Model N Inc (MODN) 2013 Q2 法說會逐字稿

Please stand by today and welcome to the Model N Second Quarter Fiscal 2013 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Greg Kleiner from Investor Relations. You may begin.

Thank you. Good afternoon, and welcome to Model N's Second Quarter Fiscal 2013 Earnings Conference Call. Joining me today are Zack Rinat, Model N's founder, chairman and CEO; and Sujan Jain, Model N's SVP and chief financial officer.

Following their prepared remarks, we'll take questions. Our press release was issued at the close of market and is posted on our website where this call is being simultaneously webcast.

Primary purpose of today's call is to provide you with information regarding our second quarter fiscal 2013 performance in addition to our financial outlook for our third quarter and full-year fiscal 2013.

Statements made on this call may include forward-looking statements such as those with the words "will," "believe," "expect," "anticipate," and similar phrases that denote future expectation or intent regarding our financial results, applications, customer demand, operations, plans, trends to the market, market opportunities and other matters. These statements are subject to risk, uncertainties and assumptions.

Please refer to the press release and the risk factors in the documents filed with the Securities and Exchange Commission, including our recently filed final perspectives with the SEC as well as our quarterly report on Form 10-Q for information on risk and uncertainties.

Should any of these risks or uncertainties materialize or should our assumptions, as outlined in our earnings release in the documents referred to in that release proved to be incorrect, actual company results could differ materially from these forward-looking statements.

In addition, during today's call we will discuss non-GAAP financial measures. These non-GAAP financial measures which are used as measures of Model N's performance should be considered in addition to not as a substitute for or in isolation from GAAP results. You can find additional disclosures regarding these non-GAAP measures including reconciliations with comparable GAAP results in our earnings press release.

At times in responses to your questions, we may offer incremental metrics to provide greater insight into the dynamics of our business or our quarterly results. Please be advised that this additional detail may be one-time in nature, and we may or may not provide an update in the future on these metrics.

I encourage you to visit our Investor Relations website at investor.modeln.com to access our second quarter press release, periodic SEC reports and the webcast replay of this call, which will be available for the next 45 days. Third quarter quiet period begins at the close of business, May 31, 2013.

Finally, unless otherwise stated, all financial comparisons in this call will be to our results for the comparable period of our fiscal 2012. And with that, I'll turn the call over to Zach.

Thank you.

Good afternoon, everyone and welcome to our first earnings call as a public company. I'm pleased to announce that revenue and profitability exceeded our expectation for our second fiscal quarter ended March 31st. In addition, we believe that Model N is well-positioned to deliver strong growth, which Sujan will cover in a moment when he discussed our guidance.

Since this is our first call, I wanted to start by providing some background on our market, strategy and product. I will follow with some of the business highlights for the quarter.

Model N is targeting a major new opportunity within the life sciences and technology industry, the revenue management market. Revenue management market is the process of managing every dollar that impact the top line of the income statement, encompassing pricing, contracting, incentives and rebates.

Currently, a majority of the Fortune 1,000 use a combination of spreadsheets, custom systems and pieces of paper to manage the revenue line leaving tens of billions of dollar on the table every year and creating revenue compliance risk. It is how to believe that global organization has not addressed these challenges when revenue growth is the most important strategic priority for the CEOs, yet this is the case.

For example, IDC estimated that $11 billion are lost annually for incentives and rebates in the pharmaceutical industry alone. Please realize that incentive and rebate management is just one piece of functionality within our application suite and that pharmaceutical is just one of the sub-verticals we serve in the life sciences industry.

In addition, McKinsey indicated that across the Fortune 2,000, on average, a 1% improvement in price translate to an 11% increase in operating profits. The potential dollars at stake here are huge and so are the rewards.

Over the past few decades, we have seen the ERP and CRM space scale dramatically. Companies have largely focused on the cost side of the income statement, becoming leaner and driving cost out of their business. As companies look to automate their back office, these markets have all moved from custom solutions and manual processes to package applications whether deployed inside the firewall or more recently from cloud-based solutions.

The [GMA] line was automated with ERP and human resources management while the sales and marketing line was automated with CRM systems. What has continued to be largely unaddressed is the most strategic component of the overall P&L, the revenue line. This is the next source of competitive advantage for company and opportunity for them to rejuvenate their business model. This is a new multi-billion dollar opportunity we are targeting.

