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Edited Transcript of MODN.N earnings conference call or presentation 9-Feb-21 10:00pm GMT

·41 min read

Q1 2021 Model N Inc Earnings Call Redwood City Feb 10, 2021 (Thomson StreetEvents) -- Edited Transcript of Model N Inc earnings conference call or presentation Tuesday, February 9, 2021 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Gwyn Lauber Model N, Inc. - Director of IR * Jason Blessing Model N, Inc. - President, CEO & Director * John Ederer Model N, Inc. - CFO ================================================================================ Conference Call Participants ================================================================================ * 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 * David B. Unger Truist Securities, Inc., Research Division - Associate * Eugene Mark Mannheimer Colliers Securities LLC, Research Division - Senior Research Analyst of Healthcare * Jackson Edmund Ader JPMorgan Chase & Co, Research Division - Analyst * Joseph D. Vruwink Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst * Joseph P. Goodwin JMP Securities LLC, Research Division - VP & Equity Research Analyst * Matthew David VanVliet BTIG, LLC, Research Division - VP & Application Software Analyst * Ryan Michael MacDonald Needham & Company, LLC, Research Division - Senior Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Greetings, and welcome to the Model N's First Quarter 2021 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Gwyn Lauber, Investor Relations. Please go ahead. -------------------------------------------------------------------------------- Gwyn Lauber, Model N, Inc. - Director of IR [2] -------------------------------------------------------------------------------- Good afternoon, and welcome to the earnings call for Model N's first quarter fiscal year 2021, which ended on December 31, 2020. This is Gwyn Lauber, Model N's Director of Investor Relations. And with me on the call today are Jason Blessing, Model N's Chief Executive Officer; John Ederer, Chief Financial Officer; Reuben Gallegos, Vice President of FP&A and IR; and Cathy Lewis, Chief Accounting Officer. Our earnings press release was issued after 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 first quarter fiscal year 2021 performance and our financial outlook for our second quarter and full fiscal year 2021. Commentary made on this call may include forward-looking statements. These forward-looking statements are based on management's current views and expectations as of today and should not be relied upon as representing our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook. Actual results may differ materially. Please refer to the risk factors in our most recent Form 10-Q filed with the SEC. In addition, during today's call, we will discuss non-GAAP financial measures. These non-GAAP financial measures should be considered in addition to, not as a substitute for or in isolation from GAAP results. Reconciliations of the non-GAAP metrics to the nearest GAAP metrics are included in the earnings release issued today, which is available on our website. I encourage you to visit our Investor Relations website at investor.modeln.com to access our first quarter fiscal year 2021 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 fiscal year 2020 results. With that, let me turn the call over to Jason. -------------------------------------------------------------------------------- Jason Blessing, Model N, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Thanks, Gwyn, and good afternoon, everyone. Thank you for joining us today. I'm pleased to report that we started our fiscal year 2021 with results that exceeded expectations and delivered record total and subscription revenues. The strategic focus on our key vertical markets continues to produce results that support our belief that a focused Model N is the best Model N for our customers, employees and investors. With our deep domain expertise and mission-critical products, we are focused on developing innovative solutions that meet our customers' needs and on developing strategic relationships with them, so they can effectively deliver their life-changing products to the world. In support of this ambition, in Q1, we acquired Deloitte's pricing and contracting solutions business, which will allow us to better serve more customers in the Life Sciences market with a powerful combination of software and business services to meet this market's unique needs. With this acquisition, we are beginning a new transformative chapter for Model N, which I believe will be even better positioned for growth over the next several years. Later in the call, I'll share more about the strategic rationale of this acquisition and John will then provide updated guidance for fiscal year 2021. Before talking more about the acquisition, I'd like to start by discussing our very strong organic performance in Q1, which included signing the largest deal in company history. Total revenue, subscription revenue, services revenue, adjusted EBITDA and non-GAAP EPS all exceeded our guidance for the first quarter. In addition, subscription revenue growth returned to double digits and margins improved across the board compared to the same period last year. I am proud of these results because they demonstrate that the demand for our products and services remained strong. Part of our Q1 success was a result of our maniacal focus, particularly on our largest customers, where we are working to expand our solution footprint and transition them to our SaaS offerings. The big 10, as we refer to them, represents a group of some of the largest Life Sciences companies in the world that depend on Model N for their revenue management needs. All of these companies are long-time customers and many of them are looking to Model N's SaaS offerings to help them compete in this dynamic market, remain compliant with changing regulations and allow their employees to maintain productivity while working from home. We have a focused team of solution experts and sales professionals working with our executive team and this elite group of customers to chart an accelerated path to our SaaS solutions. I am very pleased with the progress that this group continues to make. One of the lighthouse accounts in the big 10 is Johnson & Johnson, one of our largest customers and the largest Life Sciences company in the world. As you may recall, last quarter, we announced that J&J Japan started a project to move to our Revenue Cloud. Continuing with their cloud-first strategy, in Q1, J&J's U.S. pharma division elected to begin their transition to Model N Revenue Cloud, which resulted in the largest deal in Model N's history. This deal is also significant because it includes a new cutting-edge Model N product that we will partner with J&J to develop that will also be available to resell