Q3 2020 Model N Inc Earnings Call
Greetings and welcome to the model and third quarter 2020 earnings Conference call. At this time, all participants are named listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad other my mind or this conference is being.
Recorded it is now my pleasure to introduce your host Mr., David Bartlett Chief Financial Officer for modeling. Thank you Sir you may begin.
Good afternoon, and welcome to the earnings call for modeling third quarter fiscal year 2020, which ended on June Thirtyth 2020.
This is David border model Lynch, Chief Financial Officer, and with me on the call today is Jason blessing model N's, Chief Executive Officer.
Our earnings press release was issued after close of 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 third quarter performance and our financial outlook for our fourth quarter and full year fiscal twentytwenty.
Injury 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 around what.
Actual results may differ materially.
Please refer to the risk factors and 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 nice elation from GAAP results.
Reconciliations of the non-GAAP metrics to the nearest GAAP metric or included in the earnings release issued today, which is available on our website.
I encourage you to visit our Investor Relations Web site at Investor Day, modeled and Daqo access our third 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 sincerely hope you are all healthy unsafe during these extra ordinary times that we're living it.
The model and family is engaged and focused on growing our company and serving our customers.
We've been working remotely for almost five months, but continue to provide uninterrupted support to our customers.
Which are on the frontline fighting the Corona virus pandemic.
We are dedicated to doing our part to help them during these challenging times.
But I will provide you with color on Q3.
An update on the demand environment and conclude with my perspective on our future.
Our results for the third quarter exceeded the financial outlook, we shared on our last quarterly update call and show that model and executing well in an uncertain environment.
Much of this quarter success stems from the mission critical role our products play and the tangible ROI they provide for our customers.
I'm also very proud of our delivery team they continue to execute at very high levels. Despite working remotely.
I am pleased to report that our customers remain committed to their model N projects and they continue to engage with us I'm planning for the future and how they can leverage more of our products and services.
Our results demonstrate model n's resiliency despite the current.
Oh revenue for the quarter was 41.3 million an increase of 19% over last year and subscription revenue was 29.3 million a 10% increase over last year.
And strong professional services revenue highlights impressive number of go lives in the quarter and the importance of our products to our customers.
We're also benefiting from the go to market strategy that we launched two years ago, enabling one team to focus on serving our customer base and another team to focus solely on new logos.
And of course, we're benefiting from our focus on to resilient vertical markets life Sciences and high Tech.
I am very pleased to announce that our life Sciences team added two new logos in the quarter, including a top 15 Medtech company.
The company is a well known brands that provide medical devices and therapies to patients around the world.
Customer need a partner, who can provide an enterprise class platform for global hundreds and could also expand what the company as it moves forward on a multiyear project modernize its global commercial process.
After evaluating their options the company moved forward with model N. Because we demonstrated that we could provide a best in class solution that would meet their needs today and into the future.
They will start by deploying model and global tender management in 14 countries, where nearly 500 users will leverage the system to process billions of dollars in tender agreement annually.
We're excited about this first phase of our relationship and we're working to expand our footprint with them over the next few quarters.
This deal is a terrific example of how our new logo team is executing land and expand sales plays.
This deal gives us a win today and also sets up the opportunity for future growth as we expand our relationship with the addition of new products and geographies.
Also in the quarter and emerging biopharmaceutical company selected model N. The power, it's growing market access team.
The company has focused on developing and commercializing therapeutic medicine for patients suffering from rare diseases.
This new customer will use our revenue cloud to ensure their products are effectively brought to market to treat patients and improve their quality of life.
To compete on a global marketplace. This company needed a partner who offered a platform that could support them at a dynamic commercial and regulatory landscape.
They concluded that model that was the only company that can support them now and as they grow in the future.
I am encouraged by both of these new logos because they demonstrate that our sales teams can still initiate new relationships remotes selling.
These deals are also important because they showed that our value proposition and cloud solutions allow us to scale from a mid enterprise pharmaceutical company all the way up to one of the largest medtech companies in the world.
Another highlight of the quarter was the successful go live of a major project at Pfizer as they continue their efforts to get current on modeling and eventually move to our cloud offerings.
This project with delivered remotely and is similar in scope and magnitude to the Novartis go lives that I mentioned last quarter.
