Model N Inc (MODN) 2014 Q1 法說會逐字稿

Greetings and welcome to the Model N first-quarter fiscal 2014 financial results conference call.

(Operator Instructions)

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

Thank you. Good afternoon and welcome to Model N's first-quarter fiscal-year 2014 earnings conference call. Joining me today are Zack Rinat, Model N's founder, Chairman and CEO; and the Sujan Jain, Model N's SVP and Chief Financial Officer.

Following our 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 first-quarter, fiscal-year 2014 performance in addition to our financial outlook for our second-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 and documents filed with the Securities and Exchange Commission, including our annual report on form 10-K, and 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 response to 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 first-quarter fiscal-year 2014 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 our fiscal 2013.

With that, let me turn the call over to Zack.

Good afternoon, everyone, and thank you for joining us today to discuss our results for the first quarter of fiscal year 2014. For the first quarter we reported revenue of $21.6 million and a non-GAAP operating loss of $700,000. Both, which were above the high end of our guidance range. We are pleased to raise the mid-point of our guidance for fiscal-year 2014 as a general outline for you in a moment.

We focused over the course of Q1 on both short-term SaaS execution improvements as well as implementing our long-term go-to-market and product strategy. While we still have a long way to go, Model N had a solid start in executing our strategy and I'm happy to share with you the key accomplishments from Q1.

The first component of our strategy was to improve the focus and execution of our Dark SaaS organization targeting the enterprise market in both the life sciences and the technology verticals. In Q1 we were able to sign new customers and expand within our install based in both verticals.

In life sciences we signed Stryker Orthopedics, a division of Stryker Corporation, one of the world's leading medical technology companies. Stryker Orthopedics will leverage Model N's revenue management suite for medical device to manage their US revenues.

Stryker chose Model N to automate and manage increasingly complex pricing, contracts and rebates and reduce revenue leakage. In addition, Stryker will leverage our industry-leading analytics solution price impact to gain additional insight on how to optimize the revenue.

In the technology vertical we signed CSR, a leading multinational established semiconductor company. CSR is a top 20 established semiconductor company whose products are used in cars, music players and smartphones.

CSR selected Model N revenue management suite for semiconductors, including global price management, deal management, deal analytics, contract management and channel revenue management to help scale the company's direct and indirect revenue worldwide. In this competitive win, CSR selected Model N due to its superior fit for CSR business model. And for being the only solution that was able to support the entire process from demand to deal negotiation and through managing channel inventory and channel incentive payments.

The second component of our strategy was to expand the way which to the mid-market. Leveraging the success that we had previously with companies like Salix and Actelion. Emerging in mid-stage fin such as these have the same opportunity to gain competitive advantage over their peers by leveraging revenue management solutions.

The focus on mid-market yielded early dividends as we signed two mid-market deals this quarter. The first was an agreement with Ranbaxy, the North America commercial arm of Ranbaxy Labs, Limited, a leading manufacturer of quality affordable generic medicines serving customers in more than 150 countries.

Ranbaxy will implement Model N revenue management suite for pharmaceutical, replacing existing point solution with an end-to-end solution from Model N. Our proven methodology for migrating companies from legacy tools and solutions to an integrated revenue management platform incorporating industry best practices, was also a key component to this win.

Actelion, Inc., a fast-growing global biopharma manufacturer, selected Model N revenue management suite for pharmaceutical to administer managed-care contracting and regulatory compliance across owned and acquired product lines, replacing their existing outsourced solutions providers within end-to-end solution from Model N. Actelion is representative of a growing trend among mid-sized and industry leaders insisting on solutions with a high degree of domain knowledge, usability and fit with industry requirements that offer a fast time to value.

In addition, the ability to stay on top of changing regulatory environment, without constantly needing to implement database changes or upgrades required by legacy or low-cost providers, is becoming an increasingly important for this segment of the industry as well.

