Model N Inc (MODN) 2013 Q3 法說會逐字稿

Greeings and welcome to the Model N Third Quarter Fiscal 2013 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Errol Hunter, the Associate General Counsel for Model N. Thank you, Mr. Hunter. You may begin.

Thank you. Good afternoon and welcome to Model N's Third 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 Senior Vice President and Chief Financial Officer. Following their prepared remarks, we will 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.

The primary purpose of today's call is to provide you with information regarding our third quarter fiscal 2013 performance, in addition to our financial outlook for our fourth 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 in the market, market opportunities, and other matters. These statements are subject to risks, 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 prospectus with the SEC as well as our quarterly report on Form 10-Q for information on risks and uncertainties.

Should any of these risks or uncertainties materialize or should our assumptions, as outlined in our earnings release and in documents referred to in that release prove 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. Our fourth quarter quiet period begins at the close of business, August 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. With that, let me turn the call over to Zach.

Good afternoon everyone and thank you for joining us today to review Model N's third quarter results. We exceeded our guidance for both revenue and profitability. We generated revenues of $27.2 million, up 20% year over and $4.7 million of non-GAAP operating income.

In addition, as Sujan will outline shortly, we are increasing our guidance for the fourth quarter enhanced for fiscal year 2014. As we look ahead, we are focused on both closing fiscal year 2013 and finalizing our plan for fiscal year 2014. We continue to be optimistic about the company's market opportunity and competitive position. Revenue management is a solution category that is highly strategic and transformative for global companies, providing significant ROI. Model N is executing against a large pipeline of opportunities with respect to both the number and size of deals that we are pursuing. Some of the opportunities that we are working on have the potential to be among the biggest transactions in the company's history.

We believe the emergence of these larger deal is strong validation of our market leadership position and the value that our solution provides. Given the magnitude of such deals, we have lengthy and complex sale cycles. While we believe we are well-positioned to win and number of these deals, closing them in a timely manner requires strong sales execution.

Recently, we had some challenges in this area. To address these issues and take full advantage of our market opportunity, we believe it is important to take our global sales organization to the next level. As such, we are in the process of bringing on board the next generation of leadership of our global sales organization and we are in later stages of recruiting a new head of worldwide sales.

We are excited with the caliber of the final candidates that we have been interviewing and we are optimistic that we will be completing the process during the fourth quarter. We expect to recruit an executive with strong background in scaling global sales organization, selling strategic solution at the high level of global [2000] organization, and driving sales at the level that Model N aspires to achieve in the future. In the interim, all sales divisions are reporting directly to me and I am fully engaged in managing sales.

Now, I'd like to discuss some highlights from our June quarter. We signed a number of deals with both life sciences and high-tech customers and we brought a number of new implementations live into production. Let me walk through the details of the few notable transactions. Linear Technology, one of the best performing semiconductor companies in the world, with gross margins of 75% and operating margins of 45%, signed a multiyear agreement to move from an on-premise installation to our SaaS solution.

At the same time, Linear subscribed to additional applications. These new applications include deal analytics and contract and compliance management which provide the capabilities to track contract compliance, project margins, and rationalize concession on deals. In addition, Linear subscribed to Channel ImpACT, a revenue management intelligence application which enables Linear to track and manage multiple key performance indicators of the direct and channel business. Channel ImpACT will enable Linear to analyze and optimize both internal and channel operations.

As we have mentioned in the past, a majority of our customer base and prospects still prefer on-premise deployment. We offer our customers the freedom of choice to select on-premise or SaaS and the ability to convert from an on-premise to SaaS, which Linear decided to exercise. We have already made the investment required to deliver our SaaS offering. We are ready to evolve with our customers as their needs change over time and the flexibility of our deployment model enables Model N to maximize short- and long-term market opportunity.