These on time on budget projects are a testament to the quality of our team and our professional services methodology.
Pfizer and Novartis projects also highlight the steps being taken by top 10 pharmaceutical companies to move revenue management to the cloud.
Our delivery team also successfully completed several other projects during the quarter, including another successful SAS transition at a top 25 global pharmaceutical company.
This project is another proof point that our SaaS transition methodology is working and this customer join a growing list of companies utilizing our revenue cloud.
As more beating life Sciences companies successfully transition to revenue cloud other customers have notice and expressed an interest in beginning similar SaaS transitions.
Today's remote work environment, coupled with a dynamic regulatory landscape highlight the importance that a cloud first philosophy plays in remaining productive competitive and compliant in a global marketplace.
In our high Tech vertical we saw strength in the customer base as we expanded relationships and we also had multiple go lives during the quarter.
Andy Qualcomm Micron and others added new model end products to their footprint or expanded usage during the quarter.
Also adx completed the rollout of our solution to their international teams the last in a multiyear global deployment roadmap.
I'm also excited about the work being done by our product organization and proud that they continue to ship high quality releases on time, including our recent spring 20 release.
This release included several new features and a major upgrade to our intelligence cloud.
The intelligence cloud features bring new artificial intelligence and machine learning capabilities that will allow customers to simulate win rate and optimal pricing models when drafting new contracts.
These capabilities enable our customers to build better contracts that drive more profitable pricing arrangements with their channels.
Given the current global economic uncertainty I'd now like to share some details with you on what we're hearing from our customers and seeing in our pipeline.
Our customer base activity remains healthy, particularly in life Sciences, and we continue to believe this vertical will be resilient through this cycle.
Maybe life Sciences companies enjoyed durable businesses and they continue to invest in systems like model lend to support profitable growth and changing compliance needs.
The recently proposed changes could the Medicaid drug rebate program by the centers for Medicare and Medicaid are Great reminder of how dynamic the regulatory environments is particularly in an election year.
Cloud solutions are an important way that life sciences companies can efficiently keep up with the rate of change and this acts as a natural tailwind for our new logo sales and fast transitions in our customer base.
Our high Tech vertical has seen increased variability since the beginning of the Corona virus pandemic there have been green shoots in some areas, where secular trends like Fiveg network build outs and increase cloud computing consumption are driving healthy demand while other customers have taken a more conservative posture towards new invest.
But.
As I talk to you today, the high tech vertical does appear to be recovering, but it remains less predictable.
As discussed on the last earnings call. We will continue to focus our sales efforts on pockets of strength and supporting our existing customers.
Before turning the call over to David I'd like to give you some color on our pipeline.
Typically we do not share this level of detail with you, but I felt it was important to make an exception this quarter due to the ongoing economic uncertainty.
I do expect the macro environment to continue to elongated sales cycles for the next few quarters and this is incorporated into our guidance, but the state of our pipeline suggest favorable long term trends.
Specifically, our life Sciences pipeline has been building and is currently at its high point for the year.
We did see a decline in our high Tech pipeline in late spring as deals pushed out and the segment has not yet returned to pre March levels.
While high Tech has increased nearly 50% since its spring low the sector continues to be less predictable than life Sciences.
We believe these relatively favorable pipeline trends are related to the fact that our products. Our mission critical have a tangible ROI and can actually help customers manage their business in difficult times like the present.
Looking ahead I remain enthusiastic about model n's future, we have an amazing team that has adapted well to remote Sally and delivery and we are is focused on customer success as we have ever bet.
Our pipeline and business outlook are favorable we're benefiting from two years of fine tuning our go to market approach and we're fortunate to serve to resilient vertical markets.
This combination of factors gives me confidence that we will grow through this downturn and exit this chapter as a stronger company.
I would now like to turn the call over to David to elaborate on our financial results and guidance David.
Thank you Jason.
Our results for the third quarter exceeded every measure in the financial outlook, we shared on our last call and represent a continuation of our track record of delivering strong performance. The past few quarters illustrate the impact of our strategic focus in how it leads to increasing levels of profitable growth.
Total revenue for the third quarter grew 19% to $41.3 million and subscription revenue grew to $29.3 million, an increase of 10% from a year ago.
