Model N Inc (MODN) 2016 Q2 法說會逐字稿

Greetings and welcome to the Model N second-quarter FY16 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, Mr. Sheila Ennis, Investor Relations for Model N. Thank you, you may begin.

Good afternoon. Welcome to the earnings results call for Model N's second-quarter FY16, which ended on March 31, 2016. With me today are Edward Sander, Chief Executive Officer; Mark Tisdel, Chief Financial Officer; and Zack Rinat, Founder and Executive Chairman of the Board.

Our press release was issued after the 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 FY16 performance in addition to our financial outlook for our third-quarter and full FY16.

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 our 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 the 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 not provide any 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 FY16 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 FY15.

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

Thank you, Sheila. Good afternoon and thank you for joining us today. As you'll remember, at our last earnings call, we announced my appointment to Chief Executive Officer and Zack Rinat's new role as Executive Chairman of the Board. I'm thrilled to have the opportunity to lead Model N and appreciate Zach's partnership and support in our transition. He is with us on the call today, as Sheila mentioned, and will join Mark and me for the Q&A.

In addition to discussing our Q2 results today, I also share with you my initial perspective and thoughts about the Company. I set three priorities for my first 90 days. Number one, drive our continued execution against our Company strategy and financial plan for this fiscal year. Two, deeply engage in Model N's business with our employees, customers and partners. Three, continue to build upon our current strategy as a foundation of growth for our future.

I'd now like to discuss how things have gone against these three priorities. Number one, driving continued execution against our strategy and financial plan is of paramount importance. The transition Zach and I have shared has been both deliberate and structured to ensure that it occurred smoothly with minimal impact on our business and did not disrupt the execution of our financial plan.

I'm happy to report that Model N executed well in Q2, exceeding our guidance on both the top and bottom lines. We've made excellent progress against our executing our strategy to concurrently grow revenue while also moving our customers to our cloud solution portfolio and transforming our business to SaaS and Maintenance revenue. In Q2, for the current fiscal year, our revenues were $26.1 million, up 15% from the same period a year ago. Our recurring SaaS and Maintenance revenues grew 64% year over year compared to Q2 of FY15. Both achievements reflect increases over the information we shared with you last quarter.

What's particularly compelling, and I find immensely exciting, is that this quarter Model N reported that 81% of total revenue is now SaaS and Maintenance revenue. This is a 24 point increase year over year versus the stats we shared with you one year ago when only 57% of our total revenue was SaaS and Maintenance. I'm confident in our ability to accelerate and complete the transformation of our business model to SaaS and recurring revenues.

When I asked customers in one executive session at a Rainmaker customer conference about it, their response was not if but when they would move to the cloud. And they asked for our help to do it. Based on our confidence, Model N is raising our targeted ARR range for the year while maintaining overall revenue guidance. Mark Tisdel, our CFO will run through the details and our performance in a few minutes.

The second item was getting deeply engaged in every aspect of our business, and this has been my second biggest focus since joining in February. Since officially joining the Company on February 21, I've spent a significant amount of my time engaging with our employees, customers and partners in the broader Model N ecosystem.

For the last few months I visited our offices in the US and India and met with many of the great people we have in every aspect of our organization. During my first week in the Company, I had the good fortune to meet over 260 of our customers, partners and analysts who were in attend as at our 12th annual Rainmaker customer conference.

At Rainmaker, I was really impressed with the language used by our customers. When referring to their revenue management solutions from us, they called us their second ERP, and said that their Model N solutions were just as important as CRM. These references alone underscored the compelling value our solutions deliver as mission critical enterprise applications.

In March and April, I spent a lot of time on the road meeting many of our key customers around the world, in pharma and high tech to biotech and med tech as well. The opportunity to meet and listen to so many of our partners, customers and employees over the past two months has helped shaped three observations that I'd like to share with you now.

The first is that Model N truly has pioneered the revenue management category and is its acknowledged leader for life sciences and high tech. 17 of the top-20 global pharmaceuticals and 12 of the top-20 semiconductor companies all use Model N to run their mission critical revenue management processes. Over 50,000 users across 120 top-company brands in these industries use Model N solutions. Collectively, Model N processes over $200 billion in customer and supplier sales orders across two million transactions every day.