In the life sciences vertical, we signed a new deal with Par Pharmaceutical, another long-term Model N customer. Par is a leading global generic and branded specialty pharmaceutical company. And during the third quarter, they signed an agreement to upgrade their current implementations of our revenue management suite to our newest version Model N 5.7. With this upgrade, Par will not only begin leveraging many of our newest capabilities, including the strategy designer and Medicaid Formula Builder but they can also take advantage of the newest addition to our managed care rebate application, including support for Medicaid coverage gap and 340B refund management.

When the upload is complete, Par will have a comprehensive end-to-end solution covering their entire commercial, managed market, and regulatory books of business, giving them the flexibility to respond to the dynamic changes inherent in the generic and specialty markets, as well as to keep up with the rapidly evolving regulatory environment that pharmaceutical industries deals with.

In addition, this quarter saw continued momentum with several significant customer go lives, two of which in particular we would like to highlight. The first is Amgen, a global biopharmaceutical company with over 17,000 employees and $17 billion in annual revenue, which has been a long-time Model N customer and a revenue management pioneer. Recently, Amgen went live with pharmaceutical industry first truly global integrated revenue management system. The solution brings together the revenue management enterprise commercial and regulatory business processes, as well as the revenue management intelligence practices into a single global instance covering over 50 countries across North America, Europe, and around the globe. With the deployment now complete, Amgen will realize significant competitive advantage in optimizing, automating, and executing their revenue.

The second go live we would like to highlight is Novo Nordisk, A global healthcare company with over 90 years of innovation in therapeutic areas including diabetes, hemophilia, growth hormone therapy, and hormone replacement therapy. They are a Model N regulatory customer and during the third quarter successfully completed both an upgrade of the regulatory application, as well as a swap-out of the competing legacy managed care solution to Model N's end-to-end revenue management enterprise suite. With this implementation now complete, Novo will immediately realize the benefits of the fully-integrated Model N platform for their commercial, managed care, and regulatory compliance needs. This will both eliminate revenue leakage, as well as ensure compliance in today's rapidly changing regulatory environment.

In June, Model N sponsored the Pharmaceutical European Pricing and Profit Optimization Forum Held in Montreux, Switzerland. This forum is the only event of its kind in Europe and this year it saw a 20% increase in attendance and 60% attendance in C-level. Seventy-five of our attendees were prospects for our solutions. Speakers, such as Boston Scientific, Johnson & Johnson, Gilead, and Corning highlighted Model N expertise, measurable ROI, and strong customer relationship. Booz & Co., Deloitte, and IDC gave the perspective on the trends that are affecting the industry. Key topics this year where the impact of international price leveraging where government benchmarks which are there to determine what price to pay for pharmaceutical and medical devices, and tender management, the process of submitting bids to government for their supply of medical needs. Both of these business challenges are addressed by new Model N solutions that were also introduced at this conference.

On the product side, we have continued success with the international reference pricing application we mentioned during our last earning call, signing a number of new SaaS deals with large pharmaceutical companies during the third quarter. As you may recall, this new product offering is designed to help pharmaceutical companies manage the growing complexity of drug pricing on a global basis along with the increased regulatory scrutiny. We believe this new product offering has broad applicability across the pharmaceutical industry.

Also during the third quarter, we released an exciting new product called ScriptValidate, which allows pharmaceutical comp manufacturers to fully automate the prescription label rebate claim validation process. Rebate claim volume has risen steadily in recent years and pharmaceutical manufacturing are straining to validate these claim due to both the volume of data they receive, as well as the diversity of formats they receive it in. ScriptValidate significantly reduce revenue leakage by embedding deep industry knowledge into the application workflow using advanced detection methods and business rules to identify and scrub out invalid data. And by verifying rebate eligibility in comparing submitted data against contractually negotiated terms.

This product is available both as a SaaS and as a part of an integrated, on-premise solution offering our customers complete deployment flexibility. It also integrates seamlessly to our contract and managed care rebate applications so it can be sold both to new customers as well as back into the installed base to improve our value to the existing solution.

And finally, we believe that we are still in the very early days of growing a multibillion-dollar market opportunity. Model N is well-positioned to capitalize on this opportunity, based on our proven track record, integrated end-to-end revenue management suite. We are taking actions to improve our sales execution and capitalize on our large and growing pipeline of opportunities. And we plan to continue investing in our growth initiatives to realize our full potential and drive shareholder value.

