Model N, Inc. (NYSE:MODN) Q3 2023 Earnings Call Transcript

Model N, Inc. (NYSE:MODN) Q3 2023 Earnings Call Transcript August 8, 2023

Model N, Inc. beats earnings expectations. Reported EPS is $0.35, expectations were $0.24.

Operator: Good afternoon, and welcome to Model N’s Third Quarter of Fiscal 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. With that I would like to turn the call over to Carolyn Bass of Investor Relations. Please proceed.

Carolyn Bass: Good afternoon. Welcome to Model N’s third quarter of fiscal 2023 earnings call. This is Carolyn Bass, Investor Relations for Model N. With me today on the call are Jason Blessing, Model N’s Chief Executive Officer; and John Ederer, Chief Financial Officer. Our earnings press release was issued to 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 third quarter performance and to offer a financial outlook for our fourth quarter and fiscal year ending September 30, 2023. The commentary made in 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 for 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 in order to access our third quarter fiscal 2023 press release, periodic SEC reports and the financial replay of this call.

Finally, unless otherwise stated all financial comparisons in this call will be 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 am pleased to report that our third quarter results beat expectations across the board. We exceeded guidance for total revenue, subscription revenue and professional services revenue. We also posted record adjusted EBITDA as we continue to drive efficiencies related to our business model transition. Overall, Q3 was another strong quarter and underscores our commitment to driving profitable growth. Our Q3 SaaS metrics were also strong driven by SaaS ARR, which grew by 28% year-over-year. In addition, our SaaS net dollar retention was 126% up three points from Q3 of last year. I am very proud of our team and the business model transformation that we are driving, especially, in an uncertain macroeconomic environment.

Before talking about the quarter, I’d like to give an update on two topics that I know are very important to our investors and that’s our view on the macro and our business model transition. As I shared on our last call during Q2 we saw some customers applying more scrutiny to incremental spend and in some cases additional approvals were required to get deals done. We saw this impact continue in our fiscal Q3, but I would say that our selling environment is stabilizing and did not deteriorate further. Next we are very close to completing our business model transition and have seen significant momentum over the last year, kicking off projects to move customers to the cloud. We are also starting to see increased leverage in OpEx, as is evident by our favorable EBITDA trends.

As we get to the end of the transition, we are seeing some deal timing issues, as we work with customers to create mutually beneficial economics. We do still believe that substantially all of these customers will convert over the next couple of quarters but we are taking a conservative stance looking forward to next year to give ourselves room to work with this final cohort of customers. John will discuss this further in his prepared remarks. Despite some of the short-term deal timing issues, I am still very excited about Model N’s future. We had a great user conference in June, which we call Rainmaker, where we saw very strong engagement with our customers. In fact, this annual event resulted in a substantial amount of new pipeline, particularly on the new logo side.

There was also a lot of interest in our new products and the vision that we laid out for the company, all of which we believe will drive profitable growth over the next several years. Next, I’d like to share some of the business highlights from the quarter. Success in Q3 was driven by a healthy contribution from several areas of the business and I’d like to share some examples. During Q3, we expanded our relationship with Amgen and as they build on their recently completed successful SaaS transition. Amgen’s next phase will include implementing two of our newer products Validata and 340B Vigilance, which was released earlier this year. Our 340B Vigilance product helps companies maintain compliance while also distributing products to covered entities that serve the nation’s most vulnerable patient populations.

Amgen also expanded their use of our proprietary automated testing suite. This suite of testing tools helps customers more rapidly take seasonal releases while complying with stringent internal system validation requirements. Amgen is the latest example of a customer, who experienced a successful SaaS transition, stabilized quickly and then moved on to implement other high-value Model N products. Also during the quarter, we expanded our relationship with ICU Medical’s, Smith Medical division. ICU purchased Smith Medical in early 2022 and selected Model N as the revenue management platform of choice for the combined entity to help drive overall revenue synergies and compliance. Time and again, we see Model N’s products leveraged as a strategic enabler to M&A and to help our customers realize their business cases.

And finally in Q3, we expanded our relationship with Regeneron Pharmaceuticals, a $12 billion biotech company. Regeneron started their Model N journey as a business services customer. As the company has scaled and matured their internal operations, they decided to expand their usage of Model N and move their processing from business services to their newly built in-house team. This transition demonstrates how Model N can grow with the customer and provide revenue management solutions tailored to each stage of a customer’s growth. Turning to business services, our team continues to innovate and expand our solutions and recently launched a new state price transparency management offering. During the quarter, long-time customer Catalyst Pharmaceuticals added this new offering while also expanding usage to include chargebacks and managed care processing capabilities.

