Q2 2020 Earnings Call
Greetings and welcome to the model and second quarter 2020, <unk> earnings Conference call.
All participants are in listen only mode.
A question and answer session will follow the formal presentation.
He wants require operator assistance during the conference. Please press star zero on the telephone keypad.
As a reminder, this conference is being recorded.
I would now like to turn the conference over to David Barden Chief Financial Officer. Thank you. Please begin.
Good afternoon, welcome to the earnings call remodel in second quarter fiscal year 2020, which ended on March 31st 2020.
This is David border modeling Chief Financial Officer, and with me on the call today is Jason velocity model once Chief Executive Officer.
Our earnings press release was issue Dr. close the market and is posted on our website, where this call is being webcast.
The primary purpose of today's call is to provide you information regarding our second quarter performance in our financial outlook for our third quarter in full year fiscal 2020.
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 it should not be relied upon as representing our views as of any subsequent date.
We disclaim any obligation to update any forward looking statements reflect.
Actual results may differ materially.
Please refer to the risk factors in our most recent form 10-Q filed with the FCC.
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 non-GAAP metrics to the nearest GAAP metric or included in the earnings release issue today, which is available on our website.
I encourage you to visit our Investor Relations Web site at Investor Dot model in Dot com to access our second quarter fiscal year 2020 press release periodic FCC reports and the webcast replay of this call.
Finally, unless.
Otherwise stated all financial comparisons in this call will be to our results in fiscal year 2019.
With that let me turn the call over to Jason.
Thanks, David Good afternoon, and thank you for joining us today.
I hope you in your families are doing well and staying safe in these unprecedented times.
I'm pleased to share that the model N family as well, we shifted our global operations to remote working over seven weeks ago, and we've been able to provide uninterrupted support to our customers many of which are helping on the frontline fighting to cope with 19 buyers.
Today marks my second anniversary with model and given this milestone and the current environment I will focus my remarks in three areas.
First I will share an update on our second quarter in first half results and highlight the progress model and has made over the past two years.
Second I will share some details on what we're seeing in our markets ensuring from our customers.
And third I will share some thoughts on our outlook for the second half, including a few of clickable learnings from the 2008 recession.
Our Q2 performance is one of our best as a public company and our first half results illustrate the potential of model and operating in a healthy economic environment.
Total revenue for the quarter was $40 million, an increase of 15% over last year.
And subscription revenue was 29 million a 12% increase over the last year.
In the second quarter, we also achieved double digit year over year growth across key profitability and cash flow metrics, which allowed us to exit the quarter in the strongest financial position in our history.
When I joined the company, we had so many things going for US we had a vibrant market opportunity mission critical products and a team was strong life Sciences and high Tech domain expertise.
We built on these strengths and our focus in our operational rigor has driven consistent execution.
In a relatively short time, our results demonstrate how far we have gone.
I'd now like to share some quarterly highlights before shifting gears to discuss our response to the cobot 19 pandemic.
During the second quarter Securus, a global leader in influenza prevention selected model lens revenue cloud to drive improved operations in its government and commercial markets.
Given the importance of combating the flu next season Securus wants to make sure. It systems are ready to support the business in this dynamic environment.
This new logo win is also noteworthy as the implementation will be led by a partner using our express methodology.
This is a template ties project approach, which incorporates industry best practices and testing automation to accelerate the customers time to value.
We expect Securus to be live later, this year and be ready for the flu season.
In high Tech SPX Corporation, a global manufacturer of electronic components that we signed in Q2 of last year went live with deal management deal intelligence and channel management.
Our integrated pricing deal negotiation and channel management solution will be used by Adx is internal sales teams in North America as well as in their international distribution channels.
Also in the second quarter, the generics business unit of Mallinckrodt Pharmaceuticals completed their transition to model N's revenue cloud.
Using our proven SaaS transition approach Mallinckrodt was able to seamlessly move to our cloud platform and set a milestone as our fastest SaaS transition to date.
They joined the ranks of Gilead Sciences, Biogen Novo Nordisk in a 70% of our customers who run their business on our revenue club.
Okay.
Turning to covert 19, our response to the pandemic was swift and effective which has allowed us to continue to support our customers.
As I alluded to earlier the model N's family is safe and healthy and amazingly resilient.
For over seven weeks now we have been working remotely as a global team and plan to continue to do so through at least the end of May.
Customer support continues uninterrupted and our professional services teams are working remotely on customer projects.
In fact, a few weeks ago, we had a major go live at Novartis, where our teams worked 100% virtually through successful go lives.
Given the scale. This project the first for us and something that we will replicate in the coming months at other customers.
We're also virtually kicking off new projects and the sales team continues to engage with customers and prospects.