And now, let meet turn to Sujan for more detail on the financials.

Thank you, Zach. Total revenues for the third quarter were $27.2 million, compared to our guidance of $26.6 million to $27.1 million. Total revenues were up 20% when compared to the third quarter of fiscal 2012 and up 11% when compared to second quarter fiscal 2013.

Within total revenues, license and implementation revenues were at $16.4 million, up 24% on a year-over-year basis and 13% sequentially. Our SaaS and maintenance revenues were $10.8 million, up 13% on a year-over-year basis and 7% sequentially. The year-over-year increase in SaaS and maintenance revenue was primarily due to a $900,000 increase in maintenance and application support revenue and a $200,000 increase in SaaS and the related implementation revenue.

As I mentioned on the last conference call, internally, we track the amount of revenue coming from existing customers who generated revenue in each of the last four quarters. In the third quarter of fiscal 2013, revenues from existing customers were $85.9 million, an increase from $73.2 million for the third quarter of fiscal 2012. This was driven by the success of our land and expand strategy that Zack mentioned earlier.

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 third quarter of fiscal 2013, these items exclude $1.8 million of stock compensation charges, $82,000 of amortization from acquired intangibles, and $200,000 in compensation charges related to the LeapFrog acquisition.

Our gross profit for the third quarter was $15.5 million, an increase from $12.9 million in the third quarter of fiscal 2012. Gross margin for the quarter came in at 57%, similar to the prior period. Our gross margins reflect continued investment in our SaaS infrastructure, as well as the additions to our implementation teams, which should continue to impact our gross margins in the short term.

R&D in the third quarter was $3.8 million, compared to $4.4 million in the prior period. The decrease was due to a higher level of capitalization of software development cost and the allocation of some R&D expenses to cost of goods sold related to a few implementation projects during the third quarter of this year.

Sales and marketing expense was $4.5 million, compared to $4.7 million in the third quarter of last year. The decrease was due largely to the timing of expenses related to new hires. G&A was $3.5 million, increasing from $2.3 million in the prior period, reflecting largely, the cost of being a public company.

Our operating profit in the quarter was $3.7 million, above our guidance of loss of $700,000 to $200,000 and a profit of $1.6 million in the year-ago period. This increase was driven by the revenue and gross margin upside and expense item mentioned previously.

Our net profit of $3.6 million, which resulted in a profit of $0.14 per diluted share, based on a weighted average share count of 26.1 million shares, and above our guidance of a loss of $0.03 to $0.01 per share. This computes to a net profit of $1.3 million in the year ago period, which produce a net profit of $0.07 per diluted share, based on the weighted average share count of 18.2 million shares.

Our adjusted EBITDA in the third quarter was $4.2 million, compared to $2.0 million in the third quarter of fiscal 2012.

As far as the balance sheet goes, we ended the third quarter with $105.1 million in cash and cash equivalents, a decrease from $109.0 million at the end of the second quarter, largely due to the repayment of $4.0 million of outstanding debt, leaving us debt-free.

Our accounts receivable at the end of the third quarter were $20.1 million, up from $15.1 million at the end of the second quarter. This was largely driven by the timing of invoices. Our total deferred revenue balance was $30.2 million at the end of the third quarter. As we have previously mentioned, it is important to understand that deferred revenue balance is not a meaningful indicator of the business activity during any particular quarter, as this item is impacted by the timing of invoicing under our contracts as we do not bill our customers up front for the total contract fees.

For the third quarter, cash flow provided by operations was $1.8 million, which after considering CapEx of $300,000, and capitalized software of $1.0 million, produced free cash flow of $500,000. This compared to cash from operations of $1.8 million in the third quarter of last year, which after considering $300,000 of CapEx and $500,000 of capitalized software, produced free cash flow of $1 million.

And similar to our prior comments in regards to our receivable and deferred revenue balances, there can be some quarter to quarter variability in our cash flow as it is impacted by the timing of invoicing under the contracts.

