It has been about a month since the last earnings report for Model N (MODN). Shares have added about 15.1% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Model N due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Model N Q3 Earnings Beat Estimates,'19 View Raised
Model N delivered third-quarter fiscal 2019 non-GAAP earnings of 6 cents per share beating the Zacks Consensus Estimate of 1 cent. Moreover, the figure showed an improvement from the year-ago quarter’s loss of 7 cents.
Revenues came in at $34.7 million, slightly ahead of Zacks Consensus Estimate of $34 million. The figure was also higher than management’s guided range of $33.9 million to $34.3 million. However, the top line declined 12.5% from the year-ago quarter.
Notably, Model N had adopted ASC 606 from first-quarter fiscal 2019. The company is making steady progress in its transformation to a Software-as-a-Service (SaaS) based model.
Quarter in Detail
Model N has been reporting earnings results under two business lines — Subscription and Professional Services — from first-quarter fiscal 2019. Notably, the company previously reported under two domains — SaaS & Maintenance and License & Implementation.
In third-quarter fiscal 2019, Subscription revenues of almost $26.6 million improved 6.8% year over year. Notably, the company is accelerating its transition of revenue management to cloud. This has aided the company in customer addition during the quarter. During the third quarter, revenues from new customers were approximately in the range of $1 billion to more than $20 billion.
Professional Services revenues declined 44.9% on a year-over-year basis to $8.1 million, primarily owing to “legacy on-premise implementations.”
Non-GAAP gross profit declined 16.5% from the year ago quarter to $20.3 million. Non-GAAP gross margin (adjusted for deferred revenues) contracted 300 bps from the year-ago-figure to 58%. Non-GAAP subscription gross margin during the quarter came in at 71% compared with 65% reported in the year-ago quarter.
Adjusted EBITDA increased 6.5% year over year to $3.3 million.
Total operating expenses of $20.9 million fell 38.7% on a year-over-year basis.
Non-GAAP income from operations increased almost 20% year over year to $3 million in the second quarter. Non-GAAP operating margin (as a percentage of revenues before deferred revenue adjustment) expanded 240 bps to 8.6%.
Balance Sheet & Cash Flow
Model N exited the third quarter with cash and cash equivalents of $58.5 million compared with $54.1 million reported in the previous quarter.
In the reported quarter, the company paid $5 million in debt. As of Jun 30, 2019, the company had total debt (including current portion) of almost $49.1 million, up from $49 million reported in the previous quarter.
For nine-months ended Jun 30, 2019, net cash generated by operating activities and free cash flow came in at $4.8 million and $4.6 million, respectively.
The company anticipates fiscal fourth-quarter 2019 GAAP revenues to come in the range of $35.5 million to $35.9 million. Subscription for the fourth quarter is anticipated to be in the range of $26.8-$27.2 million.
Non-GAAP net income is anticipated to be in between 6 cents to 10 cents per share for the fourth quarter. Adjusted EBITDA is anticipated to be in the range of $3.5 million to $4.5 million.
For fiscal 2019, management revised guidance. Model N now expects GAAP revenues to be in the range of $140.1 million to $140.5 million, up from the prior guided range of $138.5 million to $142.5 million. Adoption of ASC 606 is anticipated to reduce overall fiscal 2019 revenues by 7.2 million.
Subscription for the fiscal 2019 is anticipated to be in the range of $104.6-$105 million.
Non-GAAP earnings are expected to be in the range of 16-20 cents per share, compared with previously guided 10-17 cents. Adjusted EBITDA is now projected to be in the range of $11.5 million to $12.5 million, compared with earlier predicted range of $9.5 million to $12.5 million.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates review. The consensus estimate has shifted 57.14% due to these changes.
Currently, Model N has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. However, the stock was allocated a grade of F on the value side, putting it in the lowest quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. It comes with little surprise Model N has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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