Q3 2023 Model N Inc Earnings Call
Participants
Jason Blessing; President, CEO & Director; Model N, Inc.
John Ederer; CFO; Model N, Inc.
Adam R. Hotchkiss; Business Analyst; Goldman Sachs Group, Inc., Research Division
Austin Cole
Chad Michael Bennett; Senior Research Analyst; Craig-Hallum Capital Group LLC, Research Division
Craig Matthew Hettenbach; VP; Morgan Stanley, Research Division
Johnathan M. McCary; Research Associate; Raymond James & Associates, Inc., Research Division
Jordan Ross Boretz; Equity Associate; Jefferies LLC, Research Division
Joseph D. Vruwink; Senior Research Analyst; Robert W. Baird & Co. Incorporated, Research Division
Joseph Daniel Meares; Associate; Truist Securities, Inc., Research Division
Rishi Nitya Jaluria; Analyst; RBC Capital Markets, Research Division
William Joseph McNamara; Research Analyst; BTIG, LLC, Research Division
Carolyn Bass; Co-Founder and Partner; Market Street Partners, LLC
Presentation
Operator
Good afternoon, and welcome to Model N's Third Quarter of Fiscal 2023 Earnings Conference Call. (Operator Instructions). As a reminder, this conference is being recorded.
With that, I would like to turn the call over to Carolyn Bass, from Investor Relations. Please proceed.
Carolyn Bass
Good afternoon. Welcome to Model N's Third Quarter of Fiscal 2023 Earnings Call. This is Carolyn Bass, Investor Relations for Model N.
With me today on the call are Jason Blessing, Model N's Chief Executive Officer; and John Ederer, Chief Financial Officer. Our earnings press release was issued to 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 third quarter performance and to offer a financial outlook for our fourth quarter and fiscal year ending September 30, 2023. The commentary made in 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 in order to access our third quarter fiscal 2023 press release, periodic SEC reports and the financial replay of this call. Finally, unless otherwise stated, all financial comparisons in this call will be to our fiscal year 2022 results.
And with that, let me turn the call over to Jason.
Jason Blessing
Thank you, Carolyn, and welcome to our call today.
I am pleased to report that our third quarter results beat expectations across the board. We exceeded guidance for total revenue, subscription revenue and professional services revenue. We also posted record adjusted EBITDA as we continue to drive efficiencies related to our business model transition. Overall, Q3 was another strong quarter and underscores our commitment to driving profitable growth.
Our Q3 SaaS metrics were also strong, driven by SaaS ARR, which grew by 28% year-over-year. In addition, our SaaS net dollar retention was 126%, up 3 points from Q3 of last year. I am very proud of our team and the business model transformation that we are driving, especially in an uncertain macroeconomic environment.
Before talking about the quarter, I'd like to give an update on two topics that I know are very important to our investors, and that's our view on the macro and our business model transition. As I shared on our last call, during Q2, we saw some customers applying more scrutiny to incremental spend, and in some cases, additional approvals were required to get deals done. We saw this impact continue in our fiscal Q3, but I would say that our selling environment is stabilizing and did not deteriorate further.
Next, we are very close to completing our business model transition and have seen significant momentum over the last year, kicking off projects to move customers to the cloud. We are also starting to see increased leverage in OpEx as is evidenced by our favorable EBITDA trends. As we get to the end of the transition, we are seeing some deal timing issues as we work with customers to create mutually beneficial economics. We do still believe that substantially all of these customers will convert over the next couple of quarters, but we are taking a conservative stance looking forward to next year to give ourselves room to work with this final cohort of customers.
John will discuss this further in his prepared remarks.
Despite some of the short-term deal timing issues, I am still very excited about Model N's future. We had a great user conference in June, which we call Rainmaker, where we saw very strong engagement with our customers. In fact, this annual event resulted in a substantial amount of new pipeline, particularly on the new logo side. There was also a lot of interest in our new products and the vision that we laid out for the company, all of which we believe will drive profitable growth over the next several years.
Next, I'd like to share some of the business highlights from the quarter. Success in Q3 was driven by a healthy contribution from several areas of the business, and I'd like to share some examples. During Q3, we expanded our relationship with Amgen as they build on their recently completed successful SaaS transition. Amgen's next phase will include implementing two of our newer products, Validata and 340B Vigilance, which was released earlier this year. Our 340B Vigilance product helps companies maintain compliance while also distributing products to covered entities that serve the nation's most vulnerable patient populations.
