Model N Inc (MODN) 2015 Q2 法說會逐字稿

Greetings and welcome to the Model N second quarter FY15 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's second 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 being simultaneously webcast. The primary purpose of today's call is to provide you information regarding our second quarter FY15 performance, in addition to our financial outlook for our third 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 second 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 periods 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 had solid Q2 results, exceeding our guidance on both the top and bottom line. Importantly, Q2 was the second quarter in a row where the business produced both quarter-over-quarter and year-over-year growth.

In our last call, we outlined the strategic direction of the Company, designed to drive both top line growth and accelerate the transition of our business model to recurring revenues. I am excited to share with you strong positive indicators of our progress on both fronts.

First, we launched Revenue Management Cloud Spring '15 as part of our new cadence of product releases. Revenue Management Cloud is a true and massive transformation in the way we develop and deliver products, as well as the way our customers consume these products.

We were delighted that in the second quarter, two of our largest customers, Merck and J&J, selected to upgrade their existing implementation to Revenue Management Cloud. Furthermore, Merck has signed on for Revenue Management as a Service, which is a strategy and a solution to move our installed base from their current deployments to SaaS. Merck plans to expand their solution, migrate to Revenue Management Cloud Spring release, and will stay current with future releases using Revenue Management as a Service.

We are engaged in discussion about Revenue Management as a Service with an increasing number of our customers and prospects. We were also excited to add a top-five pharmaceutical company based in Europe to the Model N family through the purchase of our Revvy Global Price Management solution, or Revvy GPM. In addition, AstraZeneca, another top 10 European-based pharmaceutical company, expanded their implementation of Revvy GPM in the quarter. Revvy GPM is a multi-tenant SaaS solution based on the Salesforce One platform that enables pharmaceutical companies to manage their prices policies on a global basis. We believe that Revvy GPM is quickly becoming the de facto industry standard, with 9 of the top 25 pharmaceutical companies already as customers.

Last but not least, for life sciences, we signed a significant deal with one of our largest customers, another top 15 pharmaceutical company, to expand their implementation of Revenue Management. This deal encompasses several of our products, including our managed care solution, providing an end-to-end management of the entire managed care revenue management process, and our ScriptValidate solution. These land and expand deal demonstrate the tremendous opportunity that Model N has to expand within our customer base.

On the high-tech side, we signed a large SaaS deal with Freescale Semiconductors, a semiconductor leader with more than $4 billion in revenue. Freescale purchased our end-to-end Revenue Management Cloud suite, as they were looking for platform replacement to address their pricing and channel management needs. The Model N Revenue Management Cloud suite will provide Freescale transparency into revenues and pricing across the organization, along with insight into customer intelligence, volume compliance, and quote, to maximize the revenues and increase sales effectiveness.

Q2 was also the first quarter in which we sold the Revvy sales application suite, or Revvy Sales. Revvy Sales combined the best of both worlds, Salesforce, Sales Cloud, and Model N's deep vertical expertise to deliver a vertically focused solution for CRM and one that is fully integrated with our Revenue Management Cloud.

We were excited to quickly sign two customers in the quarter, adding Atmel, a global leader in microcontroller security and touch solutions, and Microchip, a leading provider of microcontroller and analog semiconductors. The fact that two leading semiconductor companies purchased Revvy Sales within the first quarter of launch is a clear testament to the value of vertical CRM built with and for the semiconductor industry.

Another win in the high-tech this quarter was Allegro Micro, who purchased our Channel Management Cloud product. Allegro, a subsidiary of Sanken Electric, was looking for a solution to manage their global indirect revenues to drive better pricing and reduce margins erosion across their global channel. Our proven success with channel partners and our Revenue Management Cloud vision helped in forming this new relationship.

In summary, I am excited about our strategy and the early successes and acceptance we are seeing in the market. Model N is growing, while increasing the mix of recurring revenues at the same time. Finally, as Mark will outline in a moment, we are expecting both our growth and revenue mix to show further improvements over the balance of the year. 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 second quarter were $22.7 million, above our guidance range of $22.3 million to $22.6 million, and growth of 10%, compared to $20.7 million in the year-ago period. As both the pace of our business and execution continues to improve, this is translating into an improving growth profile and an increased percentage of revenue coming from SaaS and Maintenance line, as I'll outline in my guidance shortly.

Within total revenue, License and Implementation revenues were $9.7 million, and SaaS and Maintenance revenues were $13 million for the quarter. The mix of revenues in Q2 was 57% SaaS and Maintenance versus 43% License and Implementation, an improvement from 52% SaaS and Maintenance versus 48% License and Implementation in Q2 of FY14.