Second, revenue management is a true mission-critical business process and not a nice-to-have for companies that are serious about maximizing their revenue potential. The market mandate for companies today is about driving growth.

The days where you could build an agenda around initiatives that cut cost alone are gone. More and more, companies are investing to transform their disjointed customer interaction tasks into revenue management opportunities. They're looking for streamlined end-to-end solutions capable of helping them solve this complex problem, and this is exactly what Model N does.

Across the revenue management process, Model N addresses complex pricing, quoting, contracting, rebate, and incentive management needs and everything works together. It's end-to-end, modular, and taylor made for life sciences and high tech. Customers can start wherever they have their greatest problem and know that investment will pay itself forward as they're ready to transform more processes because Model N solutions are cloud-based with cloud performance.

Third, Revenue Management represents a large and growing market opportunity, not just in life sciences and high tech but in manufacturing and beyond. As more companies are looking to get more from their ERP and CRM investments, they are looking at areas like revenue management.

During the quarter we saw successes which I'd like to share. In life sciences, we saw several key wins. Smith & Nephew, one of our new logos, is a $5.4 billion multi-national medical equipment manufacturing company headquartered in London, United Kingdom. They are an international producer of orthoscopy products, among others, sold in over 90 countries.

Last quarter they selected the complete Model N revenue enterprise cloud suite as their global revenue management platform. They needed to replace their disjointed custom and commercial application with an end-to-end revenue management application suite for med tech, and they chose Model N. Leveraging Model N, Smith & Nephew will increase revenue by eliminating revenue leakage, comply with regulatory compliance and reduce costs through greater operational efficiency across their entire global portfolio with one consolidated global system.

Another customer was a pioneering med tech company with multi-billion revenues headquartered in the US, and they selected our revenue enterprise cloud to eliminate revenue leakage driven by significant price pressure. Leveraging revenue enterprise cloud, this company will have global price visibility and drive pricing discipline across their global contracts.

Another, Allergan plc is a $17 billion growth-oriented pharmaceutical based in Ireland, acquired by Actavis, who later changed their name to Allergan plc. In Q1, they bought Model N's Brand and Pay Intelligence, or BPI solutions, for their original Allergan brands. In Q2 they expanded their Model N contract to cover all company brands, inclusive of Actavis and Forest Pharmaceuticals.

Allergan is using Model N BPI as a single-data foundation for the entire company to integrate sales, claims, formulary status and market data to make better sales decisions across six business units and 15-plus brands for over a thousand users. By consolidating these vast volumes of data for their sales and marketing employees, Allergan will maximize net sales through better understanding of discount and concession as well as payer influent across all transactions company wide.

In the last quarter, several of our new customers also signed up for our new Revenue Management as a Service offering, which we call RMAS. Coloplast is a $2 billion international medical device company headquartered in Denmark that makes products supporting ostomy needs, among others. They're sold in 53 countries. They selected our RMAS solution for their commercial and regulatory need because they needed a global solution that was fast and easy to implement as a service in the cloud from the outset, while also leveraging their existing investment.

RMAS is also offered to our customers as a fast, easy and intuitive offering designed to help companies migrate their on-premise revenue management solutions into the cloud.

In Q2, Fresenius Kabi, a long-time model and customer based in Germany that provides products addressing dialysis needs, decided to leverage RMAS to move to the cloud with their on-premise solution with Model N.

Speaking of customers who are quickly able to solve their revenue management need using our cloud solution, I'd like to highlight one final story. A US top-three global pharma customer spoke at our Rainmaker conference regarding their success with our Revvy Global Price Management solution, which we call Revvy GPM.

During Q2, this company was able to integrate within weeks, a recent acquisition of our Revvy GPM solution. Revvy GPM initially replaced a 10-year-old homegrown legacy pricing solution in over 100 countries in only nine months. Their initial implementation of Revvy GPM, and now the recent integrations, are testaments to the speed, agility and reduced total cost of ownership offered by our cloud revenue management platform.

