Model N, Inc. (NYSE:MODN) Q1 2023 Earnings Call Transcript

Model N, Inc. (NYSE:MODN) Q1 2023 Earnings Call Transcript February 7, 2023

Operator: Greetings, and welcome to Model N’s First Quarter Fiscal 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Carolyn Bass, Investor Relations. Thank you. You may begin.

Carolyn Bass: Good afternoon. Welcome to Model N’s first quarter and fiscal 2023 earnings call. This is Carolyn Bass, Investor Relations for Model N. With me on the call today are Jason Blessing, Model N’s Chief Executive Officer; and John Ederer, Chief Financial Officer. Our earnings press release was issued at the close of market and is posted on our website. The primary purpose of today’s call is to provide you with information regarding our first quarter of fiscal 2023 performance and offer an outlook for our second quarter and fiscal year ending September 30, 2023. The comments made on this call may include forward-looking statements. These forward-looking statements are based on management’s current views and expectations as of today and should not be relied upon as representing our views as of any subsequent date.

We disclaim any obligation to update any forward-looking statements or outlook. Actual statements may differ materially. Please refer to our risk factors in our most recent Form 10-Q filed with the SEC. In addition, during today’s call, we will discuss non-GAAP financial measures. These non-GAAP financial measures should be considered in addition to, not as a substitute for or in isolation from, GAAP results. Reconciliations of the non-GAAP metrics to the nearest GAAP metrics are included in the earnings release we issued today, which is available on our website. I encourage you to visit our Investor Relations website at investor.modeln.com to access our first quarter fiscal 2023 press release, periodic SEC reports and the webcast replay of the call today.

Finally, unless otherwise stated, all financial comparisons in this call will be made to our fiscal year 2022 results. And with that, let me turn the call over to Jason.

Jason Blessing: Thank you, Carolyn, and welcome to our call today. I’m pleased to report that our first quarter results beat expectations on total revenue and subscription revenue, and professional services came in at the high end of our guidance range. I’m very proud of our team and the strong quarter that we posted to start the year. As we look ahead, we remain committed to driving profitable growth throughout the year. I’d like to highlight two important Q1 metrics that stand out to me. First, our SaaS ARR grew by 36% year-over-year. In addition, our remaining performance obligations, or RPO, which reflects the strong visibility into our business, grew 32% year-over-year. In short, we had a good start to our fiscal year. Now I’d like to share some of the business highlights from the quarter.

Success in Q1 was driven by a healthy contribution from all areas of the business. We signed new logos, closed a meaningful new SaaS transition, saw numerous customer base expansions, and we also enjoyed strong renewals across the board. Starting with SaaS transitions. During the quarter, we signed a top 10 global pharma company and a longtime Model N customer to begin their cloud journey with us. Our SaaS platform will allow them to take advantage of Model N innovations more quickly and cost effectively as well as give them access to the latest regulatory updates. This win is just the latest example of Model N’s industry standard revenue management and compliance platform helping global pharma companies to operate more efficiently. I’m personally sitting on the steering committee for this project and look forward to partnering with this customer to achieve their Model N objectives.

In Life Sciences, we also posted wins with several new logos. In Q1, we signed Lantheus as a customer. Lantheus is an established leader in the development, manufacture and commercialization of AI-powered diagnostic and therapeutic products. Lantheus sought a best-of-breed solution to address their revenue optimization and compliance challenges, which had grown in scale and complexity due to acquisitions and new product launches. This win includes U.S. government and commercial contracting as well as State Price Transparency Management. This suite of products is critical to managing the increasingly complex regulatory environment while also helping our customers maintain commercial and regulatory compliance. Model N was also selected because of our deep experience in global pricing and our successful track record of integrating with SAP.

During Q1, we also signed Kate Farms as a new logo. Kate Farms offers products that help support the nutritional needs of people with a variety of critical health issues. Kate Farms required a comprehensive solution to help their flexible approach to contracting and pricing as well as a system to help with compliance, membership management and tracking chargebacks and rebates. They selected Model N based on our industry-leading solutions, our domain expertise and track record for quality project delivery. This win also shows our ability to expand to a close adjacency to our core pharma market. During the quarter, we also enjoyed strong expansions in our Life Sciences customer base. One such example is at AbbVie, a top 10 global pharma company.

