Model N, Inc.
Q1 2021 Earnings Call Transcript

Published: 9 Feb 2021

[Operator:]

Greetings and welcome to the Model N’s First Quarter 2021 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Gwyn Lauber, Investor Relations. Please go ahead.

[Gwyn Lauber:]

Good afternoon and welcome to the earnings call for Model N’s first quarter fiscal year 2021, which ended on December 31, 2020. This is Gwyn Lauber, Model N’s Director of Investor Relations. And with me on the call today are Jason Blessing, Model N’s Chief Executive Officer; John Ederer, Chief Financial Officer; Reuben Gallegos, Vice President of FP&A and IR and Cathy Lewis, Chief Accounting Officer.

[Jason Blessing:]

Thanks, Gwyn and good afternoon everyone. Thank you for joining us today. I am pleased to report that we started our fiscal year 2021 with results that exceeded expectations and delivered record total and subscription revenues. The strategic focus on our key vertical markets continues to produce results that support our belief that a focused Model N is the best Model N for our customers, employees and investors. With our deep domain expertise and mission-critical products, we are focused on developing innovative solutions that meet our customers’ needs and on developing strategic relationships with them, so they can effectively deliver their life-changing products to the world. In support of this ambition, in Q1, we acquired Deloitte’s pricing and contracting solutions business, which will allow us to better serve more customers in the life sciences market with a powerful combination of software and business services to meet this market’s unique needs. With this acquisition, we are beginning a new transformative chapter for Model N, which I believe will be even better positioned for growth over the next several years. Later in the call, I will share more about the strategic rationale of this acquisition and John will then provide updated guidance for fiscal year 2021.

[John Ederer:]

Thank you, Jason. Before I begin, I would like to take a minute to introduce myself to all of you and provide a little insight into what brought me to Model N. I joined Model N from K2 Software, a private equity backed company, where I served as CFO. Prior to K2, I held financial leadership positions with various software companies, including MobileIron, TIBCO software and SAP Business Objects. I actually started my career on the sell-side as a research analyst covering health care and enterprise software, and it’s great to still see some familiar names on the call today. I chose to join Model N because, like many of you, I believe that the company has an incredible opportunity in front of it. Model N has long been an established leader in revenue management solutions for life sciences and high tech companies and now have successfully navigated the transition to becoming a SaaS business. I have been a part of these types of transitions before, and they can create a solid foundation for sustained growth and value creation. Model N has also established a strong platform for acquisitions. And with the addition of the pricing and contracting solutions business from Deloitte, I believe that we have an opportunity to accelerate growth by expanding into new segments of the market.

[Operator:]

Thank you. The first question is from Chad Bennett from Craig-Hallum. Please go ahead.

[Chad Bennett:]

Great. Thanks for taking my questions. I guess, first just on the acquisition, maybe a little more color if you could share. So I think you indicated the majority of the outlook increase for the year was related to the acquisition. Just in terms of, I don’t know kind of how – typically I think you would see some type of contribution number, I guess I would say from an acquisition when you make it, maybe you wouldn’t update that in future quarters, but is there any type of color you can give just on the annual run-rate of the business and the relative mix of software versus services?

[Jason Blessing:]

Yes. Hey, Chad, this is Jason. I will start on that one. So in our guidance, we did indicate that most of the change is attributable to this business and this change is due to the 9-month impact of the acquisition both with revenue and expense. So, this does give you directionally some information on the size. The other thing we are prepared to disclose just so you got a sense of not only the size of revenue and expense, but business had about 60 customers coming over. So, you can get a sense that the deal size and the revenue run-rate per customer, is interesting and this business does have customers that are everywhere from pre revenue up to top 20 pharma customers that just prefer to buy software plus services, and all of the software and services that this business delivers are through recurring revenue arrangements.

[Chad Bennett:]

Okay. So just from your P&L standpoint, Jason, will all the revenue flow through your subscription line or will there be some in professional services from the acquisition?

[Jason Blessing:]

Yes. Thanks for asking that clarification, Chad. The vast majority of it does flow through subscription, but there are small professional services projects to get customers live and those tend to be anywhere from 6 to 9 months.