to other customers. Increasingly, we are seeing SaaS transitions act as a catalyst for cross-sells and upsells and, in select strategic situations, opportunities to partner with customers to build entirely new products as they recommit to Model N for the next 10 years. J&J Pharma's SaaS transition is also significant as remaining on-premise customers will take comfort in following this industry leader and will look to benefit from the new innovation we are building in our cloud products. We believe that we are uniquely positioned to partner with the largest pharma companies in the world as we move them to our SaaS solution and innovate together in the cloud. The success of our big 10 program is truly a team effort and once again demonstrates what Model N can do when we focus. Also in the quarter, we added a leading U.S. biotechnology company as a new customer. The new customer's mission is to leverage science to bring life-changing medicines to the world, which includes their COVID-19 antibody cocktail that has been in the news recently. The customer determined that they needed a solution that will provide agility as they introduce new products and allow them to adapt to new government regulations as they scale and deliver across multiple markets. The customer felt that Model N Revenue Cloud would not only deliver the solution that they needed today but also offer a broader footprint that they could adopt over time. During Q1, Bristol-Myers Squibb went live with the first phase of a global Model N project. As part of its acquisition of Celgene, BMS needed a solution that would provide one centralized platform to improve operational efficiencies and allow for the visualization of pricing in real time. In addition to upgrading their existing platform, BMS added new Model N products, including Global Launch Excellence and Global Pricing Management analytics to improve their international pricing and compliance. It was important to deliver the first phase of this project as it sets up the rest of the program for success and further adoption of Model N. This project is also a great example of how Model N is benefiting from Life Sciences M&A and helping our customers integrate and realize their overall business cases for these important transactions. Our professional services team also had another remarkable quarter and delivered a new record number of successful go-lives. It continues to amaze me how tirelessly this team works to ensure that each project meets the customers' needs. Despite working remotely, our team continues to execute at a very high level and this past quarter delivered over 90% of our projects on time and on budget. Customer success is one of the linchpins of our go-to-market strategy and to maintaining high revenue retention rates. Turning to High Tech. Micron was one of several High Tech go-lives during the quarter. In Q1, this leader in memory and storage solutions went live on Model N Rebate Management. By adding the Rebate solution, Micron will be able to automate numerous manual processes, improving the effectiveness of its channel programs and its partner engagement. Last year, as we do each year, we ran our formal long-range planning process, and we did an assessment of our market opportunities and looked at how Model N can better serve Life Sciences companies and expand our total addressable market. The acquisition of Deloitte's pricing and contracting solutions business is the first strategic move that we made as a result of our strategy work. This deal is important for 3 key reasons: first and foremost, it significantly expands our total addressable market, enabling us to sell to companies from pre-revenue up to some of the largest companies in the world that prefer to buy a software plus services Revenue Management solution. The Deloitte solution is software designed to be sold with business services to help companies run their market access functions. The addition of business services is significant for us because it allows us to sell how customers of any size want to buy and it unlocks a sizable segment of the market that we were not accessing in the past; second, we are getting great modern technology with this acquisition that will be used in future Model N products. We are also getting a new analytics product gross-to-net that can be sold to all of our Life Sciences customers today; finally, this acquisition also brings us great new talent. We are getting domain expertise, which is priced in this complex market, along with a great engineering team. In total, we believe that the addition of the Deloitte business expands our total addressable market by approximately 40%, and the scale of our combined team will allow us to better serve the Life Sciences industry. As we combine our 2 teams, I also believe that we will be able to drive significant operational improvements by taking what was a subscale business within Deloitte and combining it with Model N. We have proven expertise driving operational efficiencies, having delivered notable improvements in Model N's adjusted EBITDA from negative 12% to over plus 13% during the 3 years following the Revitas acquisition. We have already identified several opportunities to drive cost synergies around things like application hosting as well as revenue synergies that should drive profitability back to pre-acquisition levels in about 4 quarters. We believe the short-term hit to profitability is a worthwhile trade-off to drive additional growth this year and in the future to strengthen Model N's market position and to expand our total addressable market opportunity in such a meaningful way. Finally, I believe the combination of our teams will result in a formidable company with more scale and talent that will allow us to better serve the industry and build the next chapter in Model N's growth story. Now I'll turn the call over to John to discuss our Q1 financial results and provide updated guidance. John? -------------------------------------------------------------------------------- John Ederer, Model N, Inc. - CFO [4] -------------------------------------------------------------------------------- Thank you, Jason. Before I begin, I'd like to take a minute to introduce myself to all of you and provide a little insight into what brought me to Model N. I joined Model N from K2 Software, a private equity-backed company, where I served as CFO. Prior to K2, I held financial leadership positions with various software companies, including MobileIron, TIBCO software and SAP Business Objects. I actually started my career on the sell-side as a research analyst covering health care and enterprise software, and it's great to still see some familiar names on the call today. I chose to join Model N because, like many of you, I believe that the company has an incredible opportunity in front of it. Model N has long been an established leader in revenue