Earnings Call: Q2 2021

Aug 11, 2021

Earnings release

Ladies and gentlemen, thank you for standing by, and welcome to the neath.com Second Quarter 2020 Update and Results Conference Call. Please be advised that today's conference call is being recorded. Today's call will be hosted by Eddie Ryan, Neath's CEO and Hugh Cavanagh, CFO at Neath. Before we begin, I would like to remind you that except for historical information, The comments in today's conference call contain forward looking statements, including statements regarding Neath's future financial outlook and financial performance, market growth. The release dates for and benefits from the use of Neath solutions, our strategies and our general business conditions. Any forward looking statements contained in this presentation are based upon Neath'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 Neet 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 quarterly results and limited operating history, which make it difficult to predict future results. Our expectation for future growth of our revenues, unauthorized access to our customers' data, dependence on revenues from new customers, rate of adoption of our SaaS model, acceptance of our applications and services by customers, loss of 1 or more key customers adverse changes in general economic or market conditions, particularly in the life sciences industry Delays are reductions in information technology spending, particularly in the life sciences industry, including as a result of mergers in the life sciences industry development of the market for enterprise cloud services, particularly in the life sciences industry competitive factors, including but not limited to pricing pressures, industry consolidation, entry of new competitors and new applications and marketing 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 impacts of COVID-nineteen pandemic occurring since the Q1 of 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 to date We have 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 Neath makes on www.sedar.com. The press release, the MD and A and the audited consolidated financial statements are all posted on our website. And if you wish to receive a copy of any of these documents, please do not hesitate to contact us. Eddie Vrain will now start with his comments. Thank you, Suneet. Good morning, everyone, and Thank you for taking time to participate on today's call. I will begin with some high level comments before passing the call to Hugh to provide a detailed financial update. At the end, we will open the call for questions. I am extremely pleased to report on the progress that our team has made during the Q2 of 2021. In addition to achieving record revenues, we also delivered significant gross margin expansion, reflecting the impact of the scaling of our SaaS business. During the Q2, total revenues grew 104% year over year and SaaS license revenues grew 170%. Additionally, we continue to see strong growth in our overall annual recurring revenue, which was up 141% year over year. During the quarter, we were successful in signing additional top tier companies. In June, we announced the signing of a 3 year master service agreement with 1 of the world's leading engineering consultancy design firms. They will use our technology to digitize commissioning, qualification and validation services to their life sciences clients. This European headquartered company employs over 15,000 people and delivers large capital engineering projects to multiple industry verticals across more than 90 countries. Our platform has applications in many different segments and we are excited to be expanding deeper into the life sciences supply chain. This demonstrates the flexibility of our platform in addition to expanding our total addressable market. Subsequent to quarter end, we announced a 3 year master service agreement to be corporate enterprise e validation solution for 1 of the world's leading healthcare brands. This U. S. Headquartered company employs over 10,000 people and has manufacturing facilities spanning the globe. After an extensive evaluation process, the company selected Neet as their corporate e validation platform to scale to all sites across their life sciences division. This customer win is further evidence that the Neat GX platform is the leading validation solution on the market, replacing legacy solutions that are inefficient and error prone with one that delivers speed, data integrity and compliance. We continue to see strong tailwinds in our core market as growth in data management and greater regulation is driving companies to digitize their paper based validation processes. In addition to growing revenues, we continue to strengthen our corporate structure and build out our management teams. In May, we announced the appointment of accomplished executive, Nitant Becky to our Board of Directors. We also recently appointed experienced marketing executive, Laura Sweet, to serve as our VP of Marketing. Neel will benefit from Nutan and Laura's considerable experience as we expand our global operations. In April, the company closed a short form prospectus offering and a parallel non brokered private