And finally product development is busy working on new features and executing on our roadmap.
As a team we missed the camaraderie that naturally comes from working together in the office, but we're spending a lot of time together on zoom and are grateful for the opportunity to serve our customers.
I'd now like to share some thoughts on how the covert 19 pandemic is affecting our end markets.
Life Sciences companies are in general incredibly busy right now.
Biopharmaceutical companies that produce anti viral and respiratory therapies are not surprisingly the busiest.
A leading top 10 pharma customer shared that they're actually turning away new customers as they focus on satisfying current demand.
Diagnostics testing and medical supply companies are also experiencing record demand.
One customer had order volumes increased 50 times month over month in response to demand from the pandemic.
Other customers are trending in line with pre cobot 19 business conditions. As an example customers focused on oncology and chronic illnesses seem to be as busy as they were at the start of the year.
Companies, whose products are considered elective have seen a decline in demand given that the broader health care system is focused on fighting the virus.
As a result, some medical device companies have seen their business has slowed down during this period, but are expected to bounce back over the next several months as the taxed health care system recovers.
The bottom line is we believe life Sciences, we'll see some disruption in certain pockets, but overall this is a very resilient market.
We're seeing similar trends in our high tech vertical.
Sadly speaking some companies are seeing growth due to secular trends such as the global Fiveg network build out expanding demand for cloud computing and increasing demand tied to life saving medical devices.
I also heard from some companies that have high exposure in consumer goods and automotive that their demand is challenged.
Like life Sciences, we believe that high Tech, we'll see some disruption, but will be one of the markets that will lead a global economic recovery.
We have significantly less exposure to high tech as a total percentof our business mix and we will continue to be thoughtful about selling into the pockets of strength in this market.
In response to the current environment, we'll also rolled out a package of sales tools and offers designed to help our customers.
The steps were taking now are similar to those I saw work back in 2008.
The sales tools include things like flexible payments and escalating deal structures.
We have also designed a set of product offers that our sales and customer success teams are using to drive loyalty with customers and close new deals.
One simple example is making our online training library available to all customers to ensure that they are getting maximum value from their current investment.
To date this offer has been very well received.
Other offers are geared towards our different sales motions around new logos, SaaS transitions and customer base expansion.
As I was working with the team on our response to the covered 19 crisis led me to reflect on my experience at play out and how we dealt with the 2008 financial crisis.
I recognize that the current situation is unlike anything we've ever faced.
That being said I believe that there are parallels between to lay on 2008 and model and today and those parallels gives me comfort in our ability to adapt to today's situation and continue to grow our business.
Like model in Toledo was a SaaS company that was built on a philosophy of customer success and profitable growth.
We built a durable business it till April which had a similar scale and financial profile to model and today and this put us in a position of strength when the 2008 financial crisis. It.
We took advantage of this and we continue to thoughtfully investing the business with a focus on things, we could control, which allowed us to exit the recession and even stronger position.
Today model and is in a similar spot, albeit with more mission critical products, which we believe positions us to make strategic investments in our business in the coming months and exit this recession as a better company.
As a business, we're confident about our long term future.
The results we saw through the first half of the year and quite frankly the results of the last two years are only at the beginning for modeling.
We will continue to make thoughtful investments and run the business with focus and emphasis on persistent execution.
We have a compelling market opportunity mission critical products in a team that knows how to execute and make our customers successful.
And finally, we are grateful to our customers, we're making a difference fighting the code at 19 pandemic on the front lines and saving lives.
Now I would like to turn the call over to David to elaborate on our financial results and guidance David.
Thank you Jason.
Our results for the second quarter fiscal year 2020 exceeded the financial outlook for all revenue and profitability measures. We shared with you last quarter and extended the strong performance we delivered over the last two years.
These results are further evidence, we're making progress growing and scaling is a vertical SAS company, while also delivering improved levels of profitability and free cash flow.
Total revenue for the second quarter grew 15% to $40 million. The outperformance reflects healthy subscription revenue of $29 million, an increase of 12% from a year ago.
The growth is a direct result of our strong sales execution, which led to new subscription revenue of $18.7 million increased 33% compared to $14.1 million in Q2 of last year.
As highlighted on our last call. This growth was partially offset by a natural decline in our maintenance subscription contracts due to SaaS transitions, which resulted in revenue of $10.3 million, a decrease of 13% compared to $11.8 million in Q2 of last year.
Professional services revenue was $11 million for the quarter. This amount reflects go like milestone for a successful SaaS transition.
Now I'd like to turn to profitability, our team executed well in the quarter and our topline overperformance meaningfully impacted the bottom line, reflecting our commitment to focus on generating profitable growth.