But besides life sciences alone we also saw successes in high tech. Qualcomm is a $25 billion multi-national semiconductor company headquarters in San Diego, California, who most of us know. They design and market wireless telecommunications products around the world with an extremely sophisticated global distribution channel network.

They use Model N's full revenue enterprise cloud revenue management suite for semiconductors designed to address deal management, global price management, channel management and contracts and compliance. Qualcomm is using Model N to improve price execution consistency, quote-to-order conversion rate and eliminate their claims error rate that lead to inaccurate payments reducing overall revenue.

Now as you'll remember in Q1, Model N closed the acquisition of Channelinsight, a leader in channel data management with a strong customer base in the high tech and manufacturing industries. Channelinsight enables Model N to accelerate our strategy for end-to-end revenue management application suites for both direct and indirect channels. The combination of Model N channel management and Channelinsight's CDM provides companies with a leading enterprise-grade end-to-end solution to manage their global channel revenue.

I'm very happy to report that the acquisition has gone well. Model N signed three new customers in Q2 because of this integration effort: [Fit], Sonos and mPhase. These wins with global leaders are strong testament to the market potential for Revenue Management, our vision and our strategy. I believe we'll continue to accelerate our momentum in both life sciences and high tech, domestically and abroad.

Now, I'd like to come back to the last of my top three priorities in these first 90 days and close with a few comments about work we've done to lay the foundation for Model N's future. My time spent with our employees this past two months has clearly shown me that they buy into our mission with passion. It's critical that Model N has the right leadership team in place to join our employees as we work together with our customers and partners to transform how revenue management is done in the industry.

When I started in February, I knew fairly quickly that I wanted to add to the deep and seasoned enterprise software experience we already had in our leadership team. There are many facets that distinguish leading companies at the vanguard of their category, and managing the quality of our customer experience at every touch point is a hallmark behavior of modern cloud solution companies.

Software companies that truly make the transition to cloud understand SaaS and know that they no longer provide product to their customers but a service instead. And just like the utility, it's always on.

Last month, I found two executive leaders to bolster our already strong global team, and we're fortunate to have them with us. Mark Anderson is a true enterprise software veteran with more than 20 years of experience in services-related leadership roles at terrific brands like Vendavo and SAP. He's a deep, domain expert in the CPQ, supplier management and CRM needs across a variety of manufacturing segments and joined us a month ago to run our complete global customer success organization. In this role Mark is responsible for all services, support, education, delivery, and center of excellence teams supporting our customers.

David Miller is another strong hire that we've made to join our product organization. Like Mark, David is no stranger to the enterprise software domain and is a market expert in CRM and complex global SaaS solutions. With two decades of experience in product strategy roles at firms like CA and Seibel pre-Oracle acquisition, we're looking forward to the added muscle David brings to our products organization.

I can't tell you how pleased I am that we attracted key talents like Dave and Mark who will enable us to scale up and meet the tremendous opportunity ahead. Finally, we have just embarked on our annual three year strategic planning process, and I look forward to sharing the output of this process with you in the future.

In closing, I'm encouraged by the results of Q2 for this year and our increased confidence for the rest of this year and beyond. I'm extremely happy to be with Model N as its CEO and lead it forward to capitalize on this enormous market opportunity with our enormously talented team.

I'd like to turn the call over now to Mark to discuss more of our financial results and guidance in greater detail for the remainder of the year. Mark?

Thank you, Ed. Total revenues for the second quarter were $26.1 million, above our guidance range of $25.4 million to $25.6 million. This is up 15% from $22.7 million in total revenue in the year-ago period.

Also, recurring SaaS and Maintenance revenues were $21.2 million for the quarter, up 64% from Q2 2015 and represented 81% of total revenue. License and implementation revenues were $4.8 million. Our shift towards recurring revenue is progressing very well, and Q2 represented the second consecutive quarter where SaaS and Maintenance revenues were a record 81% of the total revenue. The Q2 achievement was a 2,400 basis point improvement from the 57% of total revenue last year.

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 the earnings press release issued earlier today.

