Model N: An IPO Worth Betting On

Mar.20.13 | About: Model N (MODN)

Revenue management company Model N (NYSE:MODN) is set to hit the stock market with a Wednesday IPO that should see moderate interest. The company competes in the growing field of cloud based solutions for large businesses. Model N also counts numerous recognizable names as customers and could be more familiar than investors know.

A total of 6.46 million shares are set to price at a range of $12.50 to $14.50. The six million shares come directly from Model N, while one seller is responsible for the other 460,000 shares. A total of 21.4 million shares will be outstanding after the company's IPO.

From the company's prospectus, Model N is a "provider of revenue management solutions for the life science and technology industries, and we believe that we are a pioneer of the market." The company's slogan of "More Revenue. Made Simple." is really what the company is all about. Model N works on providing cost savings for pharmaceutical, medical device, and technology companies. The company offers the following:

· Price management

· Deal management

· Contract management

· Incentives and rebates

· Regulatory compliance

· Sales

· Marketing

· Finance

Model N's Solutions:

· Driving optimal pricing and contracting strategies

· Realizing greater value from contracts

· Maximizing revenue by standardizing and enforcing pricing and discounting

· Executing and optimizing channel incentives

· Achieving accurate financial reporting

· Automating government regulatory compliance to reduce revenue risk

The company's strengths include:

· Comprehensive approach to revenue management

· Deep domain knowledge

· Strong installed customer base

· Flexible delivery options

· Talented team focused on customer success

Growth Strategy

· Increasing sales to existing customers

· Expanding our customer base

· Introducing new applications and enhancing existing solutions

· Extending into the mid-market through the cloud

· Expanding our presence in the technology industry

· Pursuing selective acquisitions

Model N lists the following companies as customers:

· Pharmaceutical - Abbott Laboratories, Amgen, Boston Scientific, Bristol Meyers Squibb, Johnson & Johnson, Merck

· Technology - Dell, Nokia, STMicroelectronics, VMWare

The large customers are a nice list of recognizable names. One of the company's strategies is to start appealing to the mid-market companies. This is now more possible with Model N's acquisition of LeapFrogRX in January 2012. LeapFrogRX is a cloud based analytics manager for the pharmaceutical field.

The company counts on its largest companies for the majority of its revenue, creating a possible dependence on certain companies. In 2012, the company's 15 largest customers accounted for 75% of its revenue. Merck and Amgen made up the largest percents at 14% and 10% respectively.

Model N is growing revenue at a good rate, but has posted several recent losses for net income. Here is a look at revenue and net income:

License and Implementation Revenue

SaaS and Maintenance Revenue

Total Revenue

Net Income

Fiscal 2010

$31.8 mil

$18.7 mil

$50.4 mil

$0.6 mil

Fiscal 2011

$41.5 mil

$23.7 mil

$65.2 mil

$1.5 mil

Fiscal 2012

$49.8 mil

$34.5 mil

$84.3 mil

-$5.7 mil

Q4 2011

$11.4 mil

$6.7 mil

$18.1 mil

Q4 2012

$12.5 mil

$9.9 mil

$22.3 mil

Click to enlarge

SaaS revenue increased the most for the company, thanks in large part to the LeapFrogRX acquisition. Licensing revenue increased 10% in the fourth quarter. SaaS revenue increased 48% in the fourth quarter. Of the $3.2 million in additional revenue, $2.7 million came from the acquisition.

KKR (NYSE:KKR), through a joint venture with Accel has been an investor in the company since 2000. KKR will be selling 460,000 shares in the company. Prior to the offering, Accel-KKR owned 12% of Model N. After the IPO, Accel-KKR will still own 6.6%. A strong IPO could boost KKR as it can later sell off its remaining stake. After the offering, insiders and 5% shareholders will control over 50% of the company.

I expect Model N shares to price at the top end of their expected range. This is a growing company in growth markets that could provide a nice long term investment. I would be a buyer of shares if they stay under $20. My top five reasons for buying Model N on its offering are:

  • Acquisition of LeapFrogRX paying off and offering strong growth in SaaS
  • The company's focus on mid-market companies should boost revenue and decrease dependence on certain customers
  • The company has a 95% renewal rate, providing a strong steady stream of income
  • New cash from IPO should lead to acquisitions that can boost the company's growth
  • The company will be an acquisition target from larger business enterprise companies once it hits the open market

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MODN over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.