Model N Inc (MODN) 2013 Q4 法說會逐字稿

Greetings and welcome to the Model N fourth-quarter fiscal 2013 financial results conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Greg Kleiner, Investor Relations for Model N. Thank you, Mr. Kleiner, you may begin.

Thank you. Good afternoon and welcome to Model N's fourth-quarter and fiscal year 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 will take your questions.

Our press release was issued after 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 fourth quarter and full fiscal year 2013 performance in addition to our financial outlook for our first quarter and full year fiscal 2014.

Commentary made on this call may include forward-looking statements. These statements are subject to risks, uncertainties, and assumptions. Please refer to the press release and the risk factors in documents filed with the Securities and Exchange Commission, including our quarterly reports on Form 10-Q for information on risks and uncertainties. Should any of these risks or uncertainties materialize, or should our assumptions 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 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 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 fourth quarter and full fiscal year 2013 press release, periodic SEC reports, and the webcast replay of this call which will be available for the next 45 days.

Finally, unless otherwise stated, all financial comparisons in this call will be to our results for the comparable period of fiscal 2012. With that, let me turn the call over to Zack.

Good afternoon, everyone, and thank you for joining us today to discuss our fourth-quarter and fiscal-year 2013 results.

For the fourth quarter we reported revenue of $27.8 million, which was at the high end of our guidance. And non-GAAP operating income of $4 million, which was above the high end of our guidance range.

We focused over the course of Q4 on both short-term sales execution improvements as well as long-term strategy, completing our annual strategic planning process for fiscal year 2014 and beyond. We crystallized the strategy for both the life sciences and technology businesses, focusing on the go-to-market and product strategy. As part of our go-to-market strategy, we plan to expand the size of our direct sales organization, focus on the enterprise market, which we believe remains largely underpenetrated. In addition, we are adding additional resources to focus on the mid-market.

Model N has been successful in the past with companies such as Salix and Actelion, as smaller firms such as these have the same opportunity to gain competitive advantage over their peers by leveraging revenue management solutions. On the product strategy front, we will continue to focus on our global pricing product, along with the new offering we just released called REVVY CPQ. CPQ stands for configure, price and quote. We believe that there is a significant market opportunity to better integrate sales into the revenue management process.

REVVY CPQ was built on force.com in partnership with salesforce.com. REVVY CPQ will provide our customers with a solution that enables the sales organization to automate and simplify the configuration, pricing, and quoting of their product and service offering.

In order to optimize our execution on these initiatives, we have realigned the resources and leadership of the Company around these efforts. As previously disclosed, this realignment resulted in a reduction in the size of the Company workforce, mainly in our professional services organization. But we plan to increase investment in sales and marketing along with R&D during fiscal year 2014. We believe that our strategy will enable us to return to positive revenue growth in fiscal year 2015, and to capitalize on the large market opportunity for revenue management over the long term.

Overall, our sales pipeline remains strong. We improved our sales execution in Q4 and were successful in closing a number of deals. However, we still have work ahead of us to return our sales to a level we are satisfied with.

We made a critical step forward in improving our sales organization with the recent addition of a new global sales leader. We are excited that Chris Larsen joined Model N in October to serve as our Senior Vice President and Chief Sales Officer. As you know, we were looking for an executive with strong background in scaling global sales organization, selling strategic solutions to CXOs of Global 2000 organizations, and driving sales at much higher level than we are currently experiencing. Chris fit this description perfectly.

Chris is a 25-year veteran of the software industry. Prior to joining us, he had leadership position at SAP, TIBCO and Infragistics.

As the President of SAP America, Chris led a 2000-person field organization responsible for $1.2 billion of annual revenue. In that role, Chris was responsible for the go-to-market strategy, development, and execution of the organization across sales, presales, consulting, industry marketing, alliances and channels.

At TIBCO, Chris led the transformation of the company's 400-plus field organization from a technology-driven engagement model to a strategic solution and customer-centric engagement model. The hallmarks of his success in these roles were establishing a scalable and repeatable pipeline management process, from forecasting all the way through an account and opportunity management, along with engaging effectively with C-level executives.