Amgen also expanded their use of our proprietary automated testing suite. This suite of testing tools helps customers more rapidly take seasonal releases while complying with stringent internal system validation requirements. Amgen is the latest example of a customer who experienced a successful SaaS transition, stabilized quickly and then moved on to implement other high-value Model N products.
Also during the quarter, we expanded our relationship with ICU Medical's Smith Medical division. ICU purchased Smith Medical in early 2022 and selected Model N as the revenue management platform of choice for the combined entity to help drive overall revenue synergies and compliance. Time and again, we see Model N's products leveraged as a strategic enabler to M&A and to help our customers realize their business cases.
And finally, in Q3, we expanded our relationship with Regeneron Pharmaceuticals, a $12 billion biotech company. Regeneron started their Model N journey as a business services customer. As the company has scaled and matured their internal operations, they decided to expand their usage of Model N and move their processing from business services to their newly built in-house team. This transition demonstrates how Model N can grow with the customer and provide revenue management solutions tailored to each stage of a customer's growth.
Turning to business services, our team continues to innovate and expand our solutions and recently launched a new state price transparency management offering. During the quarter, long-time customer, Catalyst Pharmaceuticals, added this new offering while also expanding usage to include chargebacks and managed care processing capabilities.
Turning to High Tech, we continue to see green shoots in this area of our business as industry leaders start to invest with an eye towards the future. In Q3, AMD continued to expand their usage of Model N. AMD recently acquired Xilinx and is working to unify the company's systems and processes and Model N will be the platform of choice for the combined company. This is another great example of Model N playing a key role in enabling strategic M&A.
AMD also added our new product, Ngage, which is an embedded analytics and learning solution that helps train new users while also providing key insights into application usage. Also in Q3, KYOCERA AVX, a leading global manufacturer of advanced electronic components continued their global rollout of Model N's Revenue Cloud. They also added a large number of internal users during the quarter.
Turning to Professional Services. Our team exceeded expectations with a very strong quarter once again. The results of our Professional Services organization symbolized the strong demand for our mission-critical high ROI solutions as companies seek to drive top and bottom line improvements. Our Professional Services team continues to do a terrific job of getting new customers live on time and on budget.
One recent example is UCB. UCB, who is also one of our SaaS transition pioneers, is a multinational biopharmaceutical company headquartered in Belgium that also has operations in the U.S. In Q3, UCB went live on our State Price Transparency Management solution. This project enabled UCB to implement standard business processes to inventory state price transparency rules, track applicable price change events and create and file the necessary regulatory reports. Now that UCB is live, they will more easily be able to keep up with the increasing complexity and enforcement around state price transparency regulations.
As I mentioned earlier, we hosted Rainmaker during Q3 in person for the first time since the pandemic. It was a great event, and this year, we had the highest attendance of any Rainmaker, in-person or virtual in our history. This thought leadership event brings together people from around the world from the life sciences and high-tech industries. Our customers, team members and partners all came out of Rainmaker very energized and excited for the future, not just Q4 but the next several years.
As I reflect on Rainmaker, our team did a really nice job this year, making this an industry event and not just a user conference. When I look at the content and the attendees at this event, I can say it was truly a strategic industry event. In fact, some of the best sessions were the ones discussing important industry trends. This year's Rainmaker demonstrates the progress we've made transforming Model N and elevating to be a strategic partner to the industries we serve.
In addition to industry trends, we also had a healthy dose of product content, including several positive case studies on customers that have moved to the cloud. It is clear that our customers are realizing strong ROI from their SaaS transitions. For our customers that have successfully completed the transition, they are, on average, experiencing an 80% reduction in the time to take seasonal releases.
At Rainmaker, we also laid out our vision to develop purpose-built data and analytics solutions. These solutions will sit on top of our newly built data layer and complement our existing products. We think about data and analytics in 5 categories, which I'll briefly describe along with some examples.
The first is embedded analytics, which will be added to existing Model N solutions to improve the user experience and decision-making. One example that exists today is in our global tender management product for life sciences. We've embedded artificial intelligence that helps predict which tenders a customer should pursue based on predictive win probability.
Next, our new stand-alone analytic applications. These are applications that are designed to help customers solve a specific business problem. An example of this is our 340B Vigilant solution that's designed to help identify and reduce revenue leakage associated with this Medicaid purchasing program. Examples of new products in this category that we announced at Rainmaker include post-deal analytics and formulary compliance.
Next, our syndicated data solutions. Model N processes and stores vast amounts of industry data that is common across our customers. We believe that we have an opportunity to bring these data sources together for customers in a seamless way within our applications. An example of this that exists today is integrating external competitor pricing into global pricing management. This allows our customers to make more informed decisions on how to commercialize and launch products around the world.
