Q3 2019 Earnings Call
Greetings welcome to model and third quarter 2019 earnings call.
At this time all participants are in a 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.
Please note. This conference is being recorded I will now turn the conference over to your host the Wagner Chief Financial Officer. Thank you may begin.
Good afternoon, welcome to the earnings call for model N's third quarter fiscal year 2019, which ended on June Thirtyth 2019.
This is David Barden model, and Chief Financial Officer, and with me on the call today is Jason blessing modeling Chief Executive Officer.
Our earnings press release was issued after close of market and is posted on our website, where this call is being simultaneously webcast.
The primary purpose of todays call is to provide you information.
Regarding our third quarter fiscal year 2019 performance.
And our financial outlook for our fourth quarter and full year fiscal 2019.
Commentary made on this call may include forward looking statements. These forward looking statements are based on managements 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 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.
Reconciliation of the non-GAAP metrics to the nearest GAAP metric are included in the earnings release issued today, which is available on our website.
I encourage you to visit our Investor Relations website at Investor <unk> Dot modeling dot com to access our third quarter fiscal year 2019 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 for our third quarter fiscal year 2018.
With that let me turn the call over to Jason.
Thank you David.
Good afternoon, and thank you everyone for joining us today.
Q3 was another well executed quarter and we again delivered results that came in above our guidance.
We are now four quarters into running a more focused go to market plan and I am encouraged by the progress we continue to make.
I would like to thank the entire model N team for working hard to implement the adjustments we've made to the business.
And I would also like to thank our customers and our investors for their continued support.
Total revenue for the quarter was $34.7 million.
The over performance was primarily driven by our subscription revenue, which was $26.6 million.
The momentum is directly tied to strong bookings, which again grew in excess of 25% year over year.
The topline performance was complemented by improving levels of profitability in cash flow.
non-GAAP subscription gross margin climbed to a new record of 71% adjusted EBITDA was over 9% and free cash flow improved to nearly $5 million for the year.
When I joined the company last May I said, I was committed to driving profitable growth and improving gross margins and cash flow.
Our team continues to deliver on this commitment.
In the third quarter, we once again saw a strong performance in our new logo business.
Our success, winning new accounts is tied to the additional focus we introduced to our go to market team in this area four quarters ago.
I believe we're still in the early stages of this strategy driving bookings growth and I expect this trend to improve as account executives have additional time to work there are more focused territories.
We will continue to monitor the adjustments we've made in our go to market approach and thoughtfully invest to ensure that we capitalize on our market opportunity while balancing growth with profitability.
A signature win for us in the third quarter was a new logo in high Tech with one of the leading component manufacturers in the world with over $20 billion in revenue.
This market leader is pursuing an M&A strategy to roll up their segment and model and will be the platform of the future to unify their end to end processes for quoting contracts pricing analytics and rebate calculations.
This is a very exciting win for us and we expect this customer to have a series of successful go lives over the next year.
We also saw new logo momentum in life Sciences, as we sign new customers in both the medical device and pharmaceutical segments.
Life Sciences is a vital sector of the global economy and relies on sophisticated software to price and distribute its products.
Our company was born in this complex market and we started by serving the largest life sciences companies in the world.
As a result, we know this market as well as anyone.
This domain expertise combined with our cloud products and rapid implementation offerings now allow us to serve virtually any company in this market.
This represents a very compelling multiyear growth opportunity for us.
I continue to spend a significant portion of my time in the field with our customers and our project teams.
It's clear to me from these meetings that are more focused go to market approach is well received and it will pay dividends in the coming years as these tighter relationships yield additional sales opportunities for us.
As we have talked about in the past we believe this expansion opportunity in our customer base represents over 400 million in incremental recurring revenue.
Another point that resonates with me in these conversations is how dynamic our customers end markets are.
Life Sciences is a highly regulated market with ever changing rules, but it's also a highly competitive market.
Stories about this our chronicled in the news headlines on a daily basis.
Our high Tech customers also face increasing regulatory pressures in the form of tariffs that make selling through complex channels, even more difficult on top of an already demanding commercial environment.
M&A is another factor that also continues to play a large role in shaping the high Tech and life Sciences markets.