Most recently, Chris was the Chief Operating Officer and General Manager of the mobile business application division on Infragistics. We are extremely pleased to have been able to attract an executive of Chris's caliber. Currently, Chris is working with our sales organization to put proper process in place to address the sales execution challenges we have been working through and grow the Company moving forward. While the early signs are encouraging, please recognize that it will take time until we are firing on all cylinders.

Let me transition to discuss some of the highlights from the quarter. We signed a large multi-year deal with J&J for our managed private cloud solution, taking over the management of a significant portion of the revenue management applications. In addition, we continued to expand our commercial suite footprint to other medical devices division within J&J.

Par Pharmaceutical signed a deal to buy ScriptValidate, an exciting new product we discussed last quarter which allows pharmaceutical manufacturers to fully automate the prescription level rebate claim validation process. Rebate claims volume has risen steadily in recent years. And pharmaceutical manufacturers such as Par are straining to validate these claims to both volume of data they receive, as well as the diversity of format they receive it in.

ScriptValidate will enable Par to significantly reduce revenue leakage by embedding deep industry knowledge into the application workflow, using advanced detecting methods and business rules to identify and scrub out invalid data. And by verifying rebate eligibility and comparing submitted data against contractually negotiated terms.

In addition, we signed a new deal with Nokia who has been a Model N customer since 2011. During the fourth quarter, Nokia signed an agreement to continue to expand our contracts and pricing solutions. Combining Model N's rebate application deployed in 2011 with contract and pricing solutions will enable Nokia to offer its sales and finance organization with better visibility and control over pricing and incentive rebates.

Finally, this quarter saw continuing momentum with several significant customer go lives, one of which in particular I would like to highlight, Celgene Corporation. Celgene is an integrated global biopharmaceutical company engaged primarily in the discovery, development, and commercialization of novel therapies for the treatment of cancer and inflammatory disease through gene and protein regulation. Recently, they went live with our Chargebacks solution. This is in addition to the already implemented Medicaid and coverage gap modules.

In recent quarters, we have discussed the early success of our international reference pricing product. We released a new version of this offering during the quarter and also rebranded it as Global Pricing to better reflect its broader impact. The latest version of the product includes an enhancement user interface, improved data verification, and use simulation modeling capabilities. These enhancements will allow our customers to better examine pricing data, improve data accuracy, and use predictive analytics to anticipate future pricing changes.

We were also pleased to have participated in two leading industry events during the quarter, having been invited to speak at both the 18th Annual Summit on Medicaid Drug Rebate Program, and the Medical Device Strategic Pricing Conference. Revenue management remains top of mind with executives across the life sciences industry, so we are pleased once again to discuss the best practices with some of the industry-leading participants. Topics this year include working across organization boundaries to improve pricing strategies and execution, along with managing bundling and other incentive programs in the current regulatory environment.

In summary, we believe that the revenue management market remains vital and largely untapped. I'm excited about both the size of our opportunity and our strategy.

Let me now turn the call over to Sujan to discuss our financial results in more detail.

Thank you, Zack. Total revenues for the fourth quarter were $27.8 million, compared to our guidance of $27.3 million to $27.8 million. And our fourth-quarter fiscal 2012 revenues of $23.2 million.

Within total revenue, license and implementation revenues were $15.8 million. And SaaS and maintenance revenues were $12.0 million. The year-over-year increase in SaaS and maintenance revenue was primarily due to a $1.9 million increase in maintenance and application support revenue. And a $0.5 million increase in SaaS and related implementation revenue.

Total revenues for fiscal year 2013 were $101.9 million, compared to $84.3 million in fiscal year 2012. Revenues from existing customers that generated revenue in each of the last four quarters was $92 million in the fourth quarter of fiscal 2013, compared to $76.9 million for the fourth quarter of 2012.

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 onward. For the fourth quarter of fiscal 2013, these items exclude $1.6 million of stock compensation charges, $83,000 of amortization from acquired intangibles, $201,000 in compensation charges related to the LeapFrog acquisition, and $1.2 million of restructuring charges.

