growth, and in particular, our SaaS revenue is up 206 percent over quarter two two thousand and nineteen. New big pharma customers and the recently announced top tier leading consumer products customer have all adopted a neat GX SaaS platform. This focus on SaaS, combined with our maintenance revenue stream, has contributed to strong growth in our overall annual recurring revenue key metric. Our existing customers are expanding into new work processes and new sites, delivering great opportunity for growth and expansion of our software. Excellent customer references, coupled with a strong sales and marketing effort, is driving a healthy sales pipeline. Despite of the continuing pandemic, we are executing on our plans and continue to gather momentum in the markets. All of our employees continue to work remotely, and all our operations from software development through to product release, delivery, and customer service continue to operate effectively. We are developing our company structure and growing our ability to to deploy and support our global customers. It is very satisfying to be helping many of the largest global health care companies to digitize and become paperless 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. Supported by broad customer feedback, our r and d team continues to build out our technology, and we are excited about what they are delivering. We continue to enhance our SaaS delivery model, which is leading to its increasing adoption. Using the net proceeds of the 13,400,000.0 raised back in March 2020, we continue to invest in building our team by hiring talented staff across many functions. 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 Neat GX platform to deliver increasing value for all customers. This concludes my review and comments. I will now hand it 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 06/30/2020, was $1,550,000 This was an increase of 192% from 530,000 in the same period in 2019. SaaS license fees, which are one of our recurring revenue streams, were $640,000 for the three months ended 06/30/2020. This was an increase of 206% compared with the 2019. Gross margin for the three months ended 06/30/2020, was $510,000 This is an increase in gross margin from $130,000 for the same quarter in 2019. Underlying the change in gross margin versus Q2 twenty nineteen is an increase in both revenues and cost of revenues. Cost of revenues, including professional services costs incurred during the second quarter were expensed during the period. This included costs associated with an additional professional services of $500,000 billed during the quarter, which will be recognized in future periods. The increase in cost of revenues and professional services costs from $390,000 in the 2019 to $1,030,000 in the 2020 reflects an increase in salaries and benefits related to additional headcount in the professional services team and increased cloud hosting costs. Net loss for the 2020 was $2,300,000 as compared to a net loss of $1,750,000 for the same period in 2019. The increase in net loss was due primarily to increased salaries and benefits related to higher headcount in the professional services and development teams and exchange losses on intercompany loans and other financial assets denominated in euros and U. S. Dollars. Finally, some comments on the non GAAP measure of annual recurring revenue, ARR, which includes SaaS license fees and maintenance fees. The promotion of our SaaS offering, which added to our annual recurring revenue base, is a key strategy for Neat. Progress on this front is reflected in the growth in ARR at 06/30/2020, to $3,300,000 a 215% increase compared to June 3039. Breaking this down a little further, ARR from SaaS licensees increased by 271% and ARR from maintenance fees increased by 108% from June 3039. Focusing specifically on SaaS, ARR from SaaS has almost doubled from $1,290,000 at December 3139, to $2,550,000 at 06/30/2020. A reminder, we have filed our financial statements and MD and A on SEDAR, and they are also available on our website. We are now ready to take sell side financial analyst 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. Okay. Hi, Martin. Eddie here. Martin Toner, you Sorry, yes. Yes. The first question today is from Martin Toner. So Martin, please go ahead. Hi, thanks a lot, guys. Great quarter. Can you guys talk a little bit about what the pipeline looks like for future customer and revenue growth? Yes. Thanks, Martin. So yes, the pipeline, we go forward, we continue to build our pipeline. And so you'll notice from our announcements that we have made in the last number of months that you'll see we're adding to that as we go forward. And these will come through the system once these customers go live, and we'll recognize the revenue at that time. So we continue to build a good pipeline, and we continue to scale with our existing customers in parallel with that. Great. And have there been you have customers raised the location of the data as an issue as you guys transition to the cloud? And if not, what issues do come up the most? Yes, that's a good question, Martin. So that we're seeing more and more of that. We go through a very rigorous process of data security with all our customers. We've gotta go through quite a severe audit regarding that. So the first thing to say is that most of the customers we're dealing with are global customers, and they are they're they're putting all their data about European global global employees into the same instance of the system. So by and large, it's not an issue, but it be it is becoming more and more of a a discussion point. And it's rare that we have a customer that