Model N Inc (MODN) 2014 Q2 法說會逐字稿

Greetings, and welcome to the Model N second quarter FY14 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 second quarter FY14 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 been simultaneously webcast. The primary purpose of today's call is to provide you with information regarding our second quarter FY14 performance, in addition to our financial outlook for third-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 this press release, and the risk factors and documents filed with the Securities and Exchange Commission, including our annual report on Form 10-K and 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, to be considered in addition to, not 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 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 maybe 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 FY14 press release, periodic SEC reports, webcast replay of this call, which also 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 FY13.

And 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 second quarter of FY14. We reported $20.7 million in revenues and a non-GAAP operating loss $1.9 million for the second quarter, both of which were above our guidance. Our business continues to improve, and we are pleased to increase our guidance for the balance of the year. We forecast in Q2, on continuing to execute the strategy that we set for Model N in the beginning of the year, and we made further progress with our sales execution during the period.

While our booking can significantly vary from quarter to quarter, given the large and strategic deals we signed, I am pleased to report that Q2 was a record booking quarter in the history of the Company. In addition, we had the record booking for the first half of the year.

We also announced today two significant additions to our management team, that I believe will help us to continue to execute going forward. I am excited to announce that Mark Tisdel will be rejoining Model N as the SVP and Chief Financial Officer. Mark previously held the CFO role at Model N from 2008 to 2010, and held the role of VP of Finance and Corporate Controller at Model N, prior to being promoted to CFO.

In both roles, Mark was instrumental in driving our financial strategy. Mark has spent more than 25 years in various senior financial roles, including CFO at Steelwedge Software and Spigit. His knowledge of the business, people and systems at Model N will prove invaluable as the Company -- as we move forward. Mark will officially start in his new role in the Company on May 26, but we started the transition with Sujan Jain. Sujan has decided to leave Model N effective May 16 to pursue another opportunity.

In addition, I am excited to add Shail Khiyara as Chief Marketing Officer. One of the key requirements for Model N to fully realize our potential, is to increase our visibility, and help drive our vision for revenue management market. Shail is perfectly suited for this role.

He has spent nearly 20 years in the technology industry, in a variety of senior leadership roles, including Spigit where he served as the Chief Marketing Officer and Chief Customer Officer, Taleo, where he served as the SVP and Chief Marketing Officer, Evault, where he served as an SVP of the Data Protection Business unit, and VeriSign, where he served as the managing director in Europe. Shail assumed his new role as the Chief Marketing Officer effective April 29.

I am looking forward to working closely with Mark and Shail to take Model N to the next level. In addition to the management addition I mentioned, we continued to drive further organization improvement to enable taking Model N to the next level. We promoted our Vice President of Sales for LS in the US to be the general manager of Europe, and we hired a new Vice President of Sales for Life Sciences in the Americas. We believe that Europe will represent an exciting expansion opportunity for Model N.

So let me transition back to a review of our quarter. Our strong booking performance was driven by strong and balanced performance across both vertical and geographies. In the second quarter, we closed two large deals in our life sciences verticals. Both deals represent a significant expansion to new divisions of J&J and Striker. Our successes with both customers, and the tangible value that we deliver to them were paramount in expanding our relationship in both companies. It is further evidence of the progress we have made in addressing sales execution. Finally, it points to the value proposition and opportunity for revenue management and our solutions.

Last week, we held our annual customer conference, Rainmaker in Savannah, Georgia. During the Rainmaker, we made two exciting announcements regarding our partnership with salesforce.com, and the powerful potential of combining CRM with revenue management. This partnership enables Model N to deliver vertical-specific applications built on the SalesforceOne platform for the pharmaceutical, manufacturing, medical device and semiconductors and component manufacturing verticals, enabling our customers to maximize their revenues.

REVVY CPQ and REVVY Global Price Management are ready available on the SalesforceOne app exchange, empowering business to connect with their customers, partners and employees in all whole new way. As part of this extensive partnership, we will also be developing a new product, REVVY Sales Application Suite for semiconductors and component manufacturing.

As we have worked with our customers in this industry over time, we realize that there is tremendous market opportunity to unify CRM and revenue management to maximize revenues. Building vertical applications has been the whole mark of Model N since our inception. The REVVY Sales Application Suite, will enable semiconductors and component manufacturers to leverage critical vertical needs, such as design registration for both the direct and channel sales.

It will be integrated with our revenue management application, and it is an extension of our previous effort with REVVY CPQ and REVVY Global Price Management, to better connect our platform into the sales function. We believe that this will create significant market opportunity, and expands our total addressable market. We intend to bring this product to the market over the course of the year. We believe that we will be able to drive booking from this new product in FY15, but we do not believe that it will have a material impact on revenue until sometimes after FY15.

