Q3 2023 Model N Inc Earnings Call
Good afternoon, and welcome to the model N third quarter fiscal 'twenty to 'twenty three earnings conference call.
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Brief question and answer session will follow the formal presentation, if anyone should require operator assistance during the conference.
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I would like to turn the call over to Carolyn back from Investor Relations. Please proceed.
Good afternoon, welcome to model N's third quarter of fiscal 2023 earnings call. This.
This is Caroline Bell 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 at the close of market and is posted on our website.
The primary purpose of todays call is to provide you with information regarding our third quarter performance.
And to offer our financial outlook for our fourth quarter and fiscal year ending September 32023.
The 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 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.
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, <unk>, which grew by 28% year over year.
In addition, our SaaS net dollar retention was 126%.
Up three points from Q3 of last year.
I am very proud of our team and the business model transformation that we're 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 has seen significant momentum over the last year kicking off projects to move customers to the cloud we.
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 modeling 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 is next phase will include implementing two of our newer products valid data and $3 40 be vigilant, which was released earlier this year.
Our 340, B 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 and products.
Also during the quarter, we expanded our relationship with ICU Medical's Smiths Medical Division.
ICU purchase Smiths 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 and 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 and can grow with the customer and provide revenue management solutions tailored to each stage of our 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 longtime customer catalyst pharmaceuticals added this new offering while also expanding usage to include charge backs 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, <unk> continued to expand their usage of model N.
AMD recently acquired Xilinx and is working to unify the companies systems and processes and model and will be the platform of choice for the combined company.
This is another great example of model and playing a key role in enabling strategic M&A.
AMD also added our new product engage 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.
The result of our professional services organization symbolize 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.
Rack 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, where 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.
These solutions will sit on top of our newly built data layer and complement our existing products.
We think about data and analytics in five categories, which I'll briefly describe along with some examples.
The first is embedded analytics, which will be added to existing model and 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 that customer should pursue based on predictive wind probability.
Next our new Standalone analytic applications.
These are applications that are designed to help customers solve specific business problems.
An example of this is our $3 40 be 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 and 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 and.
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 Anonymize dataset. 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 Derek quarter values, which stands for dream align respect and excel our core values and culture are an important part of what makes modeling 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 fortunate in Great places to work honored model N. As one of this year's best workplaces for millennials.
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 centers 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 2020 for.
John .
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 from the trailing 12 month period.
But 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.
SaaS revenue increased as a percentage of total subscription revenue.
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.
<unk> EBITDA margin improved to 21, 2% compared to 17, 9% for the third quarter last year.
And I would attribute our over performance on adjusted EBITDA of three factors.
First as the macro environment has shifted we have tightened up our hiring activity and overall spending.
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 <unk> 35.
Which was <unk> 10 above the high end of our guidance.
Turning to our SaaS metrics for Q3, our SaaS <unk> 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 are our 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.
We expect this trend to continue in Q4 were SaaS <unk> 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 RPM for Q3 was $321 9 million, which was up 4% on a year over year basis.
The current portion of our RPI balance was up to $147 million representing growth of 11% year over year.
Our total RPM 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 three years.
These longer term commitments added extra years to the total contract value reflected in our RPM.
As renewals and other non SaaS transition bookings become a bigger proportion of the total we're seeing our average contract length and RP O returned 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% to $62 6 million.
With subscription revenue in the range of $45 six to $46 1 million.
And we expect professional services revenue in the range of 16% 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 28 to 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 one to $248 1 million.
With subscription revenue in the range of $185 million to $181 million.
And professional services revenue in the range of $66 six to $67 1 million.
We expect adjusted EBITDA to be in the range of 42, 9% to $43 9 million.
non-GAAP earnings per share to be in the range of $1 eight 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 five 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 is a lot of interest around the future potential for data and analytics coming out of rainmaker.
Want to be prudent in our approach and focus on what we have line of sight to today.
In FY 'twenty four we will have some similar trends and challenges.
We continue to target SaaS <unk> 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 building 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.
We will continue to show improved profitability in FY 'twenty four as we capitalize on the benefits of our business model transition and will 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 <unk> 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.
Thank you we will now conduct a question answer session.
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One moment, while we poll for our first question.
Our first question comes from Craig Patent box with Morgan Stanley . Please proceed.
Yes.
And 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 have some has kind of pushed out how do you think about it.
Into 2025 and 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 that the timing elements you are talking about here through the rest of the cloud transition.