management solutions for Life Sciences and High Tech companies and now have successfully navigated the transition to becoming a SaaS business. I've been a part of these types of transitions before, and they can create a solid foundation for sustained growth and value creation. Model N has also established a strong platform for acquisitions. And with the addition of the pricing and contracting solutions business from Deloitte, I believe that we have an opportunity to accelerate growth by expanding into new segments of the market. Now looking at our results for the first quarter. We exceeded the guidance that we shared with you on our call and demonstrated our ability to deliver profitable growth. Several factors contributed to our strong performance in Q1, including the J&J deal, strong utilization in our professional services business and good operating expense management. Finally, as a reminder, the acquisition of the Deloitte business closed on December 31. So it had no impact on our income statement, but it was included on our consolidated balance sheet. For the quarter, total revenue grew 11% to $42.7 million, subscription revenue grew 12% to $31.4 million and professional services revenue grew by 11% to $11.3 million. Excluding maintenance revenue from the subscription line, our core subscription offerings grew by 19% to $20.8 million. All of these results exceeded our expectations for the quarter with the over-performance on subscription driven in part by the J&J deal. Turning to profitability. Non-GAAP gross profit for Q1 was $27.1 million or a gross margin of 63% versus 61% in Q1 last year. Non-GAAP gross margin for subscription revenue increased to 74% in Q1 versus 72% last year, while non-GAAP gross margin for professional services revenue was 34% versus 31% last year. Adjusted EBITDA for the quarter was $7.5 million, representing a margin of 18%, which was up significantly from 13% in Q1 last year. Finally, non-GAAP net income was $5.9 million or $0.16 per share versus our non-GAAP EPS guidance of $0.05 to $0.08. Again, the over-performance on revenue and good cost management during the quarter drove the upside on earnings per share. Moving to the balance sheet. We ended the quarter with $143.5 million of cash and equivalents. Our cash balance reflects the use of cash for the acquisition and, relative to the same period last year, very strong improvement on free cash flow, especially after excluding acquisition-related expenses. I'd now like to provide you with guidance for the second quarter and update our guidance for fiscal year 2021. This update reflects the acquired business from Deloitte, which will be fully integrated into the Model N software and services offerings. As such, we will not break out results from the acquisition going forward. Also, as a reminder from our last call, our outlook includes the impact of deal structures that may dampen our near-term revenue recognition, but revenue will increase over the course of the contract period. We will continue to utilize this approach in special situations and the transaction with J&J was one such example. These deal structures can sometimes be complex, multiyear transactions with multiple revenue elements and the linearity of our forecast could change accordingly. In Q1, a portion of the J&J deal was recognized upfront, while the vast majority of it will be spread over many years. To give you a sense of the impact this approach is having on our business, I would encourage you to look at the balance of our remaining performance obligations, which grew by 32% versus Q1 last year. Now specifically for the second quarter, we expect total revenue to be in the range of $46 million to $46.5 million, subscription revenue to be in the range of $34.5 million to $35 million, non-GAAP operating income to be in the range of negative $600,000 to negative $100,000 and non-GAAP EPS to be a loss of $0.06 to a loss of $0.05 based on a fully diluted share count of approximately 35.3 million shares. Finally, adjusted EBITDA is expected to be in the range of negative $500,000 to breakeven. For the full fiscal year 2021, we expect total revenue in the range of $184 million to $186 million, subscription revenue in the range of $136 million to $138 million, non-GAAP operating income in the range of $9.5 million to $11.5 million and non-GAAP income per share in the range of $0.10 to $0.15 based on a fully diluted share count of 36.6 million shares. Also for the year, adjusted EBITDA is expected to be in the range of $10 million to $12 million. Finally, to give you some additional color regarding the impact of the acquisition, most of the incremental changes to our annual guidance are the result of the acquisition. Additionally, from a margin standpoint, due to the mix of managed services revenue coming from the acquisition and as we make targeted investments, we would expect a decline in overall gross margins for the second quarter and the balance of the year. As Jason indicated earlier, this is a highly strategic acquisition for us that expands our market opportunity, but the initial year is essentially an investment year. We have a high degree of confidence and good line of sight on the specific cross-selling opportunities and cost synergies that will make this an accretive acquisition in fiscal year 2022, and the team here has a strong track record of driving profitable growth. Thank you for joining us today. I'll now turn the call over to the operator for questions. Operator? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) The first question is from Chad Bennett from Craig-Hallum. -------------------------------------------------------------------------------- Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [2] -------------------------------------------------------------------------------- I guess, first, just on the acquisition, maybe a little more color, if you could share. So I think you indicated the majority of the outlook increase for the year was related to the acquisition. Just in terms of -- I don't know kind of how -- typically, I think you would see some type of contribution number, I guess, I would say, from an acquisition when you make it, maybe you wouldn't update that in future quarters. But is there any type of color you can give just on the annual run rate of the business and the relative mix of software versus services? -------------------------------------------------------------------------------- Jason Blessing, Model N, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Yes. Chad, this is Jason. I'll start on that one. So in our guidance, we did indicate that most of the change is attributable to this business, and this change is due to the 9-month impact of the acquisition both with revenue and expense. So this does give you directionally some information on the size. The other thing we're prepared to disclose, just so you got a sense