Model N, Inc. (NYSE:MODN) Q1 2024 Earnings Call Transcript

Model N, Inc. (NYSE:MODN) Q1 2024 Earnings Call Transcript February 6, 2024

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Operator: Good afternoon, and welcome to Model N First Quarter of Fiscal 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded. With that, I would like to turn the call over to Carolyn Bass, Investor Relations. Please go ahead.

Carolyn Bass: Good afternoon. Welcome to Model N’s first quarter of fiscal 2024 earnings call. This is Carolyn Bass, Investor Relations for Model N. With me on the call today are Jason Blessing, Model N’s President and 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 performance and offer a financial outlook for our second quarter and fiscal year ending December 31, 2024. The commentary 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 results may differ materially. Please refer to the 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 or in isolation from GAAP results. Reconciliations of the non-GAAP metrics to the nearest GAAP metrics are included in the earnings release 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 2024 press release, periodic SEC reports, and the webcast replay of this call.

Finally, unless otherwise stated, all financial comparisons in this call will be made to our fiscal 2023 results. And with that, let me turn the call over to Jason.

Jason Blessing: Thank you, Carolyn, and welcome to our call today. I am pleased to report that our first quarter results exceeded guidance for total revenue, subscription revenue, professional services revenue, and adjusted EBITDA. We also generated over $20 million in incremental cash flow from operations in Q1 versus the first quarter of last year. This metric is another proof point that demonstrates the overall health of our business and the progress we’ve made on our business model transformation. Our Q1 SaaS ARR grew by 16% year-over-year, while SaaS net dollar retention was 115%. As we have said on the last two calls, we faced tough comparables this year in the first few quarters when compared to last year’s record setting SaaS metrics.

That said, we expect our SaaS growth metrics to improve as we exit the year, and we are pleased with our start to 2024. Next, I’d like to share select business highlights from the quarter. I am encouraged by Q1 because we signed one of our last remaining large SaaS transitions, but more importantly, we saw meaningful contribution from our long-term growth drivers. The bookings mix included new logos and numerous customer base deals, including transactions involving recently released products. I was also pleased to see a strong order from business services. In Q1, our new logo team posted a strong start to the year. In Life Sciences, I am pleased to announce a marquee win with the signing of Bayer Pharmaceuticals, a top 20 global pharma company that is currently going through its own transformation.

Bayer’s broad portfolio includes many world famous products that have shaped their iconic brand. This was a competitive win and includes our full suite of cloud offerings including all commercial, government pricing, and Medicaid solutions. Bayer sought a best of breed solution to address their revenue management challenges, which included many manual and outsourced processes. Additionally, Bayer is looking to establish a robust platform to support multiple upcoming product launches. Model N will be instrumental in supporting these new launches, while also delivering several operational improvements, resulting in a strong ROI when the system is fully deployed. In Life Sciences, we also continue to see solid growth within our customer base led by new products that we’re releasing.

Novartis, a prominent Model N SaaS customer, recently implemented Model N Engage in support of their focus on operational excellence. Engage is Model N’s innovative in application guidance tool, specifically designed to help users navigate the system while also helping to enforce key operational and compliance controls. Engage also provides real time analytics to customers and Model N to help identify where users are having challenges with system usability. This helps us to improve our user experience and empowers customers to streamline user procedures. The adoption of Engage at Novartis demonstrates this new product’s ability to help companies be more successful with their Model N investments while also improving overall operational excellence.

Also in Q1, Apellis Pharmaceuticals selected Global Launch Excellence to augment their existing deployment of Model N’s global pricing management. Apellis is a global biopharmaceutical company that develops transformative medicines for people living with rare, retinal, and neurological diseases. Model N’s Global Launch Excellence module will allow Apellis to create complex launch sequences by combining accurate price data, volume forecasts and optimization algorithms to ensure that their therapies efficiently reach the patient populations that need them most. Turning to business services, during the quarter, we signed several customer expansions. One, I’d like to highlight is at Moderna. Moderna expanded their business services consumption to handle their membership, contract administration and rebates processing to support their growing business.