Turning to High Tech, we continue to see green shoots in this area of our business as industry leaders start to invest, with an eye towards the future. In Q3 AMD continued to expand their usage of Model N. AMD recently acquired Xilinx, and is working to unify the company’s systems and processes and Model N will be the platform of choice for the combined company. This is another great example, of Model N playing a key role in enabling strategic M&A. AMD also added our new product Ngage, which is an embedded analytics and learning solution that helps train new users while also providing key insights into application usage. Also in Q3, Kyocera-AVX, a leading global manufacturer of advanced electronic components, continued their global rollout of Model N’s Revenue Cloud.

They also added a large number of internal users, during the quarter. Turning to Professional Services. Our team exceeded expectations, with a very strong quarter once again. The results of our professional services organization, symbolized the strong demand for our mission-critical, high ROI 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 recent example is UCB. UCB who is also one of our SaaS transition pioneers, is a multinational biopharmaceutical company headquartered in Belgium, that also has operations in the US. In Q3, UCB went live on our state price transparency management solution. This project enabled UCB to implement standard business processes, to inventory state price transparency rules, track applicable price change events and create and file the necessary regulatory reports.

Now that UCB is live, they will more easily be able to keep up with the increasing complexity and enforcement around state price transparency regulations. As I mentioned earlier, we hosted Rainmaker during Q3, in person for the first time since the pandemic. It was a great event and this year, we had the highest attendance of any Rainmaker in-person or virtual in our history. This thought leadership event brings together people from around the world, from the life sciences and high-tech industries. Our customers, team members and partners all came out of Rainmaker very energized and excited for the future not just Q4, but the next several years. As I reflect on Rainmaker, our team did a really nice job this year making this an industry event and not just a user conference.

When I look at the content and the attendees at this event, I can say, it was truly a strategic industry event. In fact, some of the best sessions were the ones discussing important industry trends. This year’s Rainmaker demonstrates the progress we’ve made, transforming Model N and elevating to be a strategic partner to the industries we serve. In addition to industry trends, we also had a healthy dose of product content including several positive case studies on customers that have moved to the cloud. It is clear, that our customers are realizing strong ROI from their SaaS transitions. For our customers that have successfully completed the transition, they are on average experiencing an 80% reduction in the time to take seasonal releases.

At Rainmaker, we also laid out our vision to develop purpose-built data and analytics solutions. These solutions will sit on top of our newly built data layer and complement our existing products. We think about data and analytics in five categories, which I’ll briefly describe along with some examples. The first is embedded analytics, which will be added to existing Model N solutions to improve the user experience and decision-making. One example that exists today is in our global tender management product for life sciences. We’ve embedded artificial intelligence that helps predict which tenders a customer should pursue based on predictive win probability. Next, our new stand-alone analytic applications. These are applications that are designed to help customers solve a specific business problem.

An example of this is our 340B Vigilant Solution that’s designed to help identify and reduce revenue leakage associated with this Medicaid purchasing program. Examples of new products in this category that we announced at Rainmaker include post-deal analytics and formulary compliance. Next, our syndicated data solutions. Model N processes and stores vast amounts of industry data that is common across our customers. We believe that we have an opportunity to bring these data sources together for customers in a seamless way within our applications. An example of this that exists today is integrating external competitor pricing into global pricing management. This allows our customers to make more informed decisions on how to commercialize and launch products around the world.

Next is the ability to aggregate and sell anonymized data set. This could range from everything from market share information to competitor pricing. And then finally we envision being able to provide benchmarking reports. This offering could provide things like industry reports focused on KPIs and trends based on the data we process. And finally, I want to call out two recent awards that we won recognizing the importance of our DARE core values, which stand for dream align respect and excel. Our core values and culture are an important part of what makes Model N special. In June, Fortune Media and Great Place to Work honored Model N as one of this year’s Best Places in the Bay Area to work. And then in July, Fortune and Great Places to Work honored Model N as one of this year’s Best Workplaces for Millennials.

We’ve been very focused on our workplace and culture over the last several years and it’s great to get formal recognition for our efforts. In closing, I’d like to reiterate that our Q3 results reflect the strong collective efforts of model enters around the world. As we close out the year, we will continue building a great company, delivering value to our customers, all while driving growth and improving profitability. With that, I’d like to turn the call over to John to discuss our Q3 financial results, provide guidance for the fourth quarter, and offer a preliminary outlook for our fiscal 2024. John?