of not only the size of revenue and expense, but business had about 60 customers coming over. So you can get a sense that the deal size and the revenue run rate per customer is interesting. And this business does have customers that are everywhere from pre-revenue up to top 20 pharma customers that just prefer to buy software plus services, and all of the software and services that this business delivers are through recurring revenue arrangements. -------------------------------------------------------------------------------- Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [4] -------------------------------------------------------------------------------- Okay. So the -- just from your P&L standpoint, Jason, will all the revenue flow through your subscription line? Or will there be some in professional services from the acquisition? -------------------------------------------------------------------------------- Jason Blessing, Model N, Inc. - President, CEO & Director [5] -------------------------------------------------------------------------------- Yes. Thanks for asking that clarification, Chad. The vast majority of it does flow through subscription, but there is -- there are small professional services projects to get customers live, and those tend to be anywhere from 6 to 9 months. -------------------------------------------------------------------------------- Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [6] -------------------------------------------------------------------------------- Got it. Perfect. Then maybe 1 or 2 follow-ups on just the organic business. Jason, I mean, it sounds like the bookings picked up actually. You signed a very large deal or monster deal with J&J in the quarter. And it seems like High Tech, you cited Micron go-live and other High Tech go-lives. Can you just characterize relative to 3 months ago the High Tech pipeline and business activity there, if that, in fact, has improved? And then just from a -- I think you called them the big 10 or even beyond that, your relative sense of both from a conversion and cloud adoption standpoint, if we're seeing another step or acceleration on the Life Sciences side. -------------------------------------------------------------------------------- Jason Blessing, Model N, Inc. - President, CEO & Director [7] -------------------------------------------------------------------------------- Sure. So on High Tech, I would say, it's steady as she goes as we've discussed. Since the pandemic started, we've really been focused on how we're deploying our resources in High Tech to achieve the best outcome, and we continue to find that our customer base has been the area with the highest level of success. And as you point out, that's really why most of the narrative on High Tech has been focused on new deals and projects with customers. That said, the pipeline, as we've articulated the last couple of quarters, did bottom out kind of late spring, early summer of last year and has continued to improve. And I would say also this quarter, as I sat through quarterly business reviews with the sales team, the activity in that area does feel like it's picking up. And then on the big 10, you can certainly get a sense for our football preferences and how we came up with that name. But yes, we're making good progress there. I mean this was really the first one to move. And I do you think there are going to be more of these types of deals to come this fiscal year and early next. -------------------------------------------------------------------------------- Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [8] -------------------------------------------------------------------------------- Got it. And then maybe one last one for me. Just in terms of your expectations in the guide you gave on percentage of deals attached with deal ramps. First, I think last quarter, you talked about roughly 50% of deals. Is that -- with some type of ramp in it, is that still the percentage? And do you expect that percentage to persist, I guess, through the rest of the fiscal year? And I'll hop off. -------------------------------------------------------------------------------- Jason Blessing, Model N, Inc. - President, CEO & Director [9] -------------------------------------------------------------------------------- Yes. Thanks for that final question, Chad. So our guidance does assume that we're still continuing to ramp deals roughly at 50%. It was up a little bit, just a slight tick up in our Q1, we expect that steady state to continue into Q2. But as we look at the pipeline and some of the deals that we're forecasting in the second half of the year, we do expect that deal ramps will mitigate and then especially as we head into 2022, probably return to historical norms. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- The next question is from Matt VanVliet of BTIG. -------------------------------------------------------------------------------- Matthew David VanVliet, BTIG, LLC, Research Division - VP & Application Software Analyst [11] -------------------------------------------------------------------------------- I just wanted to dig in a little bit on the J&J deal. Obviously, an expansion after you talked about the Japan deal last quarter. But I'm curious what you're hearing from them in terms of motivation for both the timing and the overall scope of the project here to start the migration on the U.S. business. -------------------------------------------------------------------------------- Jason Blessing, Model N, Inc. - President, CEO & Director [12] -------------------------------------------------------------------------------- Yes. Matt, great question. So I would say that the themes in this deal were pretty consistent with the other themes that we've seen and that customers are definitely looking to make sure they're current on a mission-critical system like ours, particularly as the regulatory environment continues to be fluid. And I think work from home has also really been a nice tailwind for us as customers grappled with that reality over the last 12 months, but I think we all would agree it's probably an element that stays with us post-pandemic. So cloud-based applications are just easier for our customers and their users to consume. And then secondly, and I alluded to this in the script, J&J is pretty excited about our road map and some of the new products that we're building and is looking forward to partner with us on some of those initiatives. So it was really the combination of those things that drove J&J. And I'd say those themes are pretty consistent across the other big customers as well. -------------------------------------------------------------------------------- Matthew David VanVliet, BTIG, LLC, Research Division - VP & Application Software Analyst [13] -------------------------------------------------------------------------------- And