Following the mega merger of pharma giants, AbbVie and Allergan, AbbVie expanded their investment with us to fold Allergan into AbbVie’s Model N platform. This is another great example of where Model N is once again being chosen as the standard for a top 10 global pharma company that is growing organically and through M&A. Turning to High Tech. We continue to leverage our leadership position in the semiconductor industry by extending into other adjacent segments. Further, our land and expand strategy is paying dividends, and during Q1, we closed several upsell opportunities in High Tech. One example is Solidigm Technology, a global provider of flash drive technology that was spun out of Intel. At the time of the spin-out, Solidigm selected Model N as one of their core business systems.

After successfully going live on Revenue Cloud and Channel Data Management, Solidigm has continued to expand their usage of Revenue Cloud and recently added Global Pricing and Deal Management modules. As you may recall, we signed Solidigm as a new customer just a year ago, and it’s great to see this global company live on Model N and continuing to expand their usage. During the quarter, we also expanded our relationship with Enphase. Enphase is a technology company that develops and manufactures solar micro inverters, battery energy storage and EV charging stations. In Q1, Enphase expanded their Model N footprint by adding additional Channel Data Management partners to support their ongoing growth. Enphase is also a great example of how our High Tech solutions can be leveraged in adjacent markets that involve complex technical components and distribution channels similar to the semiconductor industry.

Turning to professional services. Our team had another very strong quarter to kick off the fiscal year. Professional services demand remains near an all-time high, and our backlog continues to be very robust. Following Model N’s latest product release, we had several customers take this update during the quarter and successfully go live. This update includes a new payment management solution for High Tech companies as well as improvements to our Global Price Management application for pharmaceutical and med tech companies. A large cohort of our customers went live on this update during Q1, which once again proves out our core SaaS value proposition of keeping our customers current and leveraging our latest innovation. Speaking of successful go-lives, we continue to do a terrific job of getting new customers live on time and on budget.

The latest example of this is Moderna. As you know, Moderna is a leading pharmaceutical and biotechnology company that focuses on combating disease by leveraging its mRNA vaccine platform. As Moderna’s business grew during the pandemic, they needed a solution to help them scale their Revenue Management processes. We started our journey with Moderna in EMEA with Global Price Management and international reference pricing, which helps companies make more informed decisions on how to price and sequence product launches across countries. Moderna then added our Global Tender Management product to more effectively distribute their products in EMEA. Then in Q1, Moderna turned to Model N Business Services to support its U.S. commercial operations. This is a great illustration of how we can land and expand and how our flexible delivery model allows us to tailor solutions based on how a customer wants to consume our Revenue Management products.

During the quarter, we also released our fall 2022 product update. This latest release demonstrates our commitment to continued investment in our industry-leading products and to deliver continuous innovation to our customers on our cloud platform. Highlights of this release include a new customer value dashboard that shows real-time savings and processing volumes in Model N. This is a great example of us delivering on our data and analytics vision. We also delivered enhanced features to help pharma companies better manage drugs coming off patent protection. We made several regulatory updates to support Medicaid changes, and we also delivered a new analytics application to help better visualize deal profitability. Finally, earlier today, we issued our new 2023 State Of Revenue report.

This marks our fifth annual report, which identifies pressing challenges and opportunities for pharmaceutical, medtech and high-tech manufacturers. This report is based on the result of a survey of more than 300 C-suite executives directly responsible for revenue management. As organizations continue to navigate the current economic climate, the quality and reliability of technology solutions are more important than ever. The top three highlights from this year’s report include, supply chain disruption is the number one theme impacting revenue management for the second year in a row. Second, 70% of executives believe their industry is losing billions of dollars due to issues like inaccurate or ineffective pricing and quoting. And finally, 96% report that staffing and expertise issues negatively impact their revenue management processes.

These insights help us understand how to empower our customers to create and bring their life-changing products to market. I encourage all of you to read the 2023 State of Revenue report by downloading it from our website at modeln.com. Let me conclude by saying that I’m pleased with our continued execution in this environment and I am proud of the strong SaaS ARR growth that we posted, while also showing leverage on our bottom line. I would also like to thank our customers who continue to partner so closely with us, and of course, these great results are a reflection of the great model enters around the world and their dedication to our DARE core values and company culture. We kicked off the year with a solid Q1 and I am excited about the year ahead.