[Chad Bennett:]

Got it. Perfect. Then maybe one or two follow-ups on just the organic business, Jason, I mean, it sounds like the bookings picked up actually. You signed a very large deal or monster deal with J&J in the quarter. And it seems like high tech, you cited Micron go-live and other high tech go-lives, can you just characterize relative to 3 months ago the high tech pipeline and business activity there if that in fact has improved? And then just from a – I think you called them the big 10 or even beyond that, your relative sense of both from a conversion and cloud adoption standpoint, if we are seeing another step or acceleration on the life sciences side?

[Jason Blessing:]

Sure. So on high tech, I would say, it’s steady as she goes as we have discussed. Since the pandemic started, we have really been focused on how we are deploying our resources in high tech to achieve the best outcome and we continue to find that our customer base has been the area with the highest level of success. And as you point out, that’s really why most of the narrative on high tech has been focused on new deals and projects with customers. That said, the pipeline, as we have articulated the last couple of quarters did bottom out kind of late spring, early summer of last year and has continued to improve. And I would say also this quarter, as I sat through quarterly business reviews with the sales team, the activity in that area does feel like it’s picking up. And then on the big 10, you can certainly get a sense for our football preferences and how we came up with that name, but yes, we are making good progress there. I mean this was really the first one to move. And I do think there are going to be more of these types of deals to come this fiscal year and early next.

[Chad Bennett:]

Got it. And then maybe one last one for me, just in terms of your expectations in the guide you gave on percentage of deals attached with deal ramps. First, I think last quarter you talked about roughly 50% of deals. Is that – with some type of ramp in it, is that still the percentage and do you expect that percentage to persist, I guess through the rest of the fiscal year? And I will hop off. Thanks much.

[Jason Blessing:]

Yes. Thanks for that final question, Chad. So, our guidance does assume that we are still continuing to ramp deals roughly at 50%. It was up a little bit, just a slight tick up in our Q1. We expect that steady state to continue into Q2. But as we look at the pipeline and some of the deals that we are forecasting in the second half of the year, we do expect that deal ramps will mitigate and then especially as we head into 2022 probably return to historical norms.

[Chad Bennett:]

Thank you.

[Jason Blessing:]

Thanks, Chad.

[Operator:]

The next question is from Matt VanVliet of BTIG. Please go ahead.

[Matt VanVliet:]

Yes, hi. Thanks for taking my questions. Great job in the quarter. And I just wanted to dig in a little bit on the J&J deal, obviously an expansion after you talked about the Japan deal last quarter. But I am curious what you are hearing from them in terms of motivation for both the timing and the overall scope of the project here to start the migration on the U.S. business?

[Jason Blessing:]

Yes. Hey, Matt. Great question. So, I would say the themes in this deal were pretty consistent with the other themes that we have seen and that customers are definitely looking to make sure they are current on a mission-critical system like ours, particularly as the regulatory environment continues to be fluid. And I think work from home has also really been a nice tailwind for us as customers grappled with that reality over the last 12 months, but I think we all would agree it’s probably an element that stays with us post-pandemic. So, cloud-based applications are just easier for our customers and their users to consume. And then secondly and I alluded to this in the script, J&J is pretty excited about our roadmap and some of the new products that we are building and is looking forward to partner with us on some of those initiatives. So, it was really the combination of those things that drove J&J. And I would say those themes are pretty consistent across the other big customers as well.

[Matt VanVliet:]

And following up on that, you mentioned that you are going to co-develop a new product, do we have a sense of at least timing-wise when that might be available to the rest of the market and are you able to share any broader sense of kind of what that’s addressing that isn’t currently in the portfolio?

[Jason Blessing:]

Yes, out of respect for our agreement with J&J, we are not going to disclose specifics on what the product does until it’s completed. But I will tell you it’s a new analytic product that will really focus on some of the specific areas of the market relative to government procurement. And the J&J project really, we are in the planning phase, just getting it kicked off. That project is going to kick off in the spring and run for about 8 to 12 months. So it will – this product will be co-developed in roughly that timeframe.