Moving on, let me now outline our guidance in the fourth quarter as well as the resulting expectations for fiscal year 2013.

For our fourth quarter ending September 30, we expect total revenue to range from $27.3 million to $27.8 million, for a growth of 18% to 20% on a year-over-year basis. Non-GAAP profit from operations in the range of $500,000 to $1 million. This would lead to a non-GAAP net profit per diluted share in the range of $0.02 to $0.04, based upon a weighted average share count of 26.3 million shares.

Accordingly, for fiscal year 2013 as a whole, we expect revenue to range from $101.4 million to $101.9 million at a growth of 20% to 21% on a year-over-year basis. Non-GAAP profit from operations in the range of $4.2 million to $4.7 million. This would lead to a non-GAAP net profit per diluted share in the range of $0.16 to $0.18, based upon a weighted average share count of 22.2 million shares.

As we stated in prior comments, we are currently focused on the appropriate investments necessary to further our lead in this large and growing market. Accordingly, we continue to reinvest in our business.

With regards to fiscal 2014, as Zack mentioned, we're taking action to strengthen our sales execution in order to execute on a strong pipeline of opportunities. We believe we are well-positioned to win the larger transactions which we are pursuing, however, the exact timing of when the transactions might close is difficult to predict making forecasting revenue more difficult.

Our ability to maintain our current growth rate into Fiscal 2014 will depend on how quickly we can address the recent challenges. After the fourth-quarter bookings are complete, we will have better visibility for the next fiscal year and we'll provide specific fiscal 2014 guidance on the next conference call.

In summary, we're going to continue investing in our product and sales organization to capitalize on a strong market position in the emerging revenue management space. With the risk, this is a very large addressable market and we remain optimistic about Model N's long-term growth opportunities.

And with that, I will turn it back over to operator for your questions.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions). One moment please, while we poll for our first question. Sterling Auty with JPMorgan.

So the very large opportunities that you're referring to, I these new opportunities that came into the pipeline recently, or ones that have been -- that you've been working on but that have expanded in scope?

They are coming from both the, both of these characteristics. We have deals that have recently come to the supply pipeline, as well as some that have been lurking for a while, have been increasing in scope. You know most of these opportunities are actually within our customer base and as I mentioned in my remarks, they represent some of the potential to be some of the largest transactions in the history of the company. And we believe that these large transactions are a really strong indication of the market opportunity for Model N and benefits that our customers are getting from revenue management and the ability to expand the solution into new applications, new divisions, and, of course, the globe.

And did you say how many of those are with existing customers? I wasn't quite clear. Are they all existing customers or some of them new?

I did not say, you know, specifically but the vast majority of them are within our installed base.

And you mentioned a change in sales leadership. When did Lawrence leave the company, if he has left the company, and can you give us -- you gave us a little color in terms of you feel that you're close to getting it done, what do you think is going to smooth the transition to make sure that there's no disruption while you're trying to close these large deals?

Sure. Lawrence has left the company and, as I mentioned in the interim, all sales regions are reporting to me. When we look at the company and we look at the opportunity to have in front of us, we need to focus on closing this large pipeline that we have in front of us and I believe that we have a strong focus right now on these deals from the executive management team and, as you know, we have been here for a long period of time, so we understand the market. We have a close relationship with the customer and the install base and we need to focus on this. At the same time, we will come to the conclusion that we need to bring the next generation of leadership for the sales organization. We need to scale the organization on a global basis and take the company to the next level. We're looking for an executive that has an experience in scaling a global sales organization, selling to the global to, [2000] and really can manage the scale and the size of the company that the company aspire to. And when you think about it, Sterling, at the end quarter, the one that we just ended, the company ran on the run rate of $108-plus million and we are aspiring to scale the company further. So we need to bring the skill sets that's going to require us to scale to the next level.