Our customers and prospects are increasingly turning to us for help as we offer industry specific cloud solutions for managing pricing quoting contracting and complex channel incentives.
As I complete my fourth full quarter with the company and start looking to fiscal year 2020, I would like to share a few thoughts and observations with you on our strategy people and company performance.
First a more focused model N is a much better model in for customers and investors.
Ultimately focus is what will enable model N to realize its full potential.
With four quarters of more focused execution under our belt. We have proven that we are a company that can grow bookings in excess of 25% serving these vibrant global markets.
We believe we are still in the early days of this journey.
As you can imagine it takes more than four quarters to fine tune the company's strategic focus, but without a doubt we're heading in the right direction as evidenced by our bookings momentum and improving margins and cash flow.
Because of this I am confident that the more we focus in our core markets, where we have great product and domain expertise the better we will perform as a company.
I also believe we are building a leadership team at model then that has the experience to capitalize on this special market opportunity.
Over the past year, we have filled gaps on the leadership team and upgraded key positions with executives that have proven track records for success at well known companies.
I have committed to our customers employees and shareholders that I will continue to put the very best team on the field to ensure that we take advantage of this unique market opportunity.
Finally, we are favorably positioned in a dynamic market and we now have a team that has consistently executing.
The market opportunity and team combined with the fact that our assay six so six and business model transition are now behind us position the company to drive meaningful improvements in our financial metrics in 2020 and beyond.
These improvements will include new subscription revenue growth of approximately 20% combined with expanding levels of profitability and cash flow.
David will offer additional perspective on 2020 in his prepared remarks.
I am pleased with the progress we have made over the last four quarters I'm looking forward to a strong Q4 and I'm incredibly excited to kick off fiscal year 2020.
Now I would like to turn the call over to David to elaborate on our financial results and our guidance.
David.
Thank you Jason Q3 was another quarter of consistent execution, we're having success winning new logos in scaling the business, which is leading to healthy growth subscription gross margin adjusted EBITDA and cash flow.
Let's now turn to some third quarter highlights as a reminder that results for Q3 are based on the modified retrospective adoption of AOCI six of six.
Total revenue was $34.7 million in ahead of our Q3 guidance range of 33.9 different $34.3 million. The outperformance was primarily driven by our subscription revenue, which was $26.6 million.
This exceeded our guidance of $26.0 million to $26.4 million and represented steady sequential growth.
It is important to note our subscription growth is being driven by the sale of subscriptions to both new and existing customers. This is partially offset by legacy maintenance revenue, which continues to trend slightly down each quarter, which is in line with the expectations. We shared at the start of the year.
Professional services revenue was $8.1 million for the quarter.
As mentioned on our last call professional services revenue will start to grow sequentially in Q4, which is reflective of the new subscription bookings growth Jason highlighted.
non-GAAP gross profit for the third quarter was $20.3 million or 58% of revenue gross margin for subscription revenue was 71 person a substantial improvement over the 65% in Q3 of fiscal 2018.
Gross margin for professional services was 17%, which was in line with our expectations.
non-GAAP operating profit for the period was $3 million. This exceeded our guidance of non-GAAP operating profit of $1.4 million to $1.8 million and reflects our focus on scaling the business.
non-GAAP net income in the third quarter was $2.1 million.
We produced a non-GAAP net income per share of six cents.
Which was well ahead of our guidance.
Zero to two cents.
Adjusted EBITDA for the third quarter was $3.3 million, which was well ahead of our guidance of $1.8 million to $2.2 million. It was driven by the improved mix of subscription revenue and the strength in our gross margins.
Also reflects our strategy to invest in long term growth, while driving enhanced levels of profitability.
Turning to the balance sheet, we ended the third quarter with $58.5 million of cash and cash equivalents compared with 54.1 million at the end of the second quarter.
Free cash flow generated was $4.6 million through the end of the third quarter, we remain confident in our ability to generate $8 million to $10 million a free cash flow this fiscal year.
I would also like to note that on July Onest, just after quarter end, we repaid another $5 million of our term loan over the last 12 months, we have paid down 25% of our debt.