can't live with the global system. But it is conceivable in the future that we would have potentially instances for European customers that may be separate from US customers, but it's not materializing any way fast in that area yet. Okay. Super. And are there any what are there any other notable objections you hear from them? Regarding their data and where it's stored? Just regarding the the cloud offering. Well, the first thing first and foremost, it's security. Can they trust their provider being neat to manage their their systems in the cloud, in our cloud? So we go through very rigorous audits around all of that, data security, security of our application, and how we address all of that and our infrastructure, etcetera. So it's always it's always a topic of conversation. It's always a big question, especially with these big tier tier tier one companies. Okay, super. Thank you very much. That's all I had. Thanks, Martin. Thank you, Martin. And our second question today comes from Gavin Fairweather with Cormark. Gavin, just for your information, you're self muted, so you'll have to unmute yourself to speak. Hi, Gavin. Gavin, you're still showing as as sales users? Gavin, we're not hearing you. Okay. Sorry, actually. Just try to unmute yourself again there. Gavin, we're good now. Yes, go ahead. Can you hear me now? Yes, I can hear you now. Great. Great. Good afternoon to you. So curious just on the pace of scaling kind of within your client base and any change that you've seen there. Have you seen any clients kind of slowing down their rollout of the software? Are you seeing others kind of wanting to go faster or any kind of pausing within the client base? Just curious if you've seen any kind of change in that pace over the past few months. Yes. No. That's a good question, Gavin. How are you? So you know, no. The scale all our customers, they have a different approach, whether they scale fast or scale slow. Sometimes there's customers are driving to get done quicker than others, and it often depends on their priorities and their bandwidth internally. But by and large, all our customers are scaling to some extent. Some are going faster than others. Okay. So still a mix there, but overall, you haven't really noticed any change in the trend, it sounds like? No, there's no change. Generally speaking, on average, it's some are going faster than others, and we do see more moving into that bracket as we go forward, and we do see more customers coming in with more of a scaling mentality as we go forward. But at the moment, it's not materializing in on the ground fully. Okay. Great. And then I thought I'd just check-in on kinda your largest client, the one that you announced, you know, in September. Obviously, it's an on prem client, so we can kind of look at your license sales and and, you know, a a portion of those will be attributed to them. But how is their kind of rollout and experience kind of progressing? And where would they sit on that, on that trend of or within the range of the ones that are going faster versus slower? Yes. So our generally, overall, the on prem customers are not going as fast as SaaS customers because because of the how slow it's within the move on their IT side internally. But, yes, those customers are scaling as well, but we would say I'm trying to remember if I understand that customer that you're you're talking about now. They are moving forward as well, but not as fast as some of our other customers. Got it. Yeah. Obviously, the SaaS definitely makes things a little bit easier. Okay. And then yeah. That's a good question, Gavin. SaaS is something that we are noticing the ability for everybody to scale from our perspective and from their perspective is is faster. Okay. Great. And then I wanted to dig in just a little bit on the services revenue. You know, obviously, in q one, you did a bunch of work that, you know, was kinda invoiced, but not kinda collected or or accounted for as revenue. And then this quarter, I think it was about 500,000 where you had done the work. You'd invoiced the customer, but you hadn't received, you know, the cash or recognize the revenue. So maybe this is for Hugh. Can you just run me through the payment terms and kinda how it works in terms of how frequently are you billing the customers, what are the payment terms after they receive the invoice, and that'll just help me think about, you know, the the cash flow and revenue from services work going forward. Yes. Sure, Gavin. In fact, actually, I know you've asked about payment terms, but in fact, what's being really referred to there is the revenue recognition versus the billing. And it's really to do with whether professional services relate to on prem or to SaaS. So revenue recognition for professional services follows the license recognition. So for example, an on prem professional services would be recognized at the point where the on prem goes live, whereas those comments that you're referring to last quarter and the $05,000,000 this quarter are really related to mostly to, I wouldn't say, exclusively to, but mostly to work on SaaS customers where the professional services are working on implementation and go live for those customers. And the revenue then will only start to be recognized at the point where the customer goes live and would be typically recognized over a twelve month period from the point where that customer goes live. Does that address the question? So wait a minute. Just to be clear. So if you're doing a bunch of services work to turn on a new plant for a SaaS customer, you can't recognize the revenue until after it goes live by twelve sorry. I I was Oh, okay. So let let let