New subscription revenue expanded to $19 million, an increase of 27% compared to $15 million in Q3 of last year.
As highlighted before this growth was partially offset by natural decline in our maintenance subscription contracts due to SaaS transitions, which resulted in revenue of $10.3 million a decrease of approximately 12% compared to $11.7 billion in Q3 of last year.
Professional services revenue was $11.9 billion. This demonstrates that our customers view our projects as mission critical to their businesses and they have continued with these projects even during a dynamic environment.
It's also important to highlight that our professional services revenue benefited in Q3 from a level of utilization that was higher than expected.
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 and focus on profitable growth.
While we continue to opportunistically invest in our sales and product development teams the absence of travel as well as our operational efficiencies enable increased levels of profitability.
Non-GAAP gross profit for the third quarter was $26.4 million or 64% of total revenue an increase of six points from last year.
Non-GAAP gross margin for subscription revenue was 74%, which is a new high watermark for us.
Non-GAAP gross margin for professional services revenue was 40%.
Non-GAAP operating profit for the quarter with $6.2 million.
Non-GAAP net income in the third quarter was $5.2 million, we produced a non-GAAP net income per share a 15 cents, which was ahead of our guidance of five to seven cents.
Adjusted EBITDA for the third quarter was $6.4 million, representing a margin of 15%.
All in all Q3 was a well executed quarter with strong financial results.
Moving onto the balance sheet, we ended the third quarter with $192.4 million of cash and cash equivalents.
This reflects the $172.5 million raised from the issuance of convertible notes, let's $40 million used to repay the term debt as well as the accrued interest and fees.
Our cash balance also reflects our healthy free cash flow of more than $7 million year to date, which is more than a 50% increase over the prior year, despite providing our customers flexible billing and payment terms, which pushed cash flow out of the third quarter.
Turning to our outlook for the fourth quarter, we expect total revenue to be in the range of $40.1 million to $40.5 million, representing approximately 11% year over year growth at the top end of the range.
We expect subscription revenue to be in the range of $29 million to $29.4 million representing growth of approximately 7% at the top end of the range.
Non-GAAP income from operations is expected to be in the range of $4.5 billion to $4.9 billion in non-GAAP income per share in the range of seven to nine cents based on a fully diluted share count of approximately 36 million shares.
Adjusted EBITDA is expected to be in the range of $4.6 million to $5 million.
For full fiscal year 2020, we expect total revenue in the range of $159.7 million to $160.1 million, we expect subscription revenue in the range of $115.5 million to $115.9 million.
Turning to profitability, we expect non-GAAP income from operations in the range of $18.3 billion to $18.7 billion and non-GAAP income per share in the range of 41 to 43 cents based on a fully diluted share count of approximately 35 million shares.
Adjusted EBITDA is expected to be in the range of $19 million to $19.4 million.
Before opening up the call for questions I'd like to share some final thoughts with you I.
Hi, I'm impressed by our team's ability to adapt to the current environment and this new way of working we are closing deals and bringing customers live on our platform our deal pipeline as Jason highlighted has continued to grow.
We believe that we will continue closing deals inclusive of new logos customer base expansions and SAS transitions.
However, we expect that most deals will likely include a financial rent.
We also expect that we will continue to provide our customers with flexible billing and payment terms.
Our initial financial outlook for fiscal year 2021, we'll factor in these variables. It will include a high degree of revenue coverage and it will hedge for the macro environment.
It's also important to note that our visibility for any given fiscal year builds over the first couple of quarters.
In November I will provide a preliminary perspective on fiscal year 2021, and then in line with past years I will provide an updated outlook as we move through the first half of the year.
Thank you for joining todays call now I'll turn the call over to the operator for questions.
Operator.
Thank you, ladies and gentlemen, we will now be conducting the question answer session. If he would like to ask a question. Please press star one on your telephone keypad. The confirmation totally indicate that your line is in the question Q you May press star occasionally if you would like can move your question from the Q.
For participants using speaker equipment and may be necessary to pick up your handset for pressing the star teens. One moment. Please let me pull for questions.
Thank you I first question comes from the line of Joe Vruwink with Baird. Please proceed with your question.
Great Hello, everyone.
Jason I wanted to go back to the pipeline comments.
The past I. Thank you alluded to the fact that in this type of environment, maybe it getting in front of the new logo and.