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

Gross profit for the second quarter was $13.5 million, compared to $11.5 million in the second 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 gross margin in the quarter was 60%, compared to 56% in Q1 of last year, and the best quarterly performance in nearly 4 years. We have been pleased with the continued improvement in gross margin, while we continue to increase our percentage of SaaS and Maintenance revenues. We do expect some quarter to quarter variability for the remainder of FY15 in gross margin, depending on the mix of revenues and other factors.

Research and development expense was $4 million, compared to $4.3 million in Q2 of FY14. We are investing to further expand the breadth and depth of our products, but the results of this quarter did include the capitalization of expenditures related to Revvy Sales, our CRM offering, in the order of $700,000.

Sales and marketing expense were $7.1 million, compared to $5.6 million in the year-ago period. This increase was driven by our continued investment in sales and marketing, as we look to expand our sales coverage and continue to increase our sales pipeline. G&A expense was $4.1 million, compared to $3.5 million in Q2 of FY14.

Operating loss for the period was $1.7 million, compared to a loss of $1.9 million in the second quarter of last year and above our guidance of an operating loss of $2.6 million to $2.9 million. Net loss in the second quarter was $1.7 million, compared to a net loss of $1.9 million in the second quarter of FY14. This produced a net loss per share of $0.08, based on a share count of 25.9 million shares, similar to the net loss in Q2 of last year, which was based on a share count of 24.4 million shares. This was above our guidance of a net loss of $0.10 to $0.11 per share. Adjusted EBITDA for the second quarter was negative $0.8 million, compared to negative $1.1 million in the year-ago period.

We ended the second quarter with $93.2 million of cash and cash equivalents, down slightly from $96.4 million at the end of the first quarter. The cash utilized in the second quarter was largely due to the timing of cash collections related to a pair of transactions. We expect to end FY15 with approximately $93 million to $94 million in cash on the balance sheet.

At the end of the second quarter, our accounts receivable balance was $18 million and our total deferred revenue was $23.9 million. As previously mentioned, we believe our accounts receivable and deferred revenue balances are not a meaningful indicator of the business activity during any particular quarter, as the timing of invoicing under our contracts impacts these items because we do not bill our customers up front for total contract fees.

For the second quarter, cash flow used by operations was $3.8 million which, after adding CapEx of $300,000 and $700,000 of capitalized software, produces a negative free cash flow of $4.8 million. This compares to cash used by operations of $4 million in the second quarter of last year, which, adding $400,000 of CapEx, produces a negative free cash flow of $4.4 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 flows, as it is impacted by the timing of invoicing under our contracts.

Moving on, let me outline our guidance for the third quarter of FY15, as well as our expectations for the full FY15. For our third quarter ending June 30, we expect total revenues to range from $23.1 million to $23.4 million, non-GAAP loss from operations in the range of $2.3 million to $2.5 million. This would lead to a non-GAAP net loss per share in the range of $0.09 to $0.10, based on a weighted average count of 26.2 million shares.

For the full FY15, we expect total revenues to range from $92.5 million to $93.5 million, or a growth of 13% to 14% for the year as a whole. We have increased the bottom end of the range from the prior guidance by $500,000. Non-GAAP loss from operations in the range of $7.5 million to $8.5 million, an increase in the bottom end of the range of $500,000 from the previous quarter. Non-GAAP net loss per share in the range of $0.29 to $0.32, based on a weighted average share count of 25.9 million shares. This is a $0.03 improvement at the bottom end of the range compared to prior guidance.

In addition, based on the new business booked in Q3 and a pipeline that continues to shift to recurring deals, we are increasingly confident that the mix of SaaS and Maintenance revenue will be 60% for the full FY15, which implies a much higher rate exiting this year. A majority of the bookings this year have been recurring in nature, as the market acceptance of our offerings continues to improve.

Overall, the business continues to show improvement in both growth and predictability. We expect to show further progress in both aspects over the balance of the year. We believe our leadership in this large and growing market positions us for further success going forward. I will now turn the call back to Zack.

Finally, I would like also to share with you that we are welcoming a new Board member to the Model N Board of Directors. Alan Henricks is a 40-year veteran of the high-tech industry, where he has served as a CFO of public and private companies, such as Pure Digital Technologies, Traiana, Interwoven, Informix, Documentum and Borland. He has extensive Board experience, serving on the Board of Directors of Roku, Applied Predictive Technologies, Ellie Mae and A10 Networks. We are very excited to have him join our Board.

And with this, I will turn this to the operator to take your questions.

(Operator Instructions)

Sterling Auty, JPMorgan.

Thanks. Hello, guys. I appreciate the comments about cash flow and deferred revenue not being a good indicator. I hear the positive commentary and some of the [case] studies. But any additional color you can give us in terms of the bookings momentum in the quarter, especially in the Life Sciences area, and what we might think about in terms of where the revenue growth might be heading in the coming quarters.

