Model N, Inc. (NYSE:MODN) Q4 2023 Earnings Call Transcript

Model N, Inc. (NYSE:MODN) Q4 2023 Earnings Call Transcript November 9, 2023

Model N, Inc. misses on earnings expectations. Reported EPS is $0.01619 EPS, expectations were $0.3.

Operator: Good afternoon, and welcome to Model N Fourth Quarter 2023 Earnings Conference. [Operator Instructions] As a reminder, today’s conference is being recorded. I would now like to turn the conference over to Carolyn Bass, Investor Relations. Please go ahead.

Carolyn Bass : Good afternoon. Welcome to Model N’s Fourth Quarter and Fiscal 2023 Year-end 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 fourth quarter performance and to offer a financial outlook for our first quarter and fiscal year ending September 30, 2024. The commentary made on this call may include 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 and 10-K 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 to access our fourth quarter and fiscal 2023 year-end press release, periodic SEC reports, the webcast replay of this call and a supplemental Investor Relations deck for Q4, which includes some additional disclosures that John will review later on in the call.

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 am pleased to report that our fourth quarter results exceeded guidance for total revenue, subscription revenue and professional services revenue. We were in line with our quarterly guidance on adjusted EBITDA. Overall, Q4 was a strong quarter and demonstrates our commitment to driving profitable growth. Our Q4 SaaS metrics were also strong, driven by SaaS ARR, which grew by 20% year-over-year, while SaaS net dollar retention was 118%. Our strong SaaS ARR growth and improving profitability of prove points, that we are building a durable SaaS business. 2023 was a pivotal year in our business model transition, as we continue to successfully move our on-premise customers to the cloud.

We closed out the year with approximately 85% of our life sciences customers, either live or in the process of moving to the cloud, up from 70% a year ago. As you know, we have announced end of life for our on-premise solutions on December 31, 2023. I do expect that we will have a few customers that will need one or two more quarters to sequence their SaaS transition into their IT road map, but I continue to believe that we will convert substantially all of our customers. This is a truly remarkable accomplishment by our, given the complexity and mission-critical nature of our applications. To help put this accomplishment into context, I thought it would be worth a quick recap of the business model transformation that we have driven. Over the last 3 years, both our annual SaaS revenue and adjusted EBITDA have doubled.

This clearly demonstrates the leverage in our model and our philosophy of delivering profitable growth to shareholders. We have built a great SaaS franchise that provides mission-critical products to our customers. This is a great foundation for future, profitable growth as we collaborate with customers to build new products and add new customers to the Model N family. Next, I’d like to share some business highlights from the quarter. We delivered strong results that were powered by our key growth drivers of SaaS transition, selling back to the customer base and signing new logos. So let me share some examples. First, SaaS transition. As I’ve said on past calls, we wanted to take our tone with the final SaaS transition to make sure that we ended up with mutually favorable agreements with customers.

This approach is paying off. And in Q4, we signed 5 new SaaS transitions. First, we signed a SaaS transition with Bausch Health Companies, a globally diversified pharmaceutical company, whose mission is to improve people’s lives with their healthcare product. This deal builds upon a 20-year relationship between our two companies and set the stage for the next decade. Moving to our cloud will allow Bausch to more efficiently take advantage of innovation and performance improvements, while also staying compliant with the evolving regulatory landscape. We also kicked off the SaaS transition with another long-time customer, who is one of the largest producers of generic drugs in the world and employs over 20,000 people across more than 30 companies.

This customer renewed their 9 country footprint with the cloud and will eventually deploy 20 additional countries over the next 5 years. During the quarter, we also signed 2 additional long-time large pharma customers to SaaS transition. Like other customers that have transitioned, these 2 customers are looking for the quicker access to innovation, improved performance, more predictable costs and, of course, easier access to new regulatory enhancements. We also continue to see SaaS transitions paid dividends by setting up additional customer base sales, as we build out a multiyear road map. During Q4, we saw this category peak at one of our major customers that they will start with a SaaS transition, as well as add new products, including Validata, Advanced Membership Management and Ngage.

This example is particularly encouraging because Advanced Membership Management and Ngage are new products that we’ve released over the last couple of years. Validata is not a new product, but it is one of our more popular products that sets up future upsell like 340B Vigilance. This example is a clear testament to our ability to sell new products to our SaaS customers. Turning to business services. During the quarter, we signed several customer extensions and a new logo Alion. Alion decided to move from their current provider to take advantage of improved service levels around processing chargebacks, membership administration and Medicaid processing. Alion was seeking a partner with an organization that could drive improved client interactions and processing using industry best practices and technology.