With that, I will now turn the call over to John to discuss our Q1 financial results and provide guidance for Q2 and fiscal year 2023. John?

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John Ederer: Thank you, Jason, and good afternoon to everyone on the call today. As Jason noted, we had a solid start to fiscal 2023, and we believe that we are right on track for the full year. The first quarter was a continuation of the key themes that we’ve been highlighting about the business. One, our balanced approach of delivering both revenue growth and improving profitability, and two, the emergent strength of our underlying SaaS business as demonstrated by our SaaS ARR growth, net retention and RPO growth. Looking specifically at our financial results for the first quarter. Total revenue grew 15% to $59.2 million, which exceeded the top end of our guidance. Subscription revenue increased by 16% to $44.2 million and also exceeded the upper end of our guidance range.

Lastly, professional services revenue grew by 11% year-over-year to $14.9 million and was at the upper end of our guidance range. In terms of our profitability, please keep in mind that we’ll be discussing non-GAAP numbers and a full reconciliation of our results is provided in our earnings release. For the first quarter, total non-GAAP gross profit was $36.1 million, representing a gross margin of 61% versus 60.3% in Q1 last year, an improvement of 70 basis points. Non-GAAP subscription gross margin continued to improve, hitting 69.3% compared to 67.6% in Q1 of the prior year as SaaS revenue increased as a percentage of total subscription revenue. Non-GAAP professional services gross margin was 36.2% compared to 39.7% in Q1 last year. As we have said for several quarters now, operating north of 40% gross margins on our Professional Services business was not sustainable, and we would expect this year to be more in line with what we saw in Q1.

As Jason mentioned, this is not a change in demand. In fact, our professional services backlog remains robust, but rather the challenge is managing the mix of resources required for specific projects and avoiding over utilization. Adjusted EBITDA was $9.1 million, an increase of 27% from the first quarter of fiscal 2022, and within our guidance range. Adjusted EBITDA margin improved to 15.4% compared to 14% in the first quarter last year. And finally, non-GAAP net income was $8.7 million or $0.23 per share, which was at the high end of our guidance. Key driver of our results in the first quarter, and our business overall is the accelerating transition to SaaS revenue. For Q1, our SaaS ARR reached $115.8 million, which was an increase of $30.4 million over Q1 of last year.

Our SaaS ARR growth rate has been accelerating over the last couple of quarters from 24% in Q3 to 31% in Q4 and now 36% in Q1 as we are benefiting from SaaS transitions. In addition, our SaaS net retention number hit 134% in Q1, which reflects our ability to successfully cross sell and upsell customers, but it is also getting a boost right now from SaaS transition activity. As we noted on our last call, SaaS revenue represented 60% of total subscription revenue for the full year of fiscal 2022. In Q1, this ratio improved with SaaS revenue contributing 66% of our total subscription revenue, another proof point that our transition to SaaS is accelerating. In terms of the balance sheet, we ended the quarter with $175.2 million in cash and equivalents, which was down from the end of September but in line with our typical Q1 seasonality, due to the timing of our annual bonus payouts and the biannual interest payment on our convertible debt.

Current deferred revenue of $67.1 million was up $4.8 million sequentially versus Q4 and up $9.1 million versus last year. At a high level, we’ve been seeing increases in SaaS deferred revenue, partially offset by declines in maintenance deferred revenue. As a reminder, deferred revenue can fluctuate depending on invoicing cycles, the timing of renewals and other factors. In addition to deferred revenue, we also focus on RPO or remaining performance obligations as an indicator of the future predictability of our business. For Q1, our total RPO grew to $339.7 million, which was up 32% on a year-over-year basis. The current portion of our RPO balance was up to $144.5 million, representing growth of 17% year-over-year. The key driver of our total RPO has been the success we’ve been having with SaaS transitions, which tend to be larger longer-term deals.