We also believe that this is an opportune time for us to do this position. This is the fourth quarter for fiscal year. The task in hand is basically one of execution on the large deals but also the planning for the next year and asserting the strategy moving forward. So it's a good time for us to make this change. And finally to your questions, we are in the late stage of the process. We have very capable candidates that we interviewed multiple times, and we believe that we will make a decision that will [do the best] to have somebody by the end of this quarter.

Last question would be on these large deals, do you have the implementation capacity already on board or, depending on how many of the deals you get, could we actually see an incremental investment needed that would bring down your operating income, you know, back to an operating loss of a certain magnitude?

So when we look at, kind of, on the implementations moving forward, our strategy is really to implement closely with our partners and one of the benefits of the company is that we develop a very strong ecosystem of partners that work to us hand-to-hand, to implement the solutions with the customers. I believe that as we move forward, Model N and the partners have the capacity to go in to meet this demand. We have a couple of projects, such as the one that we mentioned with Amgen that just completed and went live. And when we look at the future, we believe that we have both the capacity and the skill sets to address it and from an operating margin's point of view, I think that you're going to see the same distribution between Model N and the partners and hence, you can expect that our margins are going to keep within the current status where they are.

Okay.

Sterling, it's Sujan, just to give you an idea, we also are very flexible in terms of our implementation team. We continue to use third-party consultants so we can increase the size of the third-party consultants when required.

Right, thank you.

Nandan Amladi from Deutsche Bank.

Actually, the link's on what Sterling asked you earlier. The new sales leadership obviously is a change that you probably had not anticipated at the time of the IPO. What level of scale are you anticipating growing to with this new level of sales operation management?

You know, we believe in the opportunity for revenue management. We believe it's a multibillion-dollar opportunity that is growing. As we move forward and we take more customers live, people realizing significant benefit and ROI from the deployment. When you look at the penetration of Model N, we were very successful with the very high end of the market, companies such as Amgen, Johnson & Johnson, Abbott, Merck, Boston Scientific, and Bristol-Myers Squibb, just to name a few and same marquee list of customers in the technology sectors, companies such as SD micro, and NSP, and micron and others -- we believe that we have an opportunity to, A, further increase our share of wallet with these customers because we believe that we penetrate these customers for less than, about single digits. About, you know, 5% of, the total opportunity that exists there. So we have an opportunity to go in land and expand there and when we spoke about the pipeline, I think the pipeline that we see right now is indication of the opportunity to go and increase the share of wallet among the large customers.

This is also further enhanced because we are bringing new solutions to the market. If you look at the international reference pricing in our ability to go and to sell it to our install base, it's been very productive and we also, with the product if you bought with Script Validator, there is another opportunity to further expand. And then we believe that when you look at our penetration into the industry, which we can go and we can, if we further penetrate both, growth industries, so our strategy, our vision, our plan is really to be a major player in revenue management and capitalize on a significant part of this multibillion dollar opportunity.

Okay thanks, and one more quick follow up, if I might. Considering the fact that most of your new business comes from existing customers and upselling, like you said, you're still only in the single digits as far as penetration, does the change in sales management pose any challenges to how you're going to guide for next year? In other words, are you assuming any kind of disruption, obviously, on the new pipeline side, perhaps, things might slow down a bit but on the existing customer side, the opportunity to upsell, you know, how are you thinking about those two things?

You know the customers that we are working with are very close to Model N. these are people that we work together for a long period of time and you look at the [core fit], we have implemented with them for multiple layers and they made a long-term commitment to the company. It's customers that we have very strong relationship with. We are engaged with them in general and I've personally engage with them, too. So I feel confident that we will be able to close vast majority of these deals. And the question for most of these deals is not if, the question is when and that's what we work very closely with the customers to drive it home and to start this new set of transformative projects for the customer.

And Nandan, we also talked in our prepared remarks that if you look at recently, we have faced some sales execution issues and our ability to maintain our growth rate in the fiscal year 2014 will depend on how far [as to how we] resolve those.

Understood. Thank you.

Tom Roderick with Stifel Nicolaus.