Gross profit for the fourth quarter was $16.3 million, an increase from $13.0 million in the fourth quarter of fiscal 2012. Gross margins in the quarter were 59%, an increase over the 56% we reported in the fourth quarter of fiscal 2012. For fiscal year 2013, gross margins were 57%, similar to the results for fiscal year 2012.

Research and development expense was $3.8 million, compared to $4.1 million in the fourth quarter of fiscal 2012. The decrease was due largely to a higher level of capitalization of software development costs during the fourth quarter of fiscal 2013.

Sales and marketing expense was $4.4 million, compared to $4.2 million in the fourth quarter of fiscal 2012. G&A expense was $4.0 million, up from $2.6 million in the fourth quarter of fiscal 2012. This increase was driven largely by the cost of being a public company.

For the fourth quarter, operating profit was $4.0 million, compared to our guidance of $0.5 million to $1.0 million, and a profit of $2.1 million in the fourth quarter of fiscal 2012. This increase was driven primarily by the combination of higher revenue along with the gross margin improvements discussed earlier. For fiscal 2013, operating profit was $7.7 million, compared to $3.4 million in fiscal 2012.

Net income was $3.8 million, compared to $1.9 million in the fourth quarter of fiscal 2012. This produced EPS of $0.15 based on a fully diluted share count of 25.9 million shares, compared to our guidance of $0.02 to $0.04, and EPS of $0.11 based on a fully diluted share count of 18.1 million shares in the fourth quarter of fiscal 2012.

For fiscal year 2013, net income was $7.0 million, compared to $2.3 million in fiscal year 2012. This produced EPS of $0.31 based on a fully diluted share count of 22.2 million shares, compared to $0.13 based on a fully diluted share count of 18.0 million shares in the fiscal year 2012.

Adjusted EBITDA for the fourth quarter was $4.5 million, compared to $2.6 million in the fourth quarter of fiscal 2012. For fiscal year 2013, adjusted EBITDA was $9.6 million, compared to $5.0 million in fiscal year 2012.

We ended the fourth quarter with $103.4 million of cash and cash equivalents, down slightly from $105.1 million at the end of the third quarter. Accounts receivable at the end of the fourth quarter were $16.1 million, down from $20.1 million at the end of the third quarter.

Our total deferred revenue was $22.6 million at the end of the quarter. As we've mentioned previously, it is important to understand that we believe our deferred revenue balance is not a meaningful indicator of the business activity during any particular quarter, as the timing of invoicing under our contracts impacts this item because we do not bill our customers upfront for the total contract fees.

For the fourth quarter, cash flow provided by operations was $300,000, which after considering CapEx of $600,000 and capitalized software of $1.0 million, produced a negative free cash flow of $1.4 million. This compares to cash used by operations of $1.6 million in fourth quarter of last year, which, after considering $700,000 of CapEx and $600,000 of capitalized software, produced a negative free cash flow of $3.0 million. 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 our contracts.

Moving on, let me now outline our guidance for the first quarter of fiscal 2014, as well as our expectations for the full year 2014. For our first quarter ending December 31, we expect total revenues to range from $21.0 million to $21.5 million. Non-GAAP loss from operations in the range of $2.5 million to $3.0 million. This would lead to a non-GAAP net loss per diluted share in the range of $0.10 to $0.13 based upon a weighted average share count of 24 million shares.

For fiscal 2014 as a whole, we expect total revenues to range from $72 million to $80 million. Non-GAAP loss from operations in the range of $20 million to $24 million. This would lead to a non-GAAP net loss per diluted share in the range of $0.80 to $0.96 based upon a weighted average share count of 25 million shares.

In addition to the formal guidance, I would also like to add a few comments about the upcoming fiscal year. First, while we do not typically guide to the individual components of revenue, I wanted to provide some additional color on our expectations for SaaS and maintenance revenue for the March quarter. Our second quarter SaaS and maintenance revenue will be impacted by the seasonal pattern of revenue associated with our Leapfrog offering.

Customers utilizing our LeapFrog products pay us a base level of subscription and also purchase additional reporting capability when needed. The additional revenue from these capacity purchases is then recognized over the balance of the calendar year, and then resets in the March quarter, which is our second fiscal quarter.