following up on that, you mentioned that you're going to co-develop a new product. Do we have a sense of at least timing-wise when that might be available to the rest of the market? And are you able to share any broader sense of kind of what that's addressing that isn't currently in the portfolio? -------------------------------------------------------------------------------- Jason Blessing, Model N, Inc. - President, CEO & Director [14] -------------------------------------------------------------------------------- Yes, out of respect for our agreement with J&J, we're not going to disclose specifics on what the product does until it's completed, but I will tell you it's a new analytic product that will really focus on some of the specific areas of the market relative to government procurement. And the J&J project really, we're in the planning phase, just getting it kicked off. That project is going to kick off in earnest in the spring and run for about 8 to 12 months. So it will -- this product will be co-developed in roughly that time frame. -------------------------------------------------------------------------------- Matthew David VanVliet, BTIG, LLC, Research Division - VP & Application Software Analyst [15] -------------------------------------------------------------------------------- Got it. And then maybe one more, if I can here. On the -- some of the bigger customers where you've seen some traction here. How much of the, I guess, recent M&A of the large customers buying into the biotech world was: a, kind of the motivation for this Deloitte deal; and b, has already in the first several weeks that you've owned that -- kind of opened some doors or started some conversations around some of those pre-revenue-type engagements? -------------------------------------------------------------------------------- Jason Blessing, Model N, Inc. - President, CEO & Director [16] -------------------------------------------------------------------------------- Yes. The product that we acquired from Deloitte certainly gives us the flexibility to sell how customers want to buy, and many of our large customers have established market access functions and really just need software. But certainly, some of those midsized companies, enterprise companies, as we would call them, do also need business services paired with the software. And of course, most of those companies have ambitions to become bigger companies. So this just allows us to cover off a much broader swath of the market and bring them into the Model N family and have an offering for them. -------------------------------------------------------------------------------- Operator [17] -------------------------------------------------------------------------------- The next question is from Jackson Ader from JPMorgan. -------------------------------------------------------------------------------- Jackson Edmund Ader, JPMorgan Chase & Co, Research Division - Analyst [18] -------------------------------------------------------------------------------- Talking to J&J over the years at Rainmaker, their installation in the U.S. is pretty complex. So I'm just curious, are they moving the entire Johnson & Johnson U.S. installment from on-premise to the cloud? Or is it kind of maybe going to be piecemeal and there's still some left on the bone? -------------------------------------------------------------------------------- Jason Blessing, Model N, Inc. - President, CEO & Director [19] -------------------------------------------------------------------------------- Yes, that's a great question, Jackson. So as we've talked about, J&J Japan is in flight. This is their U.S. pharma business and then their medtech business is next. So to use your words, there is still some meat on the bone to get that medtech business converted over, which is another thing we're working with them on to figure out when that one comes over as well. -------------------------------------------------------------------------------- Jackson Edmund Ader, JPMorgan Chase & Co, Research Division - Analyst [20] -------------------------------------------------------------------------------- Okay. Awesome. And then just doing some rough math on the acquisition. On a per customer basis, it looks like, I don't know, $250,000, $300,000 or so on revenue per customer on those 60 customers. What about the range? I mean, are some customers 7 figures and then some of the pre-revenue customers are pretty small? Or is that kind of a couple of hundred thousand dollars pretty consistent? -------------------------------------------------------------------------------- Jason Blessing, Model N, Inc. - President, CEO & Director [21] -------------------------------------------------------------------------------- Yes, your rough math is directionally correct, for sure. They do have a couple of big customers that have larger contracts, but that average that you calculated is pretty much in line with what the vast majority of the portfolio looks like. -------------------------------------------------------------------------------- Operator [22] -------------------------------------------------------------------------------- The next question is from Joe Vruwink of Baird. -------------------------------------------------------------------------------- Joseph D. Vruwink, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [23] -------------------------------------------------------------------------------- Great. I wanted to start with the SaaS revenue performance within the subscription line. And is the -- a few questions. One is the 19% growth in 1Q, is that upside primarily reflecting the upfront piece of the J&J deal? And then looking ahead, can you maybe update just expectations for the relative mix between SaaS and the legacy maintenance, what those 2 streams should be growing at? -------------------------------------------------------------------------------- John Ederer, Model N, Inc. - CFO [24] -------------------------------------------------------------------------------- Yes. Sure, Joe. This is John. So first on the SaaS revenue number that we quoted, the $20.8 million, that would include the impact from J&J in Q1. In terms of the mix going forward, I would say that, that mix has been pretty steady between subscription and maintenance over the last several quarters. So I wouldn't see anything that would dramatically change that here. -------------------------------------------------------------------------------- Joseph D. Vruwink, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [25] -------------------------------------------------------------------------------- Okay. Okay. Great. And then maybe stepping back and thinking more strategically about how you see Model N evolving over the next couple of years because sitting here today, obviously, this is a really strong first quarter, nearly 20% SaaS