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Edited Transcript of MODN earnings conference call or presentation 8-Aug-17 9:00pm GMT

Thomson Reuters StreetEvents

Q3 2017 Model N Inc Earnings Call

Redwood City Aug 12, 2017 (Thomson StreetEvents) -- Edited Transcript of Model N Inc earnings conference call or presentation Tuesday, August 8, 2017 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Barter

Model N, Inc. - CFO

* Staci Mortenson

ICR, LLC - MD

* Zack Rinat

Model N, Inc. - Founder, Executive Chairman and CEO

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Conference Call Participants

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* Brian Christopher Peterson

Raymond James & Associates, Inc., Research Division - Senior Research Associate

* Chad Michael Bennett

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Jackson Edmund Ader

JP Morgan Chase & Co, Research Division - Analyst

* Jessica Ann McHugh

Dougherty & Company LLC, Research Division - Senior Research Analyst of Software

* Patrick D. Walravens

JMP Securities LLC, Research Division - MD, Director of Technology Research and Senior Research Analyst

* Steven William Wardell

Chardan Capital Markets, LLC, Research Division - Senior Equity Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, greetings, and welcome to Model N Third Quarter 2017 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Staci Mortenson of ICR. Thank you, you may begin.

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Staci Mortenson, ICR, LLC - MD [2]

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Good afternoon. Welcome to the earnings results call for Model N's Third Quarter Fiscal Year 2017, which ended on June 30, 2017. With me today are Zack Rinat, our Executive Chairman and Chief Executive Officer; and David Barter, Model N's Chief Financial Officer.

A press release was issued after close of market and is posted on our website where this call is being simultaneously webcast. The primary purpose of today's call is to provide you information regarding our third quarter fiscal year 2017 performance and our financial outlook for our fourth quarter and full fiscal year 2017.

Commentary made on this call may include forward-looking statements. These statements are subject to risks and uncertainties and assumptions. Please refer to the press release and the 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 and uncertainties materialize or should our assumptions prove to be incorrect, actual company results could differ materially from those forward-looking statements.

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. Reconciliation of the non-GAAP metrics to the nearest GAAP metric 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 third quarter fiscal year '17 press release, periodic SEC reports and the webcast replay of this call.

Unless otherwise stated, all financial comparisons in this call will be to our results for the comparable period of FY '16.

With that, let me turn the call over to Zack. Zack?

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Zack Rinat, Model N, Inc. - Founder, Executive Chairman and CEO [3]

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Good afternoon, and thank you for joining us today. I'll start the call today discussing progress against our strategy for fiscal year '17 and beyond, progress on Revitas acquisition and Q3 fiscal year '17 highlights. I'll end my section of the call discussing the appointment of Neeraj Gokhale as our Chief Product Officer. David Barter, our CFO, will follow me with the financial details.

Model N executed extremely well in Q3 fiscal year '17 exceeding our guidance on both the top and bottom lines. Q3 fiscal year '17 is the third consecutive well-executed quarter and one where Model N delivered the strongest quarter in Model N history in key financial metrics, such as revenues, percentage of recurring revenue and gross margins percentage to name a few.

As we discussed in the previous call, the acquisition of Revitas created a unique strategic opportunity for Model N. We have developed and are laser focused on executing our integration strategy to deliver both financial and operational results. We're making the acquisition a success for our customers and our shareholders. We realize the remaining cost synergies from the Revitas acquisition in Q3 fiscal year '17.

Since the acquisition, we eliminated duplicated G&A, sales and marketing activities as well as the redundant products outside the life sciences vertical. We believe we've executed this process with a very strong unified team in a much stronger company. We continue to focus on our customers and their success by delivering on our strategy and vision for our revenue cloud product suite as well as Revenue-Management-as-a-Service or RMaaS.

On Wednesday, August 2, we delivered the Summer '17 Release on time across all our products, including the Power by Flex product we acquired from Revitas. As part of our integration strategy, we unified the engineering processes and product release schedule, and now we'll release the entire product line on a single date. The product team did an excellent job since the Summer Release, meeting the scope that we committed internally for Life Sciences, High Tech, Emerging vertical and for both Power by Flex and Power by Model N products. In particular, we met all previously planned Revitas product road map to enable our strategy.