Non-GAAP gross profit for the second quarter was $24.8 million or 62% of total revenue an increase of 27% from last year non-GAAP gross margin for subscription revenue was 72% non-GAAP gross margin for professional services revenue was 35 person.
Non-GAAP operating profit for the quarter $3 million non-GAAP net income in the second quarter was $2.6 million. We produced a non-GAAP net income per share of seven cents, which was ahead of our guidance of one to three cents.
Adjusted EBITDA for the second quarter was $3.2 million, representing a margin of 8% a meaningful increase from the 5% margin we reported in Q2 of last year.
All in all we believe Q2 was a very well executed quarter with strong financial results.
Moving onto the balance sheet, we ended the second quarter with $61.3 million of cash and cash equivalents.
As a reminder, we repaid $5 million of debt in early January.
This payment we've repaid fully the sellers note associated with the rabbits acquisition and only a portion of the term loan with Wells Fargo remains.
Our cash balance also reflects our healthy free cash flow of more than $8 million in Q2.
Before I discuss our outlook I'd like this year, some perspective on who bid 19.
Our business is largely U.S. based so we did not see much in the way of impact during Q2.
In March we observed a few changes.
It looks like deals naturally will take longer to close in this economic environment.
Towards the end of Q2, we had one new logo deal slip out of the quarter and one renewal did not occur until the very last day.
Into deal structures will likely shift towards being more customer friendly.
In March two customers asked if we could invoice them in our fiscal Q4.
These agreements impacted our accounts receivable and deferred revenue balance at the end of Q2 by approximately $3 million.
Well, we did not have any request for escalating deal structures in March we anticipate this is a likely possibility in the second half of the year in its part of the offers decent highlighted in his remarks.
As you consider our outlook, it's important to note our subscription model provides us with significant visibility.
While there might be quarter to quarter variability in our subscription revenue due to the timing of new deals on time renewals and deal structures. Our visibility sits at 96% for the second half of the fiscal year as a business we have a healthy foundation of recurring revenue contracts.
Our professional services outlook reflects the discussions we've had with our customers regarding key projects to date, there appears to be little in the way of disruption clearly we remain in close contact with our customers increased changes to their delivery schedules are required.
Turning to our outlook for the third quarter, we expect total revenue to be in the range of $39.4 million to $39.8 million, representing approximately 15% year over year growth at the top end of the range.
We expect subscription revenue to be in the range of $20.7 million to $29.1 million representing growth of approximately 9% at the top end of the range.
Non-GAAP income from operations is expected to be in the range of $3.2 million to $3.6 million and non-GAAP income per share in the range of five to seven cents based on a fully diluted share count approximately 35 million shares.
Adjusted EBITDA is expected to be in the range of $3.4 million to $3.8 million.
For full fiscal year 2020, we expect total revenue in the range of 150 for $156 million.
We expect subscription revenue in the range of $114 million to $115 million, which reflects an increase at the midpoint compared to the guidance we issued after the first quarter.
Turning to profitability, we expect non-GAAP income from operations in the range of $13 million to $14 million and non-GAAP income per share in the range of 28 to 31 cents based on a fully diluted share count of approximately 35 million shares.
Adjusted EBITDA is expected to be in the range of $14 million to $15 million.
Our profitability guidance also reflects an increase at the midpoint compared to the guidance we issued after the first.
Before opening up the call for questions I'd like to share some final thoughts with you.
I continue to be very excited about our business, we have a strong subscription business model and as a vertical sat company, we have a great opportunity to serve our customers in life Sciences and high Tech.
As we contemplate the outlook for modeling I.
I believe we must be looking at our business through a conservative lens and we should remain humble given the broader economic climate.
We are committed to delivering profitable growth and that commitment is unchanged even in this economic environment.
Thank you for joining today's call now I'd like to turn the call over to the operator for questions.
Thank you at this time will be conducting a question and answer session.
We would like to ask a question. Please press star one on your telephone keypad.
A confirmation tolerable indicate your line is another question Q.
You May press Star too if you would like to help yourself from the Q.
For participants using speaker equipment and may be necessary to pick up your handset before pressing the star case.
One moment, please what we call for your questions.
Okay.
Our first questions come from the line of Koji Ikea of Oppenheimer. Please proceed with your questions.
Hi, This is Chad shading on her koji. Thanks for taking the question then.
Congrats on the great results, especially in this environment.
Thank you had another strong quarter double digit subscription growth, which is really great.
That are in all the disruption going on right now.
Just talk a bit about how the bookings grew between.
New logos and expansion opportunity, it's not I don't follow up thanks.