[Matt VanVliet:]

Got it. And then maybe one more if I can here. On the – some of the bigger customers where you have seen some traction here, how much of the, I guess, recent M&A of the large customers buying into the biotech world was, a) kind of the motivation for this Deloitte deal and b) has already in the first several weeks that you have owned that – kind of opened some doors or started some conversations around some of those pre-revenue type engagements?

[Jason Blessing:]

Yes. The product that we acquired from Deloitte certainly gives us the flexibility to sell how customers want to buy and many of our large customers have established market access functions and really just need software. But certainly, some of those midsized companies, enterprise companies, as we would call them, do also need business services paired with the software. And of course, most of those companies have ambitions to become bigger companies. So, this just allows us to cover off a much broader swath of the market and bring them into the Model N family and have an offering for them.

[Matt VanVliet:]

Alright, great. Thank you, guys.

[Jason Blessing:]

Thanks, Matt.

[Operator:]

The next question is from Jackson Ader from JPMorgan. Please go ahead.

[Jackson Ader:]

Great. Thanks for taking my question, guys. Talking to J&J over the years at Rainmaker, their installation in the U.S. is pretty complex. So I’m just curious, are they moving the entire Johnson & Johnson U.S. installment from on-premise to the cloud or is it kind of maybe going to be piecemeal and there’s still some left on the bone?

[Jason Blessing:]

Yes, that’s a great question, Jackson. So as we’ve talked about, J&J Japan is in flight. This is their U.S. pharma business and then their medtech business is next. So to use your words, there is still some meat on the bone to get that medtech business converted over, which is another thing we’re working with them on to figure out when that one comes over as well.

[Jackson Ader:]

Okay, awesome. And then just doing some rough math on the acquisition, on a per customer basis, it looks like, I don’t know, $250,000, $300,000 or so on revenue per customer on those 60 customers. What about the range? I mean, are some customers seven figures and then some of the pre-revenue customers are pretty small or is that kind of a couple of hundred thousand dollars pretty consistent?

[Jason Blessing:]

Yes, your rough math is directionally correct, for sure. They do have a couple of big customers that have larger contracts, but that average that you calculated is pretty much in line with what the vast majority of the portfolio looks like.

[Jackson Ader:]

Alright, great. Thank you.

[Jason Blessing:]

Thanks, Jackson.

[Operator:]

The next question is from Joe Vruwink of Baird. Please go ahead.

[Joe Vruwink:]

Great. Hi, everyone. I wanted to start with the SaaS revenue performance within the subscription line. And is the – a few questions, one is the 19% growth in 1Q, is that upside primarily reflecting the upfront piece of the J&J deal? And then looking ahead, can you maybe update just expectations for the relative mix between SaaS and the legacy maintenance, what those two streams should be growing at?

[John Ederer:]

Yes. Sure, Joe. This is John. So first on the SaaS revenue number that we quoted, the $20.8 million that would include the impact from J&J in Q1. In terms of the mix going forward, I would say that, that mix has been pretty steady between subscription and maintenance over the last several quarters. So I wouldn’t see anything that would dramatically change that here.

[Joe Vruwink:]

Okay. Okay, great. And then maybe stepping back and thinking more strategically about how you see Model N evolving over the next couple of years because sitting here today, obviously, this is a really strong first quarter, nearly 20% SaaS growth and high-teens EBITDA margins. And yet you’re acquiring a business and talking about kind of this usher again, a new era of Model N. I think what we’re seeing currently is already an interesting era. And so can you just maybe go a little bit deeper into what Deloitte is going to allow you to maybe, I don’t know, accelerate within your product development road map? Obviously, I think the TAM expansion is an interesting piece. But I guess the question is why Deloitte now. And is it bringing things that maybe you could have tackled over a number of years, but now you are just shortening the time frame?