Next is the ability to aggregate and sell anonymized data set. This could range from everything from market share information to competitor pricing. And then finally, we envision being able to provide benchmarking reports. This offering could provide things like industry reports focused on KPIs and trends based on the data we process.
And finally, I want to call out two recent awards that we won recognizing the importance of our DARE core values, which stand for dream, align, respect and excel. Our core values and culture are an important part of what makes Model N special. In June, Fortune Media and Great Place to Work honored Model N as one of this year's best places in the Bay Area to work. And then in July, Fortune and Great Places to Work honored Model N as one of this year's best workplaces for millennials. We've been very focused on our workplace and culture over the last several years and it's great to get formal recognition for our efforts.
In closing, I'd like to reiterate that our Q3 results reflect the strong collective efforts of Model Ners around the world. As we close out the year, we will continue building a great company, delivering value to our customers, all while driving growth and improving profitability.
With that, I'd like to turn the call over to John to discuss our Q3 financial results, provide guidance for the fourth quarter and offer a preliminary outlook for our fiscal 2024. John?
John Ederer
Thank you, Jason, and good afternoon to everyone on the call today.
As Jason noted, we delivered very solid P&L results in Q3 that exceeded our guidance metrics. I was particularly pleased by our profit performance as adjusted EBITDA grew 35% versus Q3 last year, and we had a strong rebound in free cash flow, which had $30.7 million for the trailing 12-month period. As Jason also described, even while we are working through the final stages of SaaS transitions, we are starting to see some of the benefits of our business model transformation to the cloud in terms of bottom line leverage.
Looking specifically at our results for the third quarter, total revenue grew 13% to $63.7 million, which exceeded the top end of our guidance. Subscription revenue also increased by 13% to $45.8 million, exceeding the upper end of our guidance range. And lastly, Professional Services revenue grew by 15% to $17.9 million which was above the high end of our guidance as the team continued to run at high utilization rates.
In terms of our profitability, please keep in mind that we will be discussing non-GAAP numbers and a full reconciliation of our results is provided in our earnings release.
For the third quarter, total non-GAAP gross profit was $39.2 million, representing a gross margin of 61.5%. Non-GAAP subscription gross margin was 69.1% compared to 68.5% in Q3 of the prior year as SaaS revenue increased as a percentage of total subscription revenue. And non-GAAP professional services gross margin was 42% in Q3, which was down from 44% in Q3 last year, but still an exceptional number above 40% and exceeding our expectations.
Adjusted EBITDA was $13.5 million, an increase of 35% from the third quarter of fiscal 2022 and well ahead of our guidance range. Adjusted EBITDA margin improved to 21.2% compared to 17.9% for the third quarter last year. And I would attribute our overperformance on adjusted EBITDA to 3 factors: First, as the macro environment is shifted, we have tightened up our hiring activity and overall spending. Second, we benefited in Q3 due to the timing of certain personnel-related expenses that will normalize in Q4. And third, we are starting to realize some leverage across the business as we're able to focus on cloud operations and innovation with less support required for a shrinking population of on-premise customers.
Finally, non-GAAP net income was $13.6 million, an increase of 60% from Q3 of last year, and non-GAAP earnings per share were $0.35, which was $0.10 above the high end of our guidance.
Turning to our SaaS metrics for Q3. Our SaaS ARR reached $129.2 million, which was an increase of $28.1 million or 28% versus Q3 of last year. In addition, trailing 12-month SaaS net retention was 126% in Q3. Over the last year, our SaaS ARR growth rate and net retention metrics have partially benefited from SaaS transition activity reaching a peak in our fiscal Q2 this year. We have talked about the bell curve that we are on due to SaaS transitions on numerous calls, and the Q3 results were right in line with our expectations. Further, we expect this trend to continue in Q4 with SaaS ARR growth in line with our long-term target of 20%.
In terms of the balance sheet, we ended the third quarter with $299.6 million in cash and equivalents, which was up $29 million from Q2. As we noted on our last call, we had a bit of an anomaly on our accounts receivable last quarter, which spiked despite strong collections due to a record quarter of billings. We have followed that up with another record quarter of collections driving accounts receivable down to $51.9 million, which was a drop of $24.1 million sequentially versus Q2.