Yes, Chad. Thanks for the question. So you know I would say Q2 was was quite honestly like the last several quarters.
In the sense that we saw good performance from both new logo as well as customer base sales.
I would say also.
The theme that we shared in Q1 of really strong traction in our life sciences customers sales team.
Continued into into Q2, and so really our core franchise, where 80% of our business comes from in life Sciences. In General continues continues to be very healthy, but you know really customer sales and the upgrade cycle that we're going through with customers transitioning to our SAS offerings is.
It is really one of the bright spots on the business.
Thanks, that's helpful. It sounds like the life Sciences vertical is doing pretty well.
Wondering if that's on the other 20% or sell in the business and high Tech and just wondering how things are going there.
And could you remind us about how pricing works, there and that industry and how we should be thinking about.
Product volume risk and churn in high Tech. Thanks again.
Yes, I'll take the I'll take the market.
Question, and then have David cover the pricing.
I would say high tech has pockets of strength for sure.
Particularly in some of the customers that are capitalizing on some of the secular trends like Fiveg network build out.
You know cloud computing and.
And even we've seen some customers.
Who make products that go into life saving devices like ventilators. So.
There are pockets of strength, if I had to compare and contrast that to now I would say life Sciences is certainly relatively.
Relatively stronger.
And for us with with our sales team, particularly as a a vertical SaaS company, you'll see us in the second half of the year and honestly in the next year continue to focus on the pockets of strength in both of our core markets and and focus where we can really help our customers, particularly in these difficult economic times.
And then chat in terms of our pricing, it's very utility based.
And our pricing really is driven by three factors.
The cloud subscription the amount of the cloud subscription that you need to up to power your business and then the number of users are endpoints and that's a model that is actually served as well.
Great that's super helpful and congrats again on the quarter.
Thanks, Chad.
Our next questions come from the line of Terry Tillman of Suntrust. Please proceed with your questions.
Hey, Jason and David can you hear me okay.
We can.
Oh I echo the congrats congrats on the quarter up and all the commentary.
It would have been great to see everybody see your bases in person, but we did the virtual.
Portion of the user conference this year hearing JJ and some of the other customers talking about kind of moving to the cloud. It was good content. So appreciate it at least the virtual nature of it what I'm curious about Jason is because of what's going on in just the.
The challenges and the opportunities that in your life science customer base like your top 20 customers the conversation speeding up or is it changing or is the tenor changing in terms of the roadmaps moving to cloud I'm talking about some of your biggest customers. Obviously, you've got some early success, but curious on the ones that have a new gotten if anything changing in the tone as.
Yeah.
Yeah, It's a great question Terry.
I appreciate feedback on on Rainmaker light. So you know as I reflect on SaaS transitions and really look back over the last couple of years since I've been at the company and look forward.
Into the future now there's a few things that stand out to me first of all I think we've been very effective at working closely with our customers.
To make sure that they understand the value prop of our SAS offerings, particularly the importance of being crypt current on mission critical software. So I think we have cracked the nut there the second thing that I would point out.
The of course helps us in a difficult economic times is the cycle time.
It to do these upgrades has compressed significantly in that our first transition that we did with Gilead took 18 months and the most recent one at Mallinckrodt that we talked about odd to took six months. So.
It's a combination of a better engagement with our customers and increasing the cycle time I think has been very helpful.
And then our pipeline just continues to build as we've had more and more customers go live I reference Novartis in my prepared remarks that was a very large project at novartis to get them.
Current to a current version.
To get ready to deploy to our cloud we've got a similar project going on at Pfizer, We've got similar discussions going on at Johnson and Johnson. So these are mission critical systems and our customers tend to take multi year.
Viewpoints on the investment horizon, and and we really have not seen a slowdown in this part of our business.
Great. That's good to hear and I guess, David My follow up question relates to how and I know, it's kind of tricky just because the puts and takes the maintenance revenues. We think about the second half of the year compared to what the decline was in the first half. Thank you.
That's a great question I think when you think about maintenance revenue as a organically. It continues to be a very sticky revenue stream and the way I think we thought about at last August as we were starting to set the frame for this year is probably still right that organically. It just through M&A. It probably comes down roughly mid single digits, and if it's coming down a little bit faster than that it's due to the interest.
And the and the push from customers around SaaS transitions. So I think of the this as transitions going to continue and then the trends that we're seeing play out through the first half probably I'm going to continue moving forward through the second.
Does that help there.
Our next question is coming from the line of Bryan Mcdonald of Needham and company. Please proceed with your questions.
Hi, everyone. This is Alex narrow on for Ryan I'm I was hoping you could dig a little bit deeper.
And though as I kind of altered pricing plans that you were talking about before.