Moderna is also a case study on how business services allows us to engage with an emerging pharmaceutical company and quickly provide fully outsourced revenue management to enable them to deliver their life changing products to the world. Another terrific example of business services enabling a growth company is at United Therapeutics. United Therapeutics is an existing Model N customer and needed help dealing with the increasing complexity of state price transparency regulations. To address this need, this customer selected our newly released State Price Transparency Management business services offering. This solution will enable United Therapeutics to accelerate their path to compliance and to ensure that their future state price compliance needs will be properly managed regardless of the changes in regulations.

Moving on to SaaS transitions, during the quarter, we signed one of our few remaining SaaS transitions with Teva Pharmaceuticals. Teva is the global leader in generic drug manufacturing, supplying affordable medicines to nearly 200 million people across six continents every day. This deal extends the 20 plus year revenue management partnership between our two companies. Our SaaS platform will allow Teva to more easily take advantage of innovations and to operate more efficiently while maintaining compliance. Turning to High Tech, this segment continues to show green shoots and hosted a strong Q1 that included customer expansions and two new logo wins. The first new logo is Taiwan Semiconductor, a multinational semiconductor design and manufacturer that also owns the world’s first dedicated semiconductor foundry.

Taiwan Semiconductor is planning to grow their business globally, especially through their distribution channel, but they are limited by a combination of manual and homegrown systems. They needed a platform to build a consistent global approach to pricing quoting and point-of-sale integration. After a thorough evaluation, Taiwan Semiconductor chose Model N’s channel data management and revenue cloud to automate these key processes to support their future growth. We also signed another logo in High Tech with a company that designs and manufactures power conversion, measurement and control solutions that are used by a wide variety of industries. During our sales cycle, we worked with the customer to identify significant operational improvements using Model N that will result in efficiencies in pricing strategies and a meaningful reduction in revenue leakage.

This customer also plans to use Model N as an enabler for future acquisitions given that Model N will allow them to quickly implement key channel incentive and pricing strategies into the newly acquired business. It is gratifying to see both of these new High Tech customers turn to Model N as the strategic partner to enable their growth strategies. Turning to professional services, our team exceeded expectations with another strong quarter. The results of our professional services organization symbolized the strong demand for our mission-critical solutions as companies seek to drive top and bottom line improvements. Our professional services team continues to do a terrific job of getting new customers live on time and on budget. One project that I’d like to call out is Genentech and their successful SaaS transition to support their pharma business.

Genentech is the latest example of our team working closely with a longtime customer with a very complex configuration and successfully moving them to our cloud platform. This project also includes the implementation of our proprietary testing suite that helps pharma companies more easily maintain compliance with internal audit while also being able to quickly adopt innovation and regulatory updates. Again, congratulations to Genentech and our services team for achieving this important milestone in our relationship. As we focus on future growth, we continue to build new products in collaboration with our customers. One recent example is price management for High Tech, a new product that enables manufacturers to simultaneously manage price execution across direct and indirect channels globally.

This new module is fully integrated with our deal management product and streamlines pricing updates to enable tight pricing control and real time market execution of changes. Finally, earlier today, we issued our new 2024 State of Revenue Report. This marks our 6th Annual Report which identifies the top challenges and opportunities for pharmaceutical med-tech and High Tech manufacturers. This report is based on the results of a survey of more than 300 C-suite executives directly responsible for revenue management. Three themes standout to me in the 2024 report because they reflect the dynamic operating environment that has become the new normal, and each is something that Model N can help our customers address. The three themes are executives name, process efficiency, and cost savings as top priorities in this operating environment and are increasingly looking to advanced analytics and AI to achieve these priorities.

For a second year in a row, supply chain disruption emerged as one of the top obstacles across all industries. And finally, pharmaceutical executives do not see the pace of regulatory change slowing down anytime soon. These insights help us better understand how to tailor our solutions to empower our customers to create and bring their life changing products to the world. I encourage all of you to read the 2024 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 and I am proud of the leverage we’re showing on our bottom line as we navigate the end of our business model transition. We are also posting tangible proof points that our long-term growth levers of new logos, customer expansion, and product innovation continue to mature and are materially contributing to our bookings.

I’d also like to thank Model Ners around the world that continued to focus on customer success, our DARE core values and driving profitable growth. Because of you, we kicked off the year with a solid Q1 and I am excited about the year ahead. With that, I’ll turn the call over to John to discuss our Q1 financial results and offer our outlook for Q2 and fiscal 2024. John?