On the product strategy front we discussed the focus on our global pricing management products along with the new offering we recently released, called REVVY CPQ. CPQ stands for configure, price and quote.

We believe that there's a significant market opportunity to better integrate sales into the revenue management process. REVVY CPQ will provide our customers with a solution that enables the sales organization to automate and simplify the configuration, pricing and quoting of the product and service offering. Model N was successful in signing deals involving both products during the quarter.

AstraZeneca, a British Swedish multinational top 10 pharmaceutical and biologics company with operations in over 100 countries, signed an agreement to replace their existing legacy system with Model N's global pricing management product. Which enables pricing and commercial stakeholders worldwide to increase focused accuracy and design winning commercial strategies.

QuickLogic, an inventor and a pioneer of an innovative customizable semiconductor solution for mobile and portable electronics, OEMs and ODMs, signed an agreement to use REVVY CPQ. This will enable their SaaS organization to move easily configure, price it and to provide a quote to their customers, improving the efficiency and effectiveness of the sales process. So while we are encouraged by the early success with both of our mid-market efforts and our new product initiatives, please remember that both are in early stages and it takes several quarters before we get the clear pictures of the size of the long-term contribution to our business.

On the broader product line we launched two key product updates. First, we announced a new version of the global pricing product I mentioned a moment ago. Key features include an improved ability to optimize and migrate risk of new product launches by better anticipating and tracking process milestones and initial price points as well as functionality for global headquarters to more effectively monitor prices and collaborate with regions.

Secondly, we announced the general availability of release 5.7 of our revenue management suite. This release includes a new version of our ScriptValidate product, the only cloud-based rebate claim validation solution in the marketplace. The key features of this release include enhanced embedded reporting capabilities and advanced support for global implementations.

We are pleased with the strong and balanced performance across a number of strategic and tactical initiatives this quarter. Our new Chief Sales Officer, Chris Larsen, had a positive effect in his first quarter at the Company, and we will be adding to our sales capacity throughout the year.

At the same time, we still have significant work ahead of us in order to get the Company fully back on track. As you know, I'm a believer in our market opportunity and revenue management and now more confident in our direction.

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

Thank you, Zach. Total revenues for the first quarter were $21.6 million, slightly above the high end of our guidance of $21.0 million to $21.5 million. This compares to $22.3 million in total revenue in the first quarter of fiscal 2013, with the year-over-year decline resulting from the same execution issues that we have discussed in recent periods.

Within total revenue, license and implementation revenues were $9.5 million and SaaS and maintenance revenues were $12.0 million. The year-over-year increase in SaaS and maintenance revenue was primarily due to our $1.6 million increase in maintenance and application support revenue and a $0.5 million increase in SaaS and limited implementation revenue.

Internally, we tracked our mode of revenue coming from interstate customers who generated revenue in each of the last four quarters, in an effort to monitor our sales into our historic base. In the first quarter of fiscal 2014 this metric was $92 million compared to $77.6 million for the first quarter of 2013.

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 first quarter of fiscal 2014 these items exclude $2.0 million of stock compensation charges, $83,000 of amortization from acquired intangibles, $200,000 in compensation charges related to the LeapFrog acquisition and $69,000 of restructuring charges.

Gross profit for the first quarter was $12.2 million compared to $12.7 million in the first quarter of fiscal 2013. As we discussed on the last call, gross profit in this quarter includes an impact of [$423,000] from the amortization of capitalized software that begin upon the launch of our REVVY CPQ product. Gross margins in the quarter where 57%, flat year-over-year when compared to the first quarter of fiscal 2013.

Research and development expense of $4.6 million compared to $4.0 million in the first quarter of fiscal 2013. A portion of this increase was driven by the expense related to the development of REVVY CPQ. We had been capitalizing these expenses during fiscal 2013.