Yes, Hi, Alex this is Jason I'll take that.
This is this is how would describe it as it's a portfolio of tools and incentives that we put in our sales teams hands to really drive a few different things.
One show some flexibility with customers too.
Work on continuing to build loyalty and long term value with our customers and then also.
Helping our customers kind of navigate.
Current budget cycles, and and ultimately how come up model then provide more.
Value for the customer and help them through these difficult times. So let me just give you a few more specifics.
So first of all on flexibility is David talked about in his prepared remarks, you know we're continuing as quite honestly, we have been over the last couple of years.
Being thoughtful to customers needs on payment terms and deal structures I think in this environment. Those those two components, probably get more customer friendly and we have factored that into two our outlook.
Second thing I would say as we really been focused on loyalty and making sure. Our customers are fully engaged in using our products and and one example of that is making a number of new training online training.
Products available to our customers so employees, who are working from home.
Can can can get even more proficient on model and the model and solution.
And then we have.
A basket of a different offers that are aligned with our different selling motions.
To help provide more value to our customers and in many cases, that's some unique bundling, perhaps giving customers access to.
Some software that they haven't used before to see it in their environment and get exposure to at some of the new products that we've built and.
Really build build future pipeline with them around those products.
Okay, Great and then also what's the progress that you guys are being made right now for the migration of around 20 customers all over to age of U.S. and have you guys completed that trends will transition so far.
We've made great progress throughout the year and that continues it will continue into the second half of the year as we as we had forecasted at the beginning of the year, but we're very pleased with the progress.
Okay, great and thanks again.
Thanks, Alex.
Your next question is coming from the line of Chad Bennett of Craig Hallum. Please proceed with your questions.
Great. Thanks for taking my question, guys and a great job in the quarter in a challenging environment and it's good to hear everybody's healthy with you guys. So I guess I'm hopping between calls so hopefully or.
Pardon My me if I'm redundant so Jason can can you maybe speak to if you again or if you haven't already logistically you know implementations and in the current environment and in kind to how you guys are managing that.
So during the world we're in now.
And then also you know in terms of.
Higher touch or enterprise grade sales, which you guys are definitely fit in that category I I'm sure, you've probably mentioned moving to a virtual sales model, but but any color there and again, sorry, if it's a redundant.
And now those are both good questions Chad and some contacts that we haven't covered yet so.
First of all what I would say on implementations you know what I can say this after being 25 years plus an enterprise software.
Implementations over time had been moving towards more remote more package delivery delivered services and cloud is definitely a further enable that so this is really part of a journey that we've been on as a company for a number of years and I would argue that our industry has that on so we have been.
Working more and more remotely over the last several years.
But it is interesting we I talked about this in my prepared remarks, we had a big go lives at Novartis in the quarter and we typically would have been on site.
For some of the key cut over activities in the war room, and providing support to our customer and their users.
But we did it 100% virtual and I'd say the experience of our team and the fact that were a software company and and custom to working remotely that was not a big deal for us.
But I have seen my teams just doing a phenomenal job working with customers and teaching them.
How do how to work in this environment. So.
The final point I would make on that we've also been very engaged with our top 10 customers in the projects that are going on right now.
Validate that they're going to continue and they feel good about the remote delivery model and and the message back there has been has been very positive.
Relative to sales you know this is another area where.
I think customers are are more akin to being sold to remotely. These days given all the productivity tools. We have my my sense tells me that as we look forward into the second half of the year, it's going to be easier to sell to existing customers or as existing relationships and trust and they understand our.
Our our value prop into our people are I think it's going be easier there relative to up to new logos.
But I guess historically, we've always assumed you had to meet someone in person and shake their hand to close a a new business deal and I think some of those assumptions, particularly in this world are being challenged so we'll we'll continue to push on both fronts great that that's that's good color and so just.
In general you.
You aren't seeing Jason any any real elongation of up sales cycles or or any.
Kind of close rate changes on deals.
Yeah, I would I wouldn't want you to walkway, Chad and say that think that theres been no impact you know I would say as is always the case in economic cycles. Like this CFO is get more involved in deal cycles reviews can increase.
But I think well what we saw through the quarter and what we see a month into this quarter and looking forward to the second half I. Thank God life Sciences is going to be resilient and I think theres going to be pockets of resiliency and high Tech and that's really where we're focused.
Got it and and.
Did you comment Jason at all on a new logo activity in the first half of the year or for the quarter. Thanks.
Yes, I did.
I did mentioned one of the highlights from the new logo perspective was.
In life Sciences.
Midmarket company called Securus very interesting company, they're focused on influenza vaccines.