Managing business processes associating with revenue is an opportunity across many vertical industries, but we have focused on the life sciences and the technology vertical due to the significant size of this market and the complexities that they face.

Gartner estimated that companies in these verticals spend approximately $17 billion annually on I.T. related to sales, marketing and finance. Of this figure, we estimated that these companies spend $5 billion annually on revenue management systems. As the market stands today, a large majority of these processes are addressed through spreadsheets, custom systems and paper.

We're still surprised of how little automation exists in this market. In fact, one of our customers recently told me that we help them to eliminate a warehouse where they held over 400,000 paper contracts.

Model N is delivering an integrated software application suite of vertically focused solutions, all built on Model N software architecture that addresses the full spectrum of revenue management processes. These application suites are available on both on-premise and SaaS, but based on the same code base.

Today, a majority of our solution are still purchased for behind the firewall deployment. However, we expect the long-term to end to be towards the cloud and we have already made the investment necessary to make sure that Model N is well-positioned to capture this demand as it occurs.

In total, we had about 18 modules currently across two end-to-end application suite. Our main application suite is called Revenue Management Enterprise, or RME. RME is the mission critical for our customers and serve as a system of record for revenue and delivering new execution engine, covering contract management, regulatory compliance, pricing, promotional activities, incentive and rebates.

The second application suite is called Revenue Management Intelligence, or RMI, which includes a broad set of intelligence application that provide the analytical insight required to define and optimize revenue management strategies.

The combination of the two creates a closed loop system, allowing our customers to optimize, automate and execute the revenues. In addition, we have ingrained over 13 years of vertically specific knowledge, best practices and algorithms into our suite of solutions, which we believe serve as a significant barrier to entry for competition.

When we founded the company, we started off in the medical device market. From there we expanded to pharma, biotech and generic drug manufacturers. After formally establishing a presence in life sciences, we moved into high tech and semiconductors. We initially target these two markets giving a number of similarities apparent in both industries. They are both global industries with very complex distribution channels, dealing with products that change prices frequently. In addition, both have extensive financially important requirements.

We believe that the size of the opportunity associated with these two industries alone give Model N significant growth potential. Some of our customers have seen their gross margins improve several hundred basis points while others have seen tens of millions of dollars of revenues, leakage [we capture].

The significant and easily quantifiable [predict] of our product has allowed us to collect a virtual whose and who list of customers in our target industries. We are proud to count household names such as Merck, Johnson & Johnson, Amgen, STMicro, Micron and Nokia among our many customers.

Despite our success to date, the market remains very underpenetrated. In total, there are more than 2,900 companies in life sciences and technology with revenues greater than $100 million annually. We deploy a land and expand strategy where after a successful initial deployment, we expand our business with new solution, expand to new geographies and new divisions.

Currently, our customers have purchased only a handful of our 18 models on average. However, if you look across all divisions and geographies of our customers, we have just barely scratched the surface in terms of selling those initial models into our customers.

The combined potential of bringing both new and existing product to additional geographies and divisions within our current customers is substantial. We believe that we are less than 5% penetrated in our existing install base.

With this as a backdrop, let me transition to talk about some of the business highlights from our March quarter.

For the quarter, our revenues increased 21% year-over-year to $24.6 million and we are slightly profitable on the non-GAAP operating line.

During the quarter, we signed several new deals and the number of Go Lives as customers went into production. Let me walk through a few of my favorite examples.

Teva, the world's largest manufacturers of generic drug signed an agreement to expand their existing product footprint into new geographies, taking the next steps in their plan to manage revenue on a global basis.

At J&J, we signed a deal that added our international reference pricing application, a new product designed to enable our customers to manage their pricing on a global basis through a single multi-tenant SaaS application.

The pharmaceutical division of J&J was looking to replace a homegrown system to better enable them to deal with the increasing regulatory scrutiny around drug prices worldwide. We won this deal based upon comprehensive enterprise grade nature of products compared to our competition that was proposing a service incentive solution.

On the Go Live front, Abbott, one of our largest life sciences customers spun off Abbott PPD into a new publicly-held company called AbbVie. As part of the transition, AbbVie went live on the model and application suite upgrading their existing RME commercial application and expanding its footprint to include government pricing, Medicaid and DRM replacing their legacy vendor. AbbVie now have a single integrated commercial and regulatory platform to run their U.S. businesses.