This is Jason I'll answer that that's a great question. So first a reminder, we do have end of life.
<unk> of this year and we pulled our customers that is non negotiable.
Also communicated to our customers that some of the key legislation thats been enacted recently like the inflation reduction act is not going to be backward it too.
The on premise.
So.
There is still a pretty big motivation for customers to move forward.
I would say is as we've gotten into this last cohort of customers. This year.
They have proven to need a little extra help in there.
Business cases, they've negotiated a little bit more on.
The economic arrangements and we just felt that it takes.
Good business decisions to take at this time with 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.
Five three to five year contracts. So the best way to think about it is we've had a cohort of deals that are maybe slip 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.
Convert.
Right around that December timeframe, maybe leak, a little bit into next year, which is consistent with the guidance we've given on prior calls.
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 margin perspective.
<unk>.
Kind of intermediate to longer term.
Sure Yeah happy to give.
More of a thematic answer today and then obviously when we get to the Q4 call.
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.
Our 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.
On Prem and in the cloud.
And then on the 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.
Got it thanks for that.
Sure.
Thank you. Our next question comes from Joe <unk> with Baird.
Please proceed.
Okay.
Great Hi, Brian .
Maybe just a 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 had maybe experienced a shift right in terms of activity and decision making.
It doesn't really sound like that kind of broad macro comment because extending to model N I.
Just wanted to confirm whether that is the case and then the second part of that question would just be it.
Part a is true why 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 youre seeing some resiliency from kind of a discussion environments.
Yes, Joe this is Jason I'll take that so.
You know kind of in line with what we've talked about on past calls we have seen some impact on Hy Tech and again I'm talking about the broader model and year end. So hi Tech has the factor in how.
How we view the out quarters.
And then yeah, I would say certainly.
The dynamic regulatory environment, which is somewhat into insular from economic.
Fluctuations.
We continue to drive the core part of our business, particularly with the.
Medium and large pharma.
As both John and I did mentioned in our prepared remarks, we have seen some customers.
Customers being more cautious on some of our subscription services that really are sold to complement our software, but overall the demand for.
Our software on the life Sciences side remains very resilient and we also saw.
A qualitative answer and then just to point out our quantitative component as well, but I talked about in my script, we really saw some nice pipeline generation coming out of our customer event back in June .
Yeah.
Okay.
Great.
Just in terms of some of the bottom line benefits that you are now realizing as you kind of our approach.
Steady state SaaS model is EBITDA like this quarter north of 20%.
Is that something you would anticipate and yeah I'll call. It the fiscal 2025 timeframe. Obviously next year there is still a bit of a transition happening but is that maybe the right timeframe to have more fully.
Flat what already seems to be kind of the endpoint then things you'd started to realize.
Yes, Joe.
Good question.
And I'll sidestep it a little bit today in terms of talking about FY 'twenty five 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 'twenty for US, we're still going through the planning process in deciding on on some of those trade offs frankly between investment opportunities for growth and dropping incremental benefit to the bottom line, where we will go through that process with a commitment for continued profitability.
I think when we look at the business overall, we've talked about some of these already on the other.
Question, but there are opportunities as we move that business over to the cloud for increased scale and increased profitability and we will continue to drive those going forward.
Okay. Thank you very much.
Thanks, Joe.
Our next question comes from Adam Hotchkiss with Goldman Sachs. Please proceed.
Great. Thanks for taking the questions I guess first could you just give us an update on the cross sell momentum you're seeing amongst the folks are shifting to cloud and the latest cohort I think you had mentioned some softness around the services, but strength in our life Sciences software just any incremental color on how you think about the behavior of this cohort.
Customers comparing to some of the earlier cloud adopters.
Yes, Adam it's a great question and certainly the pattern now that we're at.
Call it three years into our into our SaaS transition the pattern still remains that typically within a couple of quarters of a customer going live in stabilizing on our cloud platform. They will come back in and take more products.
And as I've also talked about in the past almost every one of these SaaS transitions comes with a roadmap that kind of lays out over a two to three 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 mentioned Amgen in my.
They were a customer that I was very involved with their transition.
Went live earlier this year stabilized and are now back adding two new products.
It's been a pretty consistent trend line as customers come out of their transition.
Great. That's really helpful. And then just on the high Tech side of things I think you called it called out a little bit on <unk> question is there last quarter or is it fair to say that that piece of the business is starting to stabilize a little bit or does there continue to be headwinds there.
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 continued 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.