Being able to get by end behind the ROI revenue cloud provides maybe that's how was it would be more challenging and it certainly doesn't seem like that's the case. So I'm wondering if you could just unpacks you know a is that just the health of the verticals you target has been.
Source of resiliency be it is that model N zone execution, you talked about the go to market strategy.
Or see how much do you attribute this access to the product itself and the fact that it's easy to get up and running you know the is accelerated 20 to 23 week implementation timelines or or just really the value of the cloud in this type of environment.
Curious if any of those factors maybe commands more.
More attributes and right now.
Yes. Thanks, So the question Joe So it's quite honestly a mix of all of those factors and if I had the force rank them.
I would start with the quality of our go to market team and how they're selling and some of the changes that we've made over the last couple of years.
I think we've got the right team in place right now and have changed our approach to really frontload the qualification.
Stages and building of the ROI in conjunction with.
With the customers so.
That has served us well frankly over the last couple of years certainly serves us extremely well.
In a time when deals are being scrutinized more by CFO isn't Ceos.
The second thing that I would say is in our favor, particularly in life Sciences, but also in high Tech is I do think these are our two very resilient markets, particularly in the case of of life Sciences, where.
These are just durable businesses and in many cases the therapies.
Being provided are are you know.
Not to go shippable are there.
People are very dependent on them and I would also say that in many cases, the demand for customers therapies and products have actually gone up during this period of coded. So so the market is certainly a part of it.
And then yes, our delivery capabilities as we've talked about on the last couple of calls.
Our just excellent and that does help get customers more comfortable that the ROI that we talk about early in the sales cycle is actually going to be realized through high quality on time on budget delivery. So it's really a combination of the things you mentioned.
And then if I can follow up and maybe this isn't the right for them to who update long term targets, but there was I was thinking once upon a time that maybe 20% growth for the new SaaS revenues was a sustainable rate I think they're going to do better than 20 per se.
And a pretty challenging environment. This year when you reflect on.
The success as you've had and building the life Sciences pipeline, Hi Tech coming back strongly can you maybe say directionally, whether it's 20% is it better than 20% biased. Some degree just your thoughts there.
Yeah, we continued directionally to feel very comfortable with that number and as weve demonstrated over the last several quarters, including this quarter.
Number is the north of 20% and we think with the resiliency of life Sciences, and then, particularly the positive tailwind that SaaS transitions are providing.
We continue to feel comfortable that that number can be above 20%.
Great. Thank you very much.
Thanks, Joe.
Thank you. Our next question comes from the line of Terry Tillman with Suntrust. Please proceed with your question.
Yes, good afternoon, Jason a David Thanks for taking my questions were actually Trust Securities now I should to make sure I get that they did UBS solid job on a quarter and I do appreciate the a the sales pipeline color there was.
Incrementally helpful. I guess, Jason you know Theres always regulatory changes and it's kind of normal course of business, but you did call out Medicaid and the change.
Is this wouldn't different than other times in the past when there's been regulatory changes and is there anything and kind of the new sales pipeline that kind of reflects maybe yet another change that just going to create more fluidity in a reason to talk to model and they're not a follow up.
Yeah, I would say generally speaking the dynamic regulatory environment presents challenges for our customers, but it's ultimately an opportunity.
For modeling and you know as I mentioned in my prepared remarks, as we go into.
You know in election cycle, the the regulatory environment continues to be very dynamic, both Republicans and Democrats or both.
Theory, pushing for the same thing of more price transparency and lower out of pocket costs for.
For the consumer, particularly low income and the elderly.
Both parties have a different way of dealing with this but both of them are.
I'm not going to necessarily be less complex ways of.
Addressing the issue. So that is a reason to talk to model N and some of the pipeline dynamics that I talked to we can directly C line of sight. So the dynamic regulatory environment driving people to our doorstep looking for some health and some relief.
Got it and I'm going to be savvy fair enough to two part question that will involve Dave Dave It because I don't want to leave them out of this but as you look at your top 20 customers and it's nice to see another top customer like Pfizer going live or upgrading I think you mentioned novartis up past quarter. So Jason the first part of the question relates to kind of.
Three months since the last time, we had an update how do you feel about some of your topline science customers in the trajectory in the timing of their SaaS transition and then maybe.
