Model N Inc (MODN) 2015 Q1 法說會逐字稿

Greetings, and welcome to the Model N first-quarter FY15 financial results conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I'd now like to introduce your host for today's call, Mr. Greg Kleiner, Investor Relations for Model N. Thank you, Mr. Kleiner, you may begin.

Thank you. Good afternoon and welcome to Model N's first-quarter FY15 earnings conference call.

Joining me today are Zack 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 been simultaneously webcast. The primary purpose of today's call is to provide you with information regarding our first-quarter FY15 performance, in addition to our financial outlook for our second quarter and 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 in 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, 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 your questions, we may offer incremental metrics to provide greater insight into the dynamics of our business or our quarterly results. Please be advised that this additional detail may be one-time in nature, and we may or may not provide an update in the future on these metrics. I encourage you to visit our Investor Relations website at investor.ModelN.com to access our first-quarter FY15 press release, periodic SEC reports and the webcast replay of this call.

Finally, unless otherwise stated, all financial comparisons in this call will be to our results for the comparable period of our FY14.

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

Good afternoon, everyone, and thank you for joining us today.

I am pleased to report that we began the year with solid Q1 results exceeding our guidance on both the top and bottom line. Importantly, the business returned to both quarter-to-quarter and year-to-end growth.

Before commenting on Q1, I wanted to give you an update on our strategic progress. Last week, we held our annual customer event, Rainmaker, in San Francisco focused around the theme of revenue champions.

Rainmaker bought 300 plus SMDs including [salt] leaders from the largest and most innovative companies in the pharmaceutical and technology industries. We made two important announcements during the conference and I wanted to spend some time to review them because they are indicators of strong execution on our strategy.

First, we announced the transformation in the way we engage with our customers which we branded as Rainmaker X-up. Rainmaker X-up is all about programmatic approach to connecting and communicating with our customers in an effort to crystallize our strategy. Rainmaker X is our executive sponsor group. Rena KU is our collective [grower] user groups and [Wen KP] is our product group. This announcement met with resounding support from our customers and last week we had the first meeting for all three groups with a total participation of 120 people.

We also announced immediate availability of Revvy Sales, the first CIM solution for the semiconductor and component industry on salesforce.com app exchange. In April, 2014 we committed to release the product in calendar Q4 2014 and we delivered, releasing the product in our winter release this past December. Revvy sales was built by the working closely with the group of semiconductor Lighthouse customers.

Revvy Sales combined the best of both worlds. Salesforce.com sells cloud and Model N's deep vertical expertise to deliver a vertically total solution for CRM and one that is fully integrated with our revenue management cloud.

We also revealed our new cloud paradigm for bringing all of our products to the market and the immediate availability of Revenue Management Cloud winter 2014 for life sciences. Revenue Management Cloud is the new name for our entire suite of products, but it's much more than just a name change. Is signals two and massive transformations in the way we develop and deliver product, as well as the way our customers consume these products following the very successful model of our Revvy application.

We released Revenue Management Cloud in winter 2014 and will follow with releases in spring 2015, summer 2015 and winter 2015. And from now on, customers should expect every Model N product to be released on the same paradigm in the same timeframe.

Finally, we announced revenue management as a service. Revenue management as a service is a strategy and a solution to move our in-store base from current deployments to software as a service. The announcement we made, along with the immediate availability of all the products, are indicators of strong execution on our strategy.

Now let's shift gears to discuss Q1. We saw additional success across our new and existing customers in the first quarter. We were very excited to add a top three pharmaceutical company to Model N family through departures of our Revvy global price management solution. This streamlined and coordinated processes, enabled by our Revvy GPM solution, will allow them to make timely and relevant pricing decisions to support billions of dollars in revenue.

Combined with our robust analytics and reporting capabilities, this implementation will provide significant financial benefit in this increasingly viable function. This win is a tremendous validation, not only of our solution, but of the growing acceptance of software to service in large pharmaceutical companies.

With Actavis, we signed a deal to expand the current Model N environment. Actavis is using Model N revenue management application suite as a platform to consolidate the revenue management function from their acquisition. In addition, we will be helping Actavis manage their assimilation of both current and historical data of its acquired companies, which will enable them to report an accurate, complete and timely fashion.

Actavis a long standing Model N customer selected Model N new revenue management as a service offering. Actavis will expand the solution with new applications, migrate to revenue management cloud constant release and will stay current with future releases using revenue management in the service.

In the mid-market we extended our relationship with LEO Pharma, an existing customer of Revvy Global Price Management renewal. LEO selected Model N for its full suite of revenue management solution in the US.