<unk> in our pipeline on the high Tech side. So we're.
Definitely feeling better about that.
Really helpful. Thanks, Jason.
Thanks, Ed.
Our next question comes from <unk> <unk> with Jefferies. Please proceed.
Hey, guys. This is Jordan <unk> on for some odd congrats on the strong quarter. So my first question for you John on the initial fiscal 'twenty four guide for the SaaS growth around 20%.
That would obviously imply that <unk> is growing at a similar rate and that would imply for like.
Net new <unk> added right that it kind of pick up pretty substantially from a year over year perspective, So I think maybe stepping back.
Could you speak to your visibility within that guide for 20% growth for the SaaS piece, maybe whats booked and what are you later going to expectations there.
Yes, I can speak to that a at a high level.
I think if you look at the SaaS IRR that we've added this year my guess would be that would be in excess of the amount that you're talking about there but.
In terms of setting that as a target for us and our goal we do think that it's.
And 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 cross.
Selling upsell opportunities that are sitting in front of us.
As we look at the business today, we feel like that's a reasonable target for us to go after.
Awesome. Thank you and then maybe one question for Jason you called out in your prepared remarks that there was some tightening on the hiring front I'm curious does that.
Tightening impacting sales and R&D evenly or are you focusing more on one area I'd just to echo everyone else's comments the profitability is really.
Exciting and it definitely above expectations. So I'm, just curious as to where you're focusing that savings in the near term.
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 and 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.
We do feel like generally speaking, we're well resource right now and we're getting a lot of benefit of simplifying our business model and economy of scale with the resources, we do have onboard today.
Great. Thank you for taking my questions and congrats again, thanks, Dan.
Yeah.
Our next question comes from Chad Bennett with Craig Hallum. Please proceed.
Great. Thanks for taking my question. So just on the cloud transition narrow.
Narrative, I guess I'm trying to trying to understand what the end of life AR at the end of this year or are so we expect slippage in those transition deals.
Fourth quarter in Q1 into a.
Future quarters or into the next fiscal year is that what were trying to message.
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 has 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 more closely with them on their business case on their pricing.
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.
Three to five plus year contracts.
Okay.
I appreciate the color there and then and then John maybe just in terms of the SaaS the 20% SaaS target.
Is that would apply I assume too obviously are our butt.
Subscription growth on the SaaS side.
Things should be pretty well correlated at this point in the transition.
Yes, so SaaS IRR growth in SaaS revenue growth should be essentially the same level. The metrics that are SaaS metric is based on a on a revenue metric.
Got it and then maybe last one for me just in terms of the maintenance decline.
The decline I think you you talked about 50% and and I know, we're not done with September yet, but do you get can you give us a sense of where we end this year roughly on on the maintenance slide.
Yeah, well I can I can reiterate what we've commented on before.
And so we we finished last year fiscal 'twenty two.
Just shy of $18 million in maintenance revenue.
And we expected that to decline by 30% or more here in FY2023 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 'twenty four and so.
When you get to the end of FY 'twenty four as we exit FY 'twenty four we're starting to.
Dropped down to pretty low levels of maintenance right right. Okay. I appreciate the color. Thanks, so much.
Yes.
Our next question comes from Joseph Mirrors with choice Securities. Please proceed.
Hey, guys. Thanks for taking my question and all the details here.
Among the cohort, that's taking 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 a double digit logos.
And then I guess with the carrot for the end of life.
What actually happens if they don't get it.
Transition by the end of this year like what functionality are they losing just trying to see like how powerful the end of licenses.
So I'll take that last part first so.
They will essentially go unsupported and will no longer be updating on premise code lines, we do have a period of.
A short period, where we will be doing some bug.
Fixes that are security related but the big.
If you want to call it the carrot or the stick it'd be inflation reduction act is not going to be back ported that any of our.
Any of our on premise releases.
A pretty big catalysts for customers and that you know as I said I mean this cohort there 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.
Specific quarter that just doesn't make good business sense with this business model.
We're transitioning to and will give us will give a fulsome update on our next call in terms of how many customers are left.
Transition, but yes, it's double digit and it's somewhere in the low teens.
That's really helpful and then.
Talked about the.
The high level of pipeline coming out of Rainmaker.
I'm just curious if there's any potential for that pipeline to la.
And that multiple products and potentially make up some of the ground.
That's now being.
Being pushed out by the SaaS transitions, thanks for taking the questions.