With Summer '17, revenue cloud for pharma and for power by Flex will be offered as Revenue-Management-as-a-Service. The strategic value of our revenue cloud was demonstrated in Q3 fiscal year '17 by a significant number of go-lives, including those at Smith & Nephew, Edwards Lifesciences, J&J Japan, Stryker and Shire to name a few. Shire, which was a joint customer of both Model N and Revitas prior to the acquisition, went live with a single Medicaid solution as part of integration of Baxalta. Model N's integrated Medicaid solution enabled Shire to eliminate outsourcing cost, unified into One United Shire, realize cost efficiencies of a single system, leverage analytics strategically and is the first step in transition to the cloud and Revenue-Management-as-a-Service or RMaaS.

J&J Japan went live with a chargeback, which is part of our revenue cloud for MedTech. The revenue cloud for MedTech is interoperable with the SAP instance and delivers significant business processing efficiencies, including the shutting down of an expensive legacy systems. The endoscopy division of Stryker went live with our revenue cloud for MedTech enabling Stryker to implement the shared services operation to execute contracting, rebating, reporting and other strategic revenue management processes.

Within Life Sciences, the MedTech portion of our business has been strong as companies are taking advantage of our end-to-end revenue cloud offering. Model N enables MedTech companies to make the vision of CRM Square the reality by integrating CRM, revenue management and the ERP into a powerful force by -- for driving global revenue growth, combining the front office and the back office.

Our leadership with MedTech was further evident in Q3 by the addition of ICU Medical. ICU Medical is a provider of infusion care products, mainly sold to hospital and institutions. ICU Medical recently acquired Pfizer's infusion care businesses, making them one of the largest players and leaders in this space. As part of this acquisition, ICU had the challenge of integrating the Pfizer business in moving off the Pfizer systems, while still adhering to government regulations. In addition, they had the common business process challenges of managing large-scale processing, complex contracts, price transparency and expansive reporting with visibility into revenue and margins by channel, customer and product.

ICU selected revenue cloud for MedTech for several key reasons, including: first, the end-to-end revenue management suite, including contracts, pricing, rebates, compliance, analytics and reporting. Second, Model N interoperability with both Salesforce.com and Oracle ERP to deliver an integrated process. Third, a scalable solution, capable of meeting a growing global business. Fourth, agility to deliver in the cloud as Revenue-Management-as-a-Service. And fifth, reduce regulatory risk and Model N customers' track record to leverage the system to ensure compliance.

Naturally, we continued to make progress across our Life Sciences business by expanding within our existing customers, including the following examples. Outcome is a global biopharmaceutical company, focusing on innovative medicines, expanded their revenue management footprint by increasing the number of users as well as increasing the amount of business that runs through our applications. UCB Pharma, a global biopharmaceutical company, focusing on creating value for people living with neurology and immunology conditions, expanded the use of Model N to include additional 340B in Medicaid reporting.

Now I want to shift gears from our Life Sciences business and discuss our High Tech business. Like our Life Sciences business, the High Tech business also had a significant go-lives this quarter. Diodes is a leading global manufacturer and supplier of high-quality application-specific standard product within the broad discrete, logic and analog semiconductor markets. Diode serves in the consumer electronics, computing, communication, industrial and automotive market.

In Q3, Diodes went live with revenue cloud for High Tech to take the business processes to the next level. With revenue cloud for High Tech, Diode is leveraging new capabilities such as multi-tier situation programs and multi-tier quote-and-contracts approval workflow. Our High Tech business also added Sonos, the home wireless sound system entertainment company as a customer. Sonos subscribed to our Channel Data Management, CDM solution, which is part of our revenue cloud for High Tech, to deliver its RMS. Sonos will use this solution to manage transactions, rebates and commissions across their channel partners.