We continue to strengthen the overall financial profile of the company as our free cash flow continues to improve we expect to further reduce our outstanding debt and increase our net cash position.
Looking ahead to the fourth quarter, we expect total revenue to be in a range of $35.5 million to $35.9 million and within this we expect total subscription revenue to range from $26.8 million to $27.2 million. This reflects healthy new subscription growth and we expect legacy maintenance to continue to trend down slightly.
non-GAAP income from operations is expected to be in the range of $3.2 million to $4.2 million. This would lead to a non-GAAP net income per share of six to 10 cents based on a fully diluted share count of approximately 33.5 million shares.
Adjusted EBITDA is expected to be in the range of $3.5 million to $4.5 million.
As you consider the Q4 guidance. Please note the sequential improvement in the business, which highlights the headwinds from AMC, six or six and the business model transition have begun to moderate.
For full year fiscal 2019, we are raising the midpoint of our revenue and profitability guidance. We expect total revenue to range from $140.1 million to $140.5 million. We now expect total subscription revenue to range from $104.6 million to $105 million, we expect non-GAAP income from operations in the range of $10.2 million to $11.2 million.
non-GAAP income per share in the range of 16 to 20 cents based on a fully diluted share count of approximately 33 million shares.
Adjusted EBITDA is expected to be in the range of $11.5 million to $12.5 million. We continue to expect free cash flow to be in the range of $8 million to $10 million a meaningful fourx increase on our fiscal year 2018 free cash flow of approximately $2 million.
Looking out to fiscal year, 2020, I would like to share some very preliminary perspective.
Please keep in mind, we still need to wrap up Q4, and then I will provide guidance in November when we release, our fiscal year 2019 financial results.
We expect total revenue and total recurring revenue growth in the very high single digits. This will be fueled by our new subscription revenue, which represents more than half of our recurring revenue and we expect it will grow approximately 20%.
We expect legacy maintenance revenue to decline in the single digits as we have not sold perpetual licenses for several years.
And finally, we expect professional services revenue.
Will grow in the very high single digits as we continued to leverage partners.
In fiscal year 2020, we will provide an additional level of detail on our revenue mix. So that it is easy to track our progress and the growth driven by the sale of new subscriptions as we believe this growth rate is the key indicator of the Companys long term growth.
We're incredibly excited to wrap up Q4 and to begin fiscal year 2020, which we believe will mark the beginning of a long period of topline growth and expanding levels of profitability.
As always thank you for joining today's call and I will now turn the call over to the operator for questions.
Operator.
Thank you at this time, we'll be conducting a question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tele indicate your lives in the question queue. You May press star two if he would like to remove your question from the Q and for participants using speaker equipment baby necessary to pick up your handset before pressing the star keys.
Our first question is from Cody.
Hi, Keith.
With Oppenheimer. Please proceed.
Hey, great quarter, guys and thank you for taking my question I just had a question here on the new customers that were added in the quarter I read in the press release the revenue ranges.
We're anywhere from $1 billion to $20 billion, which is actually quite a range. There I wonder if you could talk a bit about what are the core drivers that is driving that new customer acquisition and are the drivers are the same for that 1 billion revenue customer versus the 20 billion revenue customer or are they a bit different. Thank you.
Hey, good afternoon Koji thanks for the question so.
Yes, I would say you know every single one of our customers that comes to us whether it's in.
Hi Tech or life Sciences has one of three issues one they've got revenue leakage around existing contracts they have in place so essentially pricing compliance.
They have an issue potentially with managing their prices globally and in driving the best price and best economics on a global basis.
Where they have simple just compliance issues.
With government tariffs government pricing and so forth. So those are those are really the three business problems that companies have that really transcend size and.
Size and vertical for us. So there's there's very much commonality in terms of the revenue mix or excuse me the customer mix I would say we tend to see more large customers on the high tech side of things.
Just because that's the second vertical we got into after life Sciences, and so just by definition there is a little less penetration at the top of the market for us there.
And then on the life Sciences side.
Given that the heritage of the company was in life Sciences, and really focused on.
You know the top 50 of the top 100 life Sciences companies in our early years, we tend to have a little higher higher penetration there, but as you get into the mid market. They still have the same complexities and issues that the largest companies have and and that's what's driving them to us with and now I would say also with our.