Sales and marketing expense was $4.7 million compared to $5.0 million in the first quarter of fiscal 2013. G&A expense was $3.6 million compared to $3.7 million in the first quarter of 2013. Operating loss for the first quarter was $700,000 compared to a slight operating loss in the first quarter of fiscal 2013 and the guidance of operating loss of $3 million to $2.5 million.

Net loss in the first quarter was $800,000 compared to $300,000 in the first quarter of fiscal 2013. This produced a loss per share of $0.03 based on the fully diluted share count of 23.5 million shares compared to a loss per share of $0.02 based on of fully diluted share count of 15.3 million shares in the first quarter of fiscal 2013. This was above our guidance of loss of $0.13 to $0.10.

Adjusted EBITDA for the first quarter was $200,000 compared to $400,000 in the first quarter of fiscal 2013. We ended the first quarter with $102.8 million of cash and short-term investments, down slightly from $103.4 million at the end of the fourth quarter.

Accounts receivables at the end of the quarter were $16.7 million, up slightly from $16.1 million at the end of the fourth quarter. Our total deferred revenue was $21.8 million at the end of the quarter. As 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 realizing 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 used by operations was $1.8 million, which, after considering CapEx of $80,000, produced a negative cash flow of $1.9 million. This compares to cash used by operations of $1.1 million in the first quarter of last year, which, after considering $200,000 of CapEx and $900,000 of capitalized software, produced a negative free cash flow of $2.2 million.

Similar to our prior comments in the backflow of [the server] and deferred revenue balances, there can be some quarter-to-quarter variability in our cash flow as it is impacted by the timing of our invoicing under our contracts.

Moving on, let me now outline our guidance for the second quarter of fiscal 2014, as well as our expectations for the full fiscal-year 2014. For the second-quarter ending March 31, we expect total revenues to range from $20.0 million to $20.5 million.

Non-GAAP loss from operations in the range of $4 million to $3.5 million. This would lead to a non-GAAP net loss per diluted share in the range of $0.17 to $0.14 based upon a weighted average share count of 24.2 million shares.

For fiscal 2014, I suppose we now expect total revenues range from $76 million to $80 million. This is an increase at the midpoint from our prior guidance of $72 million to $80 million.

Non-GAAP loss from operations in the range of $20 million to $17 million and improvement from our prior expectations of $24 million to $20 million. This would lead to a non-GAAP net loss per diluted share in the range of $0.82 to $0.69 based upon a weighted average share count of 24.5 million shares, an increase from our prior expectations of $0.96 to $0.80.

In addition to the formal guidance, I would also like to add a few comments about the upcoming fiscal year. First, why we do not typically guide to the individual components of our revenue, I wanted to provide some additional color on our expectations for SaaS and maintenance revenue for the upcoming quarter.

As I mentioned during the prepared remarks on our last call, our second quarter SaaS and maintenance revenue would be impacted by the seasonal pattern of revenue and succeeded with the LeapFrog offering. Customers utilizing our LeapFrog products base level of subscription and also purchased additional reporting capability when needed.

The additional revenue from this capital purchase is then recognized over the balance of the calendar year and then resets in our second fiscal quarter. We continue to expect our SaaS and maintenance revenue to be approximately $10.5 million in the second quarter of fiscal 2014.

In regards to gross margins, on our last call we had mentioned our expectations for gross margins to be a bit below 50% for the full fiscal-year 2014, including the impact from the amortization of capitalized software I mentioned earlier. Based on the increase in the revenue outlook and slightly better than expected gross margins during the first quarter of fiscal 2014, we currently expect gross margins to be a bit above 50% for the full year.

I would also like to provide some initial commentary about our current expectation regarding that progression of total revenue into the next fiscal year. Based on the recent base of out business, we currently expect growth in total revenue in fiscal 2015. However, it is too early to comment on the precise magnitude of growth we expect in the next fiscal year at this point.

In summary, we saw some solid performance on our four initiatives in the past quarter. We have begun to put some of our execution issues behind us and are headed in the right direction. With that, we open the floor for your questions.