So I wanted to dig in a little bit on the profitability. Obviously, the revenues a little bit better than expected. The profitability was a lot better than expected, and if I look at the operating expense line, it was sharply down in a couple areas. Certainly understanding you're using consultants that are subcontractors, but maybe if we sort of dig in on both the R&D in the sales and marketing line, what's a good level to think about going forward and what's the level of variability in those lines quarter to quarter? For example, is sales and marketing just down because commissions were a little lower this quarter? Maybe kind of walk us through some of those line items and how we ought to think about operating expenses rolling forward. Thank you.

Sure. In terms of Q3, I think you should look at Q3 as more of an outlier. There were a number of one-time things that happened, and especially on the R&D side. If you look at $3.8 million that we have in R&D, there was about $500,000 in terms of capitalized software that was not there in the year-over-year period. In addition, we also had some of our R&D members working on some implementation projects. They had some unique skill sets that we needed on the implementation team. So we had to transfer part of the cost to cost of revenue and so what we did was we did not hire enough consultants and cost of revenue and so we used some the R&D members.

On sales and marketing, if you look at, there are two things going on in the Q2 quarter. We had expenses related to being a public company and expenses related to the IPO. We also had our rainmaker, our annual event, our user event, so those draw the numbers up in Q2 for sales and marketing.

Right, okay, good point with the user event, okay. And then maybe just following up on Nandan's question with kind of a sharper question around the timing of when you think you'll sort of be back up and running full steam on the sales force and, I guess the follow-up --- you know I heard you say relative to when you sort of resolve the execution issues, that can give you a better visibility picture into next year. I guess the question I have is as you search for a new head of sales, Zack, you've always been very involved in the sales front. How much of a step back do you feel like the organization as a whole takes with you running the sales organization and then when you put someone else new in charge, does that sort of naturally lead to a ripple effect across the organization? So maybe it's more of a question about timing and sort of the interim period in between. Thanks

So I feel that when you look at the timing of this, I believe that Q4 is a very good time for us to make this transition. But [natural], right now, the focus is actually on closing the year and on the planning for the next year. We believe that we have a very strong plan in terms of execution and how we think about and taking the company strategically to the next level. So that's a good time to bring a new head of sale onboard that is going to help us to start next year and in full capacity. So I feel that it's a very good time for us to grow and execute on that and, as I mentioned, we are in the later stage of the process. We are very happy with the caliber of the candidates that we have. They come with a very strong background in selling enterprise software on a global basis and scaling a sales organization and I am confident that we'll be able to complete this at this quarter.

Okay, thank you, guys.

Brendan Barnicle with Pacific Crest Securities.

Zack, I wanted to follow up on some of the prior questions, just in terms of large deals. I was wondering if you were seeing any metrics around the number of products customers are taking and whether you're seeing people take additional products faster or more products in that initial purchase.

Sure, so first of all, when we spoke about this large pipeline that we have and the large deals, the large deals, they are about many expansion of current implementation. Taking revenue management from a set of, a single division or multiple division, of course much wider group of organization, expanding into new applications, so think about expanding from commercial applications to the regulatory suites, of companies that have regulatory suites to the commercial, and the third one is about global and taking revenue management globally. So think about this as three separate categories where we see the large opportunities.

We also see a phenomena right now that I mentioned in my remarks where we look at the add-on products, products such as International Reference Pricing, where we see actually smaller size deals, but this is deals that actually happening a lot faster and also the implementations are a lot faster that we saw in the past because of the nature of the solution and some of the architecture that we provided as the [multi-tenant] SaaS possibilities. So that's additional set of activities that we see.

So if you pull back from this, we see the pipeline increasing, both in terms of the number of opportunities and also with the notion of few large opportunities that are emerging right now.

Great. Thanks for that additional color, Zack, that was very helpful. Sujan, I think I caught your comments about why R&D spend and gross margins and G&A were different than we'd expected, but R&D was lower than I'd expected as well. What impact did that and did -- I know deferred revenue is not a key metric, but that was lower than what I'd been modeling. Did that have any favorable impact on sales and marketing expenses?