John Ederer: Thank you, Jason, and good afternoon to everyone on the call today. As Jason noted, we had a very solid start to fiscal year 2024, with Q1 results exceeding our expectations for revenue, adjusted EBITDA, and free cash flow. I was particularly pleased by our free cash flow performance which hit $43.5 million for the trailing 12 months ending Q1 and was up 172% on a year-over-year basis. Looking specifically at our financial results, for the first quarter, total revenue grew 7% to $63.5 million, which exceeded the high end of our guidance range driven by upside on both subscription and professional services revenue. Subscription revenue increased by 8% to $47.7 million, while professional services revenue grew by 6% to $15.8 million and both were above guidance.

In terms of our profitability, please keep in mind that we will 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 $38.3 million representing a gross margin of 60.3%. Non-GAAP subscription gross margin was 68.4% and non-GAAP professional services gross margin was 35.8% in Q1 in line with Q1 of last year. Adjusted EBITDA was $9.9 million representing a margin of 15.5% and above the high end of our guidance range for the quarter. And finally, non-GAAP earnings per share, was $0.28 based on a fully diluted shares outstanding of $39.1 million. This was slightly below our guidance due to some variance on below the line items including interest income and foreign exchange.

Turning to our SaaS metrics for Q1. Our SaaS ARR reached $134.8 million, which was an increase of $19 million, or 16% versus Q1 of last year. In addition, trailing 12-month SaaS net retention was 115% in Q1. These results were right in line with our expectations. As we discussed on last call, we are facing difficult comparisons for our SaaS metrics over the first two to three quarters of this year due to SaaS transition activity last year. Next quarter, our fiscal Q2 is expected to be the most difficult comparison. However, we do expect growth to trend back up at the end of fiscal 2024, when we get back to more normal year-over-year comparisons. In terms of the balance sheet, we ended Q1 with $303 million in cash and equivalents, which was up $2 million sequentially from September.

We also had sequential increases in accounts receivable at $83 million for Q1 and deferred revenue at $74 million for Q1, both due to a record quarter of invoicing. Finally, as mentioned, Q1 was a very strong quarter from a free cash flow standpoint as trailing 12 months free cash flow increased to $43 million from $23 million last quarter. Turning to remaining performance obligations, our total RPO for Q1 was $349 million, which was up 3% on a year-over-year basis. The current portion of our RPO balance was up to $160 million, representing a growth of 11% year-over-year and up 8% sequentially from Q4. As I’ve previously noted, our total RPO growth has been impacted over the last few years by long-term SaaS transition deals, many of which had contract lengths well in excess of three years.

As renewals and other non-SaaS transition bookings become a bigger proportion of the total, we are seeing our average contract length in RPO return to a more normalized level. Looking ahead, as we said on our last call, we are still in a period of business model transition during fiscal 2024, where solid growth in SaaS revenue will be partially offset by declines in maintenance revenue. Once we are completely through SaaS transitions and the business model normalizes, we believe that we can return to double-digit total subscription growth over the medium-term, and I would refer you to the investor deck on our website for more details on our mid-term financial targets, which we outlined on our last earnings call. In terms of our guidance for the remainder of fiscal 2024, we are raising our outlook for subscription revenue and total revenue, reflecting our subscription performance in Q1 and maintaining our guidance for adjusted EBITDA and non-GAAP earnings per share, which calls for continued margin improvement versus last year.

Specifically, for fiscal 2024, we expect total revenue to be in the range of $260.5 million to $263.5 million, with subscription revenue in the range of $193.5 million to $195.5 million, and professional services revenue to be in the range of $67 million to $68 million. We expect adjusted EBITDA to be in the range of $48 million to $51 million and non-GAAP EPS to be between $1.25 and $1.32 per share, based on a fully diluted share count of approximately 40.1 million shares. For the second quarter of fiscal 2024, we expect total revenue to be in the range of $63.5 million to $64.5 million, with subscription revenue in the range of $48.5 million to $49 million and professional services revenue in the range of $15 million to $15.5 million. We expect adjusted EBITDA to be in the range of $9 million to 10 million, and for non-GAAP EPS we are expecting a range of $0.24 to $0.27 per share based on a fully diluted share count of approximately 39.7 million shares.

