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Model N, Inc. (NYSE:MODN)

F2Q 2014 (Qtr End 03/31/2014) Earnings Call

May 1, 2014, 5:00 PM ET

Executives

Greg Kleiner - Investor Relations

Zack Rinat - Chairman and Chief Executive Officer

Sujan Jain - Senior Vice President and Chief Financial Officer

Analysts

Nandan Amladi - Deutsche Bank

Operator

Greetings and welcome to Model N Second Quarter Fiscal 2014 Financial Results 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.

It is now my pleasure to introduce your host, Mr. Greg Kleiner from Investor Relations at Model N. Thank you, Mr. Kleiner, you may begin.

Greg Kleiner

Thank you. Good afternoon and welcome to Model N second quarter fiscal year 2014 earnings conference call. Joining me today are Zack Rinat, Model N's Founder, Chairman and CEO; and Sujan Jain, Model N's SVP and Chief Financial Officer. Following their prepared remarks, we will take your questions.

Our press release was issued after close of market and is posted on our website and this call is being simultaneously webcast. The primary purpose of today's call is to provide you with information regarding our second quarter fiscal 2014 performance in addition to our financial outlook for our third quarter and full year fiscal 2014.

Commentary made on this call may include forward-looking statements. These statements are subject to risks, uncertainties and assumptions. Please refer to this press release and Risk Factors in documents filed with the Securities and Exchange Commission, including our Annual Report on Form 10-K and our quarterly reports on Form 10-Q for information on risks and uncertainties. Should any of these risks or uncertainties materialize or should our assumptions prove to be incorrect, actual company results could differ materially from these forward-looking statements.

In addition, during today's call, we will discuss non-GAAP financial measures. These non-GAAP financial measures, which are used as measures of Model N's performance to be considered in addition to not a substitute for or in isolation from GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results in our press release.

In times in a response to your questions, we may offer incremental metrics to provide greater insights and the dynamics of our business or quarterly results. Please be advised that this additional detail may be one-time in nature and we may or may not provide an update in the future on these metrics. I encourage you to visit our Investor Relations website at investor.modeln.com to access our second quarter fiscal year 2014 press release, periodic SEC reports, webcast replay of this call, which will also be available for the next 45 days.

Finally, unless otherwise stated, all financial comparisons in this call will be to our results for the comparable period of our fiscal 2013.

And with that, let me turn the call over to Zack.

Zack Rinat

Good afternoon, everyone, and thank you for joining us today to discuss our results for the second quarter of fiscal year 2014. We reported $20.7 million in revenues and a non-GAAP operating loss of $1.9 million for the second quarter, both of which were above our guidance. Our business continues to improve and we are pleased to increase our guidance for the balance of the year.

We focused in Q2 on continuing to execute the strategy that we set for Model N in the beginning of the year and we made further progress with our sales execution during the period. While our booking can significantly vary from quarter-to-quarter, given the large and strategic deals we signed, I'm pleased to report that Q2 was a record booking quarter in the history of the company. In addition, we had a record booking for the first half of the year.

We also announced today two significant additions to our management team that I believe will help us to continue to execute going forward. I'm excited to announce that Mark Tisdel will be rejoining Model N as the SVP and Chief Financial Officer. Mark previously held the CFO role at Model N from 2008 to 2010 and held the role of VP of Finance and Corporate Controller at Model N prior to being promoted to CFO. In both roles, Mark was instrumental in driving our financial strategy. Mark has spent more than 25 years in various senior financial roles, including CFO at Steelwedge Software and Spigit. His knowledge of the business, people and systems at Model N will prove invaluable as we move forward. Mark will officially start in his new role in the company on May 26, but will start the transition with Sujan soon. Sujan has decided to leave Model N effective May 16 to pursue another opportunity.

In addition, I'm excited to add Shail Khiyara as Chief Marketing Officer. One of the key requirements for Model N to fully realize our potential is to increase our visibility and help drive our vision for revenue management market. Shail is perfectly suited for this role. He has spent nearly 20 years in the technology industry in variety of senior leadership roles including Spigit where he served as a Chief Marketing Officer and Chief Customer Officer, Taleo where he served as the SVP and Chief Marketing Officer, Evault where he served as an SVP of the Data Protection Business Unit, and Verisign where he served as the Managing Director in Europe. Shail assumed his new role as the Chief Marketing Officer effective April 29th.