John Ederer: Thank you, Jason and good afternoon to everyone on the call today. As Jason noted, we delivered very solid P&L results in Q3 that exceeded our guidance metrics. I was particularly pleased by our profit performance as adjusted EBITDA grew 35% versus Q3 last year and we had a strong rebound in free cash flow, which had $30.7 million for the trailing 12-month period. As Jason also described, even while we are working through the final stages of SaaS transitions, we are starting to see some of the benefits of our business model transformation to the cloud in terms of bottom line leverage. Looking specifically at our results for the third quarter, total revenue grew 13% to $63.7 million, which exceeded the top end of our guidance.

Subscription revenue also increased by 13% to $45.8 million exceeding the upper end of our guidance range. And lastly, professional services revenue grew by 15% to $17.9 million, which was above the high-end of our guidance as the team continued to run at high utilization rates. 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 third quarter, total non-GAAP gross profit was $39.2 million representing a gross margin of 61.5%. Non-GAAP subscription gross margin was 69.1% compared to 68.5% in Q3 of the prior year as SaaS revenue increased as a percentage of total subscription revenue. And non-GAAP professional services gross margin was 42% in Q3, which was down from 44% in Q3 last year but still an exceptional number above 40% and exceeding our expectations.

Adjusted EBITDA was $13.5 million, an increase of 35% from the third quarter of fiscal 2022 and well ahead of our guidance range. Adjusted EBITDA margin improved to 21.2%, compared to 17.9% for the third quarter last year. And I would attribute our overperformance on adjusted EBITDA to three factors: First, as the macro environment has shifted we have tightened up our hiring activity and overall spending. Second, we benefited in Q3 due to the timing of certain personnel-related expenses that will normalize in Q4. And third, we are starting to realize some leverage across the business, as we’re able to focus on cloud operations and innovation with less support required for a shrinking population of on-premise customers. Finally, non-GAAP net income was $13.6 million, an increase of 60% from Q3 of last year and non-GAAP earnings per share were $0.35 which was $0.10 above the high end of our guidance.

Turning to our SaaS metrics for Q3, our SaaS ARR reached $129.2 million which was an increase of $28.1 million or 28% versus Q3 of last year. In addition, trailing 12-month SaaS net retention was 126% in Q3. Over the last year, our SaaS ARR growth rate and net retention metrics have partially benefited from SaaS transition activity reaching a peak in our fiscal Q2 this year. We have talked about the bell curve that we are on due to SaaS transitions on numerous calls, and the Q3 results were right in line with our expectations. Further, we expect this trend to continue in Q4, with SaaS ARR growth in line with our long-term target of 20%. In terms of the balance sheet, we ended the third quarter with $299.6 million in cash and equivalents which was up $29 million from Q2.

As we noted on our last call, we had a bit of an anomaly on our accounts receivable last quarter, which spiked, despite strong collections due to a record quarter of billings. We have followed that up with another record quarter of collections, driving accounts receivable down to $51.9 million which was a drop of $24.1 million sequentially versus Q2. Turning to Remaining Performance Obligations, our total RPO for Q3 was $321.9 million which was up 4% on a year-over-year basis. The current portion of our RPO balance was up to $140.7 million, representing growth of 11% year-over-year. Our total RPO has been impacted by SaaS transition activity. We had a period of outsized growth last year due to a number of long-term SaaS transition deals, often with contract lengths well in excess of three years.

These longer-term commitments added extra years to the total contract value reflected in our RPO. 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. Now, looking ahead to our guidance for the year we are increasing the bottom end of our outlook for subscription revenue and raising our view for professional services revenue total revenue adjusted EBITDA and non-GAAP earnings per share. In summary for Q4, we expect total revenue to be in the range of $61.6 million to $62.6 million, with subscription revenue in the range of $45.6 million to $46.1 million, and we expect professional services revenue in the range of $16 million to $16.5 million.

I would note that, there is some typical seasonality in our professional services business with the September and December quarters impacted by vacation and holiday schedules. We expect adjusted EBITDA to be in the range of $11 million to $12 million, which again reflects a more normalized run rate for expenses compared to Q3. And finally, for non-GAAP earnings per share, we expect a range of $0.28 to $0.31 per share based on a fully diluted share count of approximately 39.3 million shares. For the full year of fiscal 2023 we expect total revenue to be in the range of $247.1 million to $248.1 million, with subscription revenue in the range of $180.5 million to $181 million and professional services revenue in the range of $66.6 million to $67.1 million.