They will be using revenue management as a service and express implementation methodology which delivers out of the box commercial and regulatory functionality. LEO is migrating to automate revenue management functionality with Model N leveraging the proven industry processes embedded in our products to enable growth, regulatory compliance and process efficiency.

In addition, we continue our history of helping to lead the discussion of the most vital issues facing companies in our target industries today, as well as best practices and how to deal with these challenges. We recently sponsored and presented at CBI's gross-to-net accounting and accrual conference in Philadelphia and the second annual medical device contracting and strategic account conference in Dallas. More recently, we participated in the APP life sciences executive briefing in Zurich to address industry pricing concerns.

Overall, we continue to execute on our strategic initiatives. Our customers consider revenue management cloud as mission critical application. We have significant opportunity in a large market to have customers transform their revenue management processes.

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

Thank you, Zack.

Total revenues for the first quarter were $22.1 million, above our guidance range of $21.6 million to $21.9 million. This compares to $21.6 million in total revenue in the year ago period.

Returns to both quarter-over-quarter and year-over-year growth as evidenced at the improvements in our execution have taken hold and, as I'll outline in a moment, we expect the velocity of our growth to improve as we move throughout the year. Within total revenue, license and implementation revenues were $9.7 million and SaaS and maintenance revenues were $12.4 million for the quarter.

Before I move on to profit and loss items, I want to remind you that my commentary will be focused on non-GAAP results. Our reconciliation of non-GAAP to GAAP results is provided with our earnings press release issued earlier today.

Gross profit for the first quarter was $13 million, compared to $12.2 million in the first quarter of FY14. Similar to recent quarters, gross profit in this quarter includes an impact of roughly $400,000 from the amortization of capitalized software that began upon the launch of our Revvy CPQ product.

Overall growth margin in the quarter was 59% compared to 57% in Q1 of last year. As we've discussed in previous calls, we continue to focus on gross margin improvement and we expect our overall gross margin to show further improvement year over year as we migrate to a higher percentage of revenues, the SaaS and maintenance revenues. We do expect some quarter-to-quarter variability in gross margin depending on the mix of revenue and other factors.

Research and development expense were $4.1 million compared to $4.6 million in the fourth quarter of FY14. We are continuing to invest in our new products.

The Q1 results did include the capitalization of expenditures related to Revvy sales in the order of $600,000. Sales and marketing expense was $6.1 million compared to $4.7 million in the year ago period. This increase was driven by our continued investment in sales and marketing personnel and marketing program spend.

G&A expense was $4.5 million compared to $3.6 million in Q1 of FY14. Operating loss for the period was $1.7 million, compared to a loss of $0.7 million in Q1 of last year and above our guidance of an operating loss of $2.5 million to $2.8 million.

Net loss in the first quarter was $1.7 million compared to a net loss of $0.8 million in the first quarter of FY14. This produces a net loss per share of $0.07 based on a share count of 25.3 million shares, compared to a net loss per share of $0.03 based on the share count of 23.5 million shares in the first quarter of last year. This is above our guidance of $0.10 to $0.11 per share loss.

Adjusted EBITDA for the first quarter was negative $0.8 million, compared to a positive $0.2 million in the year ago period. We ended the first quarter with a $96 million of cash and cash equivalents, down slightly from $101 million at the end of fourth quarter.

At the end of the first quarter, our account receivable balance was $16.7 million and our total deferred revenue was $26.3 million. As previously noted, we believe our accounts receivable and deferred revenue balances are not meaningful indicators of the business activity during any particular quarter as the timing of invoices and our contracts impact these items because we do not bill our customers up front for the total contract fees.

For the first quarter, cash flow use by operations was $3.5 million, which after adding CapEx of $700,000 and $600,000 of capitalized software, produces a negative free cash flow of $4.7 million. This compares to cash used by operations of $1.8 million in the first quarter of last year, which after adding $100,000 of CapEx, producing negative free cash flow of $1.9 million. Similar to prior commentary in regards to our receivable and deferred revenue balances, there can be some quarter-to-quarter variability in our cash flow as it's impacted by the timing of invoices under our contracts.

Moving on, let me now outline our guidance for the second quarter of FY15, as well as expectations for the full FY15. For the second quarter ending March 31, we expect total revenues to range from $22.3 million to $22.6 million. Non-GAAP loss from operations in the range of $2.6 million to $2.9 million.

This will lead to a non-GAAP net loss per share in the range of $0.10 to $0.11 based on our weighted average share count of 25.8 million. For the full FY15, we expect total revenues to range from $92 million to $93.5 million or a growth of 13% to 14% for the year as a whole and unchanged from our prior guidance.