placement, leading to total proceeds of $22,100,000 This further strengthens the company's balance sheet and we will use the proceeds to invest in our go to market strategy as well as increasing headcount within our operational and management teams. With a strong balance sheet, our team is focused on executing to plan across all areas of the business, ensuring customer success and ongoing growth and value creation for our shareholders. On the R and D front, our team is making great progress on building in close collaboration with our customers to drive faster time to customer value and to increase our addressable market. Over the past 16 months, The COVID-nineteen pandemic has caused disruptions across many industries in the global economy. Despite the challenges presented by the pandemic, we are experiencing no significant adverse effects on our business across customer acquisition, fulfillment and operations. Our customers have told us that our technology has aided their business continuity efforts during the pandemic because it allows them to manage a large proportion of their validation process remotely. Neet is ideally positioned to capitalize on this trend as the digital transformation of the validation market is accelerating. In addition, we are proud to be supporting several customers in the manufacture of COVID-nineteen vaccines. Our plan for the remainder of 2021 is to continue to add and deploy new SaaS customers, to expand the new work processes and new sites within our existing customer base, to further develop the Neat GS platform, to build out our company structure and to leverage our partner relationships to expand our global reach. I will now hand the call over to Hugh for a review of the financial results. Thanks, Eddie. For the financial review, please keep in mind that all the numbers I will be discussing are in Canadian dollars. I am happy to report that we have seen a strong revenue growth trajectory from previous quarters continuing into the current quarter. Revenue for the 3 months ended June 30, 2021 was $3,150,000 This was an increase of increased of 104 percent from $1,550,000 in the same quarter in 2020. SaaS license fees are a key metric for Neath. Compared with the Q2 of 2020, SaaS license fees of $1,720,000 increased by 170%. The increase in revenue is driven primarily by new customers going live on the platform, Existing customers scaling their use of NeatVX through the purchase of additional licenses and the growth of professional services revenues associated with services provided to customers by our larger protection services team. Cost of revenues of $1,390,000 for the 3 months ended June 30, 21 increased from $1,040,000 for the Q2 of 2020. The increase reflects additional salaries and benefits related to higher headcount in the product delivery and support teams and increased hosting costs associated with the SaaS platform. Gross margin for the 3 months ended June 30, 2021 was $1,750,000 This is an increase in gross margin from $500,000 in the same quarter in 2020. Gross margin percentage has also increased to 56% compared with 33% for the Q2 of 2020. The increase in gross margin reflects the increase in revenues over Q2 2020 offset by a smaller increase in related cost of revenue. Although there has been some volatility in gross margins, the underlying trend since the Q2 of 2020 has been on an upward trajectory. Annual recurring revenue ARR is a key performance metric for Neet. ARR includes SaaS license fees and maintenance fees. The promotion of our staff offering is adding to Neet's annual recurring revenue base. Progress on this front continues to be reflected in the growth in ARR at June 30, 2021 to $7,980,000 a 141% increase compared to June 30, 2020. More specifically ARR from SaaS license fees increased by 186 percent to $7,290,000 and ARR from maintenance fees decreased by 10% from June 30, 2020. Finally, as Eddie mentioned earlier, we completed an equity financing in April this year and the company had a cash balance of $26,100,000 on June 30, 2021. As a reminder, we have filed our unaudited 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. And I will now introduce the questioners. As I introduce you, I'd ask That each of the questions might also just mention the organization that you represent. I may be aware of other listeners On the call, I may not, so I would ask you just to mention your organization. So the first question comes from the line of Gavin Fairweather. Good morning, Gavin. Do you want to go ahead with your question? Yes, good morning. It's Gavin here from Just to start out, congrats on the really, really strong results, really great to see. I thought I'd start on The SaaS ARR, it grew by call it $2,500,000 in the quarter. If I look at what it It's grown out over the previous four quarters. It was kind of $750,000 so pretty material step up there and you referenced Some of the drivers there in your prepared remarks. I was curious if you could just go maybe one level deeper and if you could provide some additional insight And to that performance, was there any kind of one time bulk seat buys by some of your customers that maybe drove some upside there? Or