We had a good quarter in high tech and this segment continues to show steady improvement. In Q4, Cirrus Logic, an innovator in low-power signal technology for top mobile and consumer applications selected Model N as their revenue cloud platform of choice. Cirrus Logic has been leveraging some of our on-premise solutions and will now move all of their processing to our cloud. This move will allow them to streamline their processes, make it easier to collaborate with their partners and consume new releases. Also in Q4, Model N was selected as the Vendor of Choice to be a management at Allegro MicroSystems, a global manufacturer of sensor integrated circuits, used by the automotive and industrial markets. Allegro has a goal of reducing technology platform, while automating inefficient manual processes with channel partners.

Deal management will replace multiple homegrown systems and help Allegro better manage global prices, automated loading and discount controls. 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 improvement. Our professional services team continues to do a terrific job of getting new customers live, on time and on budget. One project in particular, that I’d like to call out is J&J and their successful cloud go live to support their Pharma business. J&J is a longstanding Model N customer and this project required the key to ensure success in 2 key areas: J&J’s complex integrations with their downstream IT infrastructure, as well as a customer reporting system.

We were able to meet the needs of the customer, and we were also able to pull the go-live forward by 1 full month to accommodate J&J’s quarter-end requirements. As we focus on the future, we continue to build new products in collaboration with our customers. Two recent examples that launched in Q4 are channel collaborations and Medicaid automated invoice retrieval. Channel collaboration is a new portal that allows our high-tech customers to collaborate in real time with training partners around sales and incentive data. Historically, this business process was done manually via e-mail and was sought repairs. Our channel collaboration portal will allow customers to more accurately pay their partners, which will drive efficiencies in channel costs and improve overall channel partner satisfaction.

Also during Q4, we started to deploy Medicaid automated invoice retrieval with our design partners, including one of our top 5 global pharma customers. This new product is a robotic process automation enabled service that automates acquisition and ingestion of quarterly Medicaid invoices, which was historically been done manually and therefrom. Manufacturer using this offering can expect significant productivity and cost improvements each year. We expect to make this product generally available this quarter. In closing, I am extremely pleased with another year of driving profitable growth. Our fiscal 2023 results reflect the strong collective effort of Model N around the world. As I outlined at the start of the call, our successful 5 transition is clearly showcased by the leverage we’ve demonstrated in our model in a very short period of time.

Both our annual SaaS revenue and adjusted EBITDA, have doubled in just 3 years. Looking ahead, our objective is to continue to deliver value to our customers, while driving growth and improving profitability. With that, I’ll turn the call over to John to discuss our Q4 financial results and offer our outlook for Q1 in fiscal 2024. John?

John Ederer : Thank you, Jason, and good afternoon to everyone on the call today. As Jason noted, we delivered another good quarter in Q4, and we closed out fiscal 2023 with every metric, total revenue, subscription revenue, professional services revenue, adjusted EBITDA and earnings per share, all exceeding the high end of the guidance range, that we set at the beginning of the fiscal year. I was particularly pleased by our profit performance with adjusted EBITDA growing by 34% in fiscal 2023 and non-GAAP earnings per share up 54% for the year. As Jason also described, we are working through the final cohort of SaaS transition. And we’ll talk a little more about the impact of our business model in a few minutes. Looking specifically at our financial results for the fourth quarter.

Total revenue grew $64 million, which exceeded the top end of our guidance. Subscription revenue increased by 8% to $46.4 million, also exceeding the upper end of our guidance range. Lastly, professional services revenue by 15% to $17.5 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’ll be discussing non-GAAP numbers and a full reconciliation of our results is provided in our earnings release. For the fourth quarter, total non-GAAP gross profit was $39.6 million, representing a gross margin of 61.9% and up slightly on a sequential basis from Q3. Total non-GAAP subscription gross margin was 69.2%, which was flat sequentially from Q3.

And non-GAAP Professional Services gross margin was 42.3% in Q4, which once again was exceptional performance by the team. Operating expenses for Q4 were higher than expected, due to roughly $2 million of nonrecurring G&A expenses, related to a corporate development initiative that we are no longer pursuing. We expect another $1 million of expense related to this in Q1 of FY ’24. As a result, adjusted EBITDA was $11 million, an increase of 34% from the fourth quarter of fiscal 2022, but at the low end of our guidance range for the quarter. Adjusted EBITDA margin improved to 17.2% compared to 14.1% for the fourth quarter last year. Finally, non-GAAP income for Q4 was $12.2 million, up 59% year-over-year and non-GAAP earnings per share were $0.31, which was at the high end of our guidance.