Our ability to aggregate massive amount of data and provide analytics was the key differentiator for the new customers win. I'm encouraged by the results of Q3 fiscal year '17 and our ability to raise guidance for fiscal year '17. Q3 fiscal year '17 is a testament to the strategic value of the Revitas acquisition and the strength of our combined effort for our customers and shareholders. We believe that we are in a strong position to deliver both the top line and the bottom line and in particular deliver positive adjusted EBITDA this quarter. We also believe this momentum will continue into fiscal year '18.

Last but not least, we're very excited to announce as Neeraj Gokhale as our new chief product officer. Neeraj joined Model N with strong reputation and deep expertise in delivering innovative enterprise software products at HP Enterprise, Oracle and TIBCO where he incubated and scaled software business through vertical industry expansion and transitioned from traditional to cloud businesses model. He is 2 times founder at Velosel and MartQuest where he helped to create new category of enterprise applications. Earlier, he was the management consultant at Booz Allen Hamilton. Neeraj holds an MBA from the Stanford Graduate School of Business and MS from the University of Louisville and a BTech from the Indian Institute of Technology.

Before I turn the call over to David to discuss our financial results, I'd like to thank David and the finance organization for the smooth CFO transition. David has done an excellent job and we look forward to him and his team driving the finance organization to the next level. David?

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David Barter, Model N, Inc. - CFO [4]

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Thank you, Zack. We continue to make progress driving growth, scaling the business and achieving the company's operational and financial objectives. In particular, we had another strong quarter across our key metrics including SaaS and maintenance revenue growth, gross margin expansion and adjusted EBITDA. We're very focused on scalable growth that delivers meaningful margin in cash flow. We ended Q3 with a healthy balance sheet in operating at the full expense synergy run rate of $13 million annualized, which was the high end of our guidance.

As indicated in our press release, we exceeded both our revenue and profitability guidance for the third quarter. Total GAAP revenues for the third quarter were $34.2 million, a 23% increase from $27.9 million in total revenue in the year ago period and well above our guidance range of $33.5 million to $33.8 million.

SaaS and maintenance revenues were $28.5 million for the quarter, a 25% increase year-over-year. This represents a new record in terms of our revenue mix and demonstrates that our transition to being 100% SaaS and maintenance is proceeding well. We're encouraged by customer interest and adoption of Revenue-Management-as-a-Service.

Our license and implementation revenue was $5.7 million, an increase of 12% compared to the prior year period. The growth was positively impacted by the Revitas acquisition and the fact that their business was primarily on-premise. As a reminder, we no longer sell on-premise perpetual licenses and we expect this revenue line to continue to decline as we head into fiscal 2018.

Our revenues in the third quarter reflect our acquisition of Revitas, which contributed approximately $6 million to our SaaS and maintenance revenues and approximately $2 million to our license implementation revenues.

Our GAAP revenues also reflect a purchase accounting entry of $1.7 million.

Before I move on to profit and loss items, I want to remind you that my commentary will be focused on non-GAAP results, which excludes the impact of purchase accounting. A reconciliation of non-GAAP to GAAP results is provided with our earnings press release issued earlier today.

We continue to focus on the improvement of our gross margin and we made good progress during the third quarter as we continued to drive a higher mix of overall SaaS subscription contribution.

Non-GAAP gross margin for the third quarter was $21.4 million compared to $14.9 million in the third quarter of fiscal year 2016. Overall non-GAAP gross margin in the quarter was 60%, a significant increase compared to the 53% in the third quarter of last year. We continue to see gross margin as a point of leverage for Model N over time as we move the business to 100% SaaS and maintenance and achieve greater scale.

Non-GAAP operating expense was $23.9 million in the third quarter of fiscal year 2017 compared to $19.2 million in the third quarter of fiscal year 2016 and $25.8 million in the prior quarter.

Non-GAAP operating loss for the period was $2.4 million compared to a loss of $4.3 million in the third quarter of last year and better than our guidance of an operating loss of $3.5 million to $3 million.

Non-GAAP net loss in the third quarter was $4.1 million compared with a net loss of $4.4 million in the third quarter of fiscal year 2016.