Thank you.

(Operator Instructions)

Our first question is from Sterling Auty of JPMorgan. Please go ahead.

Hi, this is Jack Nader on Sterling's behalf here. One question, one quick question. How are you guys thinking about cash burn for the rest of 2014? And then maybe beyond, how should we be thinking about that? Thanks.

Hello, Jack, as we mentioned on our prior call, we are more looking at cash to more track our operating burn. So we are currently guiding operating burn for 2014 between $17 million to $20 million and that is the projection we have for the cash burn for 2014.

In terms of moving forward, we continue to believe in the large opportunity that we have in front of us. We'll definitely be making investment going forward to make sure that we capture the opportunity we have and return the Company to growth.

Okay. Thank you.

Thank you. The next question is from Nandan Amladi of Deutsche Bank. Please go ahead.

Thank you for taking my question. So during the retooling of your sales organization over the last couple of quarters, did you see any meaningful change in your win rates relative to the competition? Any change in the competitive environment?

We look at the competitive market, the market for revenue management is going back at least in historical terms. So I don't think there's any change in the size and color of the market.

When you look at the color of the competitive environment, it also remains about the same. We are believing in our product. We are believing in our solution. We are believing in our differentiation. We believe that we have a solution that is highly differentiated and will continue to be the status in the market.

Okay, thanks, and a quick follow-up, if I might. Can you characterize the mix of new business versus new customers versus up selling into the existing base, say, over the last two quarters? And how that might change as you are -- continue to grow the sales organization and as Chris Larsen settles in, into his new job?

So when you look at our business, especially when you look at some of the deals that we just spoke about, our business is focused on both penetrating our large install base and our strategy and then expand, as well as penetrating new accounts. At the same times we are not depending on new customers to drive our business.

As you know, we have a very conservative way to look at customers. One of the deals that I mentioned for the quarter is a win that we had with Stryker Orthopedics. This is an expansion of an existing relationship that we had with Stryker.

But when you think about this, this is really the opportunity that we have to grow and to expand our business within the current customers. We don't disclose new customers versus old because we don't think it is meaningful. At the same time as I mentioned in my comments, I was very pleased with the balance performance that we have, of course, multiple initiatives that we had for the business.

Thank you.

Thank you. The next question is from Tom Roderick of Stifel Nicolaus. Please go ahead.

Yes, thank you this is Matt [Ansley] on for Tom. First question was about regional differences in terms of what you are seeing, if there's any pockets of strength or weakness, and how the sales cycles are trending through your different regions.

When you look at our performance from the comments, and then you look at the businesses that we had on the one hand with AstraZeneca, which is a European-based company. On the other hand, the business that I mentioned, actually our core business in the US, we see still very good balance across [segments]. It's very similar to historic performance.

We see actually when you look at some of the new products that we brought into the market like the global pricing management, as well as the win that we had with CSR. This is really an opportunities for the companies to go into manage their prices on a global basis, and it is applicable for companies that are headquartered both in the United States and across the globe.

There's nothing particular that I can talk to you about differences between the [wedges]. It's very similar to historical trends.

When you look at the sales cycles, the sales cycles that we have at the enterprise side is very similar to historical sales cycle that we had. At the same time when you look at the products that we brought to the markets in the SaaS area, in areas such as global pricing management with REVVY, as well as some of the trends in the mid-market we see shorter sales cycles that we see from the enterprise side and that's an actual progress.

Okay. Then in terms of performance within the life sciences and technology sector, are you seeing strength in one versus the other? Are your changes in sales efforts being welcomed more so in one or the other? Whether it be to a strong base and then a maybe slightly less strong? Or any trends you see moving forward that may differ between life sciences and technology?

As I mentioned in my remark, we had a strong and balanced performance across both verticals. So both verticals they performed well in the quarter and I do not see any differences in the performance between them.