Micrel, one of our early high tech customers migrated from an on-premise solution to a SaaS solution in addition to adding new application called Channel ImpACT, an RME solution designed to help companies to gain real-time insight into revenue and profit range from their channels.

The integration between RME and RMI was key to this expansion. Our implementation here provides Micrel with visibility across a full spectrum of revenue, pricing, quotes and opportunities across all their channels and the ability to significantly reduce revenue leakage.

On the product side, we launch our new international reference pricing offering in Q2 with great success. Coordinating pricing on a global basis is complicated enough, but the increasing regulatory scrutiny in the pharma industry has added an additional pain point.

I mentioned the J&J deal above and we have seen strong interest in this product. We also launched our first natively mobile analytic solution in the quarter called Field ImpACT. This new product is designed to help field webs in the pharmaceutical industry to better understand self-performance and competitive data when on the road.

We have a proven history of product innovation which not only expand our product leadership position, it also provides us with additional opportunities to expand our blue chip customer relationship.

In addition, last week, we bid farewell to Jim Bryer as a member of our board of directors. We thank Jim for his tremendous contribution and support over the last 12 years and wish him the best.

At the same time, we welcome software industry veteran Jay Larson to our board of directors. Jay is currently the president of Worldwide Field Operations for Jive Software. And I'm sure that many of you know Jay from his previous leadership role and success factors in Mercury Interactive. We look forward to Jay's contributions as we scale our business.

In summary, we remain enthusiastic about our market opportunity. We are pioneering what we believe is the next large software category, revenue management. We just completed our annual customer conference RAINMAKER in Q2. And I can tell you that the excitement among our customers is tremendous.

With this, I like to turn the call over to Sujan.

Thank you, Zack. So this is our first earnings call as a public company. And we haven't had a chance to meet with everyone who is on the call. I want to take a moment to describe our financial model before moving on to our second quarter results.

We report revenues in two categories, license and implementation revenues, and SaaS and maintenance revenues.

When we sign an on-premise deal, the license and implementation services components are recognized as one unit of accounting and are reported within the license and implementation categories. This combined revenue arrangement is recognized on a percentage of completion basis as were delivered by implementation services.

Our SaaS and maintenance line includes fees related to our SaaS subscription and related implementation services along with the maintenance and application support revenue generated from our on-premise sales.

This combination of revenue streams provides us with a similar level of revenue visibility as compared to our SaaS peers.

Going forward, we expect to see growth in both the revenue categories. We believe the need of our customers are best served by offering them the freedom to choose either on-premise or SaaS solutions though over the long-term we expect the market increasingly move to SaaS.

Through that end, we have seen a number of our customers transition from on-premise to SaaS. In addition, applications like international reference pricing that are only delivered through the cloud, and we have seen a number of customers who have our on-premise business have also subscribed to the SaaS applications.

In addition to the visibility we get from our revenue recognition policies, we also derive a significant portion of revenue in any given period from our existing customers. While we do operate a land and expand model, it is not dependent on lending new customers in any given period.

We then strategic (inaudible) and expand across very large opportunities over time. Internally, we track down amount of revenue generated by existing customers who generated revenue in each of the last four quarters.

In the second quarter of fiscal 2013, this metric amounted to $83 million and increased from $66.8 million for the second quarter of fiscal 2012, a strong testament to the continuing commitment from our existing customers.

So let's look at our operating results in our second fiscal quarter.

Total revenues were $24.6 million, up 21% when compared to the second quarter of fiscal 2012 and up 10% when compared to the first quarter of fiscal 2013. Within total revenue, license and implementation revenue came in at $14.5 million, up 24% on a year-over-year basis and 16% sequentially.

SaaS and maintenance revenue was $10.1 million, up 17% most of the second quarter of fiscal 2012 and up 2% most of the first quarter of 2013. This increase in SaaS and maintenance revenue was primarily due to a $1.1 million increase in maintenance and application support revenue and a $700,000 increase in SaaS and related implementation revenue.

Before I move on to profit and loss items, I would like to preface my comments by pointing out that I will be describing non-GAAP results from this point onwards.

For the second quarter of fiscal 2013, these items exclude $942,000 of strong compensation charges, $684,000 of charge related to a warranty measurement, $83,000 of amortization from acquired intangibles and $25,000 in compensation charges related to LeapFrog acquisition.