Overall, we expect our SaaS and maintenance revenue to be at a base level of approximately $10.5 million in the second quarter of fiscal 2014. From that level, we expect our SaaS and maintenance revenue to grow modestly over the second half of the fiscal year.

Secondly, we would expect gross margins for fiscal year 2014 to be a bit below 50%, down from 57% in fiscal year 2013. As Zack mentioned earlier, during the fourth quarter we aligned our workforce around our strategic initiatives, which resulted in a reduction in the size of our workforce, primarily in professional services. However, given our belief in the revenue management opportunity, we have chosen to maintain the management infrastructure that we believe is necessary to return to growth, which will impact the gross margins in the coming year. In addition, with the release of REVVY CPQ, we will no longer be capitalizing software development costs.

As the amortization begins to flow through our income statement this year, we expect an incremental expense of approximately $1.7 million to impact our cost of goods sold line in fiscal year 2014. Absent this item, we would have expected gross margins to be a bit above 50% for the year.

In summary, we believe that we have taken the appropriate steps to address our recent sales execution challenges. We have new sales leadership in place and we will work towards getting the Company back on track.

With that, we'll open the floor for your questions.

(Operator Instructions)

Sterling Auty, JPMorgan.

You walked through a couple of the wins that you got in the quarter. But can you put that into the context -- the last time we spoke you talked about a number of very large opportunities that are in the pipeline. Can you characterize how many of those you closed in terms of what you described? And what your thoughts are around those remaining large opportunities?

Sterling, in the previous quarter, we discussed the fact that we have some very large opportunities in the funnel. The challenge that we had was twofold. The first one was to bring into fruition and to close. And the second one is to advance some of them along the process.

I feel that we made some good progress on this during the fourth quarter. But we still have a way to go with these opportunities. The deal that I spoke about with J&J is one of these opportunities that we brought to fruition in the last quarter. So this was a good sign of the improvement in the sales execution. But we still have a few of them more to go and we hope to close them in the upcoming quarters.

Chris Larsen and the team are now working, him and them, with me and the team. And we're focusing on ensuring that we do whatever we can to finalize them.

And I think it might be helpful for everybody to remind us, the $72 million to $80 million in guidance, do you need to close any or some portion of those large deals to hit that range?

Sterling, when we're looking at the guidance for 2014, this is our best estimate given looking at the pipeline and looking at where we are for particular deals. We believe this is the best range that we can provide to the market.

Okay. One more question and I will hop back in the queue. The J&J deal, the private cloud, I think it's very interesting. What does the structure of that deal look like? And does that get accounted for in the SaaS revenue line, or where will that show up?

Let me speak about this from -- I could talk about it from a business point of view and then Sujan will go on this from a financial point of view. So this is a multi-year deal for Model N. It's very significant kind of deal. And I will let Sujan talk about it from a financial point of view.

Sterling, it will be reflected in our SaaS and maintenance line.

I'm sorry, you broke up there. It will be in the SaaS and maintenance?

That is correct, yes.

So, thinking about the seasonality, I'm guessing when does that ramp up? You talked about the seasonality, the follow-up in March that we see because of the LeapFrog contracting capacity issues. Is this just not ramped up fast enough to help offset that?

What we will see from this particular transaction, especially on the maintenance and application support, is more consistent recording revenue. J&J has been a customer with us for some time so we would continue to get revenues from them on the SaaS and maintenance line.

The thing that we talked about from a LeapFrog point of view is more the seasonality, just to say that we had LeapFrog in terms of we signed base subscriptions that's normally signed in January with most of the LeapFrog customers. And then as we sell more reporting throughout the year, we recognize it towards the remaining period of the year. So that's really saying something in that period, then, we recognize it from that period to December. So, yes, it's made up of revenues to December and then it resets again.

Great. Thank you.

Nandan Amladi, Deutsche Bank.

Question on the mid market, Zack. You mentioned you were going after the mid market. Are you going to approach that with your SaaS products? And is your go-to-market strategy any different in terms of the sales effort, your expectation for how long the sales cycle is, and how quickly you can deploy? And then of course rev rec.