For David just add into this is you know how do we think about the maintenance decline rate going forward kind of similar to low double digit like we've been seeing thank you.
Yes. So there is so the momentum behind SaaS transitions continues, particularly with the top five top 10 pharma companies Novartis and Pfizer are both recent examples and I think some of the secular trends persist as I talked about in the first part of your question.
Terry the regulatory environment continues to be very dynamic.
M&A continues to persist and now we have a workforce that is largely working from home this entire year and it's.
Going to continue into 2021, and so a cloud first approach to some of these mission critical solutions.
Resonates more now than ever with our customers and so I expect the momentum.
We have enjoyed at the end of 2019 throughout this year 2020 to continue to persist quite honestly for the next couple of years.
David do you want to take the second part.
And then and Terry and were in regards to revenue retention rates for maintenance I think we still fine maintenance to be very sticky so I think.
I'd say last year at this time, we kind of so yes, so think about churn in that area being roughly mid single digits.
Think as you've seen a maintenance track this year.
The exception obsessed transitions that kind of continues to hang in to that level. So I think the product will will continue to power customers on Prem and then though they will continue cutting over to the cloud.
Thank you we'll move on to my next question, which comes from the line of Ryan Macdonald from Needham and company. Please proceed with your question.
Yes, Hi, Jason and Dave Thanks for taking my questions.
Just continued be really surprising obviously pleased with the strengths on the professional services side is there any I guess should mark shift there that you've seen over the past few months in terms of bringing those more in house versus externally now there's been some news about sort of M&A. When some of your partners with competitors is that shifted the way you think about.
Implementations in managing the migrations for internally versus externally.
Hi, Ryan this is Jason I'll I'll answer that it hasn't in fact, we have continued to be very friendly with our partner ecosystem, our implementation partner ecosystem and as our business grows.
We continue to.
To grow that part of the business as well, particularly as we go through SaaS transitions over the next couple of years, there's going to be a significant amount of demand out there for services and so knowing that we continue to foster the ecosystem.
That being said the current strength that we've seen over the last couple of quarters in professional services and expect to continue to see into Q4 is really just representative of the strong sales that we've enjoyed throughout the year and particularly some of these large SaaS transitions.
That are in flight. So it's more reflective of the current state of the business versus any changes in strategy.
Excellent and then as a follow up as we think about sort of R&D expense and investments, they're moving forward, how does the evolving regulatory environment impact.
The potential spend there.
And are you doing anything new around we feared more about in sort of outcomes based contracting and pricing, particularly in the pharma space is there any incremental dollars of investment that you'd be putting their to sort of a meet this evolving need. Thanks.
Yes, I mean, certainly if you just look at the capacity of our life Sciences team.
A good portion of it is just addressing the ongoing regulatory.
Requirements and we do have some basic functionality in our product today that.
Supports outcome based pricing in fact, most of our oncology customers.
Price based on that model, so thats actually something that we handle today.
And then I would also say just kind of bumping it up a level. If you look at our current expense envelope in the investment in product. We think we can address and absorb a lot of these.
Regulatory changes that are coming on the life Sciences side.
That said, we have stated on past calls, we're going to continue to invest in product as we.
Build a durable long term company, but.
Expect you should expect that to be more on the margins not a step change.
In investment levels.
Thank you will move onto our next question, which comes from the line up Brian Peterson with Raymond James. Please proceed with your question.
Hi, guys, Kevin here on for Brian. Thanks for taking my call you've mentioned in the past, making some of your newer products available to customers to show them. Some of the capabilities that they may be habit, historically leveraged and I'm wondering if you've seen that contributing much to recent pipeline activity levels and then anything anecdotally you could share on the attach rates are up sell for those.
Initiatives just in the context of the broader expansion opportunity.
Yes, we have.
As we have.
Made all of our products deployable in the cloud it is in a much simpler as you would expect to have customers try products out in Sandboxes and this has been a very effective tool that weve used particularly in our installed base, where they perhaps at a footprint of products for a number of years.
Perhaps even on premise products and we really have utilized sandboxes to do two things one expose customers to new releases and new products.
That they may be have not had exposure to in the past and do it in a very cost effective way and then we've also use sandboxes in a fairly major way to get large customers.
