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Model N (MODN) Beats on Q2 Earnings, Raises '19 Guidance

Zacks Equity Research

Model N, Inc. MODN delivered second-quarter fiscal 2019 non-GAAP earnings of 1 cent per share beating the Zacks Consensus Estimate by 4 cents. Notably, the Zacks Consensus Estimate was pegged at a loss of 3 cents. However, the figure declined by 50% from the year-ago earnings of 2 cents per share.

Revenues came in at $34.8 million, slightly ahead of Zacks Consensus Estimate of $34.6 million. The figure was also higher than management’s guided range of $34.3 million to $34.7 million. However, the top line declined 11.2% from the year-ago quarter.

Notably, Model N 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.

Coming to price performance, shares of Model N have returned 45.4% year to date, outperforming the industry’s rally of 28.4%.

Quarter in Detail

Model N is reported earnings results under two business lines, namely, Subscription and Professional Services, from first-quarter fiscal 2019. Notably, the company previously reported under two domains —SaaS & Maintenance and License & Implementation.

In second-quarter fiscal 2019, Subscription revenues of almost $25.9 million grew 8.1% year over year. Notably, Model N is accelerating its transition of revenue management to cloud.

This has enabled the company to aid more than 60% of its customers to go live on one or more of its cloud products.

Management is optimistic on successful transition of Gilead Sciences to a 100% SaaS model from a traditional on-premise model.

Model N, Inc. Revenue (Quarterly)

Model N, Inc. Revenue (Quarterly) | Model N, Inc. Quote

Professional Services revenues declined 41.5% on a year-over-year basis to $8.9 million, primarily owing to “legacy on-premise implementations.”

Operating Details

Non-GAAP gross profit declined 15.4% from the year ago quarter to $19.6 million. Non-GAAP gross margin (adjusted for deferred revenues) contracted 270 bps from the year-ago-figure to 56.3%.

Adjusted EBITDA declined 38.8% year over year to $1.8 million.

Total operating expenses of $22.8 million fell 6.3% on a year-over-year basis. As a percentage of total revenues, the figure expanded 340 bps year over year.

Model N, Inc. Price, Consensus and EPS Surprise

Model N, Inc. Price, Consensus and EPS Surprise | Model N, Inc. Quote

Non-GAAP income from operations declined almost 32% year over year to $1.5 million in the second quarter. Non-GAAP operating margin (as a percentage of revenues before deferred revenue adjustment) contracted 140 bps to 4.3%.

Balance Sheet & Cash Flow

Model N exited the second quarter with cash and cash equivalents of $54.1 million compared with $52.2 million reported in the previous quarter.

In the reported quarter, the company paid $4.8 million in debt. As of Mar 31, 2019, the company had total debt (including current portion) of almost $49 million, down from $53.6 million reported in the previous quarter.

For six-months ended Mar 31, 2019, net cash generated by operating activities and free cash flow came in at $0.5 million and $0.3 million, respectively. Notably, for six-months ended Mar 31, 2018, Model N used approximately $5 million net cash in operating activities and reported free cash flow of ($5.1million).


The company anticipates fiscal third-quarter 2019 GAAP revenues to come in the range of $33.9 million to $34.3 million.

Non-GAAP net income is anticipated to be in between in line results to 2 cents per share for the third quarter. The Zacks Consensus Estimate is pegged at earnings of 4 cents.

Adjusted EBITDA is anticipated to be in the range of $1.8 million to $2.2 million.

For fiscal 2019, management revised guidance. Model N now expects GAAP revenues to be in the range of $138.5 million to $142.5 million, inching up slightly from the prior guided range of $138-$142 million. Adoption of ASC 606 is anticipated to reduce overall fiscal 2019 revenues by 7.2 million.

Non-GAAP earnings are expected to be in the range of 10-17 cents per share, compared with previously guided 5-17 cents. The Zacks Consensus Estimate is currently pegged at 11 cents.

Adjusted EBITDA is now projected to be in the range of $9.5 million to $12.5 million, compared with earlier predicted range of $8.5-$12.5 million.


Model N made significant efforts in its go to market strategy in order to improve growth. The company is leaving no stone unturned to enable customers’ transition to cloud from an on-premise infrastructure.

Additionally, Model N’s growth prospects in the life sciences & high technology are bright due to increasing redundancy of legacy systems. The company’s solutions provide higher Return on Investment (ROI) as well as plug gaps in the end-to-end revenue management process that legacy systems fail to do.

Moreover, per IDC estimates, approximately 90% of the surveyed biotech and pharma companies intend to implement cloud-based revenue management platform by 2020, is noteworthy in this regard.

However, increasing investments to enhance clod-based offerings with focus on High-Tech and Life Sciences customers is likely to limit margin expansion. Further, declining professional revenues and headwinds from ASC 606 adoption remain key concerns.

Zacks Rank & Key Picks

Currently, Model N carries a Zacks Rank #3 (Hold).

Some better-ranked stocks worth considering in the broader sector, include Cadence Design Systems CDNS, ACI Worldwide, Inc. ACIW and Avid Technology, Inc. AVID, all sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Cadence, ACI Worldwide and Avid is projected at 12%, 12% and 10%, respectively.

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