In terms of our outlook for the remainder of fiscal 2023 for the second quarter, we expect total revenue to be in the range of $59 million to $60 million with subscription revenue in the range of $43.5 million to $44 million and professional services revenue in the range of $15.5 million to $16 million. We expect adjusted EBITDA to be in the range of $6 million to $7 million. And for non-GAAP EPS, we are expecting a range of $0.15 to $0.18 per share based on a fully diluted share count of approximately 43.3 million shares. For the full year of fiscal 2023, we are raising our outlook for subscription revenue and total revenue reflecting the strong SaaS performance in Q1, and reiterating our guidance for adjusted EBITDA and non-GAAP earnings per share, which calls for continued margin improvement versus last year.

In summary, for fiscal 2023, we expect total revenue to be in the range of $242 million to $245 million, subscription revenue to be in the range of $179 million to $181 million and professional services revenue to be in a range of $63 million to $64 million. We expect adjusted EBITDA to be in the range of $37 million to $40 million and non-GAAP EPS to be in the range of $0.90 to $0.97 per share based on a fully diluted share count of approximately 43.7 million shares. A few reminders regarding our guidance for the second quarter and fiscal 2023. First, there are some seasonal elements to the second quarter, including two fewer days of subscription revenue compared to Q1 and increased expenses for payroll taxes and other benefits. Second, we adopted new accounting standards at the start of the fiscal year with regards to our convertible debt, and the fully diluted share count includes approximately 5 million shares for the as if converted method versus the traditional treasury method.

Finally, our guidance reflects the ongoing transition of our business model, which is driving accelerated SaaS ARR growth, but partially offset by steeper declines in maintenance revenue. On our earnings call last quarter, we noted that we expect maintenance revenue to decline by 30% or more in FY2023. While we do not provide specific guidance on SaaS ARR, we do expect the growth rate to be at an elevated level again in Q2 due to SaaS transitions and an easier comparison to last year with more moderated growth in Q3 and Q4 as the year-over-year comparisons get more difficult. For the full year, we expect SaaS ARR growth to be comfortably above our long-term target of 20%. We also expect SaaS net retention to follow a similar trend to SaaS ARR growth over the course of this year.

In summary, we executed well in Q1 and believed that we are on track for the year. We continue to build strong momentum in our SaaS business as evidenced by SaaS ARR growth, SaaS net retention, and RPO metrics and we remain committed to continued improvement on profitability. With that, I’ll turn the call over to the operator for any questions. Operator?

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Q&A Session

Operator: Thank you. Our first question comes from the line of Matt VanVliet with BTIG. Please proceed with your question.

Matt VanVliet: Yes. Good afternoon. Thanks for taking the question. I guess, when you look at the remaining pipeline of potential SaaS transitions for existing customers, how €“ I guess, how much of the overall workloads out there do you feel like you’ve gotten through? And maybe more importantly, as you announced another new top 10 pharma here, any major logos that you haven’t yet gotten to migrate that we should think about going forward?

Jason Blessing: Matt, good afternoon. This is Jason, I’ll answer that. So yes, a couple of data points I’ll share. So as we talked about at the beginning of last fiscal year, we were at 50% of our customers who had either transitioned or started their transition. And then just a quarter ago, we said that number was now 70%. And so we’ve got 70% plus now with this quarter under our belt of customers that have made that transition or are in the process of transitioning. And we do have an end-of-life date that’s looming at the end of this year, where we will stop providing regulatory support for our products. And so that’s a pretty good carrot for that remaining, call it, 25% to 30% to move this year, and we’ve got pretty good visibility into that.

So we continue to make progress. This was an important quarter for us because it was one of our few remaining top 10 customers to move. And we just continue to be bullish on the progress that we’ve made on SaaS transitions and the effect that’s had on our business model.

Matt VanVliet: And maybe just a secondary question there. Are you seeing the macro impacting the willingness of any of these customers to take on the migration projects, or maybe conversely knowing that the efficiencies and sort of future-proofing the platform are there, that maybe it’s speeding things up due to the macro? Just kind of curious on how the overall economy is impacting the decision-making.

Jason Blessing: Yes. Certainly, with respect to SaaS transitions, the macro has not become an issue in those discussions. Pharma companies just cannot afford to go unsupported on one of their core regulatory and compliance platforms. So SaaS transition certainly continued to be prioritized very highly within our customer base. And maybe just a comment more broadly on macro. We certainly haven’t seen any major changes in demand signals, particularly in life sciences. And I’d say high-tech also continues to be strong as there’s some pent-up demand coming out of the pandemic and companies coming back and inventory issues and channel issues coming back to the table and investing. So not a huge impact for us in our first quarter.