[Jason Blessing:]

Yes, that’s a great question, Joe. So, a few things in there. So we did – this was a deal process we had an opportunity to participate in. And as we talked about in the prepared remarks, we really thought this was a great opportunity given some of our cash on the balance sheet to trade-off between profitability today in exchange for growth today as well as tomorrow and really increasing the TAM. We just thought that was a prudent decision. And I appreciate your comment that today’s era of Model N is pretty exciting. We would certainly agree with you. And as this year goes on, especially as we get into the summer, late summer, we expect to have an Analyst Day and talk a little bit more about long-term where the company is going, but it will be – certainly be more of what you heard in the past from us. We are looking at ways to continue to expand out our software portfolio and add more value to our customers in that area of the business and that will continue to be the core area of the business. The second area that I have talked about on our last several calls and publicly is also looking to expand our analytics offering, and I think a data and analytics business for us could be as big as our software business, if not bigger. The Deloitte business helped with that ambition with the gross-to-net product that came over, which is essentially an analytic business that we can – or an analytic product, excuse me that we can resell to our combined customer base. And then finally, we do see an opportunity for strategic services that really enable our customers to be more successful with our software and our analytics offerings. And we have a small splash of this in the business today. We tend to see customers that consume it, have higher satisfaction rates and be stickier in their software subscriptions. And so, this Deloitte business also helped enable that area as well.

[Joe Vruwink:]

That’s great. I will leave it there. Thank you.

[Jason Blessing:]

Thanks, Joe.

[Operator:]

The next question is from Ryan MacDonald from Needham & Company. Please go ahead.

[Ryan MacDonald:]

Hi. Good afternoon, Jason. Welcome, John, as well. I wanted to just first start on the – from a product perspective on the Deloitte acquisition. What sort of – how do you view sort of the products rationalization between Model N and Deloitte over the next 2 to 3 years here? Obviously, it sounds like you are getting some great new functionality, but will there be a thought of migrating existing Deloitte customers over to Revenue Cloud?

[Jason Blessing:]

No. It’s interesting, Ryan, as we were doing the diligence, the diligence supported the work that we had done in the strategy project that led up to this acquisition, meaning we had very little overlap between our customer base and their customer base. I mean it was just – it was a small handful of customers that were using Model N products in one part of the company and Deloitte products in the other. So this business really has two components to it, software and then what we are calling business services. And the software is really purpose-built to be combined with the business services to deliver a complete solution. There are some elements of the technology we like. It’s very modern. It’s been built in the last 5 to 6 years. So it’s a very clean multi-tenant architecture. The engineering team that built this also has a background in telecom, so they’re very comfortable with very large data sets and we think bring not only technological expertise, but architecture and design expertise to enable that part of our business. So think of it as components of this solution will eventually enable new products that we’re building in the rest of the portfolio, both from a technology and a skill set perspective.

[Ryan MacDonald:]

Excellent. Very helpful. And it sounds like from a go-to-market perspective, there is obviously plenty of cross-selling opportunity. But I guess during the diligence process, when you looked at that pre-revenue segment of the market where Model N has not historically played a big role, what did you learn there? How does this affect the pipeline moving forward from a new logo perspective potentially?

[Jason Blessing:]

Yes, great question. I mean what we’ve communicated on the TAM expansion of roughly 40%, I think, really shows you that part of the market we weren’t really going after. And the fact that we had very little overlap between our logos or even logo they’ve won that we would have participated in the sales process, it all really points to there is a segment of the market, it’s a meaningful segment of the market that wants to buy software plus services. So, the vast majority of their pipeline and their target market is additive to what was in our pipeline.

[Ryan MacDonald:]

Excellent. Thanks very much.

[Jason Blessing:]

Thanks, Ryan.

[Operator:]

The next question is from Terry Tillman of Truist. Please go ahead.

[Dave Unger:]

Hey, everybody. This is Dave Unger filling in for Terry Tillman. Thank you for your time. Guys, can you please just talk about high level the duration of deals that are ramped versus non-ramped and how that’s been trending? And how we should think about RPO growth versus CRPO growth? That’s my first question.