Ability to deploy in the cloud and some of our template sized implementations were able to.
To reach the mid market and provide a favorable price point.
Jason Thanks for that and just another question here if I may.
It looks like the fiscal third quarter was another good execution quarter and the business is generating cash it sounds like the go to market strategy is really beginning to click and David If I I think I heard that riper for the early early fiscal 2020 guide you're talking about subscription revenue growth of around 20% is the right way to think about it I mean, it sounds like everything is going in the right direction why not invest war for growth today.
Well I think right now when you think about it koji any if you're going to go back and you and you think about the what we shared in our remarks around four quarters and what we've done so far a lot of it was focusing in on life Sciences, a lot of it focusing on high tech and really kind of go into that area, where we have deep domain expertise and our products are really sticky and so when you thought about the way we approached our resources this year and I think what you heard in Jason's remarks, we had some open roles to fill and we've been filling some open roles I think theres been some elements around putting.
Almost a more talented team on the field and so I think the you know for US I think we're getting though the leadership team in place I think we're moving pieces in areas where there.
Most productive and they produce the best unit economics, and so as we think about this.
You know we made continued to build I think every quarter as you know and I think we concluded our remarks were always we go through this process of where do we invest we assess our our investment landscape and we will do some true ups and we're continuing to push on on that opportunity. So I wouldn't want you to think of us as not in investment mode, but think of us as an end thoughtful investment mode to make sure that we do to kind of continue to have this good balance between growth and profitability.
Yeah, Koji I would just amplify what David said I mean, there was a lot of opportunity for us kind of operating within in our existing investment envelope.
To redirect product services and sales and marketing resources.
As we started to deemphasize some markets and reemphasize life Sciences and high Tech. So we've certainly felt.
For this year as we head into next year.
The investment levels, where appropriate we're really gaining a lot through redeployment of resources and better productivity, but yeah I think the.
The the.
The indications of those changes are very positive for us we're showing that there is a very vibrant new logo market, we have a significant opportunity in our customer base and we will continue to invest to make sure that we fully capitalize on that.
Great. Thanks for taking my questions and congrats on the great quarter. Thank you.
Thanks, Cody Thank you Greg.
Our next question is from Ryan Macdonald with Needham and company. Please proceed.
Hi, Good afternoon, Jason David Congrats on the great quarter, I guess, starting off you know obviously really impressed by that great went in high Tech.
It seems like obviously outside of the main life Science area, we have that mean domain expertise that high tech area tends to be a little bit more competitive can you talk about sort of what some of the differentiators were for model N to get such an impressive win.
[noise], yeah, whether it's <unk>, whether it's in hi Tech or life Sciences, I mean, we really position and differentiate on.
A unified suite, all the way from contracting and analytics all the way through to.
Two.
Compliance and the full suite on a unified platform. So.
So for US, we we do see competition, but they tend to be point suppliers that can't meet.
The full requirements of the business and so that that continues the suite continues to be the key differentiator for us.
Got it great and then just as a follow up as we look at sort of the existing customer base and sort of the migrations and trends das transmission projects.
One can you sort of update us on sort of where that stands I believe last quarter. You said it was about a half a dozen it and are you seeing any sort of increased velocity in the conversations now.
Now post Gilliatt go ahead. Thanks.
Yeah, Great question, Ryan So, yes, as we reported last quarter Gilead went live and then I think the other notable piece of news related to Gilead was.
In Q3, they came off the enhanced hyper care that we provide to any large customer. After go live and had a very uneventful conversion. So the fact that that project happen on time on budget and basically to schedule. After go live is giving us a tremendous amount of confidence.
As we look forward I would say this year.
You know SaaS transition bookings have been a bit of a supporting cast member we've done deals every quarter as you pointed out weve got probably a dozen or so projects that are in flight in varying degrees of of progress.
But but it's been a supporting cast member to just great organic growth this year, but it has also been.
Very much a topic of discussion with customers and I think certainly as we've proven with gilead as we prove with some of these other large projects that are in flight that we're able to handle largest customers in the world. I think this this trend is going to continue to materialize in our business as we've discussed over the next couple of years.
