Model N Inc (MODN) 2014 Q3 法說會逐字稿

Greetings. Welcome to the Model N third-quarter FY14 financial results conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Greg Kleiner, Investor Relations at Model N. Thank you. You may begin.

Thank you. Good afternoon and welcome to Model N third-quarter FY14 earnings conference call. Joining me today are Zach Rinat, Model N's Founder, Chairman and CEO and Mark Tisdel, 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 third-quarter FY14 performance in addition to our financial outlook for our fourth quarter and full- ear FY14 and our preliminary guidance for full year FY15. 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 filed in documents 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 risk 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 the 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 third-quarter FY14 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 for our FY13. With that, let me turn the call over to Zach.

Good afternoon, everyone, and thank you for joining us today to discuss our results for the third quarter of FY14. Our results for the third quarter were within the guidance range on both the top and bottom line.

Importantly, we believe that we have reached the turning point and that the third quarter's important results will be the trough for our revenue. We are making consistent progress improving our self execution.

I believe that with Chris Larsen as our Chief Sales Officer and Shail Khiyara as our Chief Marketing Officer, that we have the right leadership in place. We increased our capacity in the past quarter of making key hires in both sales and marketing.

This leadership and improved execution have increased our confidence in the outlook for the upcoming fiscal year. Mark will walk you through some early thought on FY15 in a moment.

For the third quarter, we made solid progress on our growth initiatives and the consistency of our business. We signed a number of upsell and renewals with existing customers, plus some good activity with some of the newer focus point like midmarket and our Revvy Global Price Management product. We also had some significant go-lives during the quarter.

In terms of upsell, we completed deals with both AbbVie and Actavis during the quarter. AbbVie, a top 10 pharma company extended the Model N footprint within the company.

In Q3, the aided advanced reporting allowed them to gain further value from the existing implementation of our transactional systems. Actavis added additional users to support both the organic user growth and the purchase of Forest Lab.

Further leveraging the initial investment in Model N is the platform that supports the aggressive M&A activity. These two examples are indicative that our land-and-expand strategy is working well.

In renewals, we signed extension to (inaudible) deals, with both Amgen and Respira in the past quarter. We also saw good activity with our efforts to expand our presence in the midmarket, as evidenced by SaaS deals we signed in Q3, including the following two.

[Globar], an emerging company focused on the specialty pharmaceutical market, will be leveraging full Model N revenue management application suite, including commercial, managed-care and regulatory using the Model N express implementation methodology. This was highly contested deal but our innovative Model N express offering, the quality of our team and our strong relationship with the customer helped us to win.

We also signed a deal with Sizewise, a global medical equipment manufacturer with more than 60 locations across the United States, Europe and Canada. Sizewise will be leveraging Model N's commercial suite of revenue management applications, including price impact, using the Model N express implementation methodology. This deal, a representative sample of the progress we're making in the midmarket, which we believe is underserved.

Our Revvy Global Price Management product helped us to aid a new customer, LEO Pharma, an emerging European pharmaceutical company with more than $1 billion in sales. LEO will be implementing the Revvy Global Price Management application over the coming months across all their affiliate businesses and solution partners worldwide.

We also completed two major go-lives in the quarter with both J&J and Merck. Completing the implementation at Merck is a tremendous validation of our platform and its ability to work in the scale as one of the largest pharmaceutical companies. This was a transformative project for Merck as they tend to spread revenue management processes into a strategic, integrated and end-to-end business processes leveraging our revenue management application suite.

The system will deploy not only fully aligned the revenue management processes of the merged Merck generic and Schering-Plough entities, but replaces a massive set of heavily customize legacy applications. This was a tremendous effort on both Merck and our side, and a significant milestone for both companies. With J&J, we completed a major project with several of the medical device divisions, that allows them to move off a legacy system and consolidate a large portion of the commercial processes on our platform.

On the product side, we announced a number of important announcements over the course of the past quarter. In Revvy Global Price Management, we released both new versions in the product expansion.

The spring 2014 release, including enhancement to governance, usability and reporting capabilities. We follow this announcement with the release of the Model N Launch Sequence Optimization Solution, or LSO for short. We believe new product launches can be the most critical in the defining moments of the pharmaceutical industry's product lifecycle and that the first six months of the launch can establish the products revenue trajectory for the next several years.