Sterling, thank you and thanks for the question. We see (Indiscernible) progress across our product lines across the verticals and also across geographies. We see a growth in Life Sciences, and we see the growth coming both in terms of the size of the business, as well as the size of recurring revenues, as the new offering that we brought to the marketplace and the new products, they are catching up.

As you heard in the press release, we also added a top five pharmaceutical companies based in Europe. And AstraZeneca was another one that extended their implementation of Revvy Global Price Management. So that can also give you a good indication that we are doing well actually across geographies.

And we see actually also a good growth in high-tech, with both the (Indiscernible) products that we have. And we are very excited about the fact that within the first quarter of going to market, we were able to sign two of our customers to Revvy Sales. So across-the-board, we see good progress with the business and all the part of the business are growing

And then, any color you can give us in terms of continued improvement you're seeing in terms of sales force productivity would be great, as well.

So as related to sales force productivity, we are still increasing the size of the sales organization. We had a very productive previous year for the people that have been in the sales organization throughout the year. And as we progress in the year, we're monitoring this very carefully, both in terms of size and in terms of effectiveness. We have right now been able to recruit pretty nicely into the organization. We do not depend on the new sales organization getting to productivity this year in order to meet our numbers, but this is basically where we make the investment for the next year

Great. Thank you guys.

Nandan Amladi, Deutsche Bank.

Hello. Good Afternoon. Thanks for taking my question. So Zack, as clearly your bookings mix is shifting more to the subscription model, how have you adapted your sales compensation and incentive structure?

Our sales is incented to sell constantly recurring revenues. And for us, as a Company, it was always about focusing on what is the right thing for the customers and align our sales strategy and sales compensation with the needs of our customers. And from an incentive point of view, the sales organization is incented to sell the recurring revenues.

Okay. And then in terms of your investments for the remainder of the year, and perhaps looking ahead into next year, how much -- is there going to be any change, I guess, in how you fund your R&D staffing versus sales and marketing? And within each one, perhaps more importantly for sales and marketing, which verticals will you focus on a little bit more? I know you have a growing tech business, but it's still relatively small compared to Life Sciences.

As I mentioned in my previous comment, we expect both verticals to continue to grow for the business. As related to the high-tech, we did an excellent job in recruiting, and we are right now almost at the capacity that we think that we are going to need. And as related to Life Sciences, we are adding more sales capacity for the remainder of the year and for next year.

Okay. Thank you.

Tom Roderick, Stifel.

Hello, guys. Good afternoon. I wanted to follow up on the Revvy GPM product. You had a couple of nice announcements this quarter, another top-five pharma in Europe, I believe. Can you just give us a little bit of a reminder as to who you're displacing, if anybody at all, in the solution sets when you get into these big customers? If they're not using anything, what does the decision process look like and how long do the sales cycles typically take for that product?

Sure. Revvy Global Price Management is the product that enables pharmaceutical companies to manage surprises on a global basis. This is (Indiscernible) that traditionally pharmaceutical companies could have made pricing decision in local countries without really relating to the ecosystem to other countries. However, over the last decade, the companies have started to benchmark the healthcare systems in other countries, which really created a web of related prices where a local decision in Greece, as an example, can influence the pricing in Germany and across the world.

That (Indiscernible) pharmaceutical companies to start thinking about the pricing decision in a global basis and really to understand the dependencies between a local decision and global prices. Furthermore, it also pushed them to make the decisions related to the launch sequencing of drugs, because you can imagine, it makes a big kind of a big difference.

Traditionally, these companies were using spreadsheets and actually homegrown systems they developed in the early days. And when you look at the Model N solution, we brought a solution that we developed over the last, actually, four years to the market. We decided to partner with Salesforce. We developed this product on the Salesforce.com platform, or Salesforce One.

And it has come to be an extremely successful product. As we mentioned, 9 of the top 25 pharmaceutical companies are already as customers. We announced a top 5 pharmaceutical company in the previous quarter, and we announced another one this quarter. And we believe that this trend is going to continue.

I just wanted to go and iterate the importance of this product on a couple of levers. The first one is that 9 of the top 25 top pharmaceutical companies are managing every price that they have across the globe in a multi-tenant (Indiscernible), something that nobody could have predict two or three years ago.

The second one is that the Model N is getting new customers based on this product. And the third one is that that creates a Model N, an enormous opportunity to partner with these companies and further expand our solution to the market.

Perfect. That's great. Thank you. Mark, quick follow-up for you, just in terms of the gross margin line. Again, you noted that best gross margins you've had in four years. Both of those segment lines are improving. Within the context of your guidance for the remainder of this year, how should we think about the progression for gross margins? And ultimately, where do we think about the midterm or longer term target for that line?

Sure, Tom. So as you've noted in the past, we don't guide on gross margin. I think we're very pleased with our success on both line 1 and line 2. We've had continued focus on that as we move through the year, and we will continue to focus on it as we move forward.