Thanks, Congrats again.
Hey, Thanks Ryan.
Our next question is from.
Well, yes, Grozovsky with National Securities. Please proceed with your question.
Great. Thanks.
Just wanted to get a little bit of a better understanding about your longer term outlook I get that this year with the six so six transition.
Topline from a from a year over year perspective.
It looks a little bit different than it did last year. When you talk about single digits next year that would be an apples to apples to this year.
And six so six so do you sort of is that where you're comfortable kind of looking out as.
In terms of model n's topline growth high single digits or because in the past you guys have obviously grown faster. Thanks.
Hey, Thanks, Phil you for the question I appreciate it.
And it's a it's a great point for us on I think or our long term model in the framework that we've shared is a model that we still feel very comfortable with I think a good way to think about the single digits. When you think about companies you know, obviously six or six probably made it more complicated, but even when you complete that business model transition and you start to enter the expansionary phase, it's not uncommon to actually to be in the single digits before you get back into that double digit mode that you expect to be and so for US I think we're incredibly excited that the new subscription this element around hunting and expanding relationships is feeding a growth rate at about 20%.
As we shared our remarks, and we think that does actually set the tone for how we will grow long term and actually be in the double digits and so think think of this as as we go into fiscal 20 that transitionary year that Adobe went through and others went through and then you expand and grow from there.
Quite profitably.
Okay. Thank you.
Absolutely thanks for the question.
Our next question is from Chad Bennett with Craig Hallum. Please proceed with your question.
Great. Thanks for taking my questions guys. So I've been hopping between a few calls so I apologize if I'm redundant here, but in the.
Preliminary fiscal 20 outlook that you gave David I think I heard on the last question their subscription growth is implied at at roughly 20%.
Correct I think what we shared is overdone been excited about is that a we have a very very quality growth in terms of that sale of sales to new logos and expanding relationships and then what you'll find is that maintenance will continue kind of coming down in the single digits and ultimately that kind of gives you that blended average between the two.
Okay and is there any I know, it's still early but in terms of looking out into that 20%, maybe but what are the kind of drivers within that 20%. If we were to break it down between you know conversions.
And then you know six or six is now behind us that that has to help a bit and then maybe looking at you know you guys have done some deal ramps in pods and whatnot.
We as we get ready to wrap up this year and look into next year, we're expecting more of the same in terms of.
Very nice mix of bookings between life Sciences, and high Tech I think we're going to get to the finish line here for this year and have both of those teams be at or above their internal plan. So we feel good about.
The momentum both of those teams are showing and then when you double click into both of those teams. There is a nice mix of new logos as well as sales into the installed base.
And and we just we expect that to continue next year and the reason why we expect it to continue next year is if you just look at some of the high level metrics that frame out. This this.
This market that we've talked about in the past.
Multibillion dollar Tam 400 million dollar cross sell up sell opportunity in our customer base and then in that $4 billion Tam roughly a 10% penetration from a logo perspective. So we really feel like theres that there is some good good room to run in these two markets and we think that the strategic adjustments and the focus that we've.
Putting the business this year allow us to roll that forward into next year.
Okay. Thanks, Jason and then maybe maybe last one for me just seasonally obviously the fourth quarter of the year.
You'd expect.
Some uptick on an a pretty strong.
Well it appears to be a pretty strong billings quarter in June .
I guess is the expectation that this is going to be a normal year end.
Kind of bookings billings quarter, Jason and.
Kind of is it.
Heavily skewed either way in terms of conversion activity your net new or any type of color you can give there at least qualitatively.
Yes.
Certainly from a qualitative perspective, we're expecting Q4 to look similar to the first three quarters of the year and in that we're expecting nice contribution from both of the sales teams that we've we've got hunting and farming in both high Tech and life Sciences.
I think the.
I also kind of like the dynamic of how our fiscal calendar is set up in that were in our fourth quarter. So we're motivated to finish the year strong and then that paves the way into the calendar Q4, which is a key buying season for most of our.
Customers, so I'm expecting we're going to be very busy and have a lot of activity over the next three to six months.