As a reminder, there is some seasonality to our business and our second fiscal quarter is the period when we see increased expenses for payroll taxes and other benefits. As a result, the second quarter is typically the low watermark for adjusted EBITDA margin during the year. To summarize, Q1 was a strong start to fiscal 2024 and we continue to execute well. We are getting through the final stages of our business model transformation while at the same time still driving top-line growth, margin improvement and strong free cash flow. 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. We will now be conducting a question-and-answer session. [Operator Instructions]. First question comes from Ryan MacDonald with Needham and Company. Please go ahead.

Ryan MacDonald: Hi, thanks for taking my questions. Jason, maybe to start, great to hear about the bookings commentary and obviously the continued progress in the SaaS transition. You noted in your remarks sort of this confidence in returning to double-digit growth and sort of growth improvements as we get into the later parts of the year. Once some difficult comps sort of pass-through, I guess just early in the year, as you’re sort of having pipeline building discussions and started to see some of that progression, can you talk about what the environment in terms of spending environment is that gives you confidence sort of in that trajectory. And in regards to the SaaS transitions, as we’ve now passed over the end of support date, how has the conversation shifted with the remaining customers?

Jason Blessing: Yes. There is a good series of questions there, Ryan, then let me unpack that. So first of all, on the macro environment, I think we were one of the first companies in our space in our fiscal Q2 last year to callout some deal elongation cycles of delayed SaaS transitions and a little bit softness in discretionary spend. As the year went on, we subsequently followed up that commentary with statements indicating that we didn’t see the demand environment deteriorating anymore. And I think as we come into this year, we feel like we’re in a more stable environment, particularly as we have the better — the market has a better sense on things like invest net interest rates and some of the other key metrics. So I would say that the backdrop has not deteriorated.

And I also think in our particular corner of the world, things like regulatory changes continue to drive demand. And then in terms of as I look at our pipeline this year, one of the things that I’m encouraged about you see it in our reported results, we are expecting to have nice contribution from new logos as well as our customer base. And we certainly see that with some of the new logos posted in Q1 and we have a good pipeline as we look forward this year. And I also would say great team on the new logo side. And I mentioned this on our last call as well, for the rest of our last year; we had a lot of customers that were in SaaS transitions. As we end this year, we have essentially the full base starting to come back to us and really presenting the full opportunity to sell into the base to get more SaaS.

In terms of now that we’re officially passed end life on December 31. When I look at our customer base now, as we reported on our last call, we’re more than 80% converted or process and payments, I mean we’re literally talking about a handful of customers and we have really good visibility as to when those customers will convert. And we’re also strong partnered [Technical Difficulty] with that in the back to move forward. We’ll continue to support even at the — while you’re in transition, even though the support for on premise has lapsed. And that’s been a message we’ll receive by our few remaining customers that are transitioning.

Ryan MacDonald: That’s great to hear. Maybe just as a follow-up on product, great to see the launching of price management within sort of the semiconductor and High Tech arena. I’m just curious as you think about the rollout of this offering to that segment of the customer base and the adoption curve, how do you expect that to compare relative to pricing management that you had on the Life Sciences side? And forgive me for not knowing, but is there any sort of regulatory impetus on the High Tech side that you might lend support like you got on the core Life Sciences? Thanks.

Jason Blessing: Good question. So this particular new product on the High Tech side is not something driven by any regulatory changes. It’s really addressing the — we partnered with a couple of customers to build where oftentimes the price book and market the price book of where prices are stored and some of the dynamics market where competitors are discounting customers to get passion [ph] some time to get updates to the front line and enable sales reps to be in compliance with internal policies, yet also address some of the real time competition that they’ve seen out there. So this is a product that is I think of it as a complement to our deal management product and was built in conjunction with a couple of customers. And by the way, this is also something that had been asked for by other customers.

So I think it’s going to be very well received. We’ve got a customer advisory board coming up in a few weeks where we’ll demonstrate this product. We’ve got Rainmaker coming up here in June, which will be here before we know it. And between that and the standard enablement we’re doing with our sales force, I’m excited about this product I’m sure it will make a difference, particularly in these segments of the sector where margins are particularly region.

Ryan MacDonald: Appreciate the color. Thanks for taking my questions.

Jason Blessing: Thanks, Ryan.

Operator: Next question comes from Joe Vruwink with Baird. Please go ahead.