I'm looking forward to working closely with Mark and Shail to take Model N to the next level.

In addition to the management addition I mentioned, we continued to drive further organization improvement to enable taking Model N to the next level. We promoted our Vice President of Sales for LS in the US to be the General Manager of Europe, and we hired a new Vice President of Sales for Life Sciences in the Americas. We believe that Europe will present an exciting expansion opportunity for Model N.

So let me transition back to a review of our quarter. Our strong booking performance was driven by strong and balanced performance across both vertical and geographies. In the second quarter, we closed two large deals in our Life Sciences verticals. Both deals represent a significant expansion to new divisions of J&J and Stryker. Our successes with both customers and the tangible value that we deliver to them were paramount in expanding our relationship with both companies. It is further evidenced of the progress that we have made in addressing sales execution. Finally, it points to the value proposition and opportunity for revenue management in our solutions.

Last week, we held our annual customer conference, Rainmaker, in Savannah, Georgia. During Rainmaker, we made two exciting announcements regarding our partnership with salesforce.com and the powerful potential of combining CRM with revenue management. This partnership enables Model N to deliver vertical-specific applications build on the Salesforce1 Platform for the pharmaceutical, manufacturing, medical device and semiconductors and component manufacturing verticals, enabling our customers to maximize their revenues.

REVVY CPQ and REVVY Global Price Management are already available on the Salesforce1 AppExchange, empowering business to connect with their customers, partners and employees in a whole new way. As part of this expanded partnership, we'll also be developing a new product, REVVY Sales Application Suite for semiconductors and component manufacturing.

As we have worked with our customers in this industry over time, we realized that there is tremendous market opportunity to unify CRM and revenue management to maximize revenues. Building vertical applications has been the hallmark of Model N since our inception. The REVVY Sales Application Suite will enable semiconductors and component manufacturers to leverage critical vertical needs such as design registrations for both direct and channel sales. It will be integrated with our revenue management application and it is an expansion of our previous effort with REVVY CPQ and REVVY Global Price Management to better connect our platform into the sales function.

We believe that this will create significant market opportunity and expand our total addressable market. We intend to bring this product to the market over the course of the year. We believe that we will be able to drive booking from this new product in fiscal year '16, but we do not believe that it will have a material impact on revenue until sometime after fiscal year '16. Overall, I was happy with the progress we have made and the outcomes of the quarter. At the same time, we still have work to do to ensure consistent execution.

We remain excited about the market opportunity for revenue management and we believe that the salesforce.com partnership represents a strategic opportunity to bring the power of revenue management to the sales function.

Before turning the call to Sujan, I wanted to extend personal thank you on behalf of myself, the Board and the rest of the company to Sujan for his many contributions. We all wish him the very best in his next endeavor. So with that, let me turn now the call to Sujan to discuss our financial results and guidance in more details.

Sujan Jain

Thank you for those kind words, Zack. I also like to thank you and the Board of Directors along with all of our customers, investors, analysts and employees for the opportunity to work together over the last few years. This was a very painful decision for me to leave Model N to pursue another opportunity. There's never a right time to leave a company, but I'm pleased to leave the company while Model N is on better footing and coming off record bookings quarter. I'm happy to hand the reigns over to Mark, as I know that his knowledge of the company and leadership experience will serve him well here. I'm committed to ensuring a smooth transition.

That being said, let me turn back to the results of the quarter. Total revenues for the second quarter were $20.7 million, above the high end of our guidance of $20.0 million to $20.5 million. This compares to a $24.6 million in total revenue in the second quarter of fiscal 2013, with the year-over-year decline resulting from the sales execution issues that we discussed in recent periods.

Within total revenue, license and implementation revenues were $9.8 million and SaaS and maintenance revenue were $10.8 million. The year-over-year increase in SaaS and maintenance revenue was due to a $600,000 increase in maintenance and application support revenue and $100,000 increase in SaaS and related implementation revenue. The decrease on a sequential basis for our SaaS and maintenance line was driven by the seasonal effect of the LeapFrogRX product line that we discussed on the last earnings call.