[Jason Blessing:]

Yes. I’ll comment on the bigger picture and then if John wants to add something, I’ll invite him to. I would say we haven’t seen anything dramatically change, Dave, in terms of the structure of ramps and the duration of ramps. We have had customers that – especially bigger customers that are recommitting to Model N and the cloud migration and really recommitting for – I refer to it as the next 10 years. In some cases, they’ve asked for slightly longer deal terms than our standard 3, which can help mitigate ramps over time, but nothing really new overall in terms of the structure of ramps and how we are employing them.

[Dave Unger:]

Okay, cool. And then just to talk about product utilization, you mentioned data analytics just recently and the opportunity set there. You still have about 2.4 cloud products for 77% of your customers. How should we kind of think about that number trending over time? Is that more of an aspiration to move that up over the long – medium to longer term or should we look to see that number increase in the shorter term? I just want to take a high level about that. Thank you.

[Jason Blessing:]

Yes. Certainly, I believe that number increases over the next 12 to 24 months and it increases due to two trends in the customer base. One, we have continued – and I’ll speak for now specifically about life sciences, we’ve really seen nice traction on new logos in life sciences. And most of those deals we’ve been selling have been land and expand sales campaigns, where we’ve been landing with just 1 of our 6 products. The customer – new logo I referenced in the script today is one of those examples. And so these new logos that we’ve been closing over the last couple of years, as they go live, there’s meaningful expansion opportunity in those accounts. And then I think the thing that we’ve learned now that we’re, call it, a couple of years into SaaS transitions and really seeing momentum pick up, SaaS transitions in and of themself are proving to be significant catalysts for cross-sells and up-sells, both new products as well as taking the upgraded footprint and deploying it into new divisions. So I do think cross-sells and up-sells accelerate also as a byproduct of SaaS transitions.

[Dave Unger:]

Okay. Terrific color. Thank you very much.

[Jason Blessing:]

Thanks, Dave.

[Operator:]

The next question is from Brian Peterson from Raymond James. Please go ahead.

[Brian Peterson:]

Hi, gentlemen. Thanks for taking the question. And I love the big 10 references. So, just as you think about this, Jason, it’s kind of interesting to say that you are co-developing products with customers and you have the potential to kind of sell that back into other customers. How did that really start? And is that something that could be in the pipeline with some of the other members in the big 10?

[Jason Blessing:]

Yes. Thanks, Brian. And I am glad you caught the big 10 reference. I am sure that – I figured that one wouldn’t be lost on you. With respect to some of these new products, again, as we’re really mapping out 5 to 7-year road maps with these customers about how they’re going to get current, move to our SaaS offering, adopt new products. That has really opened another door where customers have said, hey, we think Model N is uniquely positioned to partner with us to build entirely new products. That’s been an exciting byproduct as well of these big customers recommitting to us. And I also have to say in my experience of 25 years plus in software, including running a product organization, if you have got a customer that’s committed, willing to pay for, willing to help drive use cases and be a reference for it, you are going to have a much more successful new product launch. So as these opportunities have come up and I believe will come up, continue to come up, we are going to pay close attention to them.

[Brian Peterson:]

Okay, understood. And just – I know you gave some color on the Deloitte contribution, but any qualitative sense of if that’s more a reflection of the run rates of the business or what kind of revenue or cost synergies are kind of assumed in the adjusted numbers? Thank you.

[Jason Blessing:]

Yes. We have assumed pretty conservative cost synergies this year as we really make sure we understand that business and how to bring it forward and how to grow it. And most of the cost synergies are focused around things like hosting costs and getting more economy of scale there as we bring the businesses together as well as eliminating some redundant software components in our development environment. And then there are some interesting revenue synergies from cross-selling products, like gross-to-net, which came over with the Deloitte business. And then that solution footprint from Deloitte was U.S. focused. So, many of their customers are actually global customers. So there is also an opportunity to cross-sell Global Tenders Management as well as Global Price Management. So it’s a nice combination of cost synergies and revenue synergies. And as we always try and do when we give guidance we try and be very thoughtful in the guidance that we give.

[Brian Peterson:]

Great. Thanks, Jason.