Gross profit for the second quarter was $13.1 million compared to $13.5 million in the second quarter of FY15. Similar to recent quarters, gross margin this quarter included an impact of roughly $700,000 from the amortization of capitalized software that began upon the launch of our Revvy CPQ product. Overall gross margin in the quarter was 50% compared to 60% in Q2 of last year.

As mentioned previously one of the key elements to the decrease in gross margin percentage is the short-term impact of the transition to the SaaS model. We continue to expect our gross margin to show further improvement as we migrate to a higher percentage of revenue to SaaS and Maintenance revenues.

Also, as we discussed previously, we expect Q2 to be the low point during this transition as it is the first quarter of the calendar year; however, as we've stated in the past, we do expect some quarter-to-quarter variability in gross margin depending on the mix of revenue and other factors.

Research and development expense was $6 million compared to $4 million in the second quarter of FY15. We are continuing to invest in both new and existing products. Our capitalized software in Q2 2016 was less than $100,000, down $600,000 from Q2 2015.

Sales and marketing expense of $7.5 million compared to $7.1 million in the year ago period, as we continue to invest in sales and marketing personnel and marketing program spend. G&A expense was $5.2 million compared to $4.1 million in Q2 of FY15.

Operating loss for the period was $5.7 million compared to a loss of $1.7 million in Q2 of last year and better than our guidance of an operating loss of $6.8 million to $7 million. Net loss in the second quarter was $5.7 million compared to a net loss of $2 million in the second quarter of FY15.

As we have discussed we're experiencing larger losses versus years prior as we are transitioning to a pure SaaS business model. We produced a net loss per share of $0.21 based on the share count of 27.2 million shares compared to a net loss per share of $0.08 based on a share count of 25.9 million shares in the second quarter last year. This was better than our guidance of a net loss of $0.25 to $0.26 per share. Also, we expect our operating loss and our net loss per share to improve as the transition continues to mature.

Adjusted EBITDA for the second quarter was negative $4.5 million compared to a negative $800,000 in the year ago period. We ended the second quarter with $70 million in cash and cash equivalents down slightly from the $70.4 million at the end of the first quarter. We believe we are on target for the $70 million to $72 million in cash balance at September 30, 2016 as we guided on the fourth quarter FY15 conference call.

At the end of the second quarter, our accounts receivable balance was $22.5 million and our deferred revenue was $32.4 million, both record highs for the Company. As previously mentioned, we believe our accounts receivable and deferred revenue balances are not meaningful indicators of the business activity during a particular quarter as the timing of invoicing under contract impacts these items because we do not bill our customers upfront for total contract value.

For the second quarter, cash flow used in operations was $900,000, which after adding CapEx of approximately $700,000 and capitalized software of $100,000 produced a negative free cash flow of $1.7 million. This compares to cash used in operations of $3.8 million in the second quarter of last year, which after adding approximately $300,000 of CapEx and capitalized software of $700,000 produced a negative free cash flow of $4.8 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 is impacted by the timing of invoicing under our contracts.

Moving on, let me now outline our guidance for the third quarter of FY16 as well as our expectations for the full FY16. For the third quarter ending June 30, we expect total revenues to range from $27.2 million to $27.5 million. Non-GAAP loss from operations in the range of $5.6 million to $5.4 million. This would lead to a non-GAAP net loss per share in the range of $0.21 to $0.20 based on a weighted average count of 27.6 million shares.

For the full FY16, we expect total revenues to range from $106.5 million to $107.5 million or growth of 14% to 15% for the year as a whole, which also included approximately $7 million in revenue from our channel data management product we acquired from Channelinsight. Non-GAAP loss from operations in the range of $17.5 million to $17.2 million. Non-GAAP net loss per share in the range of $0.65 to $0.63 based on a weighted average count of 27.3 million shares.

The ARR is now expected to range from $37.5 million to $38.5 million, up from $36 million to $37 million we shared on the last call, an increase of 93% to 98% over FY15. Please note we define annualized recurring revenue as the monthly recurring revenue at September 30, 2016 multiplied by 12.