Matt VanVliet: All right. Great. Thank you.

Operator: Our next question comes from the line of Joe Vruwink with Robert W. Baird. Please proceed with your question.

Joe Vruwink: Thanks. Hi, everyone. Maybe I’ll start going back to the anecdote on Moderna choosing Business Services this quarter. How common does that tend to be, I guess, the question is uptake of Business Services within the Revenue Cloud installed base? And then maybe part B to the question, one thing that popped up in the State of Revenue Report, was, I think, added constraints when customers are asked about the available consultants or contracting resources they have out there. Do you think that might actually lead more potential customers your direction since you have an established franchise that can provide those services?

Jason Blessing: Joe, this is Jason. That’s actually a great question. We have actually started to see this pattern materialize around a mix of business services and software products in the customer base. Moderna is not the first. We’ve had a few previously. But we’ve also talked about €“ I’m not sure what logos we’ve mentioned, but we have started to see this pattern in the base. And Moderna was interesting, because their Global Tender Management use in Europe is being driven out of a fairly well staffed, strong tenders group there, but the market access function here in the U.S. is fairly nascent, believe it or not, for Moderna, and so the Business Services proposition €“ value proposition resonated very strongly with them.

And then yes, interesting you pick up on that people component of the State of Revenue Report. And as I said and as John said, we continue to see very strong demand for our services across the broader portfolio of services that we offer, and customers really are coming to us for that domain expertise and as a strategic addition to their teams to help them with their needs.

Joe Vruwink: That’s great. And then I’ll stick with the data revenue report because there is just a lot of detail in there. A few things that I thought were interesting actually pertain to how customers could be using more of Model N. So I suppose this is a net retention question, ultimately. But two specific areas that were highlighted. One is that by geography, if you tend to use a dedicated solution for that geography, so not kind of one consolidated or platform-based source. And then second was just the overall interest around analytics associated with your revenue management. I would guess that these are relatively small contributors to net retention today. Where does this go? Could these be bigger contributors in some sort of near-term time frame?

Jason Blessing: Yes. I’ll make a couple of qualitative comments on that. As we’ve talked about in past calls, we’ve definitely been investing in Europe and have a small but mighty team there that is driving some of these victories. And I think one of the things that’s interesting when you look at Moderna as an example, Baxter was another one earlier this year, big name brand companies where we landed in Europe and sold to a different segment of the company and then moved to €“ excuse me, moved to the U.S. And so it is not atypical to have the buying be geographically centralized like we saw in those two cases. And so having dedicated products and teams that can cater to those needs is certainly important. And then I would say on the analytics front, we haven’t even scratched the surface of that yet.

We do have some products in the market today, international reference pricing in Europe, a product that helps customers make better decisions on how to price and sequence launches across different geographies is a very interesting analytic product that we offer and I think is a great example of what’s to come. And coincidentally, that was actually one of the initial products that we landed at with Moderna in Europe. So when you look at the net dollar retention today, as John talked about in his remarks, it is getting a little bit of a boost from SaaS transitions. It’s getting a boost from a lot of the cross-sell and upsell that we pull through on SaaS transitions. But in terms of major geographic expansion and analytics, that’s really €“ I think of that more as a future opportunity and something that’s not really driving that number today.

Joe Vruwink: Okay. Very good. I’ll leave it there. Thank you.

Jason Blessing: Thanks, Joe.

Operator: Our next question comes from the line of Chad Bennett with Craig-Hallum. Please proceed with your question.

Chad Bennett: Great. Thanks for taking my questions. Nice job again on the quarter. So just €“ Jason, I don’t think I’ve heard a ton from you or a lot from you on adjacencies in life sciences and high-tech. And I know you pointed out a couple on the call that looked very interesting. Can you talk about, I guess, from a pipeline go-to-market standpoint, how long or how far along we are in really looking or approaching these adjacencies and maybe what the opportunity is for Model N, because I think it’s something that €“ I know you’ve been laser-focused on the core life sciences biz and core semi high-tech biz since you got there, but it seems like something that’s opening up a bit.