Comfortable that our products scale and can handle their volumes from a cloud perspective, and it's really been one of the catalyst that.
Helped us overcome some of the objections in SaaS transitions deals. So it has played an important role.
Got it that's helpful and then.
No you mentioned offerings, some flexible billing and payment terms to customers, but can you speak to any changes you're seeing in the timelines for renewal activity and have there been any changes in those conversations with customers say over the last several months.
That's a great question I think in overall to the I'd say, the timelines or I'd say are largely inline with what we expected in what we shared back in May.
I think customers right now certainly.
Depending upon where they sit in ecosystem, whether they're on more of the discretionary side or whether they're right in the maybe that wheelhouse of the response to go bid that probably have different needs in terms, but I'd say it largely the the need for structures I'd say continues as we expected in the cadence is roughly in line with how we thought about it in may.
Understood. Thanks, guys.
Absolutely. Thank you for questions.
Thank you. Our next question comes from Matt then lead with BT, Inc. Please proceed with your question.
Hi, guys. Thanks for taking my question.
I guess as you look forward towards the back after the calendar year and into calendar 21.
Obviously.
Hope is that there'll be some vaccine and other therapeutics coming through to help with the cobot pandemic, but.
Have you seen an increase or has there been more sales activity, where some of your customers to understand what that end market is going to look like obviously.
There hasn't really been a precedent for something on such global scale demand all at one time and as soon as it can get done but just curious what your conversations are with with customer what youre talking to them about and maybe which of your modules are most in demand as they look forward to that.
[music].
Yes, thanks for the question Matt So.
24 of our top 25 life Sciences customers all have offerings that are.
Things related to the pandemic and so you know certainly continuing to invest in model N and and have model and be available in the cloud so that their remote workforces.
Which I believe are going to continue to persist well into 2021, you know that continues to be.
One of the main subjects of conversation with current customers.
Current customers also are looking to expand footprint as you know they may be addressing new segments for new geographies again, many cases in response to the pandemic and then we certainly have seen an uptick in our new logo pipeline as.
Smaller growing pharmaceutical companies that have a therapy.
It can be used.
Number of different ways in the pandemic you know are seeing cracks in their commercial systems and need to modernize whether theyre selling.
To the private sector private healthcare sector in the us or plan to do government sales and we do see demand in both of those areas in the U.S. and that is one of the dynamics along with the regulatory landscape that I talked about earlier that it continues to drive drive pipeline and demand for products.
Great and.
I guess as we look at what the deferred revenue balance looked like it and sort of on I calculated billings basis.
Big jump last quarter.
And kind of slowed down here are there any I guess customer payments are back to the question on renewals that that may be pushed out of the quarter or how we should think about.
But overall metric as as we look into the be able to fiscal year and bill.
That's great question, I think fundamentally and when you when you think about our go to market and how we work with our industry.
Yes.
There are accustomed to about 30% of the time as little have quarterly structures as I think we highlighted on the last call. We had a couple of customers that requested that we adjusted billing terms and shift their invoicing cycle out to our Q4, which effectively had an impact on deferred revenue had an impact on some of these metrics and I think what you'll.
Find is.
We continue to.
Leverage some of our learnings from the past cycle just to be flexible with customers and so though that will ultimately impact things like deferred revenue or could impact our BPO as we ultimately provide flexible contracts to our customers. So I think it you know as we kind of work our way through this part of the of the economic cycle, you'll probably.
See deferred revenue get pushed around a little bit as we adapt to the needs of our customers.
Right great. Thank you.
Thanks, Matt.
Thank you. Our next question comes from the line of Nick Mariachi with Craig Hallum. Please proceed with your question.
Hi, This is Nick maniaci on for Chad Bennett, Thanks for taking my questions. So it looks like subscription gross margin ticked up pretty decently this quarter over the last just any more color. There would be helpful. And then how should we think vote gross margins going forward, especially assessed becomes larger mix of substrate subscription revenues. Thanks.
Yes. Thanks. Thanks for the question I appreciate it I think if you go back a couple of quarters, we had talked about some investments we were making in our delivery model in some of those investments now are starting to two to work their way through in produce some dividends. So 74 is a new high watermark for US I think we feel good about how we're.