In summary, we produced a record quarter in deferred revenue, accounts receivable as well as recurring revenue absolute value and as a percentage of total revenue. We have seen a 64% year-over-year increase in SaaS and Maintenance revenues versus Q2 of 2015 and 81% of our total revenues in Q2 2016 where SaaS and Maintenance revenues.

Our ARR bookings continue to increase as we accelerate our drive to SaaS and Maintenance revenues. As we saw from our customers at our annual Rainmaker conference, we have a great opportunity to continue to accelerate the transformation of the business and move towards profitability.

Finally, we also announced, after the close today by the way of 8-K, that Mark Garrick is leaving our Board. Mark has been a Board member and member of the Audit Committee for over eight years. His insights have been extremely valuable as we navigated from the dual transitions from private to public and from a license to a SaaS business model. We thank him for the enormous contributions and wish him the best in his future endeavors.

We will now open the floor to your questions.

(Operator Instructions)

Brian Peterson, Raymond James.

Thank you, guys, and congratulations on the good quarter. Want to hit on CPQ. How strong was that this quarter? And as the pipeline -- as you see that post the Rainmaker conference, anything interesting, and how additive do you think that could be to the TAM over the next couple of years?

So I'll start, Brian. First of all it's really great to meet you on the call today. This is Ed speaking.

In general, we had really broad interest across the entirety of the portfolio at the Rainmaker conference. I think that was really one of the hallmark things I walked away with when I sat with Zach speaking to all of the customers that we did. Not only was there interest in the CPQ offering but also the CLM offering and the other solutions that we have in the portfolio. Certainly, it is an important part of the overall portfolio. We do have interest. I've talked earlier about one of the customers.

But the totality of the interest, really, that I walked away with from the Rainmaker conference was not in any one individual solution. It was in the overall solution suite and the opportunity for any customer to jump into that suite at a point in time that reflected the business need they had. I didn't really see any specific focus on one solution over the other.

Okay. Got it. Mark, maybe one for you. On the gross margin outlook, I know you gave some commentary 52% to 53% for the year at the analyst day, a few quarters ago. Is that still the right way to think about full-year margins, and how should we think about that progression over the next couple quarters? Thanks.

Sure, Brian, thanks for the question. Number one, we are definitely on track to what we shared, and we have great visibility into the model as we move into the second half of our fiscal year and towards FY17. We talked earlier at the analyst day about the migration of the recurring revenue model and the impact it would have on revenue and gross margins. We've also talked about the investment in cloud and related infrastructure. So we continue to make those investments in the Company, but I'm very confident about our migration towards the numbers we shared on the call.

Great. Thank you.

Tom Roderick, Stifel.

Yes, hi, Matt VanVliet on for Tom this afternoon. Thanks for taking my question, and, Ed, welcome to the call. First off, just looking for more of a big picture. Since you've been on board, what things have you identified as potential changes, whether it's in go-to-market or you named a couple of new executives just maybe building out the management bench. Just a couple areas that you've maybe identified as something that can be further developed?

Matt, really good to meet you on this call this first time. I think there are three things that really were the observations that I'd have on what I've seen in the market over the last two months and how that may bode for Model N. The first point is I think it's long been discussed in enterprise software, going all the way back to my days at SAP. You usually see a blip of interest in point solutions, but there very quickly becomes a distinction for firms when they're looking for enterprise solutions. And by enterprise, I mean it's firms that offer not only best of breed point solutions but really the opportunity to integrate those solutions into one overall suite.

There's so many examples of firms that have come to market with point solutions really only to fall by the wayside that are able to offer a much better value proposition because they have a series of solutions that can reflect a journey of problems that customers may have. Like I said in my comments, that's the identity of Model N. So I'm really excited about the positioning that we have in the market because I think the market is there. They're moving towards that type of end-to-end focus.

In terms of future changes it's 60 days, so right now we're focused on executing against our business and fiscal plan for the current fiscal year. That is the top priority.

The other thing that I'm focused on actually kind of goes into the second part of your question. I had two opportunities to really add strength to our leadership team. Now first of all, I need to congratulate them because I couldn't have walked into an opportunity to work with a better team. We've got a very strong and capable set of executives. But the opportunity to add Mark and David Miller to the team I think is really going to help us accelerate and double down.