A sub-optimal launch price or sequence can result in millions of dollars of lost revenue for the pharmaceutical manufacturers. LSO will help pharmaceutical companies to define launch timing and prices to maximize the revenues and margins.

We also released an extension to the Model N regulatory update program, a component of our government compliance solution to help our customers comply with the latest governmental reporting requirements. Regulatory change, as you may know, introduces complexity and potential for both organizational and reputational risk.

One wrong price calculation can cost millions of dollars in lost revenues and enormous fines. Our new offering has been very well received by both our customers and prospects.

I'm pleased with our progress and the direction we're heading for FY15 and beyond. We have stayed, and continue to stay, true to our compass of building a strong leadership team, listening to our customers, and continuously innovating. We still are not back to where I would like to be from a consistency point of view, but we have made very good progress on our search execution throughout this year.

We have a number of exciting growth opportunities, both within our installed base and with new customers. We continue to believe in the sizable opportunity in front of us in the revenue management market. Let me turn the call over to Mark to discuss our financial results and guidance in more detail.

Thank you, Zach. Total revenue for the third quarter were $19.3 million, within our guidance of $19 million to $19.5 million. This compares to $27.2 million in total revenue in the year-ago period. The year-over-year decline was driven by the sales execution issues discussed in recent periods, with particular concentration in the license and implementation line.

However, as Zach mentioned earlier, we believe that Q3 will mark the low point for our revenues, as we are seeing the results from our efforts to improve our sales execution, as communicated previously with the record bookings in the first half of FY14. Within total revenue, licensed implementation revenues were $8.1 million, and staff and maintenance revenues were $11.2 million. In the third quarter of FY14, the amount of revenue coming from existing customers who generated revenue and each of the last four quarters was $84.7 million, compared to $85.9 million in the third quarter of 2013.

Before I move on to profit and loss items, I would like to preface my comments by pointing out that I am describing non-GAAP results from this point forward. For the third quarter of FY14, these items exclude $2.7 million of stock compensation charges, $83,000 of amortization from intangible assets, $80,000 in compensation charges related to the Leapfrog acquisition, and an adjustment to our restructuring reserve of $43,000.

Gross profits for the third quarter were $10.6 million, compared to $15.5 million in the third quarter of FY13. Similar to recent quarters, gross profit in this quarter included an impact of roughly $400,000 from the amortization of capitalized software that began upon the launch of our (technical difficulty) products.

Overall gross margin in the quarter was 55% compared to 57% in last year's Q3. This decline largely reflects our continued investment in the SaaS and infrastructure and support organization, as well as the reduction in overall revenue as highlighted previously.

Research and development expense was $4.5 million compared to $3.8 million in the third quarter of FY13. Sales and marketing expense was $5.9 million, compared to $4.5 million in the year ago period. We continue to invest in sales and marketing personnel.

G&A expense was $4.1 million, compared to $3.5 million in the third quarter of 2013. Operating loss for the period of $3.9 million, compared to operating profit in Q3 of last year of $3.7 million, and at the high end of our guidance of an operating loss of $4 million to $3.5 million.

Net loss in the third quarter was $4 million compared to net income of $3.6 million in the third quarter of FY13. This produced a net loss per share of $0.16, based on the fully diluted share count of 24.8 million shares, compared to a net income of $0.14 based on the fully diluted share count of 26.1 million shares in the third quarter last year. This was in our guidance of a net loss of $0.16 to $0.14 per share.

Adjusted EBITDA for the third quarter was negative $3.1 million, compared to positive $4.2 million in the year-ago period. We ended the third quarter with $103.2 million of cash and short-term investments, up slightly from $101.7 million at the end of the second quarter. Accounts receivable at the end of the quarter was $17.9 million, down from the $20.4 million at the end of the second quarter and driven primarily by strong collection efforts in the quarter.

Our total deferred revenue was $28.7 million at the end of the quarter. As mentioned previously, we believe our deferred revenue balance is not a meaningful indicator of the business activity during a particular quarter and the timing of invoicing under our contract impacted items that we do not bill our customers up front for all total contract values.