Overall, I was happy with the progress we have made and the outcomes of the quarter. At the same time, we still have work to do to ensure consistent execution. We remain excited about the market opportunity for revenue management, and we believe that the salesforce.com partnership represents a strategic opportunity to bring the power of revenue management to the sales function.

Before I turn the call to Sujan, I want to extend personal thank you on behalf of myself, the Board and the rest of the company to Sujan for his many contributions. We all wish him the very best in his next endeavor.

So with that, let me turn now the call to Sujan to discuss our financial results and guidance in more detail.

Thank you for those kind words, Zack.

I also would like to thank you and the Board of Directors, along with all of our customers, investors, analysts, and employees for the opportunity to work together over the last few years. It was also a very painful decision for me to leave Model N to pursue another opportunity. There is never a right time to leave a company, but I am pleased to leave the company while Model N is on better footing, and coming off a record bookings quarter. I am happy to hand the reins over to Mark, as I know that his knowledge of the Company and leadership experience will serve him well here. I am committed to ensuring a smooth transition.

That being said, let me turn back to the results of the quarter. Total revenue for the second quarter were $20.7 million, above the high end of our guidance of $20 million to $20.5 million. This compares to $24.6 million in total revenue in the second quarter of FY13, with the year-over-year decline resulting from the sales application issues that were discussed in recent periods. Within total revenue, license and implementation revenues were $9.8 million, and SaaS and maintenance revenue were $10.8 million.

The year-over-year increase in SaaS and maintenance revenue was due to a $600,000 increase in the maintenance and application support revenue, and a $100,000 increase in SaaS and related implementation revenue. The decrease on the sequential basis for the SaaS and maintenance line was driven by the seasonal lease set off the LeapFrog Rx product line that we discussed on the last earnings call.

Internally, we track the amount of revenue coming from existing customers who contributed revenue in each of the last four quarters, in an effort to monitor our sales into our installed base. In the second quarter of FY14, this metric was $89.1 million, compared to $83.0 million for the second quarter of FY13.

Before I move on to profit and loss items, I would like to preface my comments by pointing out that I will be describing non-GAAP results from this point onwards. For the second quarter of FY14, this item exclude $2.8 million of stock compensation charges, $82,000 of amortization from acquired intangibles, and $101,000 in compensation charges limited to the LeapFrog acquisition.

Gross profit for the second quarter was $11.5 million, compared to $13.3 million in the second quarter of FY13. Similar to the first quarter, gross profit in this quarter includes an impact of roughly $400,000 from the amortization of capitalized software that began upon the launch our REVVY CPQ product.

Gross margin in the quarter was 56%, up year-over-year when compared to 54% in the second quarter of FY13. Research and development expense was $4.3 million, compared to $4.4 million in the second quarter of FY13. Sales and marketing expense was $5.6 million, compared to $5.3 million in the second quarter of FY13. G&A expense was $3.5 million, compared to $3.6 million in the second quarter of FY13. Operating loss for the second quarter was $1.9 million, compared to a slight operating profit in the second quarter of FY13, and above our guidance of operating loss of $4 million to $3.5 million. This was driven by the improved performance in both our revenue and gross margin lines.

Net loss in the second quarter was $2 million, compared to $200,000 in the second quarter FY13. This produced a net loss per share of $0.08 based on a fully diluted share count of 24.4 million shares, compared to a net loss per share of $0.01 based on a fully diluted share count of 16.4 million shares in the second quarter of FY13. This was above our guidance of a net loss of $0.17 to $0.14 per share.

Adjusted EBITDA for the second quarter was negative $1.1 million, compared to a positive $500,000 in the second quarter of FY13. We ended the second quarter with $101.7 million of cash and short-term investments, down slightly from $102.8 million at the end of the first quarter. Accounts receivable at the end of the quarter were $20.4 million, up from $16.7 million at the end of the first quarter.

Our total debt to revenue was $25.7 million at the end of the quarter. As Shail mentioned previously, it is important to understand that we believe our debt-to-revenue balance is not a meaningful indicator of the business activity during any particular quarter, as the timing of invoicing under our contract impacts this item, because we do not bill our customers up front for the total contract fees.

For the second quarter, cash flow used by operations was $4 million, which after considering CapEx of $400,000 produced a negative free cash flow of $4.4 million. This compares to cash used by operations of $1.4 million in the second quarter of last year, which after considering $300 million of CapEx, and $800,000 of capitalized software produced a negative free cash flow of $2.5 million. Similar to our prior comments in regards to our reserve bill, and therefore revenue balances, there can be some quarter to quarter variability in the cash flow, as it is impacted by the timing of invoicing under our contracts.

Moving on, let me now outline our guidance for the third-quarter FY14, as well as our expectations for the full FY14. For our third quarter ending June 30, we expect total revenues to range from $19 million to $19.5 million. Non-GAAP loss from operations in the range of $4 million to $3.5 million. This would lead to non-GAAP net loss per diluted share in the range of $0.16 to $0.14, based upon a weighted average per share count of 24.8 million shares. For FY14 as a whole, we now expect total revenues to range from $80 million to $82 million. This is an increase from our prior guidance of $76 million to $80 million.