On a GAAP basis, operating loss for the period was $8.8 million compared to a loss of $8.5 million in the third quarter of last year. GAAP net loss in the third quarter was $10.4 million compared to the GAAP net loss of $8.6 million in the third quarter of fiscal year '16. The difference is driven by the $1.4 million of expense associated with the financing of the Revitas acquisition.

We produced a non-GAAP net loss per share of $0.14 based on a share count of 28.9 million shares compared to a non-GAAP net loss per share of $0.16 based on a share count of 27.6 million shares in the third quarter of last year. This was better than our guidance of a net loss of $0.19 to $0.17 per share. GAAP loss per share was $0.36 for the third quarter compared to $0.31 in the third quarter of fiscal year 2016.

Adjusted EBITDA for the third quarter was negative $1.5 million, a meaningful improvement compared to a negative $3.1 million in the year ago period and a negative $4.4 million in the prior quarter. We reiterate our guidance that we expect to be adjusted EBITDA positive in the fourth quarter of fiscal year 2017, and we will continue to improve on our profitability in fiscal year 2018.

At the end of the third quarter, our accounts receivable balance was $33.7 million. Our total deferred revenue was $52.5 million compared to $47.4 million at the end of our second quarter, which is an increase of 11%.

Our cash and cash equivalents balance was $51.8 million compared with $53.7 million at the end of the second quarter. For the third quarter, cash flow used by operations was $2.7 million, which after adding capital expenditures of $68,000 and capitalized software of $50,000 produced a negative free cash flow of $2.8 million. This compares to cash flow from operations of $0.5 million in the third quarter of last year, which after adding approximately $0.5 million of capital expenditures and capitalized software of $0.3 million produced a negative free cash flow of $0.3 million.

Moving on. Let me now outline our guidance for the fourth quarter of fiscal year '17 as well as our expectations for the full year fiscal year 2017. Please note this guidance is GAAP revenue guidance and it includes the corresponding purchase accounting adjustment for Revitas.

For our fourth quarter ending September 30, 2017, we expect total GAAP revenues to range from $34.6 million to $35.1 million. We expect the purchase accounting entry will be approximately $1.3 million. Non-GAAP loss from operations is expected to be in the range of $1 million to $500,000. This would lead to a non-GAAP net loss per share in the range of $0.09 to $0.08 based on a weighted average share count of 29.4 million shares and assuming approximately $1.4 million net interest expense and amortized debt financing fees.

For the full year fiscal year 2017, we're raising our guidance and now expect total GAAP revenues to be in the range from $130.2 million to $130.7 million. This includes an estimated reduction from the purchase accounting adjustment of approximately $5.1 million. We continue to expect our ending annualized recurring revenue, or ARR, to be between $46 million to $48 million. This represents 31% to 36% year-over-year growth.

We're also raising guidance for our non-GAAP loss from operations. We expect it to be in the range of $13 million to $12.5 million, an improvement compared to our prior guidance of a loss from $14.5 million to $14 million. Non-GAAP net loss per share is expected to be in the range of $0.63 to $0.62 based on a weighted average share count of 28.7 million shares compared to our prior guidance of $0.68 to $0.66.

We remain focused on cash and reiterate our guidance of an ending cash balance at September 30, 2017 of $50 million to $52 million as previously shared. We now expect cash flow from operations to be break even or slightly positive in Q4.

Before I turn the call over for questions, I would like to make some high-level comments on how we're thinking about the business for fiscal year 2018. We'll provide you with more detailed guidance when we report our fourth quarter. We're focused on several key objectives, driving growth with Revenue-Management-as-a-Service as we move the business towards 100% SaaS and maintenance revenue, improving the visibility and predictability of our revenues. With this, we would expect to see ongoing declines in our license and implementation revenue. Two, delivering scale and meaningful levels of profitability through improvements in our gross margin and effectively managing expenses. We would expect to be EBITDA positive throughout fiscal year 2018. And three, building the business to generate sustainable levels of cash flow. We would expect to be cash flow positive from operations in the back half of 2018 and we'll pay back a portion of the debt related to the Revitas acquisition. Again, I will share detailed guidance for the first quarter and fiscal year 2018 when we report our fourth quarter results.