For the third quarter, cash flow provided by operations was $2.3 million, which was considering CapEx of $1 million, produced a free cash flow of $1.3 million. This compares to cash provided by operations of $1.8 million in the third quarter of last year, which after considering $300,000 of CapEx and $1 million of capitalized software, produced a free cash flow $500,000. Similar to prior commentary in regards to our receivables and deferred revenue balances, that can be some quarter to quarter variability in our cash flow as it is impacted by the timing of invoicing within our contracts.

Moving on, let me outline our guidance for the fourth quarter of FY14, resulting expectations for the full FY14, as well as some initial thoughts on FY15. For the fourth quarter ending September 30, we expect total revenues to range from $19.5 million to $20 million.

Non-GAAP loss from operations in the range of $4 million to $4.5 million. This would be to a non-GAAP net loss per share in the range of $0.16 to $0.18, based on a weighted average count of 25 million shares. Accordingly, for FY14 as a whole, we now expect total revenues to range from $81 million to $81.5 million, non-GAAP loss from operations in the range of $10.5 million to $11 million, and this would lead to a non-GAAP net loss per share in the range of $0.$0.45 to $0.47 based on the weighted average share count of 24.4 million shares.

In addition to the formal guidance, I would also like to add a few comments about the remainder of this fiscal year and our outlook for FY15. As Zach alluded to earlier, we have increased confidence in our outlook for FY15, based on continued improvements we have seen in the business, pipeline, and the ability to execute consistently.

At this point, we're comfortable estimating revenue growth for FY15 in the low- to mid-teens. We'd expect improvement in our quarterly growth rate throughout the year with the business exiting the year at or near historical growth rates.

As we are finalizing our investment plan for FY15, it is premature to provide any precise estimate on profitability at this point. However, at a high level, we would expect to report operating losses in FY15 that are slightly lower compared to our FY14, as our business returns to growth.

We expect to see some positive operating leverage on these higher revenue levels, but not all of it will drop to the bottom line as we will continue to invest in growth. We will provide further detail on our Q4 conference call.

In summary, I believe we have made further progress putting the Company back on track. We remain focused on growth initiatives and executing on our strategic plan for the upcoming year.

On a personal note, I look forward to working with you all and meeting many of you over the next coming quarters. We will now open the floor for your questions.

(Operator Instructions)

Sterling Auty, JPMorgan.

It's Darren Jue on for Sterling.

I'm just wondering, given that the guide for FY15 revenue which was quite a bit above where we were modeling, can you give us a sense for just how much visibility you have into that revenue? To what degree has that revenue already been booked?

Thank you for the question. And when you look at the guidance that we have provide for FY15, it's a combination of three elements. I think the first one is that, as we mentioned, we made tremendous progress this year in terms of execution for the business, on both service and marketing.

The second one is that when we look at what we have currently in the funnel and also the fact that we had significant sales and also marketing capacity this quarter, we have confidence that we will be able to leverage on this opportunity. The third thing is that when we look at the growth initiatives that we have for our next FY15, we also feel confident about them. So that gave us actually the ability to guide the way that we guided this time.

Okay. Thanks.

As a follow-up, you just mentioned you feel confident in terms of your sales and marketing capacity. Could you comment also on the adequacy of staffing within the services organization?

We feel that we have the capacity to meet, obviously, the demand for this year. And we are still in the hiring (inaudible) capacity. But you have to remember also that the way we go to market is to work very closely with partners. And we leverage partners. We go to a market strategy.

When you look at the combination of that, of our internal growth, the way that we are scaling the business and our partnerships, we feel that we have a very good demand internally and externally to meet the requirements of the market.

Okay. Great. Thanks for taking my questions.

Nandan Amladi, Deutsche Bank.

Zach, you described quite a few upsells with the existing customer base. In terms of the new bookings over, say, the last two quarters, and as you look ahead, orders of mix of the land deal versus the expand deals. And has that mix changed, say over the last 12 months or so, as you work through the execution issues that you described?

Nandan, when you look at the market as a whole, we feel that the market is underpenetrated. It's true for both our install base and for the (inaudible) that comes from the bigger market. So we feel that there is an opportunity for us on both areas to grow and to expand farther.

When you look at the Company, and you look at our penetration and strategy to the market, as you know, we have a set of large customers that were very successful in the past. And when you look at the combination of companies like J&J or Merck or Amgen and others, these are customers that we have been very successful in farther expanding. In the previous quarter, we signed two major deals with both J&J and Striker, where we extended our footprint very significantly in both of these companies.