We expect adjusted EBITDA to be in the range of $42.9 billion to $43.9 million and non-GAAP earnings per share to be in the range of $1.08 to $1.10 per share based on a fully diluted share count of approximately 38.9 million shares. Finally, looking ahead to fiscal 2024, this is a particularly challenging time to provide a five-quarter outlook given the timing nuances that Jason discussed earlier. While pipeline is improving for the second half of the calendar year and while there’s a lot of interest around the future potential for data and analytics coming out of Rainmaker, we want to be prudent in our approach and focus on what we have line of sight to today. In FY 2024 we will have some similar trends and challenges. First, we continue to target SaaS ARR growth of 20% for the year but certain quarters notably Q2 next year will be challenging due to tough year-over-year comparisons.

Second, we have seen more impact from the macro environment on our software-enabled subscription service offerings, and expect lower growth from these offerings next year. And then third the decline in maintenance revenue will again be a headwind potentially approaching a 50% decrease next year. Rolling all of these factors up, we would expect revenue growth next year that is in line with our Q4 guidance. Hopefully, there will be some upside from the recent build in pipeline but we’ll wait to see how the next couple of quarters go and update all of you at the appropriate time. Now, on the profitability side, I believe that we have demonstrated our commitment to profitable growth with steady improvement in adjusted EBITDA margin over the last several years.

We will continue to show improved profitability in FY 2024 and as we capitalize on the benefits of our business model transition and we’ll provide more specific guidance on our Q4 earnings call. So to summarize we are pleased with our financial results in Q3, and especially our profit performance and we remain focused on driving SaaS ARR growth, while at the same time delivering continued profitability improvements. We will continue to manage our business in a prudent way ensuring that we deliver value to both our customers and our shareholders. With that, I’ll turn the call over to the operator for any questions. Operator?

Q&A Session

Operator: Thank you. We will now conduct a question-and-answer session. [Operator Instructions]. Our first question comes from Craig Hettenbach with Morgan Stanley. Please proceed.

Craig Hettenbach: Thanks. I appreciate all the color on moving parts into 2024. As you do transition customers over and complete that cloud transition, when thinking about the timing elements of that and if some is kind of pushed out, how do you think about into 2025? Is there a little bit of a catch-up because of that timing element, or how would you characterize just kind of normalizing some of the timing elements you’re talking about here through the rest of the cloud transition?

Jason Blessing: This is Jason, I’ll answer that. That’s a great question. So first a reminder, we do have end of life in December of this year and we told our customers that’s non-negotiable. We’ve also communicated to our customers that some of the key legislation that’s been enacted recently like the Inflation Reduction Act is not going to be backported to the on-premise releases. So there is still a pretty big motivation for customers to move forward. What I would say is as we’ve gotten to this last cohort of customers this year they have proven to need a little extra help in their business cases. They’ve negotiated a little bit more on the economic arrangements and we just felt that it takes — it’s a good business decision to take this time of these customers to make them feel like they end up in a good win-win.

We don’t want to give away long-term economics either in these discussions, particularly given that many of these are five — three to five year contracts. So the best way to think about it is we’ve had a cohort of deals that have maybe slipped out a couple of quarters, but we still do believe based on where we sit today that we’ve got good visibility that the remainder of these customers are going to convert right around that December time frame maybe leak a little bit into next year which is consistent with the guidance we’ve given on prior calls.

Craig Hettenbach: Understood. And then just a follow-up for John. Nice to see some of the operating leverage in the model. Just curious as you kind of segue into next year and again you get more customers onto the cloud. How are you thinking about the key operating levers to the business and what that means from a margin perspective? Kind of intermediate to longer term?

John Ederer: Sure. Yeah. Happy to give more of a thematic answer today. And then obviously when we get to the Q4 call we’ll give more specific guidance with regards to next year. But from a high-level perspective some of the bigger things that we’re seeing as we transition the business over to the cloud are opportunities in terms of cloud hosting just getting more scale on that part of our business as well as our support organization having to support fewer products both on-prem and in the cloud. And then on the operating side of things particularly in R&D, that’s another area where we have to spend a certain amount of time and effort supporting both legacy products as well as new cloud innovation. And so as we move through time and get to focus exclusively on the cloud side of the business, we start to pick up points of leverage on both cost of revenue and OpEx.

Craig Hettenbach: Got it. Thanks for that.

Jason Blessing: Yeah.