For the full year of fiscal 2023, total revenue grew 14% to $249.5 million, subscription revenue increasing by 14% to $181.4 million and Professional Services revenue up 15% to $68.1 million. Gross profit grew to 152.6 million, representing a gross margin of 61%. Adjusted EBITDA grew by 34% to $42.9 million, representing an EBITDA margin 17.2% versus 14.6% last year, and non-GAAP earnings per share grew by 54% to $1.11 versus $0.72 last year. Turning to our SaaS metrics for Q4, our SaaS ARR reached $131.2 million, which was an increase of $21.8 million or 20% versus Q4 of last year. In addition, trailing 12-month SaaS net retention was 118% in Q4. Earlier this year, our SaaS ARR growth rate and net retention metrics partially benefited from SaaS transition activity, reaching a peak in our fiscal Q2 this year.

The Q4 results were right in line with our target. In terms of the balance sheet, we ended fiscal 2023 with $301.4 million in cash and equivalents, which was up $108 million from the end fiscal 2022. Approximately $80 million of the increase in cash was due to the refinancing of our convertible debt in the second quarter with the remainder coming primarily from operations. Turning to remaining performance obligations. Our total RPO for Q4 was $344.6 million, which was up 3% on a year-over-year basis. The current portion of our RPO balance was up to $148.3 million, representing growth of 12% year-over-year. As I noted last quarter, our total RPO has been impacted by SaaS transition activity, over the last year or so. 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 3 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. Before we get into the details of our guidance for next year. We recognize that it can be difficult to understand some of the underlying trends in the business during the transition. A strong growth in SaaS revenue has been partially offset by declines in maintenance and term license revenue. A few years ago, introduced SaaS ARR and net retention metrics, provide insight into the rapidly growing SaaS business that is embedded within our subscription revenue line. Today, we are providing more details on the 3 components of our total subscription revenue, one, SaaS revenue; two, subscription services revenue; and three, maintenance and term license revenue.

The first two, SaaS and subscription services, represent the go-forward subscription revenue of the company, which was up 22% on a combined basis in FY ’23 with SaaS growth of 30% and subscriptions services growth of 2%. The third is our legacy maintenance and term license revenue, which declined by 35% in FY ’23. As we have been actively converting those customers to SaaS. You can find the detail for the last 3 years on Page 12 of the Investor Overview deck, that is posted on our website, and we will disclose these components annually going forward. As we look ahead to fiscal ’24, it will be another year of transition, and we expect solid growth in SaaS to again be partially offset by declines in maintenance and term licenses. More specifically, we continue to set a goal for SaaS ARR growth of 20% but the comparisons to last year will be very difficult, especially over the first 2 to 3 quarters, where we expect growth rates to be in the mid-teens.

For our subscription services business, we noted last quarter that we have seen some slowdown in growth for these offerings, due to the general macro environment, and we would expect flat to low single-digit revenue growth for this segment again next year. Finally, we expect the combination of maintenance and term licenses to decline even more rapidly in FY ’24, dropping by more than 50%, as we approach the end of this revenue stream. In summary, for FY ’24, we expect total revenue to be in the range of $260 million to $263 million. We expect subscription revenue to be in the range of $193 million to $195 million, representing growth of 6% to 8% and right in line with the preliminary outlook that we provided on our Q3 earnings call. Finally, we expect professional services revenue in the range of $67 million to $68 million, which would be about flat with last year.

I would note that Professional Services revenue exceeded our expectations in FY ’23, making for a very difficult comparison in FY ’24. We expect adjusted EBITDA for the year to be in the range of $48 million to $51 million, representing continued improvement. And finally, for non-GAAP EPS, we expect a range of $1.25 to $1.32 per share, based on a fully diluted share count of approximately 40.1 million shares. For Q1 fiscal 2024, we expect total revenue to be in the range of $61.5 million to $62.5 million, with subscription revenue in the range $46.5 million to $47 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 $8.5 million to $9.5 million. And non-GAAP EPS to be in the range of $0.29 to $0.31 per share, based on a fully diluted share count of approximately 39.2 million shares.

Finally, we’ve also included a midterm view business on Page 16, in the Investor Relations deck. As we look forward a few years and contemplate a normalized business model post transition, we believe that we can return to double-digit total subscription revenue growth, while continuing to improve adjusted EBITDA margins into the mid-20s. While the math is working against us in FY ’24, it starts to improve once we get through the downdraft of maintenance and term license. In summary, by maintaining SaaS growth in the 15% to 20% range, slightly improving subscription services growth to the mid-single-digit range and eliminating the year-over-year declines from maintenance and term license revenue, we would expect the blended growth rate for total subscription revenue to be in 10% to 15% range.

On the profitability side, we believe we can drive adjusted EBITDA margins into the low to mid-20s by continuing our steady performance and focus on profitable growth. Combining these two elements, we can see a path to a rule of 40 business over the midterm, based on subscription revenue growth and adjusted EBITDA margin. With that, I’ll turn call over to the operator for any questions. Operator?

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Q&A Session

Operator: [Operator Instructions] And you first question comes from Adam Hotchkiss with Goldman Sachs.