Internally we expect the amount of revenue coming from existing customers who generated revenue in each of the last four quarters in an effort to monitor our sales into our install base. In the second quarter of fiscal 2014, this metric was $89.1 million compared to $83.0 million for the second quarter of fiscal 2013.

Before I move on to profit and loss items, I would like to preface my comments by pointing out that I would be describing non-GAAP results from this point onwards. For the second quarter of fiscal 2014, this items exclude $2.8 million of stock compensation charges, $82,000 of amortization from acquired intangibles and $101,000 in compensation charges related to LeapFrog acquisition.

Gross profit for the second quarter was $11.5 million compared to $13.3 million in the second quarter of fiscal 2013. Similar to the first quarter, gross profit in this quarter includes an impact of roughly $400,000 from the amortization of capitalized software that began upon the launch of our REVVY CPQ product. Gross margin in the quarter was 56%, up year-over-year when compared to 54% in the second quarter of fiscal 2013.

Research and development expense was $4.3 million compared to $4.4 million in the second quarter of fiscal 2013. Sales and marketing expense was $5.6 million compared to $5.3 million in the second quarter of fiscal 2013. G&A expense was $3.5 million compared to $3.6 million in the second quarter of fiscal 2013.

Operating loss for the second quarter was $1.9 million compared to a slight operating profit in the second quarter of fiscal 2013 and above our guidance of operating loss of $4 million to $3.5 million. This was driven by the improved performance in both our revenue and gross margin lines. Net loss in the second quarter was $2.0 million compared to $200,000 in the second quarter of fiscal 2013. This produced a net loss per share of $0.08 based on a fully diluted share count of 24.4 million shares compared to a net loss per share of $1 based on a fully diluted share count of 16.4 million shares in the second quarter of fiscal 2013. This was above our guidance of a net loss of $0.17 to $0.14 per share.

Adjusted EBITDA for the second quarter was negative $1.1 million compared to positive $500,000 in the second quarter of fiscal 2013. We ended the second quarter with $101.7 million of cash and short-term investments, down slightly from $102.8 million at the end of the first quarter.

Accounts receivable at the end of the quarter were $20.4 million, up from $16.7 million at the end of the first quarter. Our total deferred revenue was $25.7 million at the end of the quarter. As we have mentioned previously, it is important to understand that we believe our deferred revenue balance is not a meaningful indicator of the business activity during any particular quarter, as the timing of invoicing under our contracts impacts this item, because we do not bill our customers upfront for the total contract fees.

For the second quarter, cash flow used by operations was $4 million, which after considering CapEx of $400,000 produced a negative free cash flow of $4.4 million. This compares to cash used by operations of $1.4 million in second quarter of last year, which after considering $300,000 of CapEx and $800,000 of capitalized software produced a negative free cash flow of $2.5 million.

Similar to our prior comments, in regards to our receivable and deferred revenue balances, there can be some quarter-to-quarter variability in our cash flow as it is impacted by the timing of invoicing under our contracts.

Moving on, let me now outline our guidance for the third quarter of fiscal 2014 as well as our expectations for the full fiscal year 2014. For our third quarter ending June 30th, we expect total revenues to range from $19 million to $19.5 million, non-GAAP loss from operations in the range of $4 million to $3.5 million. This would lead to non-GAAP net loss per diluted share in the range of $0.16 to $0.14 based upon a weighted average share count of 24.8 million shares.

For fiscal 2014 as a whole, we now expect total revenues to range from $80 million to $82 million. This is an increase from our prior guidance of $76 million to $80 million. Non-GAAP loss from operations in the range of $11 million to $9 million, an improvement from our prior expectations of a loss of $20 million to $17 million. This would lead to a non-GAAP net loss per diluted share in the range of $0.45 to $0.37 based upon a weighted average share count of 24.5 million shares, an improvement from our prior expectations of $0.82 to $0.69.