With that, let me turn the call over to the operator for questions. Operator ?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Jackson Ader from JP Morgan.

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Jackson Edmund Ader, JP Morgan Chase & Co, Research Division - Analyst [2]

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First question from me, I guess, we will start with Zack. So how -- one of the levers for growth I think in the life sciences business that you talked about in the past is potentially further penetrating the mid-market. It sounds like in the high end, things are going well, but any updates maybe on the logos further down in the market size ?

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Zack Rinat, Model N, Inc. - Founder, Executive Chairman and CEO [3]

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Yes, sure. When you look at kind of the focus of the company over the last 6 months from the acquisition was really to continue to execute on the integration strategy and actually bring kind of the products together and creating the cost synergies between kind of for the 2 companies. With the release that we did in August 2, last week, we basically enabled right now revenue cloud for a pharma power by Flex basically to be available as Revenue-Management-as-a-Service. And we are very excited about kind of about that. And when you look at further penetration to kind of to the market, our business is progressing well and we announced actually ICU as part of the call that we just had, and this is a very significant midsize kind of medical device company. If you look at the expansion that we just spoke with Alchemis, it's another, now they are another midsize company. So it's progressing kind of well across the board, both on the high end of the market as well as with the mid-market.

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Jackson Edmund Ader, JP Morgan Chase & Co, Research Division - Analyst [4]

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Okay. And then just quickly follow-up, David. On the expense side, in -- with all of the synergies now being reaped, should we expect then the expenses on an absolute basis on or I guess on a non-GAAP basis to grow off of this base as we head into 2018? Or do you think that you've pretty much staffed where you would like to be and things should hold flat?

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David Barter, Model N, Inc. - CFO [5]

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Yes, I look at it this way, we set up an integration plan and there were synergies that were expected out and I think we've executed very well to that. But I think in terms of how we view the business, it's not a static view in the sense that we do look for opportunities for scalable growth. And so, we do continue to look for kind of margin expansion both kind of in terms of both gross margin and operating margins. So, no, I think we are going to continue to look for ways to better run the business.

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Zack Rinat, Model N, Inc. - Founder, Executive Chairman and CEO [6]

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Basically when you look at the plan for the company for fiscal year '18, we believe that actually with kind of the growth of the company, as David mentioned, we can have better operational leverage. And actually the company is staffed correctly. And we feel actually that we can actually grow with the cost structure and optimize the cost structure.

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Jackson Edmund Ader, JP Morgan Chase & Co, Research Division - Analyst [7]

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Okay. All right. That's great. That's helpful. Quickly, if I can just follow up. David, did you say that you expect 2018 adjusted EBITDA to be positive throughout the year, meaning each quarter? Or was it just the entirety of fiscal '18, just to clarify?

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David Barter, Model N, Inc. - CFO [8]

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Yes, exactly. We expect each quarter to be positive.

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Operator [9]

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Our next question comes from the line of Chad Bennett from Craig-Hallum.

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Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [10]

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And then just another maybe point of clarification David. In speaking about 2018, did you indicate you expect to be profitable for the entire year of -- for the -- maybe not every quarter, but on an annual basis next year?

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David Barter, Model N, Inc. - CFO [11]

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So when we think about profitability, again, I think we're very focused on adjusted EBITDA, and we will be adjusted EBITDA positive every quarter. And so I think we are -- we're still working through all of the details of our plan, but we have -- we have ambitions around expanding our -- both our gross and our operating margins.

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Zack Rinat, Model N, Inc. - Founder, Executive Chairman and CEO [12]

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And we will let you -- we will give the -- kind of the specific guidance in November, when we guide to the next fiscal year.

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Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [13]

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Okay. And then deferred revs were, what you pointed out, David, were up, I think, very strongly sequentially. And since it's apples-to-apples with Revitas in there, can you give us a sense for -- I assume that, that sequential growth was mainly driven through RMaaS or SaaS deferred revenue, not necessarily maintenance renewals? Or any kind of color there?

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David Barter, Model N, Inc. - CFO [14]

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Well, you're right 100%, that it is all organic and it kind of represents us operating as kind of one company. And so you're right; the only way we're going to market right now is with cloud services. And so that's kind of what drives everything in the P&L.