Serving our customers in the in the delivery model and I think 74 is probably about where we where we stay here. Obviously, we're continuing to work on how we support our customers and deliver and.
If you think about that long term model. It had a an upper limit at about 75, and clearly that is not an ending point, but our goal is to continue modernizing how we work in support our customers and find ways to get more productive.
But 74 is a good place for us to be right now.
Got it thank you.
Thanks, Nick.
Thank you. Our next question comes from the line of Gene Mannheimer with Dougherty and company. Please proceed with your question.
Oh, Thanks, good afternoon, congrats on the on the great quarter and guide.
Jason and Dave just in terms of a free cash flow.
7 million I think in the first half plus.
And.
Following your typical seasonality I mean, if you did you did you or can you provide any free cash flow guidance for the year.
Thanks, Jeff and it's a little but it's a more 7 million for the first three quarters of the year.
Got you have just just to clarify.
As to where the progress that we've made.
Gene I think we're still working our way through Q4, and obviously working our way through the deal structure. So it's probably a little bit hard to does to look at it but admittedly we're continuing to as I can assure the I think in one of my earlier replies, just continue working with our customers and adjusting terms, but I think it is one where you'll find that we're continuing to build on the on this.
Success that we've had this year.
And and then obviously, we're starting to look forward to next fiscal year and starting to work towards setting a banker.
Alright, Thats helpful color, Dave Thanks, and the bookings that you're seeing.
How should we think about that in terms of wallet share expansion of your existing base versus a so called market share wins vis-a-vis net new logos. Thanks.
Yes, Thanks gene I'll take that one.
We've seen cute Q3, and Q2 actually Q2 in Q3 play out in a similar fashion in that.
It's just been easier given the macroeconomic.
Environment, it's been easier to do customer base expansions, where we've already got.
Master services agreements in place and and long term relationships built on trust.
That said as I mentioned in my commentary on the pipeline.
We do continue to see very strong performance in our life Sciences pipeline in our overall company pipeline as higher today.
And it was on the first day of the quarter.
And that new logo growth is driving that as well. So I think as you often see an economic cycles like this customer's definitely contribute to a good section of the bookings.
Her market leaders also capture market share and I expect that we will continue to both for the next few quarters.
That's great. Thanks again.
Thanks, Jim.
Thank you. Our next question comes from Jackson Adder with JP Morgan. Please proceed with your question.
Great. Thanks for taking my question banks and.
I guess on the and I next follow up on the gross margin line of questioning I know David you Sandy.
Plan on kind of being around the 74% level for subscription gross margin, but I'm just curious sitting on that on the actual dollar spend we sought come down where where do you expect the increased efficiency on a dollar basis to come from on those subscription on the cost of subscription line.
Sure.
I think largely we've completed a lot of the work that we had highlighted earlier in the year, we still have a little bit more work to do so there is a there is still some redundancy in spend.
Really.
The modern infrastructure that we put in place and then we have not terminated all of the agreements for some of the legacy infrastructure and so as we terminate those.
Contracts and they come to an end and on an absolute dollar basis, that's where you would find some incremental savings.
Okay, Okay that makes sense and then.
Looking out.
So the next maybe year for a couple of years I know you've mentioned that the flexibility that you're going to provide customers on payment terms, but I want to.
In a press a little bit on on the ramps deal structures for new logos are you are you seeing new customers increased their demand for these types of all that type of structure at the initial outset.
We are I think we are seeing that in this climate.
Depending upon where you sit within the ecosystem. Some customers are already working toward the next calendar year and as a result, as they think about these projects that may go live in five months or so they're thinking through how do they have start investing.
Arguably for what the horizon looks like and objection that puts us in the spot where from a deal structure will try and align it so that the theyre they're ultimately.
Escalating their economics in there and what they pay model and as they are capturing some of the benefits and the ROI for the platform. So we're happy to work with them as they start to prepare for the future state.
Excellent. Thank you.
Thanks Jackson.
Thank you. It appears we have no additional questions at this time, if I'd like to pass the floor back over to Mr. barter for any additional closing comments.
Thank you operator, we greatly appreciate everyone joining todays call and we look forward to speaking with you throughout the quarter.
I would be well and take care. Thanks, so much.
Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation and you may disconnect your lines at this time.