Our gross profit for the second quarter was $13.3 million and increased from $11.1 million in the second quarter of fiscal 2012. Gross margin in the second quarter was 54% compared to 55% in the prior period. We expect gross margins to decrease slightly over the next several quarters as we continue to invest in our SaaS infrastructure and in scaling our implementation teams.

R&D in the quarter was $4.4 million compared to $4.7 million in the prior period. The decrease was due to a capitalization of software development cost which was partially offset by an increase in personal cost.

Sales and marketing expense was $5.3 million in the second quarter and increased compared to $4.7 million in the prior period as we have continued to expand a sales organization and focus on marketing programs.

G&A was $3.6 million compared to $2.5 million in the prior period reflecting large lead because of being a public company.

On the operating range, we showed a slight profit in the quarter versus a loss of $800,000 in the year-over-year period. We showed a net loss of a little under $200,000 in the quarter which produced a net loss of $0.01 per share based on weighted average share count of $16.4 million shares in the period.

This compares to a net loss of $1.1 million in the prior year period, which produced a net loss of $0.07 per share based on the weighted average share count of 15 million shares. On an adjusted EBITDA basis, we showed a profit of $500,000 versus a loss of $400,000 in the prior year period.

Turning to some of the highlights on our balance sheet, we ended second quarter with $109 million in cash and cash equivalents, up from $12.6 million at the end of first quarter.

As a reminder, we generated $101.1 million in proceeds from our IPO at the end of March. Our total deferred revenue was $30.5 million at the end of second quarter. It is important to understand that deferred revenue balance is not a meaningful indicator of the business activity during the quarter as this item is impacted by the timing of invoicing under our contracts as we do not bid our customers upfront for the total contract fees.

Cash flow used by operations were also $1.4 million in the second quarter, which after considering CapEx of $300,000 and capitalize software of $800,000 produce a free cash flow of negative $2.5 million. This compares to cash from operations of $900,000 in the year-ago period, which after considering $300,000 of CapEx produce free cash flow of $600,000.

As with our receivables and deferred revenues, there can be quarter-to-quarter variability in our cash flow as it is impacted by the timing of invoicing under the contracts.

Let me now turn to guidance for our third fiscal quarter ending in June as well as the Fiscal Year 2013 as a whole.

For our third fiscal quarter ending June 30, we expect total revenue to range from $26.6 million to $27.1 million or growth of 17% to 19% on year-over-year basis. Non-GAAP loss from operation is in the range of $700,000 to $200,000. This would lead to a non-GAAP net loss per share in the range of $0.03to $0.01 based upon a weighted average share count of 22.8 million shares.

For Fiscal Year 2013, as a whole, we expect revenue to range from $100.6 million to $101.6 million or growth of 19% to 20% on a year-over-year basis. Non-GAAP loss from operation is in the range of $1.2 million to $200,000. This would lead to a non-GAAP net loss per share in the range of $0.12 to $0.07 based upon weighted average share count of $19.4 million.

As I alluded to earlier, we are currently focused on the appropriate investments necessary to further lead in this large and growing market. Accordingly, we have continued to reinvest in our business.

In summary, we are at the other stages of a major new software market opportunity for revenue management, and we are excited about Model N's future. And now, we would be happy to take questions. Operator?

Oh, yes. (Operator Instructions). And we'll pause for just a moment. And our first question comes from Sterling Auty with JPMorgan.

Yes, thanks. Hi, guys.

Hi, Sterling.

So, given the March quarter, we saw a lot of squishiness in terms of the results of a lot of high tech companies, can you characterize what you saw in terms of the demand environment in the high tech area versus your life sciences part of your business?

Sterling, as you know, Model N is targeting the two industries, the life sciences and high tech and the vast majority of our business coming from the life sciences industry. Because of this, I think that Model N is not directly correlated to a macroeconomic trend or to the general trend of the software industry, but more to trends of this industry.

What we continuously see in this industry is a stronger need for our revenue management solutions. We see increased regulatory environment that is being pushed on the companies both on the United States and internationally.

And as these companies are searching for revenues and revenues growth and we feel there is a good demand for our product.

So when we look at the demand for our market -- our software in the market, I would characterize that the market is very similar to what we have seen over the last couple of quarters.

Okay, great. And can you -- so could you give us a sense of total headcount at the end of the quarter versus the previous quarter? It's specifically when working for us, it looks like you, guys, continue to sign up, you know, additional deals. I want to understand, you know, if you feel you're appropriately staffed to be able to deliver the implementation needed for the coming couple of quarters in terms of the near term.