In addition, when we look at this year and to your questions about the last two quarters, we keep a very good momentum, especially on the mid-market, but not only on the mid-market. The mid-market has been very good for us right now, in terms of market expansion. With the packaging of the product and with the express offering that we have to these customers, where we implement this product out of the books with the best practices on a fixed bead in a fixed time, it was very well-received there. So I think that this year, I would say we made very good progress on both of them.

Now, the nature of our business and the size, kind of from the customers, really attests to the fact that we have more bookings currently from existing customers. But when you look at the number of deals and the extensions that we have, it's definitely more on the expense side. I hope this answered your question.

Yes. Thank you.

Tom Roderick of Stifel.

First of all, congratulations by turning the bookings picture around here and signaling the third quarter as the low watermark coming up. That's certainly good news.

If you look at what's going on within your bookings picture, you called to mind a few of these more sizable deals. AbbVie was certainly a nice one you announced in the quarter. What's changed within the execution of the sales force and the tenor of the deals relative to where they were last year at this time and as you went through the fall?

How have you managed to get these deals over the goal line, and what are some of the factors behind that? Is it macro? Is it sales execution? How do you continue these trends?

Thanks for the question. When I look at this, it's mainly a focus on our own execution and, I would say, the broader strategy.

Tom, if you look at what we have done since the beginning, the goal for the year was really to focus on and assess process and on the success execution and on alignment and a lot of critical ingredients that really create the foundation for a strong sales organization.

In addition to this, we did what I consider to be a very good hiring in the next level under Chris Larsen, with strong leadership both in the US and in Europe. The third thing is that we increased the capacity over time. We did what I consider to be a very good hiring over the last three, close now to four months. We believe that's even going to improve the execution of the Company.

I think what we were able to kind of now to do is really to focus on both the install base and on the expanding opportunities and go and take these deals off the table. And I think at the same time, also to grow and to evolve and increase the funnel that is going to create the future opportunities for the Company.

Perfect. Thank you.

One quick follow-up question. As a look at the revenue growth into next year, it still looks as though the operating losses will continue to expand off a higher revenue level. Where, incrementally, do you want to invest in the business? Is this predominantly sales and marketing? Should we see more leverage on that line or rather invest in R&D? I'm kind of curious how you we should think about our models from the OpEx standpoint.

And bigger picture, what's the right revenue run rate, whether it's annual or quarterly revenue run rate level by which you think that you could turn a profit at this point?

First of all, a clarification and then going back to some of your questions. First of all, we said that it's too early for us to guide on the bottom line. We are still working through the plan for next year.

We spent a whole week, the entire Executive Management team, on driving the strategy for the next year. We feel confident about where we are going. But we haven't really finalized the bottom line, and we are not in a position to guide. Obviously, we will guide in the next earnings call.

What Mark mentioned in his comment was that we are going to reduce the losses for the Company. What we are working on right now is where we need to make farther investments. We have couple of strategic initiatives that we feel are going to be a growth driver for the Company.

We spoke about the mid-market in the beginning of last year. And, as you saw, that's been a very good momentum and drive for the Company. We also are developing this product with Salesforce.com, Revvy, a SaaS application suite for semiconductors, which we also believe is going to be a very good growth driver for the Company.

And now with the leadership that we have in sales and marketing, we are investing in further assessing marketing, both in the US and in Europe. So that's where we are going to invest the vast majority of our resources -- on areas we think are going to be a major growth driver for the Company, and in sales and marketing and driving the potential that we see in the markets to fruition.

That's great. Thank you.

(Operator Instructions)

Terry Tillman from Raymond James.

Mark, a quick question for you. And I appreciate at least the early view for next year on the revenue and, directionally, the operating loss. That's helpful for us.

I'm curious, though, if we were we were to segment between the license and implementation versus the subscription or SaaS and maintenance, anything to think out their relative rates of growth in relationship to total revenue growth?

Terry, we are not ready at this point to give guidance on FY15 between the two line items. I would expect, as we indicated previously, we've had very strong bookings in the first half of FY14. Obviously, that's going to drive revenue as we move into 2015, plus deals we've booked for the remainder of this year.