Jason Blessing: Yes, it’s a good question, Chad. I appreciate you noticing that as well from the script. I guess there’s a couple of things I would say. I mean, first and foremost, we’re excited about the white space in our customer base in high-tech and life sciences as it exists today. We remain excited about new logos and geographic expansion as it exists in our wheelhouse today. And so we don’t actively today spend a lot on sales and marketing going into adjacencies. But these wins this quarter I talked about, I think, do a nice job of illustrating the art of what’s possible in the future. And I would also characterize the wins that I talked about today as not even a full standard deviation away from the markets we’re in today.

If you look at life sciences and some of the pattern recognition, our products play well in life sciences, where things are heavily regulated and there are complex incentives to distribute and reward the channel for those products. And then on the high-tech side, if it’s a highly engineered product that’s distributed through a multi-tier channel €“ complex multi-tier channel, the high-tech products are a pretty good fit for that pattern. And so these customers that come in, we’re opportunistic about them. And if they fit with the patterns and the situations where we know we can win, we will pursue them, and some of these early returns have been good.

Chad Bennett: Got it. I appreciate it. Maybe one for John. Just in terms of the cadence of SaaS ARR for the rest of the year, should we think about it similar, whether it’s seasonally, sequentially as to last year? And then if you look at it from a net new SaaS ARR standpoint, I mean, you put up a very good net new SaaS ARR quarter in the December quarter. Does net new SaaS ARR grow year-over-year in the next three quarters? Any way you want to address that one? Thanks.

John Ederer: Yes. Thanks, Chad. Maybe I’ll just reiterate a couple of the comments that we made upfront and try to address your question that way. I think that we want to stay just shy of providing very specific guidance on SaaS ARR, but we did want to try and provide some color commentary in terms of how we see the year laying out. And over the last €“ this actually goes back over the last couple of quarters, we’ve seen SaaS ARR growth accelerating as we’ve been benefiting from SaaS transitions in particular. And so the last few quarters, you’ve seen that number tick up, hitting 36% year-over-year growth in Q1. Our long-term target, as you know, is 20%. But as we look at the course of this year, we do expect to be at an elevated level again in Q2, where we also have an easier year-over-year comparison to Q2 of last year.

But then as we get out to Q3 and Q4 of this year, the comparisons do get a little bit tougher for that year-over-year growth number, and so we would expect it to moderate a little bit based on those comparisons over the second half of the year. And then I would just add, similarly, we would expect the SaaS net dollar retention metric to follow the same type of trend. And so we would expect to see that a little bit elevated as it was in Q1 and over the first half of the year and then moderate a little bit over the second half of the year.

Chad Bennett: Got it. And then maybe €“ sorry, one last quick one for you, John. Just on subscription gross margin, how to think about that going forward. It was €“ it’s obviously showed significant year-over-year improvement. I think it was kind of flattish sequentially. Should it kind of stay around this level? Or do you expect to see further improvement there? Then I’ll hop off. Thanks so much.

John Ederer: Yes. No, thanks for the question. So a couple of things there. So first, what we saw in Q1, I would say, largely reflected the increased mix that we’re getting from SaaS revenue. And so when we look at that total subscription line, the SaaS piece of it is at a higher margin, and so an improving mix there helps us. And that was the couple of points that you saw of improvement in Q1 this year versus Q1 last year. One thing I would caution you on over the balance of this year, we do have, of course, headcount-related expenses that hit that line, our cloud hosting team, our support organization. And in Q2, we do have a seasonal uptick in headcount-related expenses for payroll taxes and things like that. And so that will impact that line also. But in general, we’re making good progress and a lot of it has to do with the shift to SaaS.

Chad Bennett: Got it, thank you so much, nice job again.

John Ederer: Yes, Chad.

Operator: Our next question comes from the line of Joe Meares with Truist. Please proceed with your question.

Joe Meares: Hey, guys. Thanks so much for taking the question. I appreciate the color on new logos. And specifically with Lantheus, it was interesting to hear that you landed the State Price Transparency Management as one of the modules they picked up. I’m just curious if you have any qualitative or quantitative comments around attach rates for that product on new logos and how you’re doing there with current customers as well.