So Sterling, we continue to make investments as we have discussed. We continue to ramp up our implementation teams. We also continue to make investment in our SaaS infrastructure.

In terms of the headcount, that's not a metric we're looking to give on a quarterly basis but we definitely will be providing that on an annual basis.

Just to -- you know, to -- just to Sujan, if you look at the investment that we made over the last two years, we made significant investment in the company as a publicly held company.

We doubled the size of the company from 300 employees to 600 employees and we build this capacity in anticipation of us being a public held company, ability to grow our customers and to have a new one. And we will continue to recruit and to grow the business but as Sujan mentioned, we made some big investments as a privately held company.

Got you. And last question, the SaaS part of the revenue line was up more than expected on both the maintenance and the SaaS. The SaaS portion specifically, I wonder if you could give some additional color in terms of, is the analytics or what are the things that you're seeing the biggest focus on in terms of demand for your SaaS portfolio?

Yes, I can talk about the trend there. I think that first of all that when you look at the way that our business model has worked, we provide our customers with freedom of choice related to how they deploy the software.

And we enable them to deploy both on-prem and on SaaS and we believe that over time, SaaS is going to become more dominated factor if a couple of trends happen. The first one is the better acceptance of a SaaS especially in the industries that we are in.

We also provide this unique feature of having company's ability to transform from on-premise solution to SaaS and I gave one example in my comments related to [Mike Weil] who was an on-premise solution and migrated to SaaS and we see this as a very appealing value proposition for the on-premise solution.

And another trend is that we are bringing a set of projects to the market are SaaS only such as the international reference pricing and we spoke also previously about J&J and the win that we had there. And as we bring these products to the market, the customers are consuming to this as a SaaS solution, sometimes alongside of the on-premise solution.

And then finally is that we are going to go more into the midmarket from the very large implementations that you have and there is more willingness to a consumed SaaS from the beginning.

So I feel that this is something that we are going to watch carefully but again, we are providing our customers with freedom of choice related to how they deploy the software.

And Sterling, if you look at it from a mix point of view, we continue to expect a similar mix between line 1 and line 2 if you're not looking at the mix of change in the short term.

Great, thank you, guys.

And moving on now to [Joven Nappeau] with Deutsche Bank.

Hey, guys. Thanks for taking my question. I just like to follow up on the SaaS question a little bit more. So it seems like some of your technology customers are moving over to SaaS and you're selling some of your additional new modules like the different applications on SaaS. But are you -- are you seeing any of your large traditional life sciences customers also moving to SaaS?

So the answer, Joven, is the kind of -- is the following. First of all, you are right about what you are saying, is that in the technology sector, even the large companies have an appetite to consume the software there as a SaaS. And it's a much more progressive, we can call it, environment, to a kind of to consume SaaS.

As related to the life, you know, sciences market, it really kind of depends and again, our strategy there is to provide our customers with freedom of choice related to how they want to deploy.

The set of applications as we mentioned and that we provide is the SaaS and companies have no way concern whatsoever to consumer these as a SaaS. If you look at the international reference pricing, if you look at some of our analytical applications and especially revenue management intelligence, we provided these solutions as a SaaS and as a cloud and companies are very open to kind of, you know, to consume it.

Related to the revenue management enterprise, we provided both solutions and we believe that over time as SaaS is more proven, more companies are going to move to SaaS.

Got it, Okay. So Sujan, I was looking at some of the metrics that you gave out today. So seems like the full quarter trailing revenue metric at 83 million was up 25% by our math. So can you talk about where the growth is coming from? Just to get a sense, is it from more penetration with an existing customer or through -- in additional departments or are you selling more modules for existing division?

It's both. It's coming from expanding within the same division itself in terms of upsell opportunities that we have seen for additional applications and additional modules. And it's also expanding into additional divisions, so we have seen expansion opportunities in both.

Yes, I just wanted to kind of -- I want to mention that, you know, our definition of customers is very conservative. Our definition of the customers is an entity. So if you look at, you know, some of our largest customers, the companies like Amgen and like J&J and like Novartis and others, they are a single customer within our definition.

And these companies have multi-divisions that are Fortune 500 companies revenues wise. And so we feel that we have a very large opportunity actually to expand there and expand to new divisions and new geographies, bring new product to the market and work closely with our customers as they seek to expand their revenues on a global -- on a global basis.