growth and high teens EBITDA margins. And yet you're acquiring a business and talking about kind of this usher again, a new era of Model N. I think what we're seeing currently is already an interesting era. And so can you just maybe go a little bit deeper into what Deloitte is going to allow you to maybe, I don't know, accelerate within your product development road map? Obviously, I think the TAM expansion is an interesting piece. But I guess the question is why Deloitte now. And is it bringing things that maybe you could have tackled over a number of years, but now you're just shortening the time frame? -------------------------------------------------------------------------------- Jason Blessing, Model N, Inc. - President, CEO & Director [26] -------------------------------------------------------------------------------- Yes, that's a great question, Joe. So a few things in there. So we did -- this was a deal process we had an opportunity to participate in. And as we talked about in the prepared remarks, we really thought this was a great opportunity given some of our cash on the balance sheet to trade-off between profitability today in exchange for growth today as well as tomorrow and really increasing the TAM. We just thought that was a prudent decision. And I appreciate your comment that today's era of Model N is pretty exciting. We would certainly agree with you. And as this year goes on, especially as we get into the summer, late summer, we expect to have an Analyst Day and talk a little bit more about long term where the company is going. But it will be -- certainly be more of what you've heard in the past from us. We're looking at ways to continue to expand out our software portfolio and add more value to our customers in that area of the business and that will continue to be the core area of the business. The second area that I've talked about on our last several calls and publicly is also looking to expand our analytics offering, and I think a data and analytics business for us could be as big as our software business, if not bigger. The Deloitte business helped with that ambition with the gross-to-net product that came over, which is essentially an analytic business that we can -- or an analytic product, excuse me, that we can resell to our combined customer base. And then finally, we do see an opportunity for strategic services that really enable our customers to be more successful with our software and our analytics offerings. And we have a small splash of this in the business today. We tend to see customers that consume it have higher satisfaction rates and be stickier in their software subscriptions. And so this Deloitte business also helped enable that area as well. -------------------------------------------------------------------------------- Operator [27] -------------------------------------------------------------------------------- The next question is from Ryan MacDonald from Needham & Company. -------------------------------------------------------------------------------- Ryan Michael MacDonald, Needham & Company, LLC, Research Division - Senior Analyst [28] -------------------------------------------------------------------------------- I wanted to just first start on the -- from a product perspective on the Deloitte acquisition. What sort of -- how do you view sort of the product rationalization between Model N and Deloitte over the next 2 to 3 years here? Obviously, it sounds like you're getting some great new functionality, but will there be a thought of migrating existing Deloitte customers over to Revenue Cloud? -------------------------------------------------------------------------------- Jason Blessing, Model N, Inc. - President, CEO & Director [29] -------------------------------------------------------------------------------- No. It's interesting, Ryan, as we were doing the diligence, the diligence supported the work that we had done in the strategy project that led up to this acquisition, meaning we had very little overlap between our customer base and their customer base. I mean it was just -- it was a small handful of customers that were using Model N products in one part of the company and Deloitte products in the other. So this business really has 2 components to it, software and then what we're calling business services. And the software is really purpose-built to be combined with the business services to deliver a complete solution. There are some elements of the technology we like. It's very modern. It's been built in the last 5 to 6 years. So it's a very clean multitenant architecture. The engineering team that built this also has a background in telecom, so they're very comfortable with very large data sets and we think bring not only technological expertise, but architecture and design expertise to enable that part of our business. So think of it as components of this solution will eventually enable new products that we're building in the rest of the portfolio, both from a technology and a skill set perspective. -------------------------------------------------------------------------------- Ryan Michael MacDonald, Needham & Company, LLC, Research Division - Senior Analyst [30] -------------------------------------------------------------------------------- Excellent. Very helpful. And it sounds like from a go-to-market perspective, there's obviously plenty of cross-selling opportunity. But I guess during the diligence process, when you looked at that pre-revenue segment of the market where Model N has not historically played a big role, what did you learn there? How does this affect the pipeline moving forward from a new logo perspective potentially? -------------------------------------------------------------------------------- Jason Blessing, Model N, Inc. - President, CEO & Director [31] -------------------------------------------------------------------------------- Yes, great question. I mean what we've communicated on the TAM expansion of roughly 40%, I think, really shows you that part of the market we weren't really going after. And the fact that we had very little overlap between our logos or even logo they've won that we'd have participated in the sales process, it all really points to there is a segment of the market, it's a meaningful segment of the market that wants to buy software plus services. So the vast majority of their pipeline and their target market is additive to what was in our pipeline. -------------------------------------------------------------------------------- Operator [32] -------------------------------------------------------------------------------- The next question is from Terry Tillman of Truist. -------------------------------------------------------------------------------- David B. Unger, Truist Securities, Inc., Research Division - Associate [33] -------------------------------------------------------------------------------- This