Jason Blessing: Yes. Thanks for the question, Joe. So as we’ve reported the last few quarters since we partnered with Pfizer to build and release this product, demand has been strong. And we continue to see new states enacting state price transparency rules. And even more importantly, they’re now stepping up enforcement over the last year, and the forecast is for enforcement to continue to be pretty robust over the next couple of years. So as our existing customers and our new logo pipeline, they’re definitely turning to us and looking at this product. And I would say State Price Transparency Management in new logos is €“ if it’s not a part of every deal, it’s a part of just about every deal. And it’s also garnered a lot of interest as well in our customer base, and we’ve got quite a bit of pipeline tied to the base as well.

So it’s been a good add-on product. It’s been a good wedge product for us to get into new logos. It’s got a fairly easy implementation footprint with it, but it solves a major issue. So yes, State Price Transparency Management has been a good product for us.

Joe Meares: Awesome. Great to hear. I think you’ve talked about Global Price Management and Global Tender Management as potential drivers for growth in 2023. It sounded like you had some success there in the quarter with Solidigm. I’m just curious if these are a material percentage of revenue right now and what they could be exiting this year. Thanks very much for the questions.

Jason Blessing: Yes. Certainly Global Price Management and Global Tender Management are both 50 project €“ products and an important way that we land. Global Price Management as the name implies, is used by our customers to manage their price list in both the U.S. and rest of world and specifically in Europe. So the product market fit for that product is pretty much universal for global pharma companies. And so that is a product that’s quite honestly, it’s been a good seller for us over a number of years now, but that’s not a new product. Global Tender Management is really tailored for geographies where pharmaceutical purchasing processes are run through centralized health ministries through a tendering process. And so Europe is really the first geography that we focused on.

That’s a relatively newer product and demand has been brisk for it because it is tailored again specifically to pharma companies. And as we’ve talked about, we’ve landed some big new logos with that combination, that one-two punch of Global Price Management, Global Tender Management, with Moderna just being the most recent one. So they’re important products in terms of wallet share, and they’re also important products in terms of how we land and then open up the expand opportunity in an account.

Joe Meares: Thanks again.

Jason Blessing: Thanks Joe.

Operator: Our next question comes from the line of Ryan MacDonald with Needham & Company. Please proceed with your question.

Ryan MacDonald: Thanks for taking my questions and congrats on a nice quarter. Jason, you talked about the AbbVie-Allergan deal in the quarter, and also in the Q&A about sort of the excitement you have sort of with the opportunity within the existing base. Just curious, given all the M&A that we’ve seen over the past few years here, what the expansion opportunity looks like from just purely M&A deals, and what you’ve historically seen in terms of when that opportunity comes to the table post an acquisition. Thanks.

Jason Blessing: That’s a good question, Ryan. On the balance, we have benefited from M&A and a typical pattern that we will see, and this is the case with Allergan and AbbVie and we’ve seen this with others as well, that the two companies will not have the exact same footprint of Model N, and so the M&A transaction is a catalyst for us to get in, in the combined company, expand product footprint, potentially usage, potentially geographies. So M&A has been good for us. Again, a catalyst to get in front of customers and has, generally speaking, been a nice cross-sell and upsell opportunity for us.

Ryan MacDonald: That’s helpful. And then maybe one for John. John, on the updated guidance, you talked about some of the moving parts in terms of seasonality within the business and maybe some higher payroll taxes. As we look at that adjusted EBITDA guide for second quarter, is that the €“ I guess, the step down in second quarter, is that primarily being covered by the additional tax payments? Or is there other incremental investments that you’re perhaps pulling forward into the second quarter that’s going to hit then versus the back half? Thanks.

John Ederer: Sure. Yes. No, maybe a couple of different threads in there. So first, just with €“ reflect to the guidance itself, it’s really two factors. One is actually on the revenue side of things. We have two fewer days of subscription revenue, so that cost us in round numbers about $1 million of subscription revenue. The second piece is related to the expenses, and that’s due to Q1 €“ or, pardon me, Q2 being the first calendar quarter of the year. And so we have higher payroll taxes and other benefits compared to the December quarter. So it’s really those two factors that are rolling into that. And then just in terms of operating expenses more generally, we have been making select investments in the business. And I think if you go back and look at our results over the last couple of quarters, probably starting in fiscal Q3 last year and then looking sequentially in Q4 and Q1, you’ll see that we’ve been making investments in R&D and sales and marketing in particular.