Is this just a factor of some of your bigger clients scaling and rolling out quite aggressively? Just curious for any commentary there. Okay. Gavin, Eddie, do you want me to take that or? Go ahead and take that Hugh. Yes. Okay. Yes. So thanks for your question, Gavin. I have to say, we're very happy with the progress in Q2 and the growth in revenue. I mean, it's we've been growing steadily over previous quarters and this quarter has continued in that vein. So I suppose getting on the numbers a little bit, the growth in ARR It's actually a mix of both new customers and of expansions of our existing customers. So it's actually pretty evenly split between the 2 if you look from Q2 2020 to Q2 2021. And so within that, I mean, there are obviously, we have a number of big customers And some of those are contributing significantly to that, particularly on the expansion side. We've customers who are Expanding at a rapid rate, so a couple in there. But then also, as I mentioned, The growth is also driven by significant number of new customers who are coming in there since the same quarter last year. I don't know if that addresses gets to the point you're getting there. Yes. So it sounds like it was pretty broad based and obviously some Bigger contributions from some big customers. But I mean, I guess the key question is, is this kind of performance repeatable? And given that it's broad based, I mean, it sounds like if the stars align, you could repeat these kind of things in a quarter in the future. Yes. So the important thing to remember there, Gavin, is that our proportion of the time that we already have in our customer base, We've always said these customers take these larger customers take between 2 to 5 years to get them scaled. So we are seeing those customers moving steadily along now, and that is the key thing here. So as Hugh said, there's a fifty-fifty type proportion from existing expansions and new customers. But we are seeing those customers moving along in the expansion route that we would have predicted a couple of years ago. So it is a land and expand product. We get in early. It's a small ARR with them. That ARR can grow very significantly over 3 to 5 years, and we're seeing that Moving steadily long, first I would say that we're probably seeing with the impact of digitization and the maturity of Neet And its technology in the marketplace, we're seeing that even going better than we would have expected in some places. But it is a mix, just to summarize on That's very helpful. And then just the second one for me. I wanted to touch on the sales pipeline. I guess I'm kind of curious on the composition of it today. If I think about your announced wins that you put out in 2018, 2019, 2020, most of the announced wins were Tier 1 biopharmas. If we look at some of the wins that you've been announcing in 2021, you still have some of those Tier 1 biopharmas coming through, But it's a bit more of a broader mix in terms of contract manufacturers, supply chain, healthcare, and I'm sure there's some Tier 2s coming through in the background as well. So curious how does the pipe kind of overall stack up, do you still have some pharma Tier 1s in sales processes? And then which of those Kind of additional areas like contract manufacturers, supply chain or Tier 2, are you seeing some fast growth in your sales pipeline? Yes. The pipeline is robust, Gavin, and we're pushing hard in that area from a go to market perspective as well Build that stronger and stronger into the future. And we are engaged with Tier 1s. When we talk about Tier 1s, we're probably talking about at this point in time Within the top 50 or top 20, top 35 thing. And then as you both said top 50, we're probably looking at Tier 2s and beyond. And we're working across all segments now and we're winning on all fronts. And there is a mix in the pipeline going forward is Probably the best way to summarize it, Tier 1s and Tier 2 and smaller. Great. And then just lastly before I re queue, I was hoping for an update on the channel. What I thought was kind of interesting in Q1 and Q2 numbers is that the professional services revenue is kind of being Bumping around between $700,000 $1,000,000 a quarter, But we've been seeing the SaaS ARR really kind of jumping. So it's clear there's a lot of project work going on while the ProServe line is fairly flat. Do you have a sense like how much of the ProServe load is currently being taken up by the channel or the internal teams at Your clients versus the Neat personnel. Yes. So I think we are spending Quite some time now enabling channels and working with channels and looking to let channels be the lead in some of the customers and in some of the scalings in that. So that is happening. We are also our we don't see our professional services growing significantly over the short to medium term, But that they become also enablers of channels as we go forward and they support the channel in them being successful in the marketplace. And ultimately, that then leads to greater license revenues for NIS. So, yes, so does that answer the question, Gavin? Or did I get this fully right for you? Yes, I mean it sounds like it's the channel is doing