Operator: Thank you. Our next question comes from Joe Vruwink with Baird. Please proceed.

Joe Vruwink: Great. Hi, everyone. Maybe I’ll just start on macro. There was a particular update from a big consulting practice. I think actually one of your partners just talking about how efforts focused on pricing and market access have maybe experienced a shift right in terms of activity and decision-making. It doesn’t really sound like that broad macro comment is extending to Model N. I just wanted to confirm whether that is the case? And then, the second part of the question would just be if Part A [ph] is true why that is the case? And do you think it’s because just this focus around regulatory compliance within the industry is giving you a bit of an offset. And so net-net you’re seeing some resiliency from a discussion environment?

Jason Blessing: Yeah, Joe this is Jason. I’ll take that. So kind of in line with what we’ve talked about on past calls we have seen some impact on High Tech, and again I’m talking about the broader model any year. And so High Tech has to factor into how we view the out quarters. And then yeah, I would say certainly, the dynamic regulatory environment, which is somewhat insular from economic fluctuation does continue to drive the core part of our business particularly with medium and large pharma. As both John and I did mention in our prepared remarks, we have seen some customers be more cautious on some of our subscription services that really are sold to complement our software, but overall the demand for our software and the life sciences side remains very resilient.

And we also saw this kind of a qualitative answer. And then just to point out a quantitative component as well that I talked about in my script, we really saw some nice pipeline generation coming out of our customer event back in June.

Joe Vruwink: Okay. That’s great. Just in terms of some of the bottom line benefits that you’re now realizing as you approach more of a steady-state SaaS model is EBITDA like this quarter north of 20%? Is that something you would anticipate and I’ll call it the fiscal 2025 time frame? Obviously next year there’s still a bit of a transition happening. But is that maybe the right time frame to more fully reflect what already seems to be the endpoint and things you’ve started to realize?

John Ederer: Yeah. Joe it’s a good question. And I’ll side-step it a little bit today in terms of talking about FY 2025. But I think what I would reiterate is that we are very committed to continuing to drive improvements in profitability. And you’ve seen us do that over the last several years and we’re committed to doing that going forward. I won’t give you an order of magnitude today even for FY 2024 as we’re still going through the planning process and deciding on some of those trade-offs frankly between investment opportunities for growth and dropping incremental benefit to the bottom line, but we will go through that process with a commitment for continued profitability. I think when we look at the business overall, we talked about some of these already on the other question but there are opportunities as we move the business over to the cloud for increased scale and increased profitability and we’ll continue to drive those going forward.

Joe Vruwink: Okay. Thank you very much.

Jason Blessing: Thanks Joe.

Operator: Our next question comes from Adam Hotchkiss with Goldman Sachs. Please proceed.

Adam Hotchkiss: Great. Thanks for taking the question. I guess first could you just give us an update on the cross-sell momentum you’re seeing amongst the folks shifting to cloud in the latest cohort I think you had mentioned some softness around the services, but strength in the life sciences software. Just any incremental color on how you think about the behavior of this cohort of customers comparing to some of the earlier cloud adopters?

Jason Blessing: Yes, Adam it’s a great question. And certainly the pattern now that we’re call it three years into our — into our SaaS transition the pattern still remains that typically within a couple of quarters of a customer going live and stabilizing on our cloud platform they will come back and take more products. And as I’ve also talked about in the past almost every one of these SaaS transitions comes with a road map that kind of lays out over a two-year to three-year period after the SaaS transition is complete what are the next couple of phases with Model N. And so we’ve seen that pattern repeat with customers a couple of quarters after completing their SaaS transition. And I did mention Amgen in my script they were a customer that I was very involved with in their transition went live earlier this year stabilized and are now back adding two new products. So it’s been a pretty consistent trend line as customers come out of their transition.

Adam Hotchkiss: Great. That’s really helpful. And then just on the High Tech side of things. I think you called out a little bit of squishiness there last quarter. Is it fair to say that piece of the business is starting to stabilize a little bit, or does there continue to be headwinds there?

Jason Blessing: It’s certainly stabilized this year and we’ve seen some positive trends in the pipeline. We’ve seen industry leaders like I talked about with Kyocera and AMD. AMD in particular that run our platform continue to invest and expand usage. So I do think that that part of our business has stabilized. And we’ve also seen some interesting new logo activity in our pipeline on the high-tech side. So we’re definitely feeling better about that.

Adam Hotchkiss: Really helpful. Thanks, Jason.

Jason Blessing: Thanks, Adam.