And at the same -- at the same time, if you think about our markets, we have a very -- we're very excited about our customers, very pleased but there are still 2,900 companies with revenues than more than $100 million in both these industries. We penetrate less than 5% of the market and we have a long wait to go to expand our presence there.

Got it, thanks. And just a last question, so it seems like [Jay Larson] is joining the board. Jay obviously comes with a lot of experience in SaaS sales. Are you looking at kind of tweaking your sales comp plans or any changes there that you're anticipating at this point?

Yes, so our, you know, SaaS, you know, compensation plan is definitely incentive the (inaudible) of the sales organization to do what's right for the customers. And we believe that again, a long side approach that I mentioned where we give our customers freedom of choice and we want actually to make sure that our SaaS organization, solution organization, provide our customers with the base insight about what it is that they can -- they can deploy but let the customer make the right choice for themselves.

And in general, I would say that Jay is -- I believe is a great addition to the board. Just you know from his experience on both selling enterprise solution on-prem in the early days and most recently as kind of a SaaS, and I'm confident that he is going to help us to drive our next-generation SaaS strategy, compensation and operational excellence.

Okay, thank you. Congrats again.

And moving on now to Tom Roderick with Stifel. Please go ahead.

Hi, guys, good afternoon. So Zack, I wanted to hit on the topic of the number of products you have for your customers. Can you talk about a pretty conservative total customer count but certainly there's a big opportunity within those customers?

When I think about 18 modules that you have available for sale, can you -- can you look at your installed base and give us some sense of wallet share within the installed base whether that means the average number of modules that you have installed at each customer or dollar share? Any sort of metrics you can give us so as to give us a sense as to where you're at today and where you think you can grow that wallet share in the account too?

Yes, so when you look at the opportunity that we have right now with our customers, you could look at this in a lot of different ways. So one way as you mentioned is to look at the number of applications.

And I don't want to, you know, give a number because it varies across, of course, different customers but I would say that on average, our customers have fewer of the 18 applications. So we have a long way to go and expand there. And as they expanded their solution of revenue management, we have an opportunity for them to purchase more modules.

Also in -- if you look at those generically at our customers and our largest customers, we usually started in one part of the business in a single geography and these are multidivisional and obviously global company and we have an opportunity to expand to new divisions to new geographies.

And in addition, we have a history of product innovation. We have a history of bringing -- walking with our customers very closely as the market evolves and bringing new products to the market, look at the way that we brought actually revenue management intelligence to the market. It was working very closely with our customers.

You look at international reference pricing and this is something that we work very closely with them in what we call a lighthouse customer opportunity. So we have an opportunity then to go way beyond that.

And when you look at our estimate and you if you look at the number that we have, we believe that we have penetrated less than 5% of the share of wallet among our customers in general.

That's great detail. Thank you. Maybe following up on the notion of products that you can upsell, the LeapFrogRx deal seems to have been a real success for particularly given the price that you paid 40 years ago.

Can you give us a sense as to where you're at with integrating LeapFrog into the core of the product and are there any intentions at this point to crossly frog over into the tech vertical or that strictly remained life sciences here?

Actually, I thought that we pay too much but thank you for the comment. But in general, I kind of like to say is that when we purchased LeapFrog, we purchased LeapFrog because of its technology and we believe this was, you know, best-in-class technology related to analytics.

They had kind of, you know, a combination of ability really to manage analytics all the way from the data layer to the application layer and then the consulting that is absolutely critical to develop these to the market.

The way that we think right now about this business is very well engrained into the revenue management intelligence, so it's a one seat -- one set of an end-to-end application suite that we sell to our customers and we don't think about it as more of what we develop ourselves or what they -- what they develop themselves.

More than this, we use it as the way for us to accelerate and to develop new set of applications that neither Model N non-LeapFrog had and if you look at the outcome of the international reference pricing, this is really a shining example of how we bring people together, how we bring ideas together and how we brought the technologies together into a single solution for our customers.

That's great. Maybe one last follow-up, Sujan, for you. On the gross margin front, can you comment as to the level of usages subcontract, you know, this quarter and as we think about the productivity of your existing -- existing services implementation teams and the usage of those subcontractors, where do you think gross margins can kind of get to if we look at over the next two to four quarters?

If you look at any particular quarter, what we do is we use the subcontractors to more fill in whenever we need additional capacity. The focus of it, focus of the company is to more make sure that we go out and hire people, we train them and we have been very successful in doing that.