Awesome nice job on the quarter again guys.
Thanks, Jeff Thanks.
Our next question is from Patrick Walravens with JMP Securities. Please proceed with your question.
Oh, great. Thank you and let me add my congratulations.
I have kind of a big picture question, which I think you both.
Probably have a good perspective on.
Which is.
I mean, Jason you're it.
Hello, and people Soffe, which are kind of horizontal.
And then your flaccid now model in which are which are vertical.
How do you think the critical success factors differ.
For running a vertical SaaS business versus a horizontal.
Well I think the you know the thing I've really noticed patent and in my first year here really developed a pretty intimate appreciation for is the domain expertise that is required to run vertical software companies I saw that my last company the importance of manufacturing in the vertical expertise.
But I will tell you the level of complexity in life Sciences, particular, particularly where we sit at that Nexus.
Of.
Life saving therapies and government regulation. The complexity is honestly at a different level and I'd, even say that's true as well in high tech given some of the the trade issues, they're dealing with in that industry national security issues around export that they're dealing with in that industry.
And so I think the thing that really sticks out to me as a differentiator at this company more as much if not more so than any vertical company is just that domain expertise in that level of of credibility that we have with our customers I think over time that.
Level of expertise and specific focus on an industry.
Also acts as a flywheel and.
Really helps drive new logo acquisition and add on sales and I think as we've seen in.
Many vertical plays renewals are also stickier, because it's such an industry focused solution.
All right great.
Tejas actually anticipate my follow up which was you know we look at things like Veeva right.
As they play out.
Over time, what's different.
I think one of them renewals are stickier than anything else.
Yes, I mean, I think you know renewals and name brand recognition and ultimately being the.
The standard for that business process and that industry I think our.
Our Differentiators and I think we are well on our AR.
Our way on that path.
Alright, Thats awesome. Thank you.
Thanks Pat.
As reminder, it is star one on your telephone keypad, if you would like to ask a question.
Our next question is from gene Mannheimer with Dougherty and company. Please proceed.
Thank you Mike Congratulations also on the good quarter and outlook.
I wanted to know.
If you're able to break out for us the bookings growth across new versus existing customers. That's something you can you can provide.
It's been a dream, it's been actually pretty balanced I don't actually have the numbers right at my fingertips, but I think we've had pretty pretty good balance and I think if you think about the business over the last five years, you know I think weve trended.
In pretty evenly across those areas and I think thats largely playing out this year as well.
Okay.
Because it seems like it seems like this year you know with your new sales hires and upgraded leadership there that I would think that would be more of a.
A trend toward new business bookings versus.
A couple of years ago am I thinking about that wrong.
Yeah, I would say that that's right gene I mean, I would say theres a david's right. If you just kind of look at absolute dollars I think theres, a nice mix, but this year there has been a a tilt towards new logos in terms of absolute new logos acquired and that's pretty important to me because one as I talked about.
This is an underpenetrated market, where we have a very favorable competitive position and so.
Claiming more of the market right now in its early years I think is is smart for us given those assets, but also I think drives great customer sales.
In the out years, given that now we have cloud deployed products, where we can land and expand and.
I think that drives drives growth in the out years. So yes, it's been it's been tilted a bit towards new logo. This year.
Okay that makes sense.
And I know I know, Jason there's been a lot of talk this year about gilliatt and.
How they.
A great example of a large pharma going full bore cloud are there other large go lives.
That maybe you're expecting this year that you're able to talk to at this point.
Yes, the two that we've mentioned.
In the past at some of our company events are our Novo Nordisk so.
A company that I think is at least if not bigger as big or bigger than Gilead and then biogen is another.
Sizable company both of those.
Companies are fairly far down the road in their conversions and we're expecting go lives in those accounts, one is and end of year.
And then the second one is in the beginning of next year and then we have a variety of other.
Companies that are in.
Various stages of prototype being and planning for for projects next year.
Very good thank you.
Thanks, Steve.
That concludes our question and answer session I would like to turn the conference back over to management for closing remarks.
No further remarks, thanks, all for joining we really appreciate it.
Thank you. This concludes today's conference you may disconnect your lines at this time and thank you for your participation.