Operator: Our next question comes from Samad Samana with Jefferies. Please proceed.

Unidentified Analyst: Hi, guys. This is Jordan [indiscernible] on for Samad. Congrats on a strong quarter. So maybe a first question for you John. On the initial fiscal 2024 guide for the SaaS growth of around 20%. That obviously implies that ARR is growing at a similar rate. And that would imply for like net new ARR added right that it kind of picked up pretty substantially from a year-over-year perspective. So I think maybe stepping back can you speak to your visibility within that guide for 20% growth for the SaaS piece? Maybe what’s booked? And what are you layering into expectations there?

John Ederer: Yes, I can speak to that at a high level. I think if you look at the SaaS ARR that we’ve added this year my guess would it be — there will be an excess of the amount that you’re talking about there. But in terms of setting that as a target for us and a goal, we do think that it’s an achievable target. But certainly certain quarters next year are going to be a challenge. Q2 in particular will be very tough from a year-over-year comparison standpoint. But ultimately we believe this is an achievable target. Obviously, we need to execute. We’re going to have to go execute on the remaining SaaS transitions as well as on the new logo and cross-sell up cross-sell and upsell opportunities that are sitting in front of us. But as we look at the business today we feel like that’s a reasonable target for us to go after.

Unidentified Analyst: Awesome. Thank you. And then maybe one question for you Jason. You called out in your prepared remarks that there’s some tightening on the hiring front. I’m curious is that tightening impacting sales and R&D evenly? Are you focusing more on one area just to echo everyone else’s comments profitability is really exciting and it’s definitely above expectations. So I’m just curious as to whether you’re focusing that savings in the near-term?

Jason Blessing: Yes. In terms of tightening on hiring, it’s generally across the company right now. We just think it’s – in this environment it’s important to have a strong focus on expenses in the bottom line. We did do quite a bit of hiring about a year ago maybe three quarters ago in sales to build capacity for this year and especially for next year. We’ve continued to add incrementally on the R&D side to drive some of the new product innovation. But overall, we’ve been very selective and I certainly, see us being very selective on investment over the next couple of quarters, particularly in light of what John said of our desire to continue to show some improvement on our bottom line. So we do feel like generally speaking, we’re well resourced right now and we’re getting a lot of benefits of simplifying our business model and economy of scale with the resources we do have on board today.

Unidentified Analyst: Great. Thank you for taking my question. Congrats again.

Jason Blessing: Thanks, Ben.

Operator: Our next question comes from Chad Bennett with Craig Hallum. Please proceed.

Chad Bennett: Great. Thanks for taking my question. So just on the cloud transition narrative I guess I’m trying to understand with the end of life at the end of this year, so we expect slippage in those transition deals from fourth quarter and Q1 into future quarters or into the next fiscal year? Is that what we’re trying to message?

Jason Blessing: Best way to think about it is we had a cohort of deals that we expected to close in the second half of this year that have taken a little bit longer to close. And I do expect some of the Q2, Q3 deals probably close in Q4, and we may have some that slip over into the beginning of our fiscal year. And as I said this last cohort of customers, we just have to work closely with them on their business case and their pricing to make sure they feel good about their move. And as I also said, we think it makes good business sense to take a little more time to construct these deals so we don’t give away long-term economics on three to five plus year contracts.

Chad Bennett: Okay. I appreciate the color there. And then John maybe just in terms of the SaaS, the 20% SaaS target, is that would apply I assume to obviously ARR but subscription growth on the SaaS side, those things should be pretty well correlated at this point in the transition.

John Ederer: Yes. So SaaS ARR growth and SaaS revenue growth should be essentially at the same level. The metrics – our SaaS ARR metric is based on a revenue metric.

Chad Bennett: Got it. And then maybe last one for me. Just in terms of the maintenance decline I think you talked about 50%, and I know we’re not done with September yet but can you give us a sense of where we end this year roughly on the maintenance slide?

John Ederer: Yes. Well, I can reiterate what we’ve commented on before. And so we finished last year, fiscal 2022 with just shy of $18 million in maintenance revenue, and we expected that to decline by 30% or more here in FY 2023, and so that we’re basically on track for that. And then on top, we would expect to see potentially another 50% decline next year for FY 2024. And so when you get to the end of FY 2024 as we exit FY 2024, we’re starting to drop down to pretty low levels of maintenance.

Chad Bennett: Great. Okay. I appreciate the color. Thanks so much.

John Ederer: Yes. Thanks.

Operator: Our next question comes from Joseph Meares with Truist Securities. Please proceed.