Non-GAAP loss from operations in the range of $11 million and $9 million, an improvement from our prior expectations of a loss of $30 million to $17 million. This would lead to a non-GAAP net loss per diluted share in the range of $0.45 to $0.37, based on a weighted average share count of 24.5 million shares, an improvement from our prior expectations of $0.82 to $0.69.

In addition to the former guidance, I would also like to add a few comments about the remainder of FY14, and our outlook for FY15. During my commentary on the last call, I mentioned that we expected non-GAAP gross margin to be a bit above 50% for the full FY14. Given the further progress we have made with the business in the second quarter, we currently expect non-GAAP gross margin to be in the low to mid 50%s for the fiscal year as a whole.

While we don't provide guidance for free cash flow specifically, we expect cash used by operations for FY14 to be between $5 million to $7 million. Finally, as you can see in the revenue guidance for third quarter, and the resulting implied revenue guidance for the fourth quarter, we are currently expecting the revenue to bottom in the third quarter, and begin to improve from there. Furthermore, FY15 is shaping up as a growth year for revenues, and we expect to provide further updates during our next earnings call.

In summary, the Company has made some solid progress on its core initiatives in the past quarter, and has continued to put some of its execution issues behind it. I am confident that the Company is headed in the right direction.

With that, I would like to thank everyone once again, and wish the entire team of Model N, the best of luck in the future. We will now open the floor for your questions.

(Operator Instructions)

Our first question comes from Nandan Amladi of Deutsche Bank.

Hi, good afternoon, and thanks for taking my question. So, Zack, a question for you on the management changes: Obviously, you had a very good quarter. Why make even more changes at the top, while things are just starting to get better?

Changes are part of growing the Company, and taking the Company to the next level. One of the changes that we made was because Sujan decided to pursue another opportunity. So, we hired Mark Tisdel, who was previously Chief Financial Officer for the Company, and actually we are very excited about Mark coming to the Company, and because of his knowledge of the Business. But furthermore, because he bring a wealth of experience in finance positions and such, and really give us the ability to take the Company to the next level.

I am also very excited about adding Shail to the Company. We did not have a Chief Marketing Officer at the Company. Marketing is paramount, as we grow the Company to the next level. We are embarking on creating the market for revenue management, and we have a great asset with the success that we had with our customers so far.

The conference that we had last week, at Rainmaker, was really an illustration of the potential of revenue management and the impact that it has on our customers. And Shail has the experience to create the category, and to take marketing to the next level. And as you know, one of the reasons behind taking the Company public, was really to go and to drive marketing and sales to the next level. So, I believe that now with Shail, as the head of the marketing, and with Chris Larsen driving the worldwide sales, we really have a winning team that will be able to leverage on the opportunity and to scale the Company to the next level.

Okay. Thank you.

Our next question comes from Brendan Barnicle with Pacific Crest.

Thanks for taking my question, you guys. This is Owen filling in for Brendan. I just wondered if you guys could comment on the competitive environment more generally, and how pricing is holding up, especially in the life sciences segment? Thanks.

Sure. So, when you look at the competitive environment, I would say that the competitive environment remains the same, across verticals, and specifically in life sciences. When you look at the deals that we did this quarter, it was the one that we spoke in the installed base, and another one where we had new customers. There is always competition, either from internal builds to the ELP companies, and to some vertical competitors. And I am very pleased with our winning rates, and we are making really great progress in the market.

Okay. Thanks. That's helpful. I mean, do you guys anticipate seeing any impact from the M&A that is occurring in that space?

So, it's a great question. And as we all know, the life sciences industry is full with M&A these days. And I think you know we heard some of the big M&A opportunities that are happening right now in the industry.

I would say that, in general, M&A activity, so far, was favorable to Model N. If you think about what happened when Merck and Schering-Plough came together, they both had their legacy systems and their manual processes, and a variety of issues. And as part of the process, they decided to move from their legacy system, and combine forces on Model N. If you look at the acquisition of Synthes by J&J, they will just provide us with the opportunity to expand our presence at J&J.

So, I would say that for the most part, it is helpful, and for Model N. But from time to time, a customer of ours may get acquired, where they will decide to do something else, but it is rarely the case.

Okay. Thanks, guys.

(Operator Instructions)

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

Thank you for joining the call today, and thank you all for your interest in Model N. And I am encouraged by the progress that we have showed in the past quarter, as well as with the additional people that we added to the management team. We continue to believe that revenue management is a large and attractive market. We remain committed to capitalize on this opportunity, and return the Company to growth.

Thank you again for your interest, and we look forward to providing further updates on our progress in the future. Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.