I would expect to see some fluctuations from quarter to quarter and continue to drive overall improvement in gross margin as we move forward, especially in line 2. As we've talked about in the past, if we look out into the future, because of the mix change, I would expect gross margins in the future to be over 60% and continue to move to the right as we move ahead.

Perfect. That's great. Thank you guys. Nice job

Terry Tillman, Raymond James

Hello. Good afternoon, gentlemen. Thanks for taking my questions, as well. I guess the first question relates to Revvy CPQ and Revvy Sales. I just really have no idea on how to think about deal sizes. How do they compare to each other, first of all? And then secondly, with these new Revvy Sales wins, are we talking low six figures, mid-six, high six figures, or are they seven-figure deals? Just any kind of idea on how to think about the sizing in some of those early deals. And again, comparing Revvy Sales deal sizes to Revvy CPQ.

Sure. Absolutely. I think first of all, it's too early to talk about (Indiscernible). You have to remember that we sold only two deals with Revvy Sales. We were very excited about these deals, because they happened in a very short period of time.

As you know, we list the product just in December. So this was the first quarter that we sold the product. And this product has an enormous opportunity in the market, because it really makes a huge difference where you have a verticalized CRM that combines best of both worlds in one that is integrated all the way to revenue management. And it's a product and a solution that we have right now that I believe is going to make a big difference for our customers and is going to be very successful for Model N. But I think it's too early to kind of go there.

As related to Revvy CPQ, Revvy CPQ is a product that we target in the beginning as our go-to-market, actually to the small and medium-sized business. And over time, we actually started to get traction with more medium size and large companies. But it's too early for us to talk about the size of deals. And we will share it with you as we get more experience in the market.

Okay. And Zack, I guess, last quarter you had success with the third-largest pharma company globally. And this quarter, you talked about the fifth-largest pharma company. Could we get an update on the deal from the last quarter? Where are you in that implementation? I know it's a SaaS deal. How do we think about the timing of that starting to hit the P&L, and maybe in comparison to when we could start expecting this new big deal to hit the P&L?

Okay. So let me talk about it from an operational point of view, and then I'll turn this to Mark to speak about the financial. First of all, it's not the third- and the fifth-largest pharmaceutical companies. It's two of them are two of the top five top pharmaceutical companies. So we didn't say it's 1, 2 or 3, because then we've disclosed their names. I just want to make sure that these are two of the largest pharmaceutical companies, and we are not going to rank them.

The second one that I'm really glad that you asked this question is this, this company went from signing this deal at the last week in December, to going live, actually in about four months. And when you think about the notion of one of the top three pharmaceutical companies going live on a multi-tenant SaaS platform across the globe in such a short period of time, it's really a world record. And why is that? Because our solution is really one that is emitting the industry. We also use the HI-led deployment mechanism; and working closely with the customer and system integrator, we're able to bring this to deployment in a short period of time. So that's the update about this customer. And I'll turn this to Mark to speak about how it hits the P&L.

Sure, Terry. So not to get specific on the deals themself, but one of the deals is 100% line 2, and the other deal has both line 2 and line 2 elements to it. As we've talked about in the past, again, revenue recognition upon the implementation, which normally begins within a couple of weeks of the deal being executed. So we see impact, or we will see impact going forward, on both of those transactions.

Okay. And Mark, maybe just final question relates to something you can help me with. If we look out over the next couple years at line 2 on the revenue or the income statement, in terms of the revenue segmentation, how much material could it be in terms of this shift from on prem to on demand and your customers shifting to SaaS? How much of a revenue growth engine could that actually be specifically? Thank you.

Sure. And I think Zack probably would want to add color to this, as well. From a numbers perspective, Terry, the answer is significant. We are seeing, as we've indicated earlier in the call, extremely high demand for transactions that are recurring in nature. And we have ability, as we've talked about before, with Revenue Management as a Service, to convert our existing customers to a subscription basis. And obviously, with the large customer base that we have today. That's a significant amount of revenue. So not only from the new customers, but also from existing customers, is a tremendous amount of opportunity to increase our line 2 revenues.

And I just want to say, I believe that we have an opportunity to accomplish what we said we were going to accomplish. And the early indicators from this quarter is particularly strong, which is to do two things, which is through continue to grow the business and to, at the same times, continue the percentage of recurring revenues. So both improving the gross and the quality of the revenues at the same time.

All right. Thank you.

Thank you. We have reached the end of our question-and-answer session. I'd like to hand the floor back over to management for closing remarks.

Thank you again, everyone, for joining the call today. And I am very pleased with the improvement that we have delivered through the first half of our fiscal year, and we plan to continue our momentum across several fronts through the rest of FY15 and into the future. Thank you very much for your interest in Model N and we look forward to speaking with you again soon.

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