Okay.

I guess, Zach, maybe this is for you. You talked about a variety of successful renewals and then upselling and cross-selling. I'm curious, within some of your larger enterprise customers, particularly on the pharma side, what are you seeing in terms of as you upsell or cross-sell other solutions?

Has there been a more notable shift to SaaS versus doing additional license on premise deals? Have you seen any shift that surprised you? Or is it playing out as you had anticipated?

When you look at the cross sell and the upsell opportunities that we have, I would say in general, they follow what I thought that we were going to see in the market. What we see is that when you look at the expansion in the very large enterprises, most of it is actually on-prem. And I would say that aspect of this is that when you look at the newer products that we have, such as the Revvy Global Price Management, we only offer this as a SaaS or some other product. So this is basically a product that really augments what the companies have currently from a transactional system. And we only sell it as SaaS.

That is the two trends that we see when we look at extension of current implementations already on-prem. It's on-prem, but the newer products are going to SaaS.

Okay. My last question, Zach, is for you in terms of the mid-market as an opportunity that you embarked on last year; and you're having some success. Should we think of that is the primary driver of your new logos? New customer sales are going to be predominantly in that mid-market?

Anything you can say about economically, what is the deal size like there on average versus more of your Amgen or J&J types when they become a new customer? Thank you.

When you look at the number of customers, number of new customers, number of new logos, naturally, they're going to come from the mid-market. We think about this as a way to grow with these companies.

When you look at the history of Model N, in 2004, I believe, we worked with this relatively small company called Gilead. And see kind of what happened with this company over the decade that we know we worked with them. I believe that these companies are going to provide us with a wonderful opportunity to grow with them. And now that the product is a packaged in a very succinct delivery way, we are in a position where we can partner with them.

In addition to this, when you look at the vast majority of the transactions that we did with the mid-market, it's all basically SaaS. That's also helped us with the customer with recurring revenues. So I think that they are going to be a wonderful opportunity for us to expand and also to grow and also an opportunity to expand our recurring revenues.

Scott Berg from Northland Capital Markets.

Zach and Mark, congratulations on a nice sales quarter here. Two questions for you.

First of all, Zach, on the sales improvements in the quarter, the upsells. Are customers buying something different today than they did, say,12 months ago? Or is it the same type of revenue management products that they're just bringing to new divisions?

When we look at the land-and-expand strategy that we have, we see a couple of versions of this. The first version is that the companies are expanding this to other divisions. So you start in one division and you expand to other divisions.

The second one is that you expand it to new geographies. So you take it from implementation that was done in the US to other countries or to regions.

Then you have an expansion where companies are buying more [receipts], more users, either because of organic or inorganic growth. And then companies are buying more application in order to expand their footprint now to do it. So when you look at this, we have a lot of growth drivers within the install base, and we see opportunities in all of them.

When you look at this from a product point of view, we have products that we sold 12 months ago, and we keep improving them. Also, we have some newer products, such as the Global Price Management and others, that provide us with an opportunity to upsell, to expand, and actually to sell to other regions sometimes.

Great. My last question is with the improved sales execution and the guidance for next year, which was above our estimates as well, are you viewing this growth opportunity right now as a mid-teens growth opportunity on an annual basis, plus or minus? Or do you think you can get back to the 20%-plus growth opportunity on a more sustained basis, likely in 2016, maybe?

I'm not in the position to guide in this direction right now. I just wanted to reiterate what we said in the call. What we said in the call is that we guide you right now to low- to mid-teens because we wanted to give you a directional.

We also said that when you look at the exit the quarter for next year, we are going to be near or at historical growth rates when we are going to kind of exit the last quarter of the year. And we will give you much more clarity in the next quarter.

Great. That's all I have. Thank you.

Ladies and gentlemen, this concludes the Q&A portion for today's presentation. I will turn the floor back to Mr. Zach Rinat for closing comments.

Thank you, everyone, for joining the call today. As I mentioned, I am pleased with the continued improvements that we made to our business in the last quarter. We are very much looking forward to return the Company to growth and executing on this tremendous opportunity that is in front of us.

I want to thank all of you for the interest in Model N. And we look forward to is speaking with you again soon.

This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time. Have a wonderful day.