Joseph Meares: Hey, guys. Thanks for taking the question and all the details here. Among that the cohort that’s taken a little bit more coaxing to get through the SaaS transition, could you just give us a sense of how many customers is this? Is it single-digit logos? Is it double-digit logos? And then, I guess with the carrot for the end of life, what actually happens if they don’t get transitioned by the end of this year? Like what functionality are they losing? Just trying to see like how powerful the end of life is?

Jason Blessing: Yes, I’ll take that last part first. So they will essentially go unsupported and we’ll no longer be updating on-premise code lines. We do have a period of a short period where we’ll be doing some fixes that are security-related. But the big, if you want to call it the carrot or the stake of the Inflation Reduction Act is not going to be back-ported to any of our on-premise releases. So that’s a pretty big catalyst for customers. And as I said I mean the cohort they are the last ones I guess for a reason. They definitely are trying to negotiate and see if they can get a better deal. But as I said, we’re not going to give up long-term deal economics just to get a deal done in a specific quarter that just doesn’t make good business sense with this business model that we’re transitioning to. And we’ll give a fulsome update on our next call in terms of how many customers are left to transition. But yes, it’s double-digit and it’s somewhere in the low-teens.

Joseph Meares: That’s really helpful. And then you talked about the high level of pipeline coming out of Rainmaker. I’m just curious if there’s any potential for that pipeline to land at multiple products and potentially make up some of the ground that’s being pushed out by the SaaS transitions. Thanks for taking the questions.

Jason Blessing: Yes. I mean I think the exciting thing about the pipeline generation that we saw coming out of Rainmaker is the majority of it was — or good chunk of it was in new logo. And it was a combination of two things. It was existing pipeline maturing and then we had a lot of prospects there who were fairly new to the Model N story. So, certainly in that pipeline that matured at Rainmaker we feel good that that will start to convert as we move into the next fiscal year, and we certainly built I think, a good baseline as well of additional prospects that came into the pipeline. So, it’s exciting to see the trend and exciting to see it the bias towards the new logo.

Joseph Meares: Thanks for that.

Jason Blessing: Thank you.

Operator: Our next question comes from Rishi Jaluria with RBC. Please proceed.

Rishi Jaluria: Wonderful. Thanks so much for taking my question. I wanted to maybe start by thinking about your kind of ability to use generative AI to speed up implementations and make it easier to get past some of the issues that maybe some customers may have or concerns that customers may have, and maybe use it as well in terms of accelerating migrations as you kind of near the end of the road on the cloud transitions. And then, I’ve got a quick follow-up.

Jason Blessing : Yes. I mean, certainly, some of the products that we have today that leverage AI are products that help with the value proposition and get customers to move forward. Certainly, when we’ve talked about in the past is global launch excellence that helps rationalize all the complex pricing in Europe, and helps customers make more informed decisions on how to sequence and launch products. We also have a new product that we mentioned — or excuse me, that we announced called MetaBot that was at Rainmaker and so this is a product that helps upload state Medicaid claims to a customer system and has some AI built in for fraud detection and automates a lot of the — kind of check work that people would do. So I would say, our AI opportunity and the value prop is more on the product side.

I think we’ve certainly proven on the migration side and the professional services side that we’ve been very efficient in running those projects on time on budget and very profitably. So the AI story, I’d say, is more on the product front.

Rishi Jaluria : Got it. Okay. That’s really helpful. And then just turning a little bit to gross margins and diving a little bit deeper into that. As we think about the end of life of the product and over time right you’re going to get maybe a little bit more mix shift towards cloud. How should we long-term be thinking about what that subscription gross margin line could look like and that can look like over the next several years? Thanks.

John Ederer : Sure. This is John. I’ll take a shot at that one first. So when we look at the subscription line overall, I think, an important thing to keep in mind is the mix of revenue. And so today we have SaaS revenue flowing through that line. We have revenue associated with our subscription service offerings, and then we have the maintenance and a small amount of term licenses left. And so all of those elements factor into what the overall gross margin will be on the SaaS side of things, we’re seeing pretty steady improvement in gross margin that comes at a higher level versus the subscription service offerings and that’s what — and then the total number that you see is a blended rate. And so all things being equal if we continue to see SaaS growing at a higher level versus some of the subscription service offerings we would expect to see improvements in gross margin overall.

Rishi Jaluria : Perfect. Really helpful. Thank you so much.

Jason Blessing : Thanks, Rishi.

Operator: Our next question comes from Brian Peterson with Raymond James. Please proceed.