Non-GAAP operating loss from operations in the range of $7.5 million to $9 million, an improvement compared to our prior guidance of $8 million to $9.5 million. Non-GAAP net loss per share in the range of $0.29 to $0.35 based on a weighted average share count of 25.9 million shares, an improvement compared to our prior guidance of $0.31 to $0.37.

In addition to the formal guidance, I did want to reiterate that we remain committed to reaching breakeven on an adjusted EBITDA basis by the fourth quarter of this year. In addition, though the timing of certain contracts impacted revenue mix in Q1, we continue to expect the mix of recurring revenues in FY15 will improve over FY14 levels.

In summary, we are pleased in the direction of the business. Our growth initiatives have positioned us well for a year of increasing growth, operating leverage and revenue mix improvements.

The revenue management market remains large and untapped and we believe we are well-positioned to execute on this tremendous opportunity. The success of our recent Rainmaker event is both existing customers and prospects reinforces this point.

We will now open the floor for your questions.

(Operator Instructions)

Nandan Amladi, Deutsche Bank.

Good afternoon. Thanks for taking my question.

So, Zack, clearly a big event last week at the conference. And a lot of new positioning from a cloud and subscription-based business model. How much is your sales motion and sales process changing now to position one model or another and how are you changing your sales incentives perhaps, to push one versus the other?

Sure. Nandan, as you know our transition to the cloud has been occurring for quite some time. We had a set of products that we brought to the market under the Revvy brand and this includes Revvy CPQ and Revvy Global Price Management, as well as the new release of product of Revvy Sales. In addition, we also did some work in terms of selling increasingly a software type of solutions for (inaudible) our customers.

And when you look at the progress that we have made including some of the large deals that we had with Intel or with Fairchild, they all basically consume as SaaS. I believe that we have a very strong incentive program for the SaaS assimilation to grow into a push towards more recurring revenue. We are cognizant and also supportive of the fact that we need to support our customers with choices and basically the Salesforce is more incentive from a commission point of view to sell a recurring revenue solution.

Thank you. And a quick follow up if I might.

As the system integrated community continues to grow, would there be a point when you might be able to recognize your license revenues separately from implementation?

This is Mark.

In the situation where we would have partners who did the implementation from end to end, if it was sold as a perpetual license, yes, we could recognize it as delivered.

As you know, we have strong relationships with our partners and we continue to expand that relationship as we move forward. We have not factored in any one-time perpetual license in this year's revenue model.

Okay, thank you.

(Inaudible) from a direction point as we indicated in the past we want to focus on line two, we'd like to grow a line two and we think this is where the opportunity for the Company exists.

When you look at the announcement that we made this past week, there were basically an end of the process not just the beginning of the process. Because we also announced immediate availability of the color form product and the way that we think about it is that the more that we have recurring revenues it's better for the customers and it's also better for Model N in the long term.

As I mentioned, Nandan, the situation where we have a one-time license pickup from a revenue perspective where the SI does the implementation and it's a perpetual license, is an unlikely scenario for us.

Great. Thank you.

Tom Roderick, Stifel.

Yes, hi, guys. Matt Guidon in for Tom today. Thanks for taking my question.

First off, as you move to have more and more products delivered on a subscription as a service basis, what are the near-term impacts to the model and how do you look at that trade-off from a long-term value perspective?

When we look at the short term, the medium term and the long term we fundamentally believe that it's a good strategic move for the Company on a couple of levels. But I would say it's also something that is going to also support our growth.

What we in particular I just want to relate to the announcement about the revenue management as a service which is really a strategy to take customers from coin deployment into SaaS. When we think about this from a customer point of view it's about really moving them to this notion of no hassle upgrades to reduce the total cost of ownership. But it also means that we have an opportunity as a Company to get more revenues and more where we can revenues from the install base.

When we looked at the customers that we engage already in the model of a SaaS and recurring revenues we found out that among our customers these are also the happiest customers. So I believe that this is really a win/win on all aspects. Driving customers for this section, reducing the total cost of ownership for the customers and getting more revenues for the customers. And from my perspective, we see it as an opportunity to grow the business.

Matt, this is Mark, just one additional thing.

With the guidance for the fiscal year that we share on the call, we factored in the market conversion of SaaS and the fact that currently we offer all of our products on the SaaS platform today.

Okay, that leads me into my next question. How much of a shift can we expect in the reported results this year in terms of mix shift between license to SaaS? And then, I guess more importantly, where does that end up maybe three to five years down the road and what needs to happen to get to that goal?

From a FY15 perspective, we spoke about this on the last call. We expect to see the continued migration to line two from line one. We do expect both line one and line two to grow year over year, FY15, but we expect to see line two growing faster than line one.