Turning to remaining performance obligations. Our total RPO for Q3 was $321.9 million, which was up 4% on a year-over-year basis. The current portion of our RPO balance was up to $140.7 million representing growth of 11% year-over-year. Our total RPO has been impacted by SaaS transition activity. We had a period of outsized growth last year due to a number of long-term SaaS transition deals often with contract lengths well in excess of 3 years. These longer-term commitments added extra years to the total contract value reflected in our RPO. As renewals and other non-SaaS transition bookings become a bigger proportion of the total, we are seeing our average contract length in RPO return to a more normalized level.
Now looking ahead to our guidance for the year, we are increasing the bottom end of our outlook for subscription revenue and raising our view for professional services revenue, total revenue, adjusted EBITDA and non-GAAP earnings per share.
In summary, for Q4, we expect total revenue to be in the range of $61.6 million to $62.6 million, with subscription revenue in the range of $45.6 million to $46.1 million, and we expect Professional Services revenue in the range of $16 million to $16.5 million. I would note that there is some typical seasonality in our professional services business with the September and December quarters impacted by vacation and holiday schedules.
We expect adjusted EBITDA to be in the range of $11 million to $12 million which again reflects a more normalized run rate for expenses compared to Q3. And finally, for non-GAAP earnings per share, we expect a range of $0.28 to $0.31 per share based on a fully diluted share count of approximately 39.3 million shares.
For the full year of fiscal 2023, we expect total revenue to be in the range of $247.1 million to $248.1 million, with subscription revenue in the range of $180.5 million to $181 million and Professional Services revenue in the range of $66.6 million to $67.1 million. We expect adjusted EBITDA to be in the range of $42.9 million to $43.9 million and non-GAAP earnings per share to be in the range of $1.08 to $1.10 per share based on a fully diluted share count of approximately 38.9 million shares.
Finally, looking ahead to fiscal 2024, this is a particularly challenging time to provide a 5-quarter outlook given the timing nuances that Jason discussed earlier. While pipeline is improving for the second half of the calendar year, and while there's a lot of interest around the future potential for data and analytics coming out of Rainmaker, we want to be prudent in our approach and focus on what we have line of sight to today.
In FY '24, we will have some similar trends and challenges. First, we continue to target SaaS ARR growth of 20% for the year, but certain quarters, notably Q2 next year will be challenging due to tough year-over-year comparisons. Second, we have seen more impact from the macro environment on our software-enabled subscription service offerings and expect lower growth from these offerings next year.
And then third, the decline in maintenance revenue will again be a headwind, potentially approaching a 50% decrease next year. Rolling all of these factors up, we would expect subscription revenue growth next year that is in line with our Q4 guidance. Hopefully, there will be some upside from the recent build in pipeline, but we'll wait to see how the next couple of quarters go and update all of you at the appropriate time.
Now on the profitability side, I believe that we have demonstrated our commitment to profitable growth with steady improvement in adjusted EBITDA margin over the last several years. We will continue to show improved profitability in FY '24 as we capitalize on the benefits of our business model transition, and we'll provide more specific guidance on our Q4 earnings call.
So to summarize, we are pleased with our financial results in Q3 especially our profit performance, and we remain focused on driving SaaS ARR growth, while at the same time delivering continued profitability improvements. We will continue to manage our business in a prudent way ensuring that we deliver value to both our customers and our shareholders.
With that, I'll turn the call over to the operator for any questions. Operator?
Question and Answer Session
Operator
(Operator Instructions). Our first question comes from Craig Hettenbach with Morgan Stanley.
Craig Matthew Hettenbach
I appreciate all the color on moving parts into 2024. As you do transition customers over and complete that cloud transition, when thinking about the timing elements of that and if some is kind of pushed out, how do you think about into 2025? Is there a little bit of a catch-up because of that timing element? Or how would you characterize just kind of normalizing some of the timing elements you're talking about here through the rest of the cloud transition?
Jason Blessing
This is Jason, I'll answer that. That's a great question.
So first, a reminder. We do have end of life in December of this year, and we told our customers that's nonnegotiable. We've also communicated to our customers that some of the key legislation that's been enacted recently like the Inflation Reduction Act is not going to be backported to the on-premise releases. So there is still a pretty big motivation for customers to move forward. What I would say is as we've gotten to this last cohort of customers this year, they have proven to need a little extra help in their business cases. They've negotiated a little bit more on the economic arrangements and we just felt that it takes -- it's a good business decision to take this time of these customers to make them feel like they end up in a good win-win.