Johnathan McCary : Hello. This is Johnathan McCary on for Brian. Thanks for taking the question. So, on the SaaS transition I think you’ve spoken to maybe shifting some resources away from focusing on that transition and driving upsell and instead focusing on net new logos. So, do you expect any incremental investment needed there in your sales and marketing department, or the hiring last year kind of sets you up to shift that focus. And then how do you think about tweeting that go-to-market motion internally?

Jason Blessing: Yes. So, it’s really the latter. When you look back over the last three or four quarters, we were hiring and building out our new logo team both from a leadership perspective as well as a rep perspective. And that team especially over the last three, four years have not gotten as much investment because we were so focused on the base and so focused on transition. So, I’m super excited about that team and I think they’re going to have a strong finish to this year and be a major growth driver for us next year. And then in terms of the customer base, it’s the same reps that can — self-transitions that also do cross-sell and upsell. And as I talked about earlier in response to the question about some of the patterns we’re seeing, we think that makes a lot of sense because reps build great relationships and understanding of the customers’ business pitching and driving the transition and then that makes it easy for them to relatively easier to follow on with add-on products.

So, all of that said, we feel pretty good about our level of investment in sales right now and I think we’ve got the right capacity as we end the year and look forward to next.

Johnathan McCary: Okay. Thank you. And then kind of on the life sciences regulation front there’s obviously a lot of focus on legislation at rainmaker. And I know that you’ve mentioned 340B has been a key driver of upsell. But can you kind of approximate maybe what inning we’re in for 340B and state price transparency and then kind of maybe the compliance-based opportunity overall? Thanks.

Jason Blessing: Yes, I think the unique thing about the compliance opportunity is I don’t know that it’s a finite game with the beginning in the end like a baseball game for the analogy used by customers that resonates with me and they talk about it more like the tax code that just keeps getting more and more complex and as we’ve talked about we benefit from that. That said, certainly with 340B and our solutions it’s a big part of our pipeline right now. So, I think that’s a good — shows that we’re still early there and our solution is resonating with customers state price transparency management also a big part of our pipeline and in the early innings. And then we haven’t even really gotten started with the Inflation Reduction Act.

We’re still working with our customers and industry experts to fully sort out how that gets implemented. So, I guess, the more of the story is the changes in regulation continue to be a tailwind for us and an opportunity for new products as well.

Operator: Our next question comes from William McNamara with BTIG. Please proceed.

William McNamara: Hi. This is Bill on for Matt. Thanks for taking my question. I know you guys mentioned that the selling environment is stabilizing. I just kind of wanted to know do you think or have it forecasted to improve in the fourth quarter? Like how should we think of if we’re approaching a bottom if you will?

John Ederer: Yes, I would say that I would take the comments at face value. I think when we look at the macro environment, we don’t have a perfect crystal ball. And so, we look at where we are currently today and we do our best to line up what we think the forecast should be. And so, that’s the way we’ve done it. I would say, it’s a very similar approach to the way we’ve always approached guidance and taking a constructive view based on our line of sight today.

William McNamara: Great. Thanks.

Operator: The next question comes from Austin Cole with JMP Securities. Please proceed.

Austin Cole: Thanks for taking the question. So this is all sounding pretty positive. At a high level Jason maybe, what are your — what are your top two priorities heading into the fourth quarter? And maybe it’s something from your prepared remarks, but I’d love to just hear what are the top two things you’re focused on heading into the next quarter? Thanks.

Jason Blessing: Yes. That’s a good question. So certainly making sure that we’re in a position to wrap up transitions as we approach embolize. I mean transitions are important to us because it drives near-term sales, it sets up cross-sell upsell and helps with some of the expense realizations that John was talking about. So I’m very focused on that part of the business and also very focused on the new logo part of our business. As I’ve talked about we’ve been very focused on the customer base for obvious reasons. But as I look forward, I’m super excited about the new logo opportunity. I’m excited about the pipeline. I’m excited about some of the big customers that have engaged with us that I’ve been personally involved in their sales cycles and so making sure that team is in good shape and ready for next year is the second priority.

Austin Cole: Great. Thanks to hear.

Operator: This concludes today’s call [indiscernible] to Jason Blessing the CEO for closing comments.

Jason Blessing: Well, thank you operator, and thank you to everyone for attending our call tonight. I wish you all a great conclusion to your summer. And John and I look forward to seeing you out on the road in August and September. So, thanks again everyone and have a great night.

Operator: This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day.