And we did talk about the fact we expect to see above 60% of our revenue on line two and then continue to accelerate as we move ahead. We have not modeled out two to three years out to see what that progress would be, but I would expect to see the line two revenue increase year to year as more and more of our customers adapt the SaaS platform.

One of the things that I made crystal clear doing my keynote speech was the fact that we look at the revenue management as a service. We provide it as an option to our customers. We fundamentally believe this is going to deliver enormous value to our customers.

As I indicated in my remarks, we have already Stellas, which is a long-term customer of Model N, that actually engaged with us on revenue management as a service, as well as a couple of other (inaudible) customers. But we as a Company we like to provide the choices to our customers. And I believe that this is going to become crystal clear about the value of this and we are going to see a vast majority of the model and install base, if not all, move to this model.

Great, thank you, guys.

Sterling Auty, JPMorgan.

Thanks a lot. It's Darren Jue on for Sterling.

I'm just wondering if you can talk about the mix of business this year? How that's shaping up in terms of the life sciences vertical versus high-tech and whether you can maybe update us on whether there are other verticals that you plan to go after in near term?

We do not disclose the differences between life sciences and coming from the high-tech on a quarter-by-quarter basis. I think also the fact that we ended the Q1 and there's going to be some seasonality in both of verticals.

And in particular you have to remember that we just released Revvy Sales at the end of December. So this is basically we are going into this quarter first time actually selling this product.

In general, the only comment that I will make is that we expect the high-tech business to grow faster than life sciences. It's a very untapped market. We believe that Revvy Sales, because of the partnership that we have with salesforce.com, because of the fact that that's the only CRM solution that is targeted in semiconductors and the component manufacturing industry is going to have a good success as we move forward. That's the only comment I want to make about the differences between the two verticals.

Okay, that's helpful. Thanks.

Maybe a question for Mark. Sales and marketing came in a bit lower than we were modeling. I'm just wondering if there were any lower than expected marketing program costs in the quarter or were there perhaps lower personnel costs?

No, you have to remember, Darren, in our model in our fiscal year that Q1 for us is Q4 calendar year and then Q2 for us is obviously Q1. So therefore, we reset all of our commissions from an accelerated perspective with our sales folks in our Q1. Basically everyone starts back at the bottom again. So we would expect to see lower commissions in our Q1, which will be fiscal Q4, and it would continue to move up as we move through the year.

From a marketing program spend perspective, we're very consistent throughout the year. Although from a calendar perspective, Q4 with a holiday season we do have a few less programs that we invest in and we'll continue to see that pickup as we move into the fiscal year.

Okay, thank you.

Terry Tillman, Raymond James.

Good afternoon, gentlemen. Hopefully you can hear me okay.

Zack, I guess you were telling the idea of a success with a top three Pharma company. And I think it was in a SaaS model where you're having the traction.

Could you all talk a little bit more about the financial impact and the timing on how this would roll into the income statement from a revenue standpoint? And could this potentially be a 10% plus customer?

Sure. So a couple of things about this.

First of all, we were very pleased with this win. It's one of the top three largest pharmaceutical companies and, as you can imagine, it was a competitive opportunity and we are very excited to win it. But furthermore, I think it really pushes the point that there is a growing acceptance of SaaS as a delivery model in the pharmaceutical industry. We have right now already 7 of the top 15 pharmaceutical companies on our global price management solution.

And when you think about it this is really a solution that is managing every price that behaves across the globe on the moving and SaaS platform based on force.com and something that two years ago was unthinkable. And we are in the meat of the implementation right now. Even as we signed the deal just in December it's a very tight implementation.

And another statistic that I want to give to you is that when you look at implementation on somewhere between 100 to 200 countries it actually is less than six months. So that's a rather big benefit of this methodology and solution that we have.

So with this, I'll turn this to Mark to speak about how it floats to the P&L.

Terry, a couple things, as Zack mentioned on the call earlier, this is on the SaaS platform so obviously we would be recognizing the subtraction piece broadly over the term of the engagement and then services be recognized as delivered.

As far as when the revenue would begin, it begins immediately. We've already begun work on the projects so we began recognizing both the subscription and the service dispute of revenue associated with this project.

And then your other question was growing to 10%. So I think we have the ability with this particular customer to grow with other products and services and they certainly can be very large customer as we move ahead.

Okay.

I guess another question, Zack, is and I don't know if some of this -- first question is as it relates to the December quarter, it's hard for us to really get a -- you mentioned a variety of customer wins but it's hard for us to really gage what that means in terms of affecting the revenue model. Overall, bookings activity, do you feel like it's strengthening? Is it about the same in terms of close rates and demand trends? Or softer?