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Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [15]

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Okay. And then maybe last one for me, if I can. Non-GAAP, line 2, I guess, SaaS and maintenance gross margins, were a little bit above 66%. I assume you expect continued improvement there. Any type of idea of kind of how we should think about that heading into next year, David?

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David Barter, Model N, Inc. - CFO [16]

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It's probably a little bit early. I think overall what we had said was, when we were kind of meeting with you back in June at all the conferences, is that we continue to expect gross margins to improve a couple of points year-over-year. But we'll provide detailed guidance, again, in November.

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Operator [17]

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Our next question comes from the line of Steven Wardell from Jardin.

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Steven William Wardell, Chardan Capital Markets, LLC, Research Division - Senior Equity Research Analyst [18]

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So my first question is, can you give any color of what you're seeing from customers in the marketplace? So are they in one product more than expected or less than expected? Are you seeing demand from smaller life science in addition to from midsize life science in addition to large life science?

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Zack Rinat, Model N, Inc. - Founder, Executive Chairman and CEO [19]

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Yes, so when you look at the -- kind of the market, again, the focus of the company over the last 6 months was to execute on kind of the integration strategy to continue to deliver for our customers and really positioning the products to be consumed across the board as revenue management kind of as a service.

From a demand point of view, I would say that the market right now is acting well. I would not characterize this as a heated market, but it's a market that is moving kind of nicely.

There is a lot of focus right now on some of the new regulation coming right now from the new administration and trying to figure out the impact that it's going to have, if any, to the way that they think about revenue management. And then we see, actually, companies is actually looking at the global price management and the ability to manage prices on a global basis. And some of the challenges that exist on global is front and center to the way people think about their kind of (inaudible) business.

And then we see strong interest across the board, actually, for the medical device space. With the revenue (inaudible) for medical device, we have a very strong solution right now that encompass all the way from the front office, enable service people -- their productivity to continue, price and quote, or CPQ, and CLM, contract lifecycle management, all the way through the spectrum of how you handle contracting and rebates and incentives and leverage and analytics in a very kind of a powerful way. So we see this market in particular right now strong interest across the board in both the mid-market as well as the high end of the market.

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Steven William Wardell, Chardan Capital Markets, LLC, Research Division - Senior Equity Research Analyst [20]

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Great. And can you summarize what kind of effect has the continuing turmoil in Washington healthcare reform had on you so far? And do you expect it to have any further impact over the next 6 months?

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Zack Rinat, Model N, Inc. - Founder, Executive Chairman and CEO [21]

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So the way that we look at this is everybody is anticipation about what's going to come next. It's very clear that there is going to be a drive towards higher regulation. For example, there was a paper published on the notion of outcome-based contracting and changing the business model from fee per service to a lot of risk sharing and outcome-based. And companies are moving in kind of this direction already. And they're going to look at this both from a business point of view as related to the offering, but definitely from a system point of view, its ability to drive it.

And I think for the companies in this space, it's very clear that they need to have agility and ability to accommodate the changing regulatory, both what is coming right now and over time. And it's also important in the move to the cloud and to SaaS, is the system deliver a much better flexibility and agility. So that's where we see a lot more acceptance and accommodation and drive towards the cloud.

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Operator [22]

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Our next question comes from the line of Brian Peterson from Raymond James.

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Brian Christopher Peterson, Raymond James & Associates, Inc., Research Division - Senior Research Associate [23]

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So Zack, (inaudible) now. Can you give us any sense for how some of the Revitas customers have talked about the Flex product portfolio versus the kind of legacy Model N portfolio? Any updates to what customers are thinking there?

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Zack Rinat, Model N, Inc. - Founder, Executive Chairman and CEO [24]

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So basically when you look at this, we less have Revitas product and Model N product. We have right now product that we call Revenue Cloud. And as you know, we leveraged the Revitas Flex product, but we did what is called the best of both, which is really ability to integrate the best products from the Model N portfolio and actually one from Revitas across the board.