is Dave Unger, filling in for Terry Tillman. Guys, can you please just talk about high level the duration of deals that are ramped versus non-ramped and how that's been trending? And how we should think about RPO growth versus CRPO growth? That's my first question. -------------------------------------------------------------------------------- Jason Blessing, Model N, Inc. - President, CEO & Director [34] -------------------------------------------------------------------------------- Yes. I'll comment on the bigger picture and then if John wants to add something, I'll invite him to. I would say we haven't seen anything dramatically change, Dave, in terms of the structure of ramps and the duration of ramps. We have had customers that -- especially bigger customers that are recommitting to Model N and the cloud migration and really recommitting for -- I refer to it as the next 10 years. In some cases, they've asked for slightly longer deal terms than our standard 3, which can help mitigate ramps over time. But nothing really new overall in terms of the structure of ramps and how we're employing them. -------------------------------------------------------------------------------- David B. Unger, Truist Securities, Inc., Research Division - Associate [35] -------------------------------------------------------------------------------- Okay. Cool. And then just to talk about product utilization. You mentioned data analytics just recently and the opportunity set there. You still have about 2.4 cloud products for 77% of your customers. How should we kind of think about that number trending over time? Is that more of an aspiration to move that up over the long -- medium to longer term? Or should we look to see that number increase in the shorter term? I just want to take a high level about that. -------------------------------------------------------------------------------- Jason Blessing, Model N, Inc. - President, CEO & Director [36] -------------------------------------------------------------------------------- Yes. Certainly, I believe that number increases over the next 12 to 24 months, and it increases due to 2 trends in the customer base. One, we've continued -- and I'll speak for now specifically about Life Sciences, we've really seen nice traction on new logos in Life Sciences. And most of those deals we've been selling have been land and expand sales campaigns, where we've been landing with just 1 of our 6 products. The customer -- new logo I referenced in the script today is one of those examples. And so these new logos that we've been closing over the last couple of years, as they go live, there's meaningful expansion opportunity in those accounts. And then I think the thing that we've learned now that we're, call it, a couple of years into SaaS transitions and really seeing momentum pick up, SaaS transitions in and of themself are proving to be significant catalysts for cross-sells and upsells, both new products as well as taking the upgraded footprint and deploying it into new divisions. So I do think cross-sells and upsells accelerate also as a byproduct of SaaS transitions. -------------------------------------------------------------------------------- Operator [37] -------------------------------------------------------------------------------- The next question is from Brian Peterson from Raymond James. -------------------------------------------------------------------------------- Brian Christopher Peterson, Raymond James & Associates, Inc., Research Division - Senior Research Associate [38] -------------------------------------------------------------------------------- So just as you think about this, Jason, it's kind of interesting to say that you're codeveloping products with customers and you have the potential to kind of sell that back into other customers. How did that really start? And is that something that could be in the pipeline with some of the other members in the big 10? -------------------------------------------------------------------------------- Jason Blessing, Model N, Inc. - President, CEO & Director [39] -------------------------------------------------------------------------------- Yes. Thanks, Brian, and I'm glad you caught the big 10 reference. I'm sure that -- I figured that one wouldn't be lost on you. With respect to some of these new products, again, as we're really mapping out 5- to 7-year road maps with these customers about how they're going to get current, move to our SaaS offering, adopt new products. That has really opened another door where customers have said, "Hey, we think Model N is uniquely positioned to partner with us to build entirely new products." That's been an exciting byproduct as well of these big customers recommitting to us. And I also have to say, in my experience of 25-plus years in software, including running a product organization, if you've got a customer that's committed, willing to pay for, willing to help drive use cases and be a reference for it, you're going to have a much more successful new product launch. So as these opportunities have come up and I believe will come up, continue to come up, we're going to pay close attention to them. -------------------------------------------------------------------------------- Brian Christopher Peterson, Raymond James & Associates, Inc., Research Division - Senior Research Associate [40] -------------------------------------------------------------------------------- Okay. Understood. And just -- I know you gave some color on the Deloitte contribution, but any qualitative sense of if that's more a reflection of the run rates of the business? Or what kind of revenue or cost synergies are kind of assumed in the adjusted numbers? -------------------------------------------------------------------------------- Jason Blessing, Model N, Inc. - President, CEO & Director [41] -------------------------------------------------------------------------------- Yes. We've assumed pretty conservative cost synergies this year as we really make sure we understand that business and how to bring it forward and how to grow it. And most of the cost synergies are focused around things like hosting costs and getting more economy of scale there as we bring the businesses together as well as eliminating some redundant software components in our development environment. And then there are some interesting revenue synergies from cross-selling products, like gross-to-net, which came over with the Deloitte business. And then that solution footprint from Deloitte was U.S.