So that's a very important therapy. These days and ultimately they came to us in large part because of the current environment, they're seeing.
Dramatic increase in demand.
For their offerings and their project and implementing our product is one of the things they're doing to shore up the business to meet the current demands.
Great Nice job guys on the quarter and it's good to see the guide come in where where it did so thank you much.
Thanks, Jeff Thanks, Jay.
Our next question has come from a line of Joe Vruwink of Baird. Please proceed with your questions.
Great. Good afternoon, everyone, Hi, I was wondering if you've got in a sense, particularly west for life science customers.
Why their revenue management is maybe moving up a dead and the packing order within the broader scheme of I keep projects and I asked because when I think about.
Some of the anecdotes you shared on time to value I mean, you can get sick and and the transitions being down to I think you said six months, that's pretty impressive, but then even some of the initial landing modules like provider for instance, I think it can even be shorter than that so it actually.
It seems like the type of project, where maybe it's it's never easy to grab a new logo, but it certainly seems like something that could still got darden and the type of environment, and therefore might be if rising a bit unimportant, but I wanted to get your thoughts of why they're kind of your experience today, it's maybe backs that.
For now.
Yeah Joe.
Good question today I'll share a couple of.
A little bit of contacts with you to help with your thesis because I do agree with it.
First of all and again I'll go back to Securus is just a great example, you know a company that had a patchwork of of systems and ER and really viewed revenue management as a strategic cornerstone to their companies future growth and competing in the market and so I do think these and buyer in this environment Securus as.
Hello.
Bob of the environment driving demand.
You mentioned the cycle time, improving or you referenced the cycle time, improving on SaaS transitions you know that's that's absolutely a fact, we're getting better at that but we're also getting better at just new logo implementations and have a proprietary services methodology called model unexpressed.
That we're using that is really a collection of templates and best practices and automated testing and.
To the specific point you made I mean, we can get a customer live on provider and seeing value.
Within 20 to 22 weeks. So it can be a a very quick return on investment for sure.
Great that's great color thanks, everyone.
Thanks, Joe.
Our next questions come from the line of Jackson Ader of JP Morgan. Please proceed with your questions.
Thanks for taking my questions. This evening guys I just had a question on on the pipeline, Jason I understand that you know as as you look towards the second half a year existing customers, probably going to be a little bit more more comfortable as you mentioned to.
Purchase things virtually but what about the pipeline of new logos, even if you're not necessarily looking to close the same amount of new logos How's the pipeline build look.
Yeah, I would I would characterize the pipeline and kind of three separate vignettes. The first one you already talked about and that as you know we continue to see very strong.
Support and pipeline growth for SaaS transitions in our customer base.
The second area that I'm paying a lot of attention to is a team where we have a new leader and have made some thoughtful sales investments over the last year to focus on mid market life Sciences companies and so those are companies like Securus that we've mentioned today and the pipeline in that segment has has been grow.
I'm very nicely I would characterize it as pipeline that is has been growing for the last couple of quarters in is going to mature.
In the second half of the year and start driving business second half of the year and really setting us up for for 2021.
And then a third third area that you know is really showing some promise as we've also added some key sales capacity and high tech.
Really focused at the top end of the market, which is where we've been successful. If you think of some of our customers there like and the western digital Poly and Qualcomm is just a few examples.
And these reps have really been focused on that upper end of the market and prospecting and that and we're seeing really positive trends. There. So yes definitely in a in an interesting time some nice.
Green shoots in each of those different areas.
Great and then if I can just quickly follow up on on that that last points up mid market life science seems to be.
Nice little director vector for growth what about but.
Below the very large and in high Tech do you see yourself maybe in.
Adding that as the strategic priority over the next couple of years.
Yeah, I think it's it's a it's an attractive growth lever for us over the next couple of years as you characterize it we just have some interesting greenfield at the top end to the market, where we've proven our solutions work and deliver value for customers and so it's just a matter of priorities and where do you start.
Yep, Okay that makes sense. Thank you.
Thanks Jackson.
Our next question it's come from the line of Brian Peterson of Raymond James. Please proceed with your questions.
Hi, guys, Kevin here on for Brian Thanks for taking my call.
You spoke about the varying demand trends for some of your end customer segments and I was curious if that in particular has had an impact on the mix of your near term transmission pipeline and I guess, a willingness or those customers to take on new projects given the current demand environment.
You are you broke up a little bit in the middle of the question could you repeat it Kevin.
Oh, sorry about that Vicki everybody.
Yeah I can hear you find out. Thank you Gotcha I was curious if the demand trends at some of the end customer segments. If you think that in particular has had an impact I guess on on the mix of your pipeline and conversations you're having about the I guess their willingness to take on a new project given what's going on in their business right now.