The only area that I would offer is I am looking to add a similar executive, of their caliber, to the team to focus on global human resources. It's an area that will complete the overall senior team and also help us prepare to scale and grow the organization.

Great. Thank you. Then looking at the demand across the market, I feel like recently there's been a lot of talk about the global price management and the various compliance issues around that reference pricing. Do you feel like that's really driving business in the pharma world, and maybe even medical devices? Or is that just something that's been a little stronger but maybe is not indicative of the overall largest driving forces for the business right now?

I think it's a key and acute need that firms in the pharma space are really wrestling with. Look, there's been a lot of M&A activity in the space that's occupied headlines. Any time an individual firm acquires another that's an entirely new price book, an entirely new set of protocols and processes and portfolios that they are trying to integrate. It's a massive endeavor, and I think it's one of the reasons why we've seen increased demand for our global price management solution.

I want to touch on the compliance issue. Every organization has their own set of processes for how they demonstrate that they are compliant with a regulatory requirement in any part of the world. There are always different points of views.

Any time that organizations are either moving into the new segment of the world, they're introducing new product portfolio or they're going through an accretive event, like an M&A event, it introduces risk and exposure. And that's another reason why I believe that we've seen an increased uptake in our global price management solution. I really don't think that's going to stop, Matt.

Look, I came from a company that was all about compliance and helping organizations of all shapes and sizes improve their ability to satisfy regulatory requirements. I think that's an area of significant opportunity for Model N, and it's one that I'm personally going to bring my experience to help us explore further.

Great. Thank you.

Sterling Auty, JPMorgan.

Yes, thanks. Hi, guys. Sorry about the background wind noise, if you can hear it. Just wondering in terms of you talked about the accelerating ARR bookings and billings. Just curious what you're seeing in terms of customers taking more of your solutions at once in each of those deals versus doing bigger deals covering more of their company?

Sterling, hi, this is Ed. Really great to meet you this first time on the call. I'll just start with my observation, and then I think of Mark is wanting to chime in as well.

I think that there are two things at play here. Again, I'll reflect it back to the usual trends that you see in enterprise software. Companies will purchase multiple point solutions when they have bought into -- when they have a long-term strategy and vision for solving a much larger problem. We help customers solve their revenue management problem. There are multiple chapters in that story and that journey.

We've seen an increased uptake, which I'm very pleased about with customers that are willing to purchase, not just a point solution from Model N, but several. And in some cases, like I mentioned in my comments, our entire suite.

There are reasons why they do that. It's because they have organization maturity and they are able to do that internally. They have their processes and the people in place. Also, they are often signing up for a multi-year implementation plan. They are making a bet on a partner for the longer term.

We're starting to see that maturity come into life sciences and high tech, which is one of the reasons I'm so excited about our solution offering because I think it is that kismet: right inflection point within the industry for solving problems like the ones we solve and the offerings that we have to help them with it.

Hey, Sterling, it's Mark. I'd like to emphasize also on Ed's point, and we disclosed earlier on the call a couple things. Number one is we have eight new customers this quarter; that's a record for us. I think that really validates where we are in the industry. We're selling to all size customers across all product lines. As Ed indicated, we're solving a very complex problem. We also have a strong sales into our existing customer base as well. So I think back to Ed's point, it's a great opportunity for us to execute on.

Do you see any real key differences in terms of the tone of your customer spending behavior geographically?

Overall, Sterling, I don't think that I've seen any significant shift in the historical purchase patterns within the Model N customer base. Overall, that's been guided really by the focus that we apply to the different markets and the environment, but I see consistency so far, which is a good thing for the Company.

Got it. Thank you.

Patrick Walravens, JMP.

Hi, this is Natasha on for Pat. My question is, last time we spoke we adjusted life sciences side of business and how the space is consolidating and you were expecting M&A to continue in that sector. Do you have any progress or update on that side of business?