Any kind of directional commentary. I know your not going to give us bookings numbers but it's helpful to just get a sense on how the overall bookings activity is versus maybe previous quarters?

Well, you know as you mentioned, we do not disclose no bookings. I think from a market point of view I would say that the market is about the same as we had it in the past. We are making good progress on our goal.

And obviously, with the new Revvy sales for components in semiconductors because of the fact that we are outside the normal revenue management space, I think that this is a market that is very hot. It's going very strong but we have a way of going to establish ourselves as a vendor there. Obviously, that the partnership salesforce.com helps. So this is where we need to -- where we are putting some effort in terms of accelerating the growth.

Okay.

As we mentioned earlier, guidance for the year is $92 million to $93.5 million which is 13% to 14% year-over-year increase. And as we mentioned on the last call and on this call, we expect to exit the year with historic growth rates.

Got it. Just my final question just relates to just for education purposes, in terms of Rainmaker, do you typically use that as an event to actually close business into a quarter or is it something that just helps? I mean, obviously, there's a learning and training and education component, but is it something that strengthens more of the pipeline for the rest of year?

Or just trying to understand whether that's actually an event you actually close a lot of business at or I shouldn't think of it that way? Thanks a lot.

I would look at the Rainmaker as a way to, for us to get in line with the customers on a strategic base. It's a way for us to bring a prospect which really helps us sell processes because they can actually get a lot done in a very short period of time.

And it has, I would say in general, a minor impact on closing deals. It has some impact but it's minor.

Okay, thanks.

Scott Berg, Northland Capital Markets.

Hi, Zack and Mark, congrats on a good quarter. A couple quick ones here.

First of all, Zack, can you talk a little bit more about Rainmaker in terms of the momentum that you typically gain off of this event? Attendance was up a lot on a year-over-year basis and that's just closing deals. Were there any product areas in particular that you felt really good about in terms of the momentum that was seen during the show, during the conference?

I felt very good about this event. I thought it was actually one of the best events that we ever had in the history of the Company. I tend to relate more to customers than prospect feedback because as you know, we have some long-term relationships there.

I would say that throughout this event, starting with Rainmaker X, which is our executive strategy board, to the closing session with salesforce.com, I felt it was very good from the momentum and we received very strong feedback from our customers and prospects. We are going to conduct also an official survey and then we're going to get the real results. But on a gut level it felt actually as an extremely strong advance for the Company.

Great.

Then from the revenue management as a service road map to convert existing customers that are perpetual licensed to the cloud products, can you give any color on what pipelines for some of the larger life sciences or Pharma customers look like in terms of them potentially moving? I'm just trying to better understand is this a slow and steady over a five to six, seven year type progress or could we see some additional momentum maybe earlier than that?

Again, when you look at the way that we form, the way that we evaluate and the way that we decide on strategy, we do it with very close interaction with our customers. We develop the strategy of revenue management as a service for quite some time and now we actually we announce it and it's ready to be consumed by the customers. Just because of the fact that it's targeted at our install base, I would say we have quite a significant discussions with all of our customers on the subject.

And from my perspective the question is not if the question is when the issue is more of an issue of when. And as a Company I think that we should have the flexibility with our customers because we need to make sure that people are moving in this direction at their own pace and their own level of comfort. I would say that so far, the initial indicators are very strong about people's level of comfort. We will continue to give you an indication as we gave in this call about still as about companies that are moving in this direction.

Thank you.

The last one for me, Mark, is you talked about your reiteration of exiting this year in Q4 with roughly breakeven adjusted EBITDA or better. Can you talk a little bit more about is that more a function of gross margin improvements, further improvements on the OpEx side or kind of a combination of both?

Scott, it's really a function of all three lines. We talked about the revenue growth year over year and the expectations there. We've talked about gross margin and we do expect gross margin to continue to improve. I think you've seen the last two quarters have improved over the traditional run rate and we expect to be able to improve on that as we move into the back half of the year.

Then from an operating expense perspective we're going to leverage our current investments in the Company. We did make some investments in sales, marketing and development up front, so great about those investments and the return we're getting on those and we will continue to invest in those areas. But we will be able to leverage that as we move into 2016.

All right, that's I have. Thanks for taking my questions.

There are no further questions in the queue. I'd like to hand the call back over to Zack Rinat for closing comments.

Thanks, everyone for joining the call of Q1. We appreciate you taking the time. As I indicated, we are making good progress on our strategy and we're looking forward to speaking with you in the future.

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