Having said that, if you look at it from gross margin point of view like we see more slight decrease in the next two quarters which we have guided you, we will continue to make some more investments in the first half of 2014 but we believe those investments will then start providing us with enough resources that we can start getting back our gross margins.

That's helpful. Thank you, gentlemen. Nice job.

Moving on now to Brendan Barnicle with Pacific Crest Securities.

Thanks so much for taking my questions. Zach, I want to follow up a little bit on Tom's question about customer penetration. I was wondering if you could specifically talk to J&J and how much -- how extensively they are using you and whether there are opportunities in an account like that.

I can, you know, talk about -- about J&J, you know, kind of in general as well as our other -- kind of our customers. You know, J&J has been a customer of Model N since 2002. We started this there in one division called OCD on the medical devices side.

We're also managing a couple of brands of J&J on the regulatory -- sorry, on the analytic side. And we are currently implemented -- implementing in couple of other -- other divisions.

And so J&J is what we considered to be a lighthouse customer for kind of for the company. And when you think about some of the largest customers that we have in life sciences and like J&J and Merck and Novartis, Amgen, Bristol Myers Squibb and Abbott, we think about them as lighthouse customers. We work with them very closely and we are committing -- we are committed to their success as well as they -- we believe that they are committed to Model N's success.

Terrific. That's helpful color.

And then on the new CRM-related product, is that product design for drug reps on the field or is that more an internal product that's used by companies?

We spoke about the two products and the product that we spoke Field ImpACT is designated for sales rep in the pharmaceutical industries in the field. So that...

Great.

That enable (inaudible) it's a mobile solution that is available on their tablets and that enable them to use it when they are remote.

Got it. And then Sujan, could you just remind us again on the visibility that this model gives you as you go into sort of any quarter or any year?

Well, if you look at Q2 performance, you know, we are very happy with the revenue performance of Q2. We are guiding to our Q3, we're guiding to our fiscal year 2013 and we have very high confidence and the reason being revenue recognition policy provides us with (inaudible) to future revenues. We are not yet talking about 2014. That guidance we'll provide towards the end of the -- end of the fiscal year.

What I was just referring to was whether you could talk about sort of the percentage of visibility you have going into, say, a fiscal year when you start that year or into a quarter when you start that quarter.

So again, from a guidance point of view, if you look at Q3 and for the fiscal year of 2013, great confidence in the numbers. Beyond that, we would refrain from providing any guidance for 2014.

Great, thanks for the clarity.

Thank you.

And next, we'll hear from Mark Murphy with Piper Jaffray.

Yes, thank you very much. Zach, regarding the Medicaid claims processing where your algorithms are looking at the validity of claims. That appears to be a big market and you have very little competition. Can you provide us any update on the adoption trends and the ROI that is being realized by your customers specifically for that Medicaid claims processing application?

Yes, Medicaid claims processing is a critical component of the application suite. It's a critical component of the regulatory suite. And it's a product that is delivering a very significant ROI for our customers.

When you look at ranges of return, it's from a couple of millions of dollars to sometimes 10s of millions of dollars, say, a year. We're -- because we have the ability to validate and to reject the claims, this is basically revenue leakage that our customers recapture, and we believe that there is further market opportunity.

I mentioned in my comments, AbbVie, the pharmaceutical division of Abbott that was a spun-off -- as part of their spun-off, they -- actually, they went live of our entire regulatory suite including GP and Medicaid and also DRM. That's the example of the expansion that we have with this product -- particular product.

Thank you. And I was hoping as well you could clarify a little further just on the topic of your on-premise versus SaaS architectures. You had said that today, the majority is being ran on-premise but that that's going to shift towards SaaS over time. I guess I'm curious what percentage of the full suite of products across all of the apps and all the modules is currently available in a SaaS product today.

So all of our products are available on the SaaS basis today and again, you know, our philosophy is the customer strategy and choice and we as a company needs to provide them with freedom of choice of how they want to deploy it.

And more than that, that we enable them actually to go and migrate from on-prem to SaaS but all of our products are available right now as a SaaS solution with the same functionality.

Ands Sujan, is it possible to estimate what percentage of your total revenue you would characterize as being SaaS here in Q2?

So in terms of separating the revenues, we don't separate the SaaS and the maintenance lines, but just to give you an idea, currently SaaS revenues are less than 15% of our total revenue.