So we continue to focus on the product and sales capacity, and those are underlying our model as well.

Ryan MacDonald: Excellent. I appreciate the clarification there.

Operator: Our next question comes from the line of Joe Goodwin with JMP Securities. Please proceed with your question.

Joe Goodwin: Great, thanks so much for taking my questions. John, did you disclose the amount of maintenance revenue you had in the first quarter? I apologize if I missed that.

John Ederer: We did not update that, so we’ll just do that on an annual basis. And so at the end of fiscal 2022, I believe we had $17.5 million in maintenance revenue. And we did indicate on our last call that we thought maintenance revenue would be down 30% or more this year, but we’re not going to update that quarterly. That will just be an annual metric.

Joe Goodwin: Understood. Okay. Yes. Okay. And then I believe you still have about $20 million or so of term license revenue in the subscription line. Can you just talk about the stability of that term license revenue stream and maybe how we should think about that going forward?

John Ederer: Yes. I’m not sure where your $20 million number comes from. That’s not something that we’ve disclosed in the past. But what I would say is that we do still have some term license activity in the subscription line. It’s gotten down to a pretty small level, frankly, and not overly material.

Joe Goodwin: Okay. And then I guess last question for me is in the State of Revenue Report that came out today, nearly half of company’s share €“ captured in the survey show that they leverage different revenue management systems across different regions. I guess as these companies are looking to become more cohesive with maybe things that they’ve acquired globally, are you seeing and reaching and finding more additional efficiencies in their businesses? Are those type of conversations having more frequently, people are actually trying to expand, kind of, or standardize on a single platform?

Jason Blessing: Yes, Joe, this is Jason. I’ll take that one. I mean the simple answer is yes. I mean there’s definitely economy of scale of having 1 vendor, and then we do provide some consolidated unified reporting for companies that are, for example, using our tenders product in Europe and the full suite of products here in the U.S. And that analytics layer that will sit on top of the global products will continue to expand over time. So yes, I mean, we €“ as I talked about with Moderna specifically on this call, customers are increasingly looking for 1 vendor who can fit their needs across different geographies and keep up with the fluid regulatory environment. So that’s definitely a tailwind for us.

Joe Goodwin: Great, thank you.

Jason Blessing: Thanks Joe.

Operator: We have time for one last question. Our next question comes from the line of Brian Peterson with Raymond James. Please proceed with your question.

Johnathan McCary: Hey, this is Johnathan McCary on for Brian. Thanks for taking the question. So with the SaaS transition driving a lot of the recent growth, I’m just kind of curious qualitatively how you see that trending after the sunsetting of on-premise solutions. Do you guys anticipate investing more into sales and marketing post that transition narrative? Or how are you thinking about balancing margins and growth there? Thanks.

Jason Blessing: Yes. Thanks for the question, Johnathan. I mean, there’s a couple of things I would say there. As we reported throughout the balance of last year, we have hit a tipping point where the majority of our bookings are actually coming from things other than SaaS transitions, and it’s really reflective of two things. One, the strong product portfolio we have and the white space opportunity to sell more broadly into a customer who has gone through a SaaS conversion; and then, of course, the new logo opportunities. So we really have seen that. I would argue that tipping point really hit last year. And then as John noted in one of the answers to the prior questions, we have been selectively investing in sales and marketing for life after SaaS transitions. And when you put that with the product component that I just talked about, that really is what’s driving the business today.

Johnathan McCary: Got it. Thanks.

Jason Blessing: Thank you.

Operator: That concludes our question-and-answer session. I’d like to turn the call back over to Jason Blessing for closing remarks.

Jason Blessing: Thank you, operator, and thank you to everyone for joining us today. As we discussed on today’s call, Model N started our fiscal year 2023 with a good quarter and once again delivered strong profitable growth. John and I are going to be out on the road at several investor events this quarter and look forward to seeing many of you in person. Thanks again for joining today, and have a great night.

Operator: 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.