more and more effectively each quarter and work with clients more and more, which is just speaks to the scalability of The channel is improving considerably as we go along. And we are some of our internal resources are enabling that. And the other comment I was going to make there, Gavin, is that the Professional services, there was a little bit of slippage of projects, which we probably would have anticipated coming in Q2 into Q3. So I suppose the underlying run rate is probably fractionally higher than we're seeing in the quarter, but just due to that slippage. Okay, great. I'll re queue. Thanks so much. Okay. Thanks, Gavin. And the next question comes from the line of Christian Sprott. Christian, if you want to go ahead and just introduce your organization as well. Good morning, Hugh. This is Christian from 8 Capital. Again, congrats on the strong quarter, the good ARR growth. The first question I'll ask sort of feeds off of Gavin's last question. If I remember right, You filled out the professional services team through last year and the revenues have sort of been flat and that's good color that we could expect run rate to increase. But beyond that, would you say the teams hitting an inflection where they're more productive now, which could drive strength in revenue Our margins there? Hi, Christian. Thanks for that. Yes, you're correct. We are. Our professional service team is becoming more productive. They are we are not hiring many more in that area at this point in time. The one thing to say is that, again, they are at this point in time spending some more time with the channels, enabling channels. So the channels will be stronger on their own in the future, but you're correct in that assessment, yes. Great. That's helpful. There's one mechanical question I wanted to ask quick before I forget. Could you remind us with a lot of companies that report in Canadian, Foreign exchange considerations are becoming more impactful. How much of the billing is in U. S. Dollars? How should I think of FX and need? Was it an impact that I was sort of was there any impact in the quarter and would you advise you look out for any impact? Sorry, Christian, I just missed part of that question. Could you just repeat that a little bit there? Just It went a bit broke up on me. Absolutely. Mostly just how much of the billing is in U. S. Dollars. Okay. Okay. Yes. So yes, the majority of our billing is in U. S. Dollars. It has had a small impact FX has a small impact over the quarter in terms of how the Canadian dollar had moved. So it had Small negative impact. It's not huge. So but, yes, the majority of our billings probably 3 quarters plus are in U. S. Dollars. Great. Great. So good growth despite that headwind in Q2. I'll ask one more question on investment in the business. Given the acceleration ARR and gross profitability, Are you thinking about maybe adding ahead of plan to sales and marketing and R and D to maintain the pace? Or do you think that, let's say, next year, Some of the strength to drop profitability. Yes. So that's a good question, Christian. The goal has been to accelerate our go to marketing and we are building that capability on an ongoing basis and also Building out the technology to satisfy additional areas of the customer's business, add more value The customer deploy our technology faster, shorten the sales and deployment cycles, also build capabilities to address adjacent areas in the life sciences and the other segments and also address ultimately address additional verticals. So the technology, the vision of the technology is constantly being driven. So we will continue to spend in R and D and in sales and marketing. Great. Thanks, Vinny. I'll ask one more. I'll sneak one last question in and it's getting more back at the ARR question that Gavin asked earlier. When you guys say that new customers added to the build, would you say that's the newest customers? For example, the December biopharma win contributing to the Q2 growth or when you say new, do You mean all of the 2020 wins starting to ramp. I'm just wondering the impact of, let's say, a go live with a new customer. Could that really lift the ARR trajectory in a single quarter? Does that take more time? Okay. I'll just take that quick briefly Hugh. Just on new customers, as I said, they usually start on the smallish side, Christian, And then that customer ramps over time, right? So usually the big customers will take some time to start scaling the licenses. The small ones come in, but they don't have the same upside over time. So the thing is that's basically what's contributing to that. So like when you talk about something 6 months past, they are now beginning to deliver revenues for us after they go live. And I suppose I'd like to ask that, Christian, just in terms of if you think of it in terms of timing and announcements and so So essentially, customers show in our ARR at the point where they go live. So from the point of announcements, there's obviously a deployment phase happens after that. And if that customer then goes live before the end of a particular quarter, but then they're showing the they would show in the ARR for the end of that quarter. And