Yeah, I mean, it's a it's a good point I think you know given that our solution directly affects.
Revenue and profitability you know, it's a top of mind topic for C level people.
In any environment for particularly in this environment and so yes as I mentioned in some of the prior questions. I mean, we just continue to see good strength in our core life Sciences business.
And that ranges from a a mix of new logos customers, who are trying to sort out the demand in this environment and shore up their operations to take advantage of it and we continue to see.
Progress on the SaaS transition.
The other thing that I haven't talked about yet, but we do see as a a byproduct of of this environment is customers just adding more usage more seats.
To capitalize on on a growing business and we take advantage of that as well. So there's definitely theres definitely a correlation between some of the end market demand signals that I talked about and the type of deals that are making its way into our pipeline.
Got it that's helpful.
Then maybe a it sounds like the professional services organization, it's really switched over to a remote work environment without a hitch.
Just curious what role do you see for on site support in the professional services organization moving toward.
Well Luckily we've had a couple of big projects now that have proved that and when I say prove its really more to our customers not not our team.
Prove that some of those things we've historically thought we had to do on site that we can do them remotely and again I go back to the Novartis project that I referenced earlier, you know that's normally a a complex cutover, where we're gonna have people onsite in a war room during the cutover weekend and probably for a couple of weeks after.
And we were able to get the customer I'm comfortable that we'd be able to do that remotely.
And the called customer ultimately took the leap of faith, they're with us and I think thats going to be a project that will will use as a great a reference going forward for some of these other customers that are learning about this new way working and working remotely with their partners.
Got it thanks guys.
Thanks for next questions come from the line of Matt Vanvliet BTI Ji. Please proceed with your questions.
Hi, Thanks, guys. Thanks for taking my question just wanted to dig in a little bit more on on some of the more recent trends that you've seen you talked about just having the existing relationships that customers may prove to be a little bit easier.
In terms of expansion deals, but I guess wondering if youve diverted resources are really sort of put.
Extra resources behind some of those cross sell upsell opportunities more so than focusing on new logos in the short term and then how much of that potentially factored into the back after the irrs guidance.
Oh.
Only a investment levels and what we're expecting in terms of yield are factored into our second half investment or excuse me second half guidance.
You know as we sit here today, we have the benefit of of seven months under our belt. So we've got.
Pretty good visibility into you know in into the business.
So and remind me I'm sorry, Matt the first part of your question was was about re diverting resources. Yeah. Just curious if if you've actually sort of taken taken some oh the planned budget out of potential new logo generation and focus that in on.
Near near term opportunities with existing customers or if they're still running sort of separate tracks.
Yes. Thanks. Thank you for that so we havent made any dramatic changes here in the short term and again, if I reflect how we've been running the business over the last few years, we've gotten a lot more focused on our sales model first segmenting by industry and then within each industry said.
Commenting bye bye hunting and farming and then making investments you know as we see demand materialize.
But right now we do feel good about the resource levels and.
I don't have anything major any major changes planned.
And then David you talked about some flexible payment terms and in a couple of customers either renewing sort of right at the another quarter or potentially <unk> renewing at the end of the year here curious if that are what what direct impacts that might have on on the overall both reported revenue, but maybe maybe more impactful on.
On the overall margin structure as we look out to the end of the year.
That's great question. Thank you very much for we I think as we've highlighted before when we think about either maybe customers on quarterly payments, which we highlighted before and maybe 30% of the business or even with escalating deal structures that we the way we've set up our pricing model is that it's not impactful to our gross margin.
And you know I think we continue to prosecute business, but we're providing that flexibility to customers. So I'd say overall, we you shouldn't think about our I'd say our profitability suffering in terms of the way we're going to market.
What you can think about is when you're putting in place an escalating deal structure. The Rev. RAC, maybe a little bit less and so and so it is possible that what may be while the customer might be in an implementation mode for that 20, or 22 weeks, you're running a little bit less and then its kicking up later on so that's probably the more of the when we thought about the outlook. What we were thinking about is just.
Things that we did an overweight where to in order to when the business unlocking growth for the future maybe the Rev. Rec was a little bit lower in the near term so.
We feel we feel good about how we set up the business for profitability and growth and I think that you were continuing to work work hand in hand, as we as we work our way through the Cobot chapter.
And then just lastly quickly on on you know a shift to to virtual.
Professional services and implementations.
Does that have any impact on either utilization of those people from a billable hour perspective, or an overall, oh, I guess either profitability on the excluding travel, but maybe not billable travel on the revenue side. Just curious if that's going to impact professional services margins tend to agree.
Next to him.