Yes, I mean, I think the exciting thing about the pipeline generation that we saw coming out of a rainmaker is majority of that was it.
Chunk of it was a new logo and it was a combination of two things. It was existing pipeline maturing and then we had a lot of prospects there who are fairly new to the model N story. So.
Certainly 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 it the bias towards the new logo.
Thanks again.
Thanks, Jeff.
Our next question comes from <unk> <unk> with RBC. Please proceed.
Wonderful thanks, so much for taking my questions.
Wanted to maybe start by thinking about.
Your kind of ability to use generative AI to speed up the implementation and make it easier to get past some of the issues that maybe some customers may have a concern that that customers may have and maybe use it as well in terms of accelerating migrations as you've kind of near the end of.
The road on the cloud transitions and then I've got a quick follow up.
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 of global launch excellence that helps rationalize all the complex pricing in Europe , and helping customers make more informed decisions on how to sequence and launch products.
Also have a new product that we mentioned or excuse me that we are.
Announced called met about that does that.
Rainmaker.
Rainmaker and so this is a product that helps upload state Medicaid claims.
Two our customer system and has some AI built in for fraud detection and automates a lot of the.
We kind of 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 would say, it's more on the on the product front.
Got it okay, that's really helpful.
Then just turning a little bit to gross margins and diving a little bit deeper into that as well.
We think about.
The end of life for the product.
Over time, right Youre going to get maybe a little bit more mixed shift towards cloud how should we long term thinking about you know.
What what that subscription gross margin line could look like and how it can look like over the next several years.
Yeah sure. This is John ill.
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.
Some of the subscription service offerings, we would expect to see improvements in gross margin overall.
Perfect really helpful. Thank you so much.
Thanks Richie.
Our next question comes from Brian Peterson with Raymond James. Please proceed.
Hello. This is Jonathan Macquarrie on for Brian Thanks for taking the question.
On the SaaS transition I think you've spoken to maybe shifting some resources away from focusing on that transition and dragging upsell and instead focusing on net new logos. So do you expect any incremental investment needed there in the sales and marketing department or did the hiring last year kind of set you up to shift that focus and then how do you think about tweaking that go to market.
<unk> internally.
Yes, so it's really the latter when you look back over the last three or four 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 three four years had 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.
Major growth driver for US next year and then in terms of the customer base. It's the same reps that can sell for the solid transition 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' busy.
Miss.
Getting in and driving the transition and then that makes it easy for them are relatively easier to follow on with 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 got the right capacity as we end the year and look forward to that.
Okay, great. Thank you and then kind of normal life Sciences regulation front Theres, obviously, a lot of focus on legislation at rainmaker.
And I know that you've mentioned seems wouldn't be has been a key driver of upsell, but can you kind of approximate maybe what any more interesting before you begin and state price transparency and then kind of maybe the compliance based opportunity overall.
Yeah, I think the unique thing about the compliance opportunity is I don't know that its a finite game with at the beginning and then like a baseball game.
I've heard the analogy used by customers that resonates with me and they talk about it more like the tax code. It just keeps getting more and more complex and as we've talked about we benefit from that.
Said, certainly with $3 40.
Our solutions.
Part of our pipeline right now so I think thats a good here.
But we're still early there and our solution is resonating with customers.
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 sorted out.
How that gets implemented so I guess the moral of the story is.
The changes in regulation continues to be a tailwind for us and an opportunity for new products as well.
Our next question will come from William <unk> with <unk>. Please proceed.
Hi, This is bill on for Matt. Thanks for taking my question I know you guys mentioned that the selling environment is stabilizing I'm just kind of wanted to know do you think or have it forecasted to improve in the fourth quarter like how should we think of if we're approaching a bottom if you will.
Yes, I would.
I'd 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.
Lineup, 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 taken a constructive view based on our line of sight today.
Great. Thanks.
Our next question comes from Austin, <unk> with JMP Securities. Please proceed.
Thanks for taking the question. So this is all sounding pretty pretty positive you know at a high level, Jason maybe what are your what are your top two 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.
Youre focused on heading into the next quarter. Thanks.
Yes. Good question, so certainly making sure that we're in a position to wrap up.
Transitions as we approach and the life I mean transitions are important to us because it drives near term sales it sets up cross sell up sell and.
It 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 <unk> 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.
Big customers that are engaged with us, but 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.
Great Thanks to here.
This concludes today's call.
Jason Blackstone to CEO for closing comments.
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.
This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a great day.
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