me let me restate that. The so for a SaaS customer, the the the professional services to do with deployment, the deployment professional services are recognized over the same period as the SaaS license. So for example, if the professional services have done $100,000 worth of work. Let's take a $120,000 worth of work. And and then when the customer goes live in January 1, then that rate revenue will be recognized 10,000 per month over over the following twelve months. Okay. That's a nuance that I wasn't aware of. So I guess then going forward, I mean, we're going to be seeing this kind of each quarter. Is that the way to think about it as you continue to turn on these new customers where you're incurring the cost kind of ahead of the revenue? Exactly, yes. So obviously, it'd be at this early stage, it's more notable in its impact. But obviously, as time goes on and as we continue to roll out the SaaS model, then we would have revenues coming through from professional services that would have been provided on deployments in earlier months and quarters coming through. And then in current months and quarters, the equivalent will be happening where there's working done and being recognized in future quarters. But then from a pure kind of cash flow perspective, let's say that you turn on a new plant and the revenue from that services will accrue into the top line over twelve months. But when do you actually receive the cash? Do you tend to get the cash a lot faster? No. Absolutely, cash is faster. Yes. So it's would cash is associated with invoicing. And invoicing can typically be done either associated with milestones or with go live, etcetera. So that's really on normal credit terms based on invoices. It's the revenue recognition is really tracking the revenue recognition for the SaaS license. Okay. So we'll just look at billings as a better metric. And then maybe one for Eddie. Can you just give us an update in terms of your services team and the headcount that you have there? And I'm trying to think about, you know, what is kind of the the billing capacity of that team or or kinda how much your revenue would be associated with them if they're running kinda full out? Yeah. So we don't disclose the numbers in the different functions, Gavin, but we have built that team up considerably over the last year, and it's at a sort of a plateau right now. We are fairly well resourced in that area of professional services, and they're well trained up at this stage. And in the short term, we we have overcapacity there to deal with the pipeline that's ahead of us. And, you know, as we need, we will in encourage more to come on board, and then we're also enabling partners as we go forward to support that side of the business too. Okay. Makes sense. And then kind of outside of the services team, are there any other kind of planned hires, maybe R and D or sales? Or just curious there. Yes. So we are we're generally outside of professional services, which we are still adding a little bit to. We're we're putting people into R and D to build out our technology vision. And we're also going to be putting in some more sales and marketing individuals in the short term. Got it. That's it for me. Thank you. Thanks, Gavin. Very good. Thanks, Gavin. Martin, I know that you still have your hand up. I'm not sure if that's if you have another question or it's just still up from earlier. No. I put it back up. Thanks. That worked. Similar to Gavin's question, just wondering if there are any what the constraints on your business and its growth are and what you're doing to build the business and alleviate those constraints? Yeah. So the I suppose the constraints would be what any business would have, the ability to respond to our customers' needs, especially from services and from a support perspective, and also deliver features for areas of business that the customers are looking to use our technology in. So we have all these things, and there's always conflicting priorities. But we believe that we're in a very good situation where we're addressing them all in in in good time. You know? Awesome. What about size of the Salesforce? The Salesforce is is quite is there's it's not very big right now. We have three salespeople in the company and one marketing person. But we're going to now focus on on that again and build that up a little bit more. Good stuff. Okay, thanks. Thanks, Martin. Gavin, I see that you have your hand up. I'm not sure again if that's off from the last time or if you put it up again. Over to you. Yes. Sorry, I forgot to take it down after I asked my questions. I think I'm good. Thank you. Okay. Thank you. And Martin, just see that yours is still up. Presume that's you again that you forgot taking it down? Correct. Yes, I'm done. Okay. That's fine. Thank you. Okay. There seems to be no further questions. So So thank you, everyone. And this concludes today's question and answer session. I would now like to turn over to Eddie for his closing comments. Thanks, Hugh. In summary, we are very pleased with the progress we have made in the second quarter of twenty twenty, and we are very proud of the LEAP team as they continue to develop quality compliant software, continue to win top tier customers and continue to provide excellent end to end customer service. At Knee, 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're very proud of the relationships we are building with these global companies. Before I finish, thanks to our shareholders, our partners and our team for their ongoing support and belief in what we do. We look forward to the journey ahead. Thank you for your attention. Thank you. And that concludes today's call.