The short answer is no it will not right now our utilization has been very healthy we actually as part of setting our outlook for the second half went a key account by key account discussing with our customers. This schedule.
Resourcing and exactly how things would work so we feel I'm quite comfortable with the team that we have deployed working virtually again hand in hand with our customers in accordance with the schedule. So I think it is one where you can you can expect that utilization will probably hold up what I highlighted in my prepared remarks, we had them.
A a SaaS transition go live milestone that happened this quarter, which did boost profitability a little bit I think our profitability for professional services on a non-GAAP basis, we'll continue to hover around 30%.
Given given the outlook in terms of the engagements were working on the new utilization of the team.
Great. Thanks for taking my question I struggle in the quarter absolutely.
Thanks, Thanks much.
Our next questions come from the line that Pat Walravens of JMP Securities. Please proceed with your questions.
Oh, great. Thank you.
My first question for Jason then I have a follow up for date. So Jason is there any.
Pending legislation or regulatory changes that investors should be keeping an eye on that might impact your business sort of like the conversation, we're having last year about the.
Safe Harbor for the pharmacy benefit managers.
Yeah, Hi, Pat Thanks for the question you know how did that this button is still going on in the background, but has really taken aback see does as you know the government and health care system has been up in dealing with the go that 19 pandemic I do expect as we get into the summer and as we get closed.
There are two the election I do think this will he back up and and become a central topic to the election and as you know I've talked about in the past and I shared publicly I think you know pending legislation.
In this area continues to be a good thing for us because it highlights the importance of revenue management and the importance of our customers being live and on the current release of our product that's going to be the first place where we address any of these regulatory changes.
Great. Thank you and then Dave.
And yeah follows all around us, it's sorta clamping down on spending I'm wondering if you implemented any new spending controls within model Len.
And if so what sorts of things would those be.
Oh through its a great question are we continue to do I'm actually quite frankly, the pad. The same behaviors. We had before this chapter where each quarter, we do take a hard hard look at the piano.
We think very thoughtfully thoughtfully around how do we invest in the flip side to that ledger pad is how do we de investment not we continue to fine.
Efficiencies in the business and that behavior. It certainly has continued.
In line with their remarks, it Jason shared we are orienting some of our.
Initiatives are our focus as a team around the green shoots.
And I think is just highlighted we will continue to make some targeted investments, but I think I'd say programmatically, we continue to be very meticulous around how we invest and utilize our headcount and equally all of our program spend we've been very thoughtful around making sure that each each dollar program spend we feel like as agreed ROI.
Greg, but nothing there like anything above a certain dollar mountain might sign off his CFO.
I sign off on most links back both commercial contracts and spend contracts, there's not too much that I don't see into that in the piano.
Yeah, Okay, great. Thank you.
Absolutely expat.
Our final question comes from the line of Gene Mannheimer of Dougherty and company. Please proceed with your questions.
Oh, Thanks, guys that thought I got dropped congrats on a on a great quarter and outlook, especially in this environment.
I wanted to just circle back to the comments around some of the concessions you're making around amount around maintenance.
And be more user friendly so to speak with with the contracts where are we in that cycle in your view or do you think that we've seen the the apex of that already or is this the start of a have a trend here around.
Escalating contracts and maintenance breaks or deferrals, how much of that is baked into your outlook would you say.
That's a great question are you I mean, I guess fundamentally I guess when are we think about it gene. It we're not really I concessions as such as specific accounting interpretation I think what we are really doing around our deal structures is making it very easy where there are customer may be motivated for cash reasons.
And as you know you know as we highlighted at the ended the quarter, we shifted some building around for customers or ultimately its escalating and I think it is one where we're kind of working very closely with our customers knowing quite frankly, how mission critical the solution is to make sure that we match.
Ultimately that contract to some of the ROI characteristics of our solution. So that it quite frankly makes it very easy for our customer really to say, yes to move forward with a revenue cloud project at this time and and ultimately kind of maps to what they're doing commercially within their business.
I think it is a many of the things we're doing gene or kind of maybe naturally building on some of those concepts. We highlighted a couple of years ago, where we thought we would start fit feathering in escalating deal structures just to make it.
Very easy to move forward with a model and project and a you know would have some of those in commercial characteristics that they're seeing from other software vendors.
Does that help make sense thing it does does thank you Dave.
We have reached the end of the question and answer session I will now turn the call back over to management for any closing remarks.
Thank you operator, we greatly appreciate everyone joining todays call. We'll look forward to speaking with you throughout the quarter at upcoming conferences and of course.
Please continue to be well and be safe.
Thanks, so much.
This concludes todays conference you may disconnect. Your lines at this time. Thank you for your participation and have a great evening.