[Jason Blessing:]

Thanks, Brian.

[Operator:]

The next question is from Gene Mannheimer from Colliers. Please go ahead.

[Gene Mannheimer:]

Thanks, gentlemen and congrats and welcome, John. Hey, on the Deloitte business, how much, if any, of the revenue would you be writing off under purchase accounting? And can you share with us what is the normalized margin run rate on the acquired business? Thanks.

[John Ederer:]

Yes. So in terms of the deferred write-down, it’s actually pretty minimal. So this was a carve-out situation and so as such, they’re limited in terms of the balance sheet items that were brought over. And you can see in our 10-Q that was filed today, we’ve got the disclosures there in terms of what did come over. And then in terms of kind of the run rate of the business, I think as we’ve tried to articulate, what I would do is look at the change in the guidance for fiscal ‘21. And in total revenue, we increased by $14 million from our last call, and on an adjusted EBITDA basis, we decreased by $8 million. And so if you annualize those numbers, I think you’ll be in the right ballpark. That’s the 9-month impact for the acquisition. So I think hopefully, that gives you some decent guidance in terms of directionally where this business is at.

[Gene Mannheimer:]

No, that’s – that will be very helpful. Thanks, John. And more broadly, historically, you guys have talked about a 2x to 3x revenue uplift, right, by – with your customers transitioning to the cloud. So I’m wondering if that general math holds true with somebody like a J&J and your other top 10 customers for that matter. And over what time period would we see that play out? Thanks.

[Jason Blessing:]

Yes, Gene, the guidance we’ve given on that, you are exactly correct, has been an uplift of 2.5x to 3.5x maintenance. And so we’ve just kind of normalized as we talk about it at 3x, some deals are a little more, some are a little less. But most of these big deals that are in flight we’re talking about are certainly in that range, and we don’t expect anything materially different as we go through the SaaS transition chapter. We are far enough into it now that we’ve got good data on it.

[Gene Mannheimer:]

Yes. That will make sense. And what time period do we see that lift? I mean it’s not overnight, right? It’s...

[Jason Blessing:]

Yes, it depends on how the deal is structured, but some of these deals do have deal ramps in them to accommodate a customer that is running on-premise software, paying for it while they’re doing their SaaS transition. So as we’ve talked about more generally with deal structures, they tend to ramp over the course of the initial term, which our standard term has been 3. We’ve seen some customers that have asked for slightly longer terms but still ramping over the term of the deal. And I do expect these SaaS transitions, particularly the big ones that are meaningful like J&J, to accelerate over the next 12 to 18 months.

[Gene Mannheimer:]

That’s great. Thanks again. Congrats.

[Jason Blessing:]

Thanks, Gene.

[Operator:]

The next question is from Joe Goodwin from JMP Securities. Please go ahead.

[Joe Goodwin:]

Hey, guys. Thank you so much for taking my question. So on some of the earlier customers that opted in for the ramp deal, when will we start seeing those renewals actually happen? I believe you’ve done a handful of them, but kind of is there a large cohort that’s coming? And kind of when is that timing set? Any color you could provide there would be great.

[Jason Blessing:]

Yes. So we started ramping deals, Joe, almost 3 years ago, not quite 3 years ago. And some of those deals have had varying deal terms – yes, deal terms. And so we have seen deals renew and renew at the full value. And then in the second half of last year, we had a concentration of deals as we discussed about on our Q4 call. That cohort, again, there’s a range of deal sizes in there, but – excuse me, deal terms will renew over the next couple of years, and that will continue to be a tailwind for us, but we have generally had good experience at renewal, renewing at the full rate.

[Joe Goodwin:]

Thank you.

[Jason Blessing:]

Thanks, Joe.

[Operator:]

We have reached the end of the question-and-answer session, and I would now like to turn the call back over to Jason Blessing for closing remarks.

[Jason Blessing:]

Thank you, operator, and thank you, everyone, for attending today. We look forward to talking to you all throughout the quarter. And this concludes our call. Thank you very much.

[Operator:]

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.