Sure. So, as you know, Model N has been very successful in the very high end of the market, which was a combination of the product and our go-to-market strategy over the last couple of years. The mid market was always a very interesting expansion market for us. And we spoke extensively about our desire to go to the mid market.

We've been in the mid market. And I mentioned in my comments companies like Salix and Actelion and others that are part of our customer base, customers that have been very successful, and if they were able to scale with our solution to accommodate the rate of growth.

In addition, when we first engaged with Gilead, a long time ago, the company was also a sub $2 billion enterprise. So we believe that that leaves a great opportunity to partner with these companies and to deliver value because the challenges that they face are similar to large companies, but also they need the platform to go and to scale their business moving forward.

We also believe that our SaaS solution is going to be very applicable to these customers, just from the fact that these companies usually do not have a large IT organization. And they believe, too, that they would like to use this software as a utility. Our preference, our methodology, our go to market and everything around it is about providing a SaaS solution.

You also need to note -- remember that this is not just about product. It's about marketing. It's about sales. It's about realigning of the Company around this. And we put it in place.

However, we're not in the business of forcing our customers to go to SaaS like the enterprise side of the business. We also provide them with choices. But our expectation is that most of these customers are going to go to SaaS.

Okay. And then one last quick follow-up. You talked about expanding your sales and marketing efforts next year. What portion of that roughly would be to address this mid market opportunity? Or is it mostly on the enterprise side?

We're not talking specifically about the investment in each one of them. As Sujan mentioned, we're investing actually in both of them, both from a sales and marketing and go-to-market approach. As I mentioned in my comments, we align the Company along these strategic initiatives across all aspects of the Company.

And we have a strategic market initiatives team that includes representation from all functions of the Company. And that's augmenting by marketing and the sales organization. So our investment is in both of these markets because we believe that we have an opportunity in both.

Thank you.

Tom Roderick, Stifel Nicolaus.

Matt Leedon for Tom. It looks like your view on non-GAAP profitability going forward seems to be pretty conservative. And by our estimates it looks like bookings growth projected to resume two to three quarters in. At what point do you take measures to strive for more near-term profitability if the sales cycles continue to lengthen and some of the execution isn't there? What specifically, what levers can you pull on the cost side to enable the Company to continue to show profitability even below $100 million rev levels that we're looking for now?

Matt, if you look at historically, we have been very financially conservative in terms of how we have run the operations. You also see it in September as we saw the slowdown. We took immediate steps in terms of realigning our workforce. But we also have to look at the opportunity in front of us.

We believe that it's a very large opportunity in revenue management for us, and we need to make the right investments. So we try to be cash conscious in places where we can. So we did that in the professional services. And again we were very measured there.

We did not do it at the expense of -- we wanted to make sure that as the business picks up we would be able to meet the requirements of our customers there. So we more focused on looking at some of the people who were at the lower level, but kept some of the management, especially people at the director level who had good amount of experiences there.

Now, if you look at the investments, we are more making investment in sales and marketing and in research and development. And we believe that's what is required for us to do right now to capture the opportunity. But we continue to assess. We will continue to see, as things pick up, we will make more investment. And if we see that we are not able to perform to what we need to, we would continue to look at the organization and see where we can more be cash conscious.

Okay. And then on the sales side, with the new leadership coming in, have there been any structural changes yet? And if so, could you lay out high-level what those are? And if not, what is your new Chief Sales Officer putting in place over the next 12 to 18 months to really make significant changes in both the way the sales process is run and then how do you scale it up, as you mentioned he has experience doing?

When you look at Chris's background, and you look at the hallmark of his success, was really about creating a sales machine. Basically a process that can really scale with the business and scale with the revenues. And a lot of it is basically in motion right now. We have already had the field kickoff for fiscal year 2014. And it includes all our customer-facing personnel.

And part of it was to reset, basically, the set process to work on the steps in the process, to align the systematic and system approach to (inaudible) to the process. It includes also a segmentation of the customers, of the targets and the territories, and a variety of other activities. So I believe that there is a lot of work that is already being executed. And we still have some work to do to finalize it.