And when you look at the products that we have in terms of the contract lifecycle management, in terms of global price management, some of the analytics products, and actually a product that we just announced last week, which is a tender management which help companies to manage revenues on a global basis through a tendering process, that's basically now an end-to-end integrated solution that has really, not come too soon. So that's one aspect of the product line.

The second aspect of this was really the notion of taking what we have done at the Model N and starting to move the solutions to cloud and to Revenue Management as a Service. We released this product a week ago. This was the second release that we have done together. And now we can actually start implementing this solution for Revitas customers with an end-to-end revenue cloud solution. And there is a lot of interest across the board from the Revitas customer to leverage this solution into a -- move the kind of business to kind of now to the cloud. So now it's going to enable us to work with them to implement it now that the product is available. So that's kind of where we are from a progress on the Revitas customers.

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Brian Christopher Peterson, Raymond James & Associates, Inc., Research Division - Senior Research Associate [25]

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Got it. Thanks, Zack. And that's actually a good segue into my second question. So I don’t know if you or David want to take this. But obviously the results have been strong for the last few quarters. Just curious why that wouldn't translate into an increase in the ARR guidance for the year?

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David Barter, Model N, Inc. - CFO [26]

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So I think we're executing a kind of a beat-and-raise when we think about the ARR guidance. We look at it from the vantage point that we're continuing to grow the business very well. I think the midpoint of our ARR guidance is about 34%, which we -- again, we feel kind of very good about the ARR guide. But we also recognize that we deal with lots of large customers and deals can ultimately come in a variety of sizes. And so I think when you're in a vertical market and you sell to very large multinational and very large multi-billion dollar pharma companies or medical device companies or even high tech companies, I think we judiciously plan and we conservatively plan for ultimately how we will contract with them.

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Zack Rinat, Model N, Inc. - Founder, Executive Chairman and CEO [27]

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So from our point of view, we believe that the 34% growth at the midpoint, as David mentioned, is kind of a good target. And I think that you have to remember that this quarter, our fourth quarter is a summer quarter and most of the deals they happen in September. And we don’t want to put ourselves in a position where we need to do an (inaudible) in September and close kind of new business. We give ourselves the kind of flexibility to close deals in September or October or November and drive the business to make sure that we have kind of good economics for the deals.

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Operator [28]

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Thank you, ladies and gentlemen. (Operator Instructions) Our next question comes from the line of Jessica McHugh from Dougherty & Company.

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Jessica Ann McHugh, Dougherty & Company LLC, Research Division - Senior Research Analyst of Software [29]

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You mentioned a couple of wins earlier. But I was wondering what sort of traction are you seeing in the high tech vertical versus 6 months ago? And what gives you confidence that you can increasingly win deals in that vertical?

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Zack Rinat, Model N, Inc. - Founder, Executive Chairman and CEO [30]

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So the -- we need to spend a lot more time about the high tech vertical. Just by the nature of the fact that we just did the acquisition, we tend to speak more on life science side. But the high tech vertical is kind of -- is moving nicely. It's kind of now performing well. And I believe that the product that we have right now is the most comprehensive end-to-end solution for the high tech business. We were traditionally strong in semiconductors, and then we started our expansions to more of OEM and to other part of kind of the high tech. As part of the release last week, we also released a product that is called Marketing Development Funds, which is a type of rebate that you can manage across the board. It is very important for OEM companies.

And I think that the notion of, again, creating an end-to-end solution that enables you to encompass the front office with CLM and CPQ and with the design of this situation and all the way to the specific processes, is an extremely strong product, kind of product offering.

So when I look at the funnel, when I look at the deals and when I look at these trends of the product, I feel very good about where we are from the evolution of the vertical.

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Jessica Ann McHugh, Dougherty & Company LLC, Research Division - Senior Research Analyst of Software [31]

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Okay. Thank you. And then David, I have one for you. We talked about SaaS gross margins. For license gross margins, it looks like that was better than typical for the quarter on a non-GAAP basis. We know that segment is pretty unpredictable, but I was wondering what contributed to the better margin in the quarter and how should we think about license gross margins going forward?