They just one last one, following up on some of the changes in the sales organization. Can you point to any specifics that have been made, either in the strategy or the actual process that you're going through that's giving you more confidence in both tracking deal progress, qualifying the pipeline? As well as actually following through in getting deals booked?

I think that Chris Larsen, as I mentioned in the remarks too, he brought very good discipline to the sales organization. I think his focus initially was really to create a disciplined process and matrix to ensure the timely execution, as well as to ensure that the sales organization is focused on the opportunities that we have.

A lot of this was about really operational excellence and involving the sales organization and making sure that the machine, the sales machine is working very, very well. And I think it really showed an impact on more colorful on our business. So this is really the focus that we had during the quarter.

Great. Thank you.

Thank you. The next question is from Brendan Barnicle of Pacific Crest. Please go ahead.

Thanks so much. I wanted to follow-up a little bit on Chris Larsen's apparent early success, which is terrific. Are you or is he, planning on additional hires at this point and building out the sales force further? And if so, can you give us a sense on how big that build-out is going to be?

We plan to continue investing in sales and marketing for the Company. As you know and as we always say, we believe in the market opportunity that we have.

We made, and we're going to make, investment in sales and marketing. Part of the process is definitely adding people to the sales organization. That's a process that we are going to push on for the next couple of quarters.

I just wanted to make sure that you know that our revenue numbers for the year are not dependent on us hiring more sales people. But as we grow the business and as we move to FY15, we would like to add more sales people and continue the investment in sales and marketing for the Company. We are not disclosing specific numbers for a number of salespeople because we don't feel that that's a valuable metric.

Zach, were you hiring new salespeople in the interim when you were running the sales department before you had Chris on board?

We definitely accelerated the process right now where Chris is on board because we believe that he has the charter and also the ability to go and to bring top-notch people and scale them to the next level.

Then have you looked at all around the idea of applying the product in new verticals? You obviously highlighted your traditional verticals, life sciences and tech, which have always been strong for you.

But obviously the revenue management products have applicability to broader or more broadly to other industries. Do you have any update on any work there?

We have no immediate plan to expand beyond the current verticals. We believe that these two verticals represent a very large market opportunity. We believe we need to take it one step at a time and our first objective is really to go and to execute well in these two verticals.

When you look at the opportunity that we had in these verticals, both within the install base and then expanding to new customers, these two markets are very much under-penetrated. Just the initiatives that we started at the beginning of the year to expand the reach to meet the market, the life sciences, two deals within the quarter, is just a great indication to opportunity to expand farther.

Then when you look at our install base, when you look at the [expand] opportunities is demonstrated in the deal that we had with Stryker. Our market in both verticals remains under-penetrated and we need to focus in the beginning to go and execute well there. And we have no immediate plans to expand into new verticals.

Great and then lastly, Sujan, I had originally been modeling fiscal Q3 as where revenue would bottom out and then start to recover again. Is that still the way we should be thinking about it? Given the out-performance that we've had in the first half of year, I've got a bigger deceleration in the back half of year. Is that still the right way to be thinking about it?

Brendan, we continue to be encouraged by the signs that we see. We have put in a plan in place early this year and we are very happy with the performance we have seen against the plan, especially in the last quarter.

Where the revenue exactly bottoms out would be more of a function of how our new bookings come in, and also how the implementation takes place in terms of the pace of implementation. What we are comfortable talking now about is we definitely see 2015 to be a growth year than 2014. But we are not prepared to talk about exactly which quarter we see the revenues bottom out.

Great, thanks, guys.

Thank you. The next question is from Mark Murphy of Piper Jaffray. Please go ahead.

Thank you. This is Pinjalim sitting in for Mark. Thanks for taking my questions. Continuing on the hiring question, is it possible for you to give us a idea about where are you going to stress hiring on? Is that the enterprise area or the mid-market area?

And also the build-out of the professional services, are you focusing on that? Or are you planning to more out-source to partners for implementations?