Adam Hotchkiss : Great. I guess, John, could you just break out the pieces a little bit more for us on the fiscal ’24 guidance relative to what you provided us last quarter in your soft guidance, how you’re thinking about SaaS ARR. I know you mentioned, there might be a mid-teens growth there in the beginning of the next couple of quarters relative to the 20% you had provided last quarter. And then just any way you’re thinking about maintenance and term license and the business services line, relative to last quarter, just breaking down the expectations across those 3 would be really useful.

John Ederer : Yes. Sure, Adam. I think we made some of these comments in the prepared remarks, but maybe I’ll just reiterate a few things. I think, first off, in terms of the total subscription number and the growth rate that is right in line with outlook that we provided on the Q3 call. And so, when I look at some of the components of that on the SaaS ARR in particular, we do continue to set a goal for Saas ARR growth of 20%. But the comparisons to last year are going to be pretty challenging, especially over the first 2 to 3 quarters. And so over the first, let’s call it, first half to 3 quarters of the year, we would expect growth rates to be in mid-teens. In terms of the other elements, again, we laid those out in the comments as well.

So for maintenance and term license revenue, we expect that to decline pretty significantly again in FY ’24, probably dropping by more than 50% next year. And then on the subscription services piece, which includes application services and business services, there, we’re expecting to see flat to low single-digit growth again next year.

Adam Hotchkiss : Okay. That’s really helpful. And then just, Jason, anything you would call out on the regulatory side. I know there are a number of products you’ve had launched through Rainmaker and have had a number of customer conversations on in relation to recent regulation. Just any updates on how customers are responding to that and how that momentum is going?

Jason Blessing : Yes. So we’ve got products in market right now to deal with some of the State Price Transparency laws that have been acted over the last 3, 4 years. That is actually — last year was one of our best-selling products in terms of cross selling into customers. So I think that tells you right there how important State Price Transparency is to customers. We’ve also just recently or last year released a 340B product called 340B Vigilance, that helps customers deal with that purchasing program and supplying therapies into low-income community. And we’ve really seen nice pipeline build there and have been working with a couple of our lighthouse customers to continue to enhance the product. So those have been definitely two stars for us that show regulatory is top of mind and then, we just issued a press release if it wasn’t yesterday, it was today on our life sciences fall ’23 release, and that’s going to start to lay some of the groundwork for the Inflation Reduction Act.

And the pharma companies that are going to be impacted by that. There’s roughly 10 therapies on the first round of focus by the government and virtually all of those therapies are produced by our customers. So we’re starting to layer in Inflation Reduction Act functionality as well. So it’s a part of every one of our conversations, Adam. It’s a great question.

Operator: Your next question comes from the line of Ryan MacDonald with Needham.

Ryan MacDonald : Nice quarter. Jason, I’m curious, as you think about the professional services and the business services side of the business, I’d be curious to see what here — more about what’s contemplated in the growth for next year, particularly as today, another vendor in the space had called out and lowered their guidance based off of sort of less discretionary spending on services from Life Sciences companies, as they look out over the next year. Just curious if you’re seeing any impact at all or how much of that sort of contemplated in the updated guidance for ’24?

Jason Blessing : Yes. I might have seen that other vendors that you’re referencing, Ryan. Yes. I mean as we’ve talked about the last couple of quarters, so we have a subscription services bucket. And in that bucket is business services and then some enhanced service offerings that we provide to our customers. And I think we talked about in Q2, but especially on the Q3 call. We have seen some macro impact on those two. It’s been well published that the emerging biotech and mid-market pharma segment has been impacted by the constricting financial markets and lack of availability to capital. So we see a little bit of impact there in business services, as fewer drugs are approved and fewer companies are looking to scale in market segment.

And then certainly on the application services, which is the enhanced services, those are things that companies of all sizes as they’re tightening their belts, at times, see as discretionary. So there’s a little bit of macro pressure for us, it was in those 2 segments, and it is reflected in the guide that we just provided, as well as our midterm model.

John Ederer : Ryan, this is John. I’ll just call a distinction to Professional Services, which is our implementation team. It’s a little bit of a different dynamic there. The team has been doing extremely well, over the last couple of years, and they’re still carrying quite a bit of project backlog into FY ’24. However, with the over-performance in FY ’23, it’s setting up for some pretty difficult comparisons. And so it will be harder for that piece of the business to grow next year.

Ryan MacDonald : I appreciate that additional color there, John. And maybe as a follow-up for you. Great to see and thanks for providing some of those midterm targets and walking us through some of the math there. Just curious, as we think about the 23% to 26% adjusted EBITDA margin targets in the midterm, can you talk about sort of where you expect across the P&L to get the most leverage? Are you seeing more at the gross margin level, as revenue mix shifts over the next few years? Or how much do you think more you can squeeze out on sort of the OpEx, which already runs pretty efficient?