So from a deferred revenue point of view, like again, if you look at our prepared remarks, we don't track this metrics. Those metrics can be highly variable because of the timing of when we signed the contracts and what we work with the customers in terms of payment terms, but if you look at the number, that number is very similar to what we had in the last quarter.

And then on the R&D side, the better, or lower expenses there?

So on the R&D side, it was mainly because of two things going on. One, we had a higher number in terms of what we capitalized for software development, and then second, this is unique to this quarter in terms of we used part of the R&D team to more help us in the implementation of some projects, so where they had some unique skill sets, so what we did was we did not hire third-party consultants and the cost of revenue, instead we used some of our R&D team members and from an accounting rules point of view, we were required to allocate that cost out of R&D into the cost of revenue.

I'm sorry. You had said the R&D before. I misspoke. I meant sales and marketing.

In sales and marketing, it's more of the Q2 affect. In Q2 of 2013, we had two things going on, one, we had expenses related to being, to our IPO, and also we had our user conference, which was the rainmaker which we had in Q2.

Great, thank you.

Mark Murphy with Piper Jaffray.

I'm wondering to the extent that you have seen some challenges and delays just relating to the new bookings, to what are you attributing it at this point? Do you think your customers, themselves, are under strain and maybe they're pulling back on new capital expenditures? Do you think that they're debating build versus buy? Do you think there's a -- do think their preference is shifting more toward some of your cloud offerings in there trying to sort through that or is there maybe some other factor behind it?

So if you look at our customer in the notion of build is not existence. This company has realized the benefit of off-the-shelf software that embody best practices and the result that they get from these systems and the ROI is very significant. When you look at some of the recent numbers that we get from our customers, we have one of our customer, which is a large pharmaceutical company that installed a single application from Model N that is managing Medicaid claim processing, and since the implementation, they were able to realize $45 million in benefit on this single application. And so the notion of both the value of best practices, the notion of embody sophisticated algorithms, and the ability to deliver value by developing a packaged solution, I think it's very noticeable to these customers, so this is not an issue at all.

When I look at the size and the magnitude of this project, these are very strategic project, they're very transformative for the customers. The fact that the number of these deals is the largest number that we've seen in the history of the company, I think give you an indication about the value that it deliver. Obviously, I mean, when you speak about this magnitude of investment, companies need to think very carefully about how the spend, about timely of the spend and how it's related to other activities that they are doing, but we believe in the strategic value of revenue management. We believe in the ROI. More than this, all these customers have demonstrated the ROI, so we believe that revenue management is a top of the list related to their priorities.

So Zack, I guess kind of inferring off of that, it feels like it's normal course, large projects, timing discussions? In other words, something that you've seen before, kind of the lumpiness of new bookings? It's kind of nothing out of the ordinary here, is that a fair way to look at that?

Yes, when you look at our business, our business have a number of large deals. I think that the fact that even if you look at the financial performance of the company in this quarter and the guidance that we give into the next, I think it shows the resilience of the business model and as Sujan say, we are working, we are very committed to go in to resolve the sales execution issue. We are working on to execute to close the deals and also working to put the right leadership that's going to enable us to scale it to the future.

And so Zack, I'm wondering as well -- I think we all fully realize that you don't quantify bookings on a quarterly basis and we respect that. I guess that said, I'm trying to understand should we infer that your bookings results year to date, that those are directionally below plan or are you saying that you're kind of in line with plan but that the visibility into Q4, that there's multiple different outcomes here?

When you look at the, first of all, about our Q4, we increased the guidance and we feel very comfortable about the results for Q4.

So Mark, in terms of bookings, no, we talked about we are recently faced sales execution issues, but as a company, we are very focused in terms of making sure we address those. We look at the large pipeline at these that we have and we've begun to close those, so our growth rate, in terms of fiscal 2014 will more depend on how fast we address some of those issues.