As we speak right now, actually Chris is in Europe working with our team there on our European strategy. So these are some of the highlights. And I can elaborate this farther if you want now or later.

No. That should be good. Thank you.

Brendan Barnicle, Pacific Crest Securities.

I just wanted to follow-up on that question a little bit. Historically, when software companies have made these kinds of changes, it's taken a couple quarters. It sounds like you've gotten one quarter through this. Do you think it's going to be faster for you guys because maybe your size and when he's coming in? Or do you expect it to still be maybe two or three quarters before that sales organization is what I call normalized?

I cannot give you an exact answer to kind of know to date. The one thing that I want to say is that I have the same experience like you did, which these things take time, and we should not plan on us so-called flipping a switch and things are going to fall into place. We made ourselves some progress in the fourth quarter. We still have a way to go.

It's also not that Chris is working by himself. He has tremendous support from the various functions of the Company to ensure that we are executing well on sales. So, just from an expectations point of view, I think it's going to take the same time that it takes other companies. And if we're going to be pleasantly surprised, so be it.

Great. You raised an important point that I wanted to follow-up on, Zack, which is the support that Chris has. Specifically I was interested in how much involvement you're having in sales right now. I'm wondering were you a principal person behind those large deals that happened in the fourth quarter and how you are envisioning your role through this transitionary period.

As you know, sales is a team effort. And I believe that everybody in the executive team and other parts of the Company are in the business of supporting our customers. And this is not just in sales. It's also throughout the customer engagement process.

We are in the business of selling to customers. But, frankly, we are in the business of making our customers successful. And that's the single most important thing that we need to do as an organization, to have a really unique experience on the way the customers engage from us as prospect, through the customer life cycle and how we maximize throughout the value.

And so my first priority is to work very closely with Chris, which I did. And in the last couple of weeks since he joined the Company, we had multiple calls with prospects, with customers. Chris led the Company field kickoff meeting and I was there to support him. And the way that I look at this is he's already the front person for the Company and I'm in the business of supporting him as much as he's going to need.

Great. And then just one for you, Sujan. You had mentioned that in fiscal 2015 you see returning to revenue growth. Can you give us any sense of what a normalized revenue growth we should be thinking about that? Is it going to be less than what we've seen historically because of the trough we're coming off of? Or do you think we can get back to what historical rates were?

Brendan, we're not providing numbers on 2015 yet. But in terms of the focus of the organization, the focus is definitely on making sure that we capture the large revenue management opportunity that we have in front of us. And that's why we are continuing to make investments. And we definitely believe that as we execute in 2014 we would lead to a path for a better 2015 and going forward.

All right. Thanks, guys.

Mark Murphy, Piper Jaffray.

This is Matthew Costa on for Mark Murphy. I'm interested in hearing a little bit more about the configure, price, quote tool that you've built using salesforce. Is this something that your customers were asking for? And then also what market opportunity do you see for this, or what expansion of your TAM can this provide for you guys?

Sure. First of all, CPQ or configure, price, and quote is part of an endeavor that we have where our customers want to better integrate our -- the sales organization into the revenue management process.

We were actually a pioneer in this space. And if you look at our high-tech solution, our high-tech solution is completely dominated by sales and marketing people, both in the direct and actually in the channels. And we believe, and our customers believe, and we hear it all the time that they want to have the sales organization focus on efficiency and effectiveness. And they really work on the notion of capturing revenues, rather than to rely on a back-end system.

And in addition, there is opportunity to provide them with analytical capabilities to enable them to generate more revenues. We believe that there is a large market for CPQ. We hear it from our customers. And we did an extensive analysis of the market.

It's a solution that is integrated well into the front end CRM. And enables the sales organization to configure to price and to growth, either independently or integrated to the back-end revenue management systems. And it's a very nice market opportunity for Model N to expand revenue management.

Okay. And that's available today?

That's a product that we released and it's available today.

Great. Thank you very much.

Terry Tillman, Raymond James.