Okay. And in terms of your -- your total customer count and the way that they might have changed sequentially just in terms of active customers, I think I was trying to understand, you mentioned a bunch of wins which sounded very exciting in the quarter and I was trying to understand how many were expansions versus net new logos additions. Is it a safe assumption that your -- your total customer account would have increased sequentially or that would be higher than 72 now?

So again, from a customer count point of view, again, I'm not looking to provide that number on a quarterly basis.

But in terms of our strategy -- our strategy is very focused on lending new logos and then expanding within those logos, and that's how we go out and structure safety and we have hunters, we have farmers, we also have implementation services team which are very important all in terms of going out expanding opportunities for us in terms of additional applications, additional modules that we can serve to our customers, also helping us going to additional divisions.

So that's our focus. Really internally, we don't look at, Okay, how much are we getting from existing customers or how much are we looking -- getting from new customers. The focus is how do we increase our footprint.

Mark, and the one other comment that I wanted to add is that in my comments, I just gave highlights of some of my favorite deals for the quarter and it was not by any stretch of the imagination, a comprehensive release.

Okay, got it, understood. Thank you very much. Thanks for taking my questions.

And now our next question will now come from Terry Tillman with Raymond James.

Yes, thanks for taking my questions and nice job on the quarter. Zach, maybe just a follow-up question that relates to, you know, the last couple of years you have been stepping up investments and sales and marketing. I assume some of that's been -- or meaningful focus has been on hunters.

So, you know, as we look at on a go-forward basis, I mean are you seeing a greater mix of your pipeline that's related to potential new logos or, you know, is that still too early to kind of see a mixed shift in the new potential bookings business between new and existing?

I think that, you know, the way that I look at these in the future, I believe that our mix is going to stay about the same because of the way that we define customers and also because of the fact that we are very committed to work with our, you know, large customers and continue to support them as they expand their revenue management on a global basis.

And while the number of this may vary, I would say that the mix should remain about the same because as these companies realize that the benefit of revenue management, we have a big potential to expand it, to globalize it and even to develop a whole new set of applications as the market change, as the need change and as they become to be deploying revenue management on the global basis. So I think that the mix is going to stay the same.

Okay, thanks for that. And I guess as a follow-up, Zach, you know, it does seem like a lot of your customers haven't touched yet even the European rollout or South American rollout or just other regions.

Earlier you talked about maybe about even less than 5% penetration within the installed base. Could you give -- maybe give us a statistic or a snapshot about how much of your pharma or your life science customer base? You've even scratched the surface on the international side.

So your observation is absolutely right. We believe there is a tremendous opportunity for us to work with our customers as they expand on a global basis. We have a very successful global implementations. We have one of the largest biotech companies in the world that deployed our solution across 50 different countries in the Europe, Middle East and Africa where they actually standardized the revenue management policies.

And in addition to this, they developed a set of common matrices where they heavy weight to evaluate their business on kind of a global basis. We believe that the globalization of a revenue management is a major trend.

And furthermore, if you look right now at the notion of reference pricing, the continues benchmarks of different countries to the healthcare systems of other countries, the implication of the way that people launch drugs in others, we believe that this is a major trend that we can work with our customers and help them as they move -- as they move forward.

And then as I mentioned before, we believe that our penetration rate of, you know, the share of wallet is less than 5% and definitely the globe and the globalization expansion is big portion of the opportunity for us.

Okay. And thank you. Sujan, just a quick question on the gross margin profile for the rest of the year, should we assume that the gross margin trough in 4Q '13? Thanks.

So what you'll see is in Q3 and Q4, you would see a slight decrease and that decrease will continue for Q1 and Q2 of 2014 and then you'll start seeing some pickup in the gross margin.

And do you have anything addition, Mr. Tillman?

No, that's it. Thanks.

Okay, thanks.

Thank you, Terry.

Thank you. That will conclude today's question-and-answer session. At this time, I will turn the conference back over to Zack Rinat for additional and closing remarks.

Well, thank you, everyone, for the questions and for the interest in Model N. We are -- we believe that we are a leader in our markets and we believe this is the right place and the right time to address this major underserved technology need.

And I believe that this is going to allow us to build a very successful company in the process over the long run.

We're approaching these opportunities with the same passion and the same core values that have brought us thus far. And again, thank you all for joining us for the first conference call as a public company.

And that does conclude today's program. Thank you all for joining today.