From a sales hiring point of view, it is balanced across both enterprise and mid-market as well as REVVY. So we have hiring plans across all the aspects of the business.

As I mentioned, it is not just sales. It is also the investment in the marketing and ability really to create the machine that is going to create results on a consistent basis. So it is across the board.

Okay. What about the build-out of the professional services?

We believe that we have enough professional services capabilities to drive the numbers. We are doing some hiring in our professional services organization, but we have capacity to deliver as well as we have a very active ecosystems.

We work with large and small system integrators. We have a very striving ecosystem around the Company. We will continue to deliver projects with them.

Actually vast majority of our project is being delivered in concert with partners and that to know we are continuously working on. Because we believe that the stronger the ecosystem around the Model N revenue management, the better the market is.

Okay. And on the CPQ product, could you talk about that competitive landscape there? Also, how do we think about the revenue recognition? Is that going to be ratably into the SaaS line?

Sure. So this product that we announced in the beginning of the quarter, REVVY CPQ, it's the product it is starting hitting the market for configure price and quote. And that's a solution that enabled the sales organization to interact to configure an offering, to price it correctly and then to quote it for customers.

We believe that that's an important product because it's a product that has a very good market need, as well as the ability really to be a first in terms of integrating sales organization into the revenue management process in a much more systematic way. This is very active market and there are quite a few players in the market. It is a market that we studied for quite some time and developed this product. And we believe is going to LeapFrog what we have right now in colorful in the market.

Competition in this market range from smaller companies to a recent acquisition that Oracle made in a company called BigMachines, and a few others. So it is a market that is evolving right now.

We build our solution on [medicalforce.com]. It was a very easy-to-use graphical user interface, in terms of taking this solution to the next level.

In terms of revenues, we are just in a very, very early stages of the colorful process. It is very early to say when this product is going to get meaningful revenues for the Company. I'll turn to Sujan to speak about how we are going to recognize the revenues.

We will be recognizing it in the second line, in the SaaS and maintenance and the subscription fees of it will be on an integral basis.

Okay, thank you.

Thank you. The next question is from AJ Shrestha of Raymond James. Please go ahead.

Hi guys, this is AJ Shrestha speaking for Terry Tillman. My first question is regarding the update on the sales force. Since the leadership has changed, have you seen any greater turnover on sales force?

We have not seen any change in turnover in the sales organization. No, we have not seen any. I'm just trying to think. We have not seen any change in turnover in the sales organization.

Okay, great. My second question is the recent new module releases like global referencing pricing, just want to know how these add-on modules are doing?

First of all, this is about the global pricing management. It really stems from the need, though, for global pharmaceutical and medical device companies to manage their prices on a global basis.

It became to be really a strategic imperative for this Company because of reference pricing. But it really drove them right now to think about how they manage prices on a global basis.

We see this as a nice and growing market. When you look at the customers of Model N in this product, companies such as Amgen and Janssen, which is the pharmaceutical part of J&J, and Gilead Life Sciences, AbbVie and now AstraZeneca, it is clear that the latest in the industry need the solution. It is also a solution that we built from the ground up, as a multi-tenant SaaS platform.

We see great interest in this product and in this space, and also in the notion about how you effectively manage prices on a global basis. Again, same comment that I made about REVVY, it is early to determine about when this is going to have a meaningful impact on our revenues. But from an interest point of view, we see a lot of interest in this product.

Got you. Okay. Thanks for taking my question, guys.

Thank you. We have no further questions in the queue at this time. I'd like to turn the floor back over to Mr. Rinat for any closing remarks.

Thank you, everyone for joining the call today, and for the interest in Model N. I'm encouraged by the progress that we have shown in the past quarter.

We continue to believe in revenue management. It's a large and attractive market, and we remain committed to capitalize on this opportunity and to return the Company to growth. Thank you again for the interest, and we look forward to providing further updates on our progress in the future.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.