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David Barter, Model N, Inc. - CFO [32]

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It was kind of a combination of factors on the license and implementation. And obviously, Jessica, I know you know the story very well. We don't have license; it's just an implementation related to the legacy perpetual deployments. And so we ended up this quarter with just a slightly better mix of contracts. We certainly had some headwinds from some legacy contracts that we had picked up. But arguably the mix was a little bit better this particular quarter. So it was probably a little bit higher than we normally expect. But obviously, it's one where I'd say, from a modeling perspective, it probably trended a little bit closer to what the average has been over time.

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Operator [33]

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Our next question comes from the line of Pat Walravens from JMP Group.

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Patrick D. Walravens, JMP Securities LLC, Research Division - MD, Director of Technology Research and Senior Research Analyst [34]

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My first question would be maybe for you, David. And maybe -- I'm not sure if you commented on this at all. But any hints in terms of how we should think about revenue for next year?

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David Barter, Model N, Inc. - CFO [35]

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A little early. We'll provide more detailed guidance in November.

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Patrick D. Walravens, JMP Securities LLC, Research Division - MD, Director of Technology Research and Senior Research Analyst [36]

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Okay. And Zack -- are you -- I mean, are you seeing any competition these days? Is it -- and if so, who are you seeing and how does it work?

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Zack Rinat, Model N, Inc. - Founder, Executive Chairman and CEO [37]

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Of course we see kind of, we see competition. And we see competition across the board in the verticals that -- kind of across the verticals of the kind that we have. As you know in -- kind of in life sciences we see competition from some of the largest ERP players, in particular SAP. We competed with them for over the last couple of years. And it's kind of -- it's not -- kind of not changed.

Kind of the high tech space, we see competition from companies that address a portion of the revenue management cycle, people that either address price management or price optimization and companies that are providing solutions for channel data management or channel management. So that's the competition that we see there.

And in the emerging verticals, we see competition from CPQ and CLM vendors. So that's the competition that we see.

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Patrick D. Walravens, JMP Securities LLC, Research Division - MD, Director of Technology Research and Senior Research Analyst [38]

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Great. And then some of the sort of large potential acquirers in the space have this point of view, which I think you're going to disagree with, but I'd love to hear your thoughts. So one of the thoughts is that it's better to acquire horizontal SaaS companies than vertical, and the rationale being that the vertical ones are tougher to scale globally. What's your perspective on that?

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Zack Rinat, Model N, Inc. - Founder, Executive Chairman and CEO [39]

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I'm not sure that I can put myself in the shoes of the larger kind of acquirer. But basically when I look at this, when I look at the software market in kind of, you know, in general, I think that when you look at vertical solutions, by their nature, this is the only solution that enable you to define a competitive advantage. Because it's vertical, it's the solutions that really enable you to compete with the other companies in the space.

And I think that companies such as Aviva, companies such as Guidewire and companies such as Metadata and Model N, I think we've proved that we can create kind of a sustainable competitive advantage and leadership in the kind of, you know, kind of in the space.

So I think that the focus right now for the large companies is on the horizontal SaaS platform. That's why you can see actually that the large players, they acquire companies like Ariba and Concur and SuccessFactors and a lot of horizontal kind of companies. And to a degree it's good, because it enable the vertical companies to focus on delivering high-value solutions to the market and partner with companies in a very significant way. That's my perspective on that.

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Operator [40]

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Thank you. Ladies and gentlemen, there are no further questions in queue at this time. I would like to turn the floor back over to management for closing comments.

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Zack Rinat, Model N, Inc. - Founder, Executive Chairman and CEO [41]

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Thank you all for attending our call today. We are very excited about the performance of the company year-to-date, delivering a third consecutive strong quarter. We are very excited about our ability to deliver adjusted positive EBITDA and turn the company in the steps to being profitable and kind of cash flow positive. We think it's a major kind of milestone. And we're looking forward to our next call, where we're going to give you guidance for fiscal year '18. And thank you very much for joining the call.

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Operator [42]

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Thank you, ladies and gentlemen. This does conclude the teleconference for today. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.