-focused. So many of their customers are actually global customers. So there's also an opportunity to cross-sell Global Tenders Management as well as Global Price Management. So it's a nice combination of cost synergies and revenue synergies. And as we always try and do when we give guidance, we try and be very thoughtful in the guidance that we give. -------------------------------------------------------------------------------- Operator [42] -------------------------------------------------------------------------------- The next question is from Gene Mannheimer from Colliers. -------------------------------------------------------------------------------- Eugene Mark Mannheimer, Colliers Securities LLC, Research Division - Senior Research Analyst of Healthcare [43] -------------------------------------------------------------------------------- Congrats and welcome, John. On the Deloitte business, how much, if any, of the revenue would you be writing off under purchase accounting? And can you share with us what is the normalized margin run rate on the acquired business? -------------------------------------------------------------------------------- John Ederer, Model N, Inc. - CFO [44] -------------------------------------------------------------------------------- Yes. So in terms of the deferred write-down, it's actually pretty minimal. So this was a carve-out situation and so as such, they're limited in terms of the balance sheet items that were brought over. And you can see in our 10-Q that was filed today, we've got the disclosures there in terms of what did come over. And then in terms of kind of the run rate of the business, I think as we've tried to articulate, what I would do is look at the change in the guidance for fiscal '21. And in total revenue, we increased by $14 million from our last call, and on an adjusted EBITDA basis, we decreased by $8 million. And so if you annualize those numbers, I think you'll be in the right ballpark. That's the 9-month impact for the acquisition. So I think hopefully, that gives you some decent guidance in terms of directionally where this business is at. -------------------------------------------------------------------------------- Eugene Mark Mannheimer, Colliers Securities LLC, Research Division - Senior Research Analyst of Healthcare [45] -------------------------------------------------------------------------------- No, that's -- that will be very helpful. And more broadly, historically, you guys have talked about a 2 to 3x revenue uplift, right, by -- with your customers transitioning to the cloud. So I'm wondering if that general math holds true with somebody like a J&J and your other top 10 customers for that matter. And over what time period would we see that play out? -------------------------------------------------------------------------------- Jason Blessing, Model N, Inc. - President, CEO & Director [46] -------------------------------------------------------------------------------- Yes, Gene, the guidance we've given on that, you're exactly correct, has been an uplift of 2.5 to 3.5x maintenance. And so we've just kind of normalized as we talk about it at 3x, some deals are a little more, some are a little less. But most of these big deals that are in flight we're talking about are certainly in that range, and we don't expect anything materially different as we go through the SaaS transition chapter. We're far enough into it now that we've got good data on it. -------------------------------------------------------------------------------- Eugene Mark Mannheimer, Colliers Securities LLC, Research Division - Senior Research Analyst of Healthcare [47] -------------------------------------------------------------------------------- Yes. That'll make sense. And what time period do we see that lift? I mean it's not overnight, right? It's... -------------------------------------------------------------------------------- Jason Blessing, Model N, Inc. - President, CEO & Director [48] -------------------------------------------------------------------------------- Yes, it depends on how the deal is structured, but some of these deals do have deal ramps in them to accommodate a customer that is running on-premise software, paying for it while they're doing their SaaS transition. So as we've talked about more generally with deal structures, they tend to ramp over the course of the initial term, which our standard term has been 3. We've seen some customers that have asked for slightly longer terms but still ramping over the term of the deal. And I do expect these SaaS transitions, particularly the big ones that are meaningful like J&J, to accelerate over the next 12 to 18 months. -------------------------------------------------------------------------------- Operator [49] -------------------------------------------------------------------------------- The next question is from Joe Goodwin from JMP Securities. -------------------------------------------------------------------------------- Joseph P. Goodwin, JMP Securities LLC, Research Division - VP & Equity Research Analyst [50] -------------------------------------------------------------------------------- So on some of the earlier customers that opted in for the ramp deal, when will we start seeing those renewals actually happen? I believe you've done a handful of them, but kind of is there a large cohort that's coming? And kind of when is that timing set? Any color you could provide there would be great. -------------------------------------------------------------------------------- Jason Blessing, Model N, Inc. - President, CEO & Director [51] -------------------------------------------------------------------------------- Yes. So we started ramping deals, Joe, almost 3 years ago, not quite 3 years ago. And some of those deals have had varying deal terms -- yes, deal terms. And so we have seen deals renew and renew at the full value. And then in the second half of last year, we had a concentration of deals as we discussed about on our Q4 call. That cohort, again, there's a range of deal sizes in there, but -- excuse me, deal terms will renew over the next couple of years, and that will continue to be a tailwind for us. But we've generally had good experience at renewal, renewing at the full rate. -------------------------------------------------------------------------------- Operator [52] -------------------------------------------------------------------------------- We have reached the end of the question-and-answer session, and I would now like to turn the call back over to Jason Blessing for closing remarks. -------------------------------------------------------------------------------- Jason Blessing, Model N, Inc. - President, CEO & Director [53] -------------------------------------------------------------------------------- Thank you, operator, and thank you, everyone, for attending today. We look forward to talking to you all throughout the quarter. And this concludes our call. Thank you very much. -------------------------------------------------------------------------------- Operator [54] -------------------------------------------------------------------------------- This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.