so as a consequence, The additions to ARR are probably a reflection of customers that were added throughout 2020. So if you think of ones that were added where the announcement would have been, say, in Q1 of 2020, they might have gone live until Q2 or maybe if they're late Q1 or into Q2, then they wouldn't go live until Q3. So they would be counted as new customers in terms of the ARR growth over that period. Got it. That's all super helpful. Thanks for taking my questions today. Okay. And I can come back if you have more. Okay? Thanks. And the next question comes from the line of Rob Goff. Rob, I think you're You're on mute there now. So if you want to introduce your organization and then go ahead with your question. Thank you very much, Hugh. And the organization would be Echelon Wealth Partners. And first Congratulations as well on the strength of the quarter. My question would be on how you are currently Strategizing your perspective on the development of your sales capabilities, trading off internal investment versus channel development. And that's both the life sciences and the adjacencies. Yes, that's a good question, Rob. So Today, the channels are beneficial and supportive and Great from the implementation perspective and the ongoing support locally in the customers area or the customer sites area. Sales today is handled direct. We're supported and true to partners in that, But the sale will be directly between Neet and the customer. And then the channels are leveraged to do the deployment. And The services revenues are being passed over to the channels as much as possible for the deployments and implementations So that we can do more of that. But right now there is no reseller as such. We don't sell through channels. We just deployed through channels and support locally through channels. And do you see yourself adding channels for that sales functionality? In the short term, it hasn't been fully concluded, but not straight away. But over time, I think, yes, As we move forward, we will be looking at how we can make that fluid. And would that coincide as well with Greater traction perhaps in the adjacencies? Yes, adjacencies and potentially verticals where we can get the right partners who have the domain expertise that can take our technologies into these other areas for sure, yes. Okay. Thank you. Cheers. Thanks, Rob. Thank you, Ralph. Gavin, I noticed you still have your hand up. I think maybe you haven't taken it down, but if you've got an additional question, you can go ahead now. Yes, yes, I've got an additional one. I did notice in the text of the MD and A, one of the contributors that you called out Some of the SaaS revenue growth was migrations from some of your on premise clients and we did see the ARR related to the maintenance stream, stepped down a little bit this quarter. I was hoping for just a bit of an update on how many of your clients are still on prem, Hoping to get maybe your updated view on what's the timing of some of those customers switching over more fully and whether You would expect the pace of their deployments and growth to accelerate after they switch over? Yes, very good, Gavin. That is we are now we are switching them over. I think we have half a dozen that are now still on prem and but All of our 1 maybe are clearly you have a road map for switching over and growth after that. So I and the others are may take a little bit longer, but I think when I said It was a 2 year when I started talking about this last year, it was probably 2 years. I think it's around it's still around 2 years. I think at the end of 2022, we should have a lot of that done. That's helpful. And if I recall correctly, I think that there's not necessarily a big ARR lift right away because they're still Depreciating the licenses that they bought on prem, but then longer term as that switches over to SaaS, you'll get an error left on that. Am I thinking about that right? Yes, correct. But most of them there's we do see at least continuing the way they're doing And with a lift over time, I think that's correct what you said there actually, yes. Okay. Thanks for the color. Yes. Thanks, Gavin. Thanks, Gavin. I'm not seeing any further hands at this point. Okay. So thank you, everyone. And that concludes today's question and answer session. I'd now like to turn you back to Eddy for his closing remarks. Eddy? Thanks, Hugh. In summary, we are very pleased with the progress we have made in the Q2 of 2021, and we're very proud of the Neat team as they continue to develop quality compliance software to focus on growth initiatives to win and scale customers across all tiers and to provide excellent end to end customer service. Today, amongst our many customers across all tiers, we can count 7 of the top 10 global pharmaceutical companies who have chosen Neath as their corporate solution. It gives gives us great pleasure to be trusted by this industry, supported in its mission to bring life enhancing and life saving therapies to its customers. 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. Back to you, Joon. Thank you very much, everyone, and thank you for Connecting in. And that ends today's call. Thank you. Bye now.