So Sujan, just one last one from me. It seems like it is very encouraging to hear that you have, I guess, and abnormally large pipeline of large transactions out there. Is there any way you can help us understand what would have to happen here in the next six weeks remaining in Q4, just to enable the company to kind of stay on this current glide path, call it around 20% as we were to look around the corner into fiscal 2014? Are there one or two specific megadeals that are essentially going to get you where you want to be, enable us to continue that trajectory into next year?

If you look at the company currently, now, like Zack is very much focused on the sales execution. We are focused on hiring the next level of leadership. The company has a number of employees who have been with the company for long-term, have a significant relationship with the customers. So what needs to happen is we need to address the sales execution challenges and close a number of deals that we have in the pipeline. That's our focus for this quarter.

Okay, they could very much for taking my questions.

Thank you.

Thank you.

Terry Tillman with Raymond James.

Thanks for fitting me in here. I guess, Sujan, first question for you in terms of one of the strengths of your model, though, is this license and implementation. You've got a large backlogs project scheduled for 4 to 12 quarters, so could you give us, maybe, an update or just at least remind me in terms of what kind of visibility you usually have in the next 12 months on the revenue front? And then I have a follow-up on that.

So Terry, in terms of visibility, we have similar visibility as any sales company. If you look at Q4 guidance that we've provided, we are comfortable with the guidance for Q4 and for our fiscal year 2013. In terms of looking at 2014, we would wait to provide you guidance. We want to see how Q4 shapes up in terms of bookings and that would realize the impact in terms of what growth rate we forecast for fiscal 2014.

Got it, but there's all these questions people are asking about these large deals and it's good you've got a lot on your plate, but even if you close these large deals, I mean there's a ramp even in terms of those implementations, right? So I mean I just don't understand how much --- I mean there could be some impact, obviously, but is the reality even if you close these large deals, there's still a lot of meat that revenue's going to come even one fiscal year out?

Right, that's the , that's our business model now in terms of how we recognize our revenues. If you look at license and implementation, we always go into a quarter with a healthy backlog of current deals where we are executing on particular projects and we take the license and we take the implementation fees and we recognize on a percentage of completion basis, so but that's not changing. That continues to be the case but again, at the same time, we need new bookings to continue to fill in the pipeline, now. So from that point of view, again, we have to wait to see how this quarter shapes up in terms of looking at fiscal year 2014 in terms of what growth rate we will be able to forecast for fiscal year 2014.

Got it and I guess on a lighter note, Zack, maybe I could just ask you about IRP, which you know, we've been doing some research on. I guess one of the ideas come as though, with that product would be, aside from just your, (stick) installed base selling the product, it can open up opportunities maybe with smaller or midsize life science companies. Is that something to think about or is that just maybe a future opportunity? Thank you.

So we believe that this product has very wide applicability across the pharmaceutical industry and it's also a product that has a very broad applicability on a geographic basis, because pharmaceutical and also medical device companies right now, they need to deal with this notion, both in Europe, but also in the US. And when you look at some of the transaction that we did in the last quarters, it was with the European expansion of some of our customers. So we believe that this is a great product. It is an independent product, but it also a great product in a way that it's really [accepted] the need for managing the prices on a global basis and ability to accelerate the adoption with both our customers and then to some small and medium-size companies.

All right, thank you.

At this time, I would like to turn the floor back over to Mr. Zack Rinat for closing comments.

So just want to thank all of you for joining the call today and for the interest that you have in Model N. Just in our financial results for the third quarter of fiscal year '13, they exceeded the prior guidance. We have grown the company by working very closely with our customers on transformative projects and we are currently working on another set of very large pipeline of deals. As we discussed, we take the action to improve our sales execution and we, too, believe it necessary for both are shorter and long-term goals exploration. We are committed and we are confident that we're going to be successful. We want to be transparent with our investors about our strategy. We continue to believe in the large market opportunity for revenue management. This is still a very early-stage market and Model N is very well-positioned to capitalize on this opportunity. The large transaction we see in our pipeline demonstrate both the market potential and Model N leadership. We feel that the vast majority of these deals, the question is a matter of when, not if when these deals close. Thank you for your interest today and we look forward to providing further updates in the future.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.