In addition to the formal guidance, I would also like to add a few comments about the remainder of fiscal year 2014 and our outlook for fiscal year 2015. During my commentary on the last call, I mentioned that we expected non-GAAP gross margin to be a bit above 50% for the full fiscal year 2014. Given the further progress we have made with the business in the second quarter, we currently expect non-GAAP gross margin to be in the low to mid-50%s for the fiscal year as a whole.

While we don't provide guidance for free cash flow specifically, we expect cash used by operations for fiscal year 2014 to be between $5 million to $7 million. Finally, as we can see in the revenue guidance for third quarter and the resulting implied revenue guidance for the fourth quarter, we are currently expecting the revenue to bottom in the third quarter and begin to improve from there. Furthermore, fiscal year 2015 is shaping up as a growth year for revenues and we expect to provide further updates during our next earnings call.

In summary, the company has made some solid progress on its core initiatives in the past quarter and has continued to put some of its execution issues behind it. I'm confident that the company is headed in the right direction.

With that, I'd like to thank everyone once again and wish the entire team of Model N the best of luck in the future. We will now open the floor for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Nandan Amladi of Deutsche Bank.

Nandan Amladi - Deutsche Bank

So, Zack, a question for you on the management changes. Obviously you had a very good quarter. Why make even more changes at the top while things are just starting to get better?

Zack Rinat

Changes are about growing the company and taking the company to the next level. One change that we made is because Sujan decided to pursue another opportunity. So we hired Mark Tisdel who was previously Chief Financial Officer for the company. And I think we're very excited about Mark coming to the company, because of his knowledge of the business, but furthermore because he brings a wealth of experience in the finance positions and SaaS and to really give us ability to take the company to the next level.

I'm also very excited about adding Shail to the company. We did not have a Chief Marketing Officer at the company. Marketing is paramount as we grow the company to the next level. We are embarking on creating the market for revenue management. And we have a great asset with the success that we had with our customers so far. The conference that we had last week at Rainmaker was really illustration of the potential of revenue management and the impact that it has on our customers. Shail has the experience to create category and to take marketing to the next level. And as you know, one of the reasons behind taking the company public was really to grow and to drive marketing and sales to the next level.

So I believe that now with Shail as the head of marketing and with Chris Larsen driving worldwide sales, we really have a winning team that will be able to leverage on the opportunity and to scale the company to the next level.

Operator

And our next question comes from Brendan Barnicle with Pacific Crest.

Unidentified Analyst

This is (inaudible) for Brendan. Just wondered if you guys could comment on competitive environment more generally and how pricing is holding up, especially in the Life Sciences segment.

Zack Rinat

So when you look at the competitive environment, I would say that the competitive environment remains kind of the same, of course, verticals and specifically in Life Sciences. When you look at the deals that we did this quarter, it was the one that we spoke in the install base and other one where we add new customers. There is always competition either from internal builds to the ERP companies and to some vertical competitors. And I'm very pleased with our winning rates. And we're making really a great progress in the markets.

Unidentified Analyst

Do you guys anticipate seeing any impact from sort of M&A that's occurring in that space?

Zack Rinat

As we all know, the Life Sciences industry is full with M&A these days. And I think you know we have some of the big M&A opportunities that are happening right now in the industry. I would say that in general, M&A activities so far were favorable to Model N. If you think about what happened when Merck and Schering-Plough came together, they both had legacy systems and manual processes in the variety of issues. And as part of their process, they decided to move on the legacy systems and combined forces on Model N. If you look at the acquisition of Synthes by J&J, they did provide us with the opportunity to expand our presence at the J&J. So I would say that for the most part, it's helpful for Model N. But from time to time, a customer of us may get acquired, where they will decide to do something else, but it's rarely the case.

Operator

(Operator Instructions) At this time, I'd like to turn the floor back over to management for closing comments.

Zack Rinat

Thank you for joining the call today and thank you all for your interest in Model N. I am encouraged by the progress that we showed in the past quarter, as well as the additional people that we added to the management team. We continue to believe that revenue management is a large and attractive market. We remain committed to capitalize on this opportunity and return the company to growth. Thank you again for your interest and we look forward to providing further updates on our progress in the future. Thank you.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.

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