Zack, the first question for you is just what's the motivation behind increasing the size of the sales force focused on enterprise and then the mid market? Because one of the things you've emphasized is throughout these execution challenges the sales pipeline has remained active or solid. So, it sounds like you're working with a variety of opportunities. But what's behind the expansion of the sales force further? Are you seeing more RFP activity or just more prospects coming into the fold? I would like some more color on that first.

Absolutely. Again it started from our belief in the market of revenue management. It also stems from the fact that once the large companies have moved, once the large companies have been successful in implementing revenue management solutions, the rest of the market is moving in this direction.

If you think about the go live that we had last quarter with Amgen where Amgen implemented a global revenue management solution for both the US and 60 other countries, handling both commercial and regulatory, handling both the transactions in analytic on a single system, and proved the notion of a single global revenue management solution, these companies have the same needs like the large companies.

And now we have an opportunity to package the software and to provide it to them with out-of-the-box solution that is going to meet their needs. It's going to provide them with the platforms to scale. And it's going to enable them to handle regulatory issues.

When you think about the focus right now on regulatory issues, starting with the government ruling on A&P in January, continued with the international reference pricing issues in Europe and others, these companies need to absolutely adhere to these regulations. And we see an increased interest in revenue management solutions.

And we feel right now that we can package this solution with the SaaS offering, packaged implementation, and others that is going to cater to this market. Furthermore, we have demonstrated the success with this market and now we feel that we can actually demonstrate to these companies that their appeals has been successful. So that's the opportunity that we see.

Got it. And, Zack, nothing's ever easy, but with Chris onboard and working to enhance sales processes, and sales execution, whether it's the installed base and just doing better at selling into the installed base, or actually winning net new logos, do either of those areas seem more apt to see improvement quicker? Or how should we think about his impact on both sides of the house there?

I think we're going to again -- we are looking at both of these at the same time. And I think that the way that I would characterize this is obviously the very large opportunities from a dollar point of view are within the installed base. But from a growth of the market and opportunity to drive the market in the future, it's actually within the expansion, both from number of transactions and then also from recurring revenues. But when you look at our installed base right now, we have some very large opportunities. And this is where the dollars are in the near-term.

Got it. And then, Sujan, just a quick question. I just don't have it in front of me, but I think you talked about $1.9 million increase in maintenance in the quarter. I assume that was on a year-over-year basis.

I don't have the details in front of me on how the year-over-year increase, or I don't know if there were increases in the other quarters of the year, but does something happen seasonally with maintenance in the fourth quarter where there's true ups or catch-up payments or a price increase? Or was that not a more notable increase here in the fourth quarter with that $1.9 million? Thank you.

Normally, if you look at from a price increase point of view our customers normally have the standard price increases which is, again, not applicable to all our customers. Sometimes a customer may have a longer-term contract. So, that's one component of that.

Second, we also have sometimes a phenomenon where some of the customers may not renew maintenance in one particular period. We may have a catch-up maintenance when the particular revenue, let's say someone is late by three months, someone is late by a couple of months.

And then the third is when we sign a new contract, and if we have an undelivered item we don't recognize either the POC, which is our percent of complete or the maintenance. So we wait until all the items are delivered and that's when we recognize the maintenance. So you will see some fluctuation, very slight fluctuation, in the second line, but most of the time you will see a steady line item there.

Well, in the fourth quarter, was this a larger than normal increase in maintenance compared to prior periods?

I would say on a year-over-year basis it was larger than what we have would normally see in maintenance and application support. The other item you have to look at there is also the application support, which is more of a premium support. In terms of premium support sometimes you'll see some variability quarter to quarter.

Okay. Thank you.

Thank you. Mr. Rinat, there are no further questions at this time. I'd like to turn the floor back over to you for closing comments.

Thank you, everyone, for joining us for the call today. We appreciate your interest in Model N and in our conference call for today. Revenue management remains a large and relatively untapped market opportunity. We believe that our leading solutions are uniquely suited to solve the revenue management challenges of companies across the life sciences and tech industries.

We have taken the initial steps to address our recent sales execution challenges. But we still have work to do until we are back on track. But we remain confident in the market and our position in it. So, thank you again for your interest. And we look forward to providing further updates on our process in the future.

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