We don't want to give away long-term economics either in these discussions, particularly given that many of these are 5 -- 3- to 5-year contracts. So the best way to think about it is we've had a cohort of deals that have maybe slipped out a couple of quarters, but we still do believe based on where we sit today, that we've got good visibility that the remainder of these customers are going to convert right around that December time frame, maybe leak a little bit into next year, which is consistent with the guidance we've given on prior calls.
Craig Matthew Hettenbach
Understood. And then just a follow-up for John. Nice to see some of the operating leverage in the model. Just curious as you kind of segue into next year, and again, you get more customers onto the cloud. How are you thinking about the key operating levers to the business and what that means from a margin perspective? Kind of intermediate to longer term?
John Ederer
Sure. Yes. Happy to give more of a thematic answer today. And then obviously, when we get to the Q4 call, we'll give more specific guidance with regards to next year. But -- but from a high-level perspective, some of the bigger things that we're seeing as we transition the business over to the cloud are opportunities in terms of cloud hosting, just getting more scale on that part of our business as well as our support organization having to support fewer products, both on-prem and in the cloud. .
And then on the operating side of things, particularly in R&D, that's another area where we have to spend a certain amount of time and effort supporting both legacy products as well as new cloud innovation. And so as we move through time and get to focus exclusively on the cloud side of the business, we start to pick up points of leverage on both cost of revenue and OpEx.
Operator
Our next question comes from Joe Vruwink with Baird.
Joseph D. Vruwink
Maybe I'll just start on macro. There was a particular update from a big consulting practice, I think actually one of your partners, just talking about how efforts focused on pricing and market access have maybe experienced a shift right in terms of activity and decision-making. It doesn't really sound like that kind of broad macro comment is extending to Model N. I just wanted to confirm whether that is the case.
And then the second part of the question would just be if part A is true, why that is the case? And do you think it's because just this focus around regulatory compliance within the industry is giving you a bit of an offset? And so net-net, you're seeing some resiliency from kind of a discussion environment?
Jason Blessing
Yes, Joe, this is Jason. I'll take that. So kind of in line with what we've talked about on past calls, we have seen some impact on High Tech. And again, I'm talking about the broader model any year. And so High Tech has to factor into how we view the out quarters. And then, yes, I would say, certainly, the dynamic regulatory environment which is somewhat insular from economic fluctuations does continue to drive the core part of our business, particularly with medium and large pharma.
As both John and I did mention in our prepared remarks, we have seen some customers be more cautious on some of our subscription services that really are sold to complement our software, but overall, the demand for our software and the life sciences side remains very resilient. And we also saw -- kind of a qualitative answer. And then just to point out a quantitative component as well that I talked about in my script, we really saw some nice pipeline generation coming out of our customer event back in June.
Joseph D. Vruwink
Okay. That's great. Just in terms of some of the bottom line benefits that you're now realizing as you kind of approach more of a steady-state SaaS model. Is EBITDA like this quarter north of 20%? Is that something you would anticipate and I'll call it the fiscal 2025 time frame. Obviously, next year, there's still a bit of a transition happening. But is that maybe the right time frame to more fully reflect what already seems to be kind of the endpoint and things you've started to realize?
John Ederer
Yes. Joe, it's a good question. And I'll side-step it a little bit today in terms of talking about FY '25. But I think what I would reiterate is that we are very committed to continuing to drive improvements in profitability. And you've seen us do that over the last several years, and we're committed to doing that going forward. I won't give you an order of magnitude today, even for FY '24 as we're still going through the planning process and deciding on some of those trade-offs, frankly, between investment opportunities for growth and dropping incremental benefit to the bottom line, but we will go through that process with a commitment for continued profitability.
I think when we look at the business overall, we talked about some of these already on the other question, but there are opportunities as we move the business over to the cloud for increased scale and increased profitability, and we'll continue to drive those going forward.
Operator
Our next question comes from Adam Hotchkiss with Goldman Sachs.
Adam R. Hotchkiss
I guess, first, could you just give us an update on the cross-sell momentum you're seeing amongst the folks shifting to cloud in the latest cohort. I think you had mentioned some softness around the services but strength in the life sciences software. Just any incremental color on how you think about the behavior of this cohort of customers comparing to some of the earlier cloud adopters?
Jason Blessing
Yes, Adam, it's a great question. And certainly, the pattern now that we're, call it, 3 years into our -- into our SaaS transition, the pattern still remains that typically within a couple of quarters of a customer going live and stabilizing on our cloud platform, they will come back and take more products. And as I've also talked about in the past, almost every one of these SaaS transitions comes with a road map that kind of lays out over a 2- to 3-year period after the SaaS transition is complete, what are the next couple of phases with Model N. And so we've seen that pattern repeat with customers a couple of quarters after completing their SaaS transition. And I did mention Amgen in my script, they were a customer that I was very involved with in their transition went live earlier this year, stabilized and are now back adding 2 new products. So it's been a pretty consistent trend line as customers come out of their transition.