Natasha, this is Ed. Really good to speak with you today. Look, I think we've all seen a lot of headlines recently about M&A that's been happening in life sciences. There were two existing customers of Model N's that were coming very close, and we were very much looking forward to helping them through that process but they decided to unwind it. Today, there was a very topical headline also by one of our customers about a rumored M&A event.

In general, you'll see that I'm not really speaking about direct brand names. We just simply have a policy that we usually don't comment on the M&A activity of our customers.

In general, do I expect to see it continue in the industry? Certainly, and I see that as a very good thing for Model N.

This is Zach. Just to add, when Ed spoke about the customers for the quarter and our transactions, you can notice there was this global three pharmaceutical companies that acquire another company and they use the global price management as the platform for the consolidation. Then we spoke about Allergan and comes from a consolidation of the solution that they had between Actavis and Allergan coming together. So when you look at the industry and the M&A activities, Model N is a real partner, as Ed mentioned, for the consolidation. And as this is going to continue, we're going to work with our customers because it provides us, actually, more opportunities to provide them with the platform for consolidation.

Sounds good. Thank you.

(Operator Instructions)

Chad Bennett, Craig-Hallum.

Great, thanks for taking my questions. Nice job on the quarter, guys. Mark, I know you don't like to look at deferred revs as a predictor of the future, but deferred revs were up just under $5 million on a short-term basis this quarter sequentially, which is as good as at least I've seen it. Any kind of color there on what drove that? Was it larger deal sizes or have terms changed dramatically from a billings standpoint?

Hey, Chad, it's Mark. Good to hear from you, good question. No, I think as we've stated before, we don't feel it's a meaningful indicator of the business. That's primarily because we've talked about the timing of the bookings and the timing of invoice that may roll from one quarter into another quarter. We were just very focused on strong sales execution in the quarter and getting the invoicing out, and I think that was the indication of where we landed from a deferred revenue perspective.

Okay. The increase in the ARR growth for this year, can you give us an update on how you're thinking about that 90% plus or -ish ARR growth, the mix between existing customer growth in that number versus new customer growth?

Sure, actually the growth has been strong. We originally guided for $34 million to $35 million for the year; we raised it to $35 million to $36 million. And now we raised it again from $37.5 million to $38.5 million, so we've had good growth in that area this year. Its been really across both areas. It's in both new and existing customers. I don't think we've been surprised by either side, and it hasn't been more so new versus existing.

Okay. Last one for me, so if you back into your fourth-quarter guide, Mark, we're basically going to have an earnings number that's south of -- an earnings loss number, I should say, that's south of a dime It's more like $0.06, $0.07 loss. You're predicting for the fourth quarter, which is a pretty significant decrease from where you've been running at. The revenue is kind of the revenue. What's really going to drive that type of EPS improvement in the fourth quarter?

Absolutely. Again, you're looking at what would be implied Q4 guidance, so we have not guided to Q4. But I do understand the math on how you got there, and I can say this. We have net -- and these are our EPS and revenue guidance for a number of quarters in a row. We have very strong visibility into our revenue and expenses for the next two quarters. Again, we maintained our annual guidance from both the top and bottom line, so what I can say is we have very strong visibility into the revenue performance over the next two quarters.

Okay. Then, one last question for me, sorry. Ed, maybe -- whoever can touch on this. How many of your life sciences customers today have multiple products or modules?

We don't share that statistic. We have not disclosed that traditionally. Again, one of the issues that you have in that question, Chad, is what the definition of a product is. We sell individual products, we sell suites and we sell different products from different areas. So it's a hard question to answer, but I think a lot of our -- I would say that a lot of our customers purchased a lot of our products. And there's still a lot of up-room for us to sell in the future.

Okay. Great. Nice job again, guys.

This does conclude our question-and-answer session. I'd now like to turn the call over to Ed Sander, CEO, for closing remarks.

Everyone, I really want to thank you for joining us today. It was a pleasure speaking to all of you. And Mark and I are looking forward to seeing you at some upcoming conferences. On May 25 we're going to be at the JPMorgan Technology Conference in Boston. And you'll see us in early June at two other conferences. We'll be at the Craig-Hallum conference in Minneapolis as well as the Stifel Technology Conference here in San Francisco. With that, thank you very much.

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