Adam R. Hotchkiss
Great. That's really helpful. And then just on the High Tech side of things, I think you called out a little bit of squishiness there last quarter. Is it fair to say that piece of the business is starting to stabilize a little bit? Or does there continue to be headwinds there?
Jason Blessing
It's certainly stabilized this year, and we've seen some positive trends in the pipeline. We've seen industry leaders like I talked about with KYOCERA and AMD -- AMD in particular -- that run our platform, continue to invest and expand usage. So I do think that that part of our business has stabilized. And we've also seen some interesting new logo activity in our pipeline on the High Tech side. So we're definitely feeling better about that.
Operator
Our next question comes from Samad Samana with Jefferies.
Jordan Ross Boretz
This is Jordan Boretz on for Samad. Congrats on a strong quarter. So maybe a first question for you, John. On the initial fiscal '24 guide for the SaaS growth of around 20%. That obviously implies that ARR is growing at a similar rate. And that would imply for like net new ARR added, right, that it kind of picked up pretty substantially from a year-over-year perspective. So I think maybe stepping back, can you speak to your visibility within that guide for 20% growth for the SaaS piece? Maybe what's booked? And what are you layering into expectations there?
John Ederer
Yes, I can speak to that at a high level. I think if you look at the SaaS ARR that we've added this year, my guess would be, there will be an excess of the amount that you're talking about there. But in terms of setting that as a target for us and a goal, we do think that it's an achievable target. But certainly, certain quarters next year are going to be a challenge. Q2, in particular, will be very tough from a year-over-year comparison standpoint. But ultimately, we believe this is an achievable target. Obviously, we need to execute. We're going to have to go execute on the remaining SaaS transitions as well as on the new logo and cross-sell up -- cross-sell and upsell opportunities that are sitting in front of us. But as we look at the business today, we feel like that's a reasonable target for us to go after.
Jordan Ross Boretz
Awesome. And then maybe one question for you, Jason. You called out in your prepared remarks that there's some tightening on the hiring front. I'm curious, is that tightening impacting sales and R&D evenly? Are you focusing more on one area. Just to echo everyone else's comments, profitability is really exciting and it's definitely above expectations. So I'm just curious as to where you're focusing that savings in the near term?
Jason Blessing
Yes. In terms of tightening on hiring, it's generally across the company right now. We just think it's -- in this environment, it's important to have a strong focus on expenses in the bottom line. We did do quite a bit of hiring about a year ago, maybe three quarters ago in sales to build capacity for this year and especially for next year. We've continued to add incrementally on the R&D side to drive some of the new product innovation.
But overall, we've been very selective, and I certainly see us being very selective on investment over the next couple of quarters, particularly in light of what John said of our desire to continue to show some improvement on our bottom line. So we do feel like, generally speaking, we're well-resourced right now, and we're getting a lot of benefits of simplifying our business model and economy of scale with the resources we do have on board today.
Operator
Our next question comes from Chad Bennett with Craig-Hallum.
Chad Michael Bennett
So just on the cloud transition narrative, I guess I'm trying to understand, with the end of life at the end of this year, so we expect slippage in those transition deals from fourth quarter and Q1 into future quarters or into the next fiscal year? Is that what we're trying to message?
Jason Blessing
Best way to think about it is we had a cohort of deals that we expected to close in the second half of this year that have taken a little bit longer to close. And I do expect some of the Q2, Q3 deals probably close in Q4 and we may have some that slip over into the beginning of our fiscal year. And as I said, this last cohort of customers, we just have to work closely with them on their business case and their pricing to make sure they feel good about their move. And as I also said, we think it makes good business sense to take a little more time to construct these deals, so we don't give away long-term economics on 3- to 5-plus year contracts.
Chad Michael Bennett
Okay. I appreciate the color there. And then, John, maybe just in terms of the SaaS, the 20% SaaS target, is -- that would apply, I assume, to obviously, ARR, but subscription growth on the SaaS side, those things should be pretty well correlated at this point in the transition?
John Ederer
Yes. So SaaS ARR growth and SaaS revenue growth should be essentially at the same level. The metrics -- our SaaS ARR metric is based on a revenue metric.
Chad Michael Bennett
Got it. And then maybe last one for me. Just in terms of the maintenance decline, I think you talked about 50%, and I know we're not done with September yet, but can you give us a sense of where we end this year roughly on the maintenance slide?
John Ederer
Yes. Well, I can reiterate what we've commented on before. And so we finished last year, fiscal '22, with just shy of $18 million in maintenance revenue and we expected that to decline by 30% or more here in FY '23. And so that we're basically on track for that. And then on top, we would expect to see potentially another 50% decline next year for FY '24. And so when you get to the end of FY '24 as we exit FY '24, we're starting to drop down to pretty low levels of maintenance.
Operator
Our next question comes from Joseph Meares with Truist Securities.
Joseph Daniel Meares
Among that -- the cohort that's taken a little bit more coaxing to get through the SaaS transition, could you just give us a sense of how many customers is this? Is it single-digit logos? Is it double-digit logos? And then I guess with the Care Act for the end of life, what actually happens if they don't get transitioned by the end of this year? Like what functionality are they losing? Just trying to see like how powerful the end of life is?
Jason Blessing
I'll take that last part first. So they will essentially go unsupported and we'll no longer be updating on-premise code lines. We do have a period of -- a short period where we'll be doing some bug fixes that are security-related. But the big -- if you want to call it the Care Act or the Inflation Reduction Act is not going to be backported to any of our on-premise leases. So that's a pretty big catalyst for customers. And as I said, I mean, this cohort, they are the last ones, I guess, for a reason. They definitely are trying to negotiate and see if they can get a better deal. But as I said, we're not going to give up long-term deal economics just to get a deal done in a specific quarter that just doesn't make good business sense with this business model that we're transitioning to. And we'll give a fulsome update on our next call in terms of how many customers are left to transition. But yes, it's double digit, and it's somewhere in the low teens.
Joseph Daniel Meares
That's really helpful. And then you talked about the high level of pipeline coming out of Rainmaker. I'm just curious if there's any potential for that pipeline to land at multiple products and potentially make up some of the ground that's being pushed out by the SaaS transitions.
Jason Blessing
Yes. I mean I think the exciting thing about the pipeline generation that we saw coming out of Rainmaker is the majority of it was -- or good chunk of it was in new logo. And it was a combination of 2 things. It was existing pipeline maturing and then we had a lot of prospects there who were fairly new to the Model N story. So certainly, in that pipeline that matured at Rainmaker, we feel good that that will start to convert as we move into the next fiscal year. And we certainly built a, I think, a good baseline as well of additional prospects that came into the pipeline. So it's exciting to see the trend and exciting to see the bias towards the new logo.
Operator
Our next question comes from Rishi Jaluria with RBC.
Rishi Nitya Jaluria
I wanted to maybe start by thinking about your kind of ability to use generative AI to speed up implementations and make it easier to get past some of the issues that maybe some customers may have or concerns that customers may have and maybe use it as well in terms of accelerating migrations as you kind of near the end of the road on the cloud transitions. And then I've got a quick follow-up.
Jason Blessing
Yes. I mean, certainly, some of the products that we have today that leverage AI are products that help with the value proposition and get customers to move forward. Certainly, when we've talked about in the past is Global Launch Excellence that helps rationalize all the complex pricing in Europe and helps customers make more informed decisions on how to sequence and launch products. We also have a new product that we mentioned -- or excuse me, that we announced called MetaBot, that was at Rainmaker, and so this is a product that helps upload state Medicaid claims to a customer system and has some AI built in for fraud detection and automates a lot of the -- kind of check work that people would do.
So I would say our AI opportunity and the value prop is more on the product side. I think we've certainly proven on the migration side and the professional services side that we've been very efficient in running those projects on time, on budget and very profitably. So the AI story, I'd say, is more on the product front.
Rishi Nitya Jaluria
Got it. Okay. That's really helpful. And then just turning a little bit to gross margins and diving a little bit deeper into that. As we think about the end of life of the product and over time, right, you're going to get maybe a little bit more mix shift towards cloud. How should we long term be thinking about what that subscription gross margin line could look like and how it can look like over the next several years?
John Ederer
Sure, this is John. I'll take a shot at that one first.
So when we look at the subscription line overall, I think an important thing to keep in mind is the mix of revenue. And so today, we have SaaS revenue flowing through that line. We have revenue associated with our subscription service offerings, and then we have the maintenance and a small amount of term licenses left. And so all of those elements factor into what the overall gross margin will be. On the SaaS side of things, we're seeing pretty steady improvement in gross margin that comes at a higher level versus the subscription service offerings, and that's what -- and then the total number that you see is a blended rate. And so all things being equal, if we continue to see SaaS growing at a higher level versus some of the subscription service offerings, we would expect to see improvements in gross margin overall.
Operator
Our next question comes from Brian Peterson with Raymond James.
Johnathan M. McCary
This is Johnathan McCary on for Brian. So on the SaaS transition, I think you've spoken to maybe shifting some resources away from focusing on that transition and driving upsell and instead focusing on net new logos. So do you expect any incremental investment needed there in your sales and marketing department? Or did the hiring last year kind of sets you up to shift that focus. And then how do you think about tweaking that go-to-market motion internally?
Jason Blessing
Yes. So it's really the latter. When you look back over the last 3 or 4 quarters, we were hiring and building out our new logo team, both from a leadership perspective as well as a rep perspective. And that team, especially over the last 3, 4 years, have not gotten as much investment because we were so focused on the base and so focused on transition. So I'm super excited about that team and I think they're going to have a strong finish to this year and be a major growth driver for us next year.
And then in terms of the customer base, it's the same reps that can sell transitions that also do cross-sell and upsell. And as I talked about earlier in response to the question about some of the patterns we're seeing, we think that makes a lot of sense because reps build great relationships and understanding of the customers' business, pitching and driving the transition and then that makes it easy for them to relatively easier to follow on with add-on products. So all of that said, we feel pretty good about our level of investment in sales right now and I think we've got the right capacity as we end the year and look forward to next.
Johnathan M. McCary
Okay. And then kind of on the life sciences regulation front, there's obviously a lot of focus on legislation at Rainmaker. And I know that you've mentioned 340B has been a key driver of upsell. But can you kind of approximate maybe what inning we're in for 340B and State Price Transparency and then kind of maybe the compliance-based opportunity overall?
Jason Blessing
Yes. I think the unique thing about the compliance opportunity is I don't know that it's a finite game with the beginning and an end like a baseball game for the analogy used by customers that resonates with me, and they talk about it more like the tax code that just keeps getting more and more complex. And as we've talked about, we benefit from that. .
That said, certainly, with 340B and our solutions, it's a big part of our pipeline right now. So I think that's a good heuristic which shows that we're still early there, and our solution is resonating with customers. State Price Transparency Management, also a big part of our pipeline and in the early innings. And then we haven't even really gotten started with the Inflation Reduction Act. We're still working with our customers and industry experts to fully sort out how that gets implemented. So I guess the moral of the story is the changes in regulation continue to be a tailwind for us and an opportunity for new products as well.
Operator
Our next question comes from William McNamara with BTIG.
William Joseph McNamara
This is Bill on for Matt. I know you guys mentioned that the selling environment is stabilizing. I just kind of wanted to know, do you think or have it forecasted to improve in the fourth quarter? Like how should we think if we're approaching a bottom, if you will?
John Ederer
Yes, I would say that -- I would take the comments at face value. I think when we look at the macro environment, we don't have a perfect crystal ball. And so we look at where we are currently today and we do our best to line up what we think the forecast should be. And so that's the way we've done it. I would say it's a very similar approach to the way we've always approached guidance and taking a constructive view based on our line of sight today.
Operator
The next question comes from Austin Cole with JMP Securities.
Austin Cole
So this is all sounding pretty positive. At a high level, Jason, maybe what are your -- what are your top 2 priorities heading into the fourth quarter? And maybe it's something from your prepared remarks, but I'd love to just hear what are the top two things you're focused on heading into the next quarter?
Jason Blessing
Yes. That's a good question. So certainly making sure that we're in a position to wrap up transitions as we approach end of life. I mean transitions are important to us because it drives near-term sales, it sets up cross-sell, upsell and helps with some of the expense realizations that John was talking about. So I'm very focused on that part of the business and also very focused on the new logo part of our business. As I've talked about, we've been very focused on the customer base for obvious reasons.
But as I look forward, I'm super excited about the new logo opportunity. I'm excited about the pipeline. I'm excited about some of the big customers that have engaged with us that I've been personally involved in their sales cycles and so making sure that that team is in good shape and ready for next year is the second priority.
Operator
This concludes today's call. I'll turn it back to Jason Blessing, the CEO, for closing comments.
Jason Blessing
Well, thank you, operator, and thank you to everyone for attending our call tonight. I wish you all a great conclusion to your summer. And John and I look forward to seeing you out